Theft Claims Fuel Further Downside Risk
BMI View: Shell's threat to shut down the Nembe Creek pipeline following a surge in oil thefts is likely to fuel growing concerns about security in Nigeria. We maintain our long-held view that Nigeria must act decisively to improve its business environment, which appears to be worsening. Prompt political intervention will be needed in 2013 to alleviate downside risk to the country's hydrocarbons sector.
Royal Dutch Shell , one of Nigeria's largest producer s and exporter s has threatened t o shut down the 150,000 b arrels per day (b /d ) N embe Creek pipeline. The line transports crude oil from producing field s to Shell's Bonny export terminal at Port Harcourt. Mutiu Sunmonu , managing director of Shell Petroleum Development Company of Nigeria (SPDC) , a j oint v enture between Shell (30%), Nigerian National Petroleum Corporation (55%), Total (10%) and Eni (5%), made the threat on the basis that oil theft ha s been accelerating, with the company estimating record losses of 60,000 barrels per day ( b/d ) .
However, Nigeria's security forces appear to disagree with Shell's take on the situation. A spokesman is reported to have denied that there has been a surge in thefts along the pipeline, alleging instead that Shell has simply failed to seal leaks. If theft is the cause, Shell will be able to declare force majeure - a clause that allows producers to miss contractual delivery quotas due to uncontrollable circumstances.
This is not the first instance of such disruption in Nigeria; Shell had to temporarily suspend production in May 2012 and December 2011 because of similar thefts . Furthermore, s ince the beginning of 2013, three international oil companies (IOCs) have declared force majeure for similar reasons . We have already highlighted that repeated disruption and concerns over security are creating serious downside risk s to the country's future hydrocarbon s production (See our online service, November 23 2012, ' Above-Ground Risks Lead To Loss In Competitiveness ') .
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|Nigerian Oil Production, Consumption, & Net Exports|
Time To Act
Regardless of the actual reason for the disruption, we believe that acting to improve security is critical for the Nigerian government. Militia groups claiming emancipation of the Niger Delta have already caused considerable disruption. Conflict in neighbouring Mali has most likely further fuelled this situation. To this should be added the ever-growing uncertainty around the government's Petroleum Industry Bill (PIB), which is deterring new international investment. Finally, more uncertainty arises from falling demand for Nigerian crudes from the US, which will leave local producers in need to find a new demand base. Our view is that Nigeria will have to implement decisive and prompt policies if the authorities want to avoid significant downside risks to output. This could in turn lead to fiscal instability, as 80% of state revenues come from the country's hydrocarbons sector.