Oil Theft and The Nigerian Economy
In the middle of political instability and a multitude of urgent socio-economic issues, the scourge of Nigeria’s oil theft has gradually propelled its way to the height of international prominence. It is quite challenging considering the tasks that lie ahead of constituted authorities in the restructuring of the country’s valuable oil sector. Adding this fast growing criminal activity to the list of existing underlying issues not only dampens hopes of a transparent industry but makes it harder for policy formulation and implementation to triumph.
Oil bunkering (as it is known in Nigeria) is not new to the Nigerian oil industry; only in recent years has it begun grabbing international headlines due to its consistent rise and its effect on Africa’s second largest economy. According to the Nigerian National Petroleum Corporation (NNPC), crude oil theft increased by approximately 224% between 2010 and 2011 and The Economist estimates that oil theft is costing the country as much as $8 billion a year.
Official reports from the Federal Ministry of Finance also suggest that Nigeria loses about 400,000 barrels of crude oil per day to oil theft and this is just an estimate as the figure could be potentially higher. According to them, this led to a 17 percent reduction in crude oil sales and when the running of illegal refineries is included, the government has estimated the annual revenue lost to be around $7 billion. A research on pipeline vandalism in 2010 by Bala-Gbogbo explains how the federal government lost approximately N174.6 billion between 2000 and 2010.
The Damaging Process
A significant element of oil theft relies on the damage to oil pipelines which results in intermittent supply of oil. Like the Economist explains, one of the key reasons Nigeria has not been able to produce oil at its maximum installed capacity is as a result of deliberate damage to oil installations.
An independent research study by Chatham House breaks down oil theft into three distinctive categories:
- Small scale pilfering and illegal local refining- This activity is undertaken by mostly indigenous groups and opportunistic local residents who tap into oil pipelines for the crude refining and sale of the condensates for domestic consumption.
- Large scale illegal bunkering in the field- This involves the use of more refined equipments like long range tapping pipes, motorboats, oil tankers to steal oil. The study suggests that perpetrators have the capacity to transport up to 18,500 barrels of oil directly from source unto different sizes of tankers. An official figure of how much oil is stolen through this practice is still elusive. Since the amnesty programme was introduced; there has been a reduction in militancy activities which constituted the unpopular deliberate attacks on oil pipelines. However, there has been a steady rise in large scale oil theft by organized highly criminal networks.
- Theft at export terminals- This process is a relatively less rigorous but a very effective way of siphon oil on an industrial scale. It involves crude oil being stolen from official storage tanks and also using the country’s export terminals to export the hydrocarbons to various foreign locations.
Chain of Complicity and Effect on Oil Revenue
Over the years, the problems in the Niger Delta have often left the Nigerian government perplexed. The long standing battle with militancy in the oil producing area is an example of this. With regards to oil bunkering, the complicity of security and government officials in this criminal activity makes it more difficult.
To put this straight, without oil revenues, the Nigerian economy will be brought to its knees as it accounts for over 70% of Nigeria’s export earnings. This is the reason the presidency is already tense about the situation throwing accusations in all corners. A few months ago, the special adviser to the President on Niger Delta affairs fingered international criminal networks and the international oil companies operating in the country as complicit in the illegal activity.
A worrying fact is that we have not witnessed a robust action plan taken to tackle oil theft on a large scale. A good point raised in the Chatham House study is that there is no existing process of dealing with cases of oil theft. More worrying is the fact that those responsible with curbing this practice are suspected to be heavily involved in it. It must be very embarrassing for the government as upcoming 2015 elections is being highlighted as one of the reasons the authorities will do little to stop this practice as a steady flow of cash is required to aid the funding of election campaigns. This again is another indictment on the integrity of top government officials in their fight to end corruption in the oil industry. It gives room to suggest that the country as a whole might be offering an enabling environment for oil bunkering to continue.
Factually, inaccurate data has made it difficult for researchers to evaluate the extent at which the damage to oil infrastructure affects the balance sheets of oil companies operating in the country. Without being over-reliant on statistical figures, it is reasonable to suggest that oil theft will be a major threat to their profitability as oil supply is affected and damaged pipelines cost money, time and resources to fix. The long term effect of this might be the continued declaration of force majeure and selling of exploration and production assets as we have noticed for a few years now. For example, last month, Shell Nigeria had to shut down its 150,000 b/d Trans-Niger pipeline because of damage due to theft. This trend is not encouraging for the Nigerian economy in terms of foreign investment as it is currently ranked 131 out of 185 economies in the “ease of doing business” report compiled by the World Bank.
Environmental Damage and Economic Hardship
After decades of dealing with oil spillage and gas flaring, deliberate attacks on oil pipelines leading to further spillage will continue to damage the local oil producing communities. According to a report by the United Nations Environment Programme (UNEP), the extent of damage done by oil spillage in the Niger Delta is underestimated. They found at least 10 communities in Ogoniland where drinking water is contaminated with high levels of hydrocarbons thereby posing a significant threat to public health. The fisheries sector is also said to have been seriously hit by constant spillage leading to further economic hardship for local indigenes.
There are grounds to suggest that small scale pilfering for example has a causal relationship with different kinds of poverty. When you consider the percentage of people living below 1 dollar per day in the country, it gives an indication on what locals will be willing to do particularly when the proximity of this source is to their advantage. However, the same cannot be said about large scale oil bunkering which requires the use of sophisticated and costly equipments to carry out successful operations.
This is not the position the Nigerian economy should be considering the uncontrollable rise in its population which puts more pressure on existing infrastructure. According to the United Nations, the Nigeria’s population is expected to become the third highest in the world by 2100 behind only China and India and ahead of the United States. Nigeria’s current GDP growth rate (2012) is 7% with no changes from the previous year according to the World Bank. There are grounds to be optimistic however as the country’s GDP to expected to rise sharply when the current GDP deflator is updated. How that will translate to improved economic conditions is where the real assignment lies for policy makers in the country.
Interestingly, quite a lot of local and international parties are suspected to benefit from oil theft in Nigeria. The research by Chatham House on Nigeria’s Criminal Crude explains how some top military officers, security officials, politicians and government officials are involved in this act. There are reports where local oil thieves describe the act of bribing security personnel as crucial to the success of their trade. Putting these circumstances into consideration, it gives the impression that the African oil giant is not ready to seriously engage this bane. Time will tell if this is a result of the rumoured involvement of top security officials and influential stakeholders.
The complicity of security officials in this crime makes policy formulation look like a bootless errand if a top down approach is not taken nip this problem in the bud. When corruption at the top level is scaled down or completely purged if possible, there might be hopes of a serious and genuine war against oil theft. However, as it stands, it looks as if the perpetrators are having a field day and there is no reason to think this will not continue on a larger scale.