Ebola Isn’t the Biggest Threat to Nigeria’s Oil Industry

Ebola, the deadly disease that has killed some 1,350 people this year, escaped the confines of Sierra Leone, Guinea, and Liberia last month and found its way to Nigeria, Africa's most populous country and largest oil producer. According to recent news reports, there have been more than a dozen reported cases of Ebola in Nigeria so far and five infected persons have died.

Beyond the tragic loss of human life, the spread of Ebola is also a major potential threat to Nigeria's oil and gas industry. Many of the largest oil producers in the nation are Western companies like Royal Dutch Shell and Total SA, which would presumably scale back their operations and evacuate expatriate staff if the outbreak were to accelerate.

Photo Credit: Flickr/European Commission DG Echo

Considering Western oil companies account for an overwhelming share of total Nigerian oil production, the impact on the West African nation's overall output could be severe. A sharp decline in oil production and revenue could have serious fiscal consequences, since roughly 80% of Nigerian government revenues come from the oil industry.

Luckily, authorities say they are taking the utmost care and precaution to prevent the spread of the disease, which can kill up to 90% of its victims, and that Nigeria could be Ebola-free within the next few weeks. Unfortunately, the nation's oil industry faces graver threats than Ebola, namely oil theft, attacks on oil infrastructure, falling oil prices, and declining demand for its exports.

Oil theft and sabotage
Crude oil theft, which refers to the siphoning of oil from pipelines and other infrastructure primarily in the Niger Delta region, is a pervasive problem. According to a report by the International Energy Agency last year, oil theft costs the Nigerian government an estimated $7 billion in annual revenues. And the problem is only getting worse, with the most recent estimates pegging the cost at nearly $35 million in lost revenue per day, or nearly $13 billion per year.

Lower oil prices
In addition to oil theft, falling oil prices pose a major threat to Nigeria since the nation relies on oil and gas exports for roughly 80% of its government revenues. The country required an average price of $87 a barrel to fund its import bill last year, according to PFC Energy, a Washington, D.C.-based energy research and consulting firm now part of IHS. If prices fall below $85 per barrel for a sustained period of time, the country could find itself in dire financial straits.

Declining export demand
The final -- and related -- challenge for Nigeria is another issue that's entirely beyond its control: falling demand for its crude oil exports, especially from the U.S. At its peak, Nigeria shipped some 1.6 million barrels per day to the U.S., its single biggest customer. But imports plunged to just 260,000 barrels per day in 2013 as the U.S. replaced Nigerian barrels with domestically produced oil.

The downward trend continued into this year, with U.S. imports from Nigeria falling to a total of 5.6 million barrels in the first quarter of 2014, down sharply from 30.7 million barrels in the first quarter of 2013. The loss of these 25.1 million barrels resulted in a financial loss to the country of over $2.7 billion, according to estimates from the Central Bank of Nigeria (CBN).

The bottom line
Ebola is only the latest challenge facing Nigeria's oil and gas industry. Crude oil theft and sabotage, falling demand for its oil exports, and a sustained decline in oil prices pose much bigger risks to the country's economy.

Like many other resource-rich nations, Nigeria has fallen prey to what economists call the "resource curse," whereby its bounty of crude oil has failed to enrich the average citizen. Instead, the benefits have been concentrated largely within the hands of a few corrupt government officials, crude oil thieves and their counterparties, and -- to a lesser extent -- Western oil companies.

While Nigeria has no control over global oil prices or demand for its oil, let's hope that the nation's authorities can introduce and enforce legislation to curb the harmful practice of oil bunkering and allow local companies, workers, and the average citizen to benefit from its vast oil resources.

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  • Report this Comment On August 24, 2014, at 4:13 PM, Nwogbo wrote:

    Indeed, Ebola isn’t the biggest threat to Nigeria’s Oil industry. There are many known and unknown threats to the Nigeria’s Oil industry than can be imagined in this discourse. As it’s, Ebola appears to be a threat or is seen as such in the meantime because Ebola happens to have acquired some notoriety from its recent devastation in neighbouring West African countries. As a result, it has also attracted global attention and a call for immediate solution in order to contain it and avoid exporting it to the western countries, given that West Africans are frequent travellers.

    This in part could explain the apparent attention Ebola has received in Nigeria. Hypothetically speaking, had this very scourge of Ebola started firstly in Nigeria, the world might not have known much about it or perhaps not much would have been spoken of it, as Ebola deaths could have been seen as the like of those deaths resulting from the normal way of living conditions in Nigeria.

    Conventionally, a pandemic of this nature, apart from the loss of human life, is also a threat to every sector of the economy and the economy as a whole. But, such might not be the case in Nigeria given the unconventional way things are done in the country. An average Nigerian faces more threats that are more devastating than Ebola, on daily basis, that you could imagine. To these threats, government in its simple characteristic nature has remained indifferent since the victims are not blood relations to those in leadership. These victims are merely seen as statistics and typically, the unfortunate situation is seen as business as usual, affords them the opportunity to divert state fund into their personal pockets.

    I quite agree with you that the economy, apart from the Ebola, faces other grave threats in the form of oil theft, attacks on oil infrastructure, falling oil prices, and declining demand for its exports. Ebola, even, at its peak cannot be compared to the disastrous effect of Boko Haran on human life and by extension on the economy. Boko Haran on the average has claimed more human lives than Ebola. Still the government has remained indifferent to the ills of Boko Haran not minding the fact that their operational base is geographical defined.

    Excluding the declining demand for Nigeria’s oil exports, other threats, mentioned, are a way of life and is good for business for those in authority in Nigeria. Notwithstanding, the proceeds from the oil theft, attacks on oil infrastructure and even the exports go to the same coffer. The falling oil prices shouldn’t be seen as a policy dilemma for government as they have no explanation for the windfalls realised from the high oil prices in the past years. Even if the oil price has risen to $200 per barrel that wouldn’t have had impact on the life of an ordinary citizen since it isn’t going to transform their lives. The citizens had a better living standard 15 years when oil price was below $27 per barrel than now with oil price above $100 per barrel.

    The declining demand for its oil exports should not be an excuse for the state of the economy. America oil market is not the only oil market in the world, and America is not the only consumer of oil in the world either. To solely depend on America to demand for its oil is indicative of a paralysed or even dead economy. Nigeria’s economy should not only be forward-looking, but be seen as such and also acts as such. So, with the expected decline in the America’s demand for Nigeria’s oil, Nigeria should have targeted and penetrated other oil consumers in other regional markets in order to sustain the economy.

    Though Nigeria has no control over the falling oil price, it has control over its internal variables, but refuses to do what it ought to do. With 80% of its foreign revenue coming from oil, a significant decline in oil price would have a severe negative impact on the economy’s fiscal stance. Such exogenous negative shock could render the economy vulnerable and has the potential to result in a collapse of the economy.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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