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

The recent Ebola outbreak in West Africa is one of many challenges facing Nigeria’s oil industry.

Aug 23, 2014 at 9:50AM

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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