On May 13, militants attacked a Chevron (NYSE:CVX) oil pipeline in Nigeria, causing serious disruption to supply. The explosion wasn't a lone event. In the week before, militants knocked out Chevron's Okan offshore facility in the Nigerian Delta, affecting around 35,000 barrels per day of crude production. Given that Chevron has substantial operations and interests in the country, let's analyze how Nigeria's militant trouble affects Chevron's financials.
The Nigerian militants and why they're attacking
Because of the low oil prices, Nigeria's oil revenue has declined by more than 50% from 2014, and the government has had to make some serious budget cuts. Because the government cut a program that paid militants to protect facilities that they once attacked, many militants have seen their incomes fall. One group, the Delta Avengers, has attacked energy infrastructure in the oil-rich Nigerian Delta as a way of protesting the cuts. The Delta Avengers would like the government to compensate the natives of their oil-producing region more for the resources they produce. They have vowed to continue their attacks until their demands are met. Because of the severity of their crimes, Nigeria's government has branded the Delta Avengers as terrorists and has refused to meet their demands.
The escalating militant situation in Nigeria has seriously disrupted production. As a result of the attacks and other factors, Nigeria's production has declined from its normal rate of 2.2 million to 2.4 million barrels per day to less than 1.6 million. Many investors think production could fall further to 1.2 million barrels per day if the current dynamic isn't reversed. Unless the military defeats the militants or the government makes a deal with the groups, the supply disruptions are likely to continue.
Chevron isn't the only company that has seen its operations disrupted. In February, one of Royal Dutch Shell's (NYSE:RDS-A) (NYSE:RDS-B) pipelines to an export terminal was bombed. The bombing caused a bottleneck that has reduced production by 300,000 barrels per day. As of mid-May, the bombed pipeline hasn't come online yet.
Chevron operations in Nigeria
The attacking militants represent a vexing problem for Chevron. Nigeria is an important country for the company. Nine percent of Chevron's net unrisked resource base of 68 billion barrels of oil equivalent resides there. The Niger Delta, which has been the main location of the supply disruptions, accounts for a substantial amount of Chevron's production. In 2015, the company's net daily production in the Delta averaged 65,000 barrels of crude oil, 6,000 barrels of LPG, and 229 million cubic feet of natural gas. That's around 110,000 barrels of oil equivalent per day, or 4.2% of Chevron's current production rate of 2.62 million barrels of oil equivalent per day. If the situation gets worse, Chevron's substantial deepwater operations near Nigeria, which produces another 160,000 barrels of oil equivalent per day, could be affected if militants attack export terminals.
If the supply disruptions become serious, they could trim Chevron's total production by a few percentage points. That would shave off around a billion dollars in revenue if the disruptions last one year. The disruptions would also make it harder for Chevron to realize fair market value for any operations that it's thinking about divesting in the nation.
OPEC has hidden costs
The recent events in Nigeria illustrate how difficult it is to sustain production at low oil prices. Although many OPEC countries are blessed with abundant reserves with full cycle costs that can easily beat that of any shale driller, those same countries also have hidden costs that they will eventually have to pay. Some of the revenue garnered from production is owed to citizens of the country. When those revenues decline sharply, the citizens won't be happy and might disrupt production.
Because crude inventories around the world have set record highs and production has been greater than demand, the market has largely ignored geopolitical risks. As supply and demand come more in balance in the second half of the year, however, the market may pay more attention to potential distruptions. If that occurs, the dynamic is bullish for oil prices and ultimately for Chevron shares.
Although Chevron has substantial Nigerian operations and the company's production could drop by a few hundred thousand barrels per day because of the militant activity, the increase in crude prices from the decline in Nigerian production will probably offset most of the revenue losses.