Nigeria’s Oil: A Theft without End

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Nigeria loses billions of dollars to oil theft every year. It is estimated that over $40 billion has been stolen from the country by oil thieves over the last 10 years. While most perceive oil thieves to be shadowy figures skiting across the snaking waters of the delta region, the reality is that the oil thieves can also be found in the hallowed bureaus of government and state institutions. To effectively tackle the clear and present danger of unending oil theft, the searchlight must be beamed on both sections of economic sabotage. Nosa James-Igbinadolor reports

It can well be said, after all, that Nigeria’s oil industry is inevitably managed by two competing groups; the federal government that has inefficiently managed the industry for the Nigerian people, and thieves that continue to effectively shear billions of dollars’ worth of oil from pipelines across the delta. Indeed, Nigeria is the clearest evidence of the failure to establish accountable institutions, with its economy long being characterised by corruption and non-transparency, and its political economy offering a strong enabling environment for the large-scale theft of crude oil.

Criminal gangs dominate the official and non-official end of the oil and gas industry, making away with billions of dollars’ worth of unaccounted oil. Oil accounts for 90 per cent of Nigeria’s foreign exchange and the bulk of government revenue. But the oil pipelines that snake through the swampy, oil-rich Niger Delta region are targets for theft and sabotage. Oil theft and pipeline vandalism is an old song in the Niger Delta, where there is usually political and social unrest.

A typical large-scale theft network has facilitators, operations and security people, local and foreign transport, buyers and sellers, and a range of opportunists. Top Nigerian officials cut their teeth in the oil theft business during military rule. Over time, evidence surfaced that corrupt members of the security forces were actively involved. The country’s return to democracy in 1999 then gave some civilian officials and political ‘godfathers’ more access to stolen oil.

In 2013, Chatham House released a report on Nigeria’s criminal crude. The report found that “Nigerian crude oil is being stolen on an industrial scale. Some of what is stolen is exported. Proceeds are laundered through world financial centres and used to buy assets in and outside Nigeria. In Nigeria, politicians, military officers, militants, oil industry personnel, oil traders and communities’ profit, as do organised criminal groups. The trade also supports other transnational organised crime in the Gulf of Guinea.”

It has been estimated by the Nigerian National Petroleum Corporation, NNPC, that Nigeria lost as much as 22 million barrels of oil to theft in the first half of 2019. The stolen oil amounts to more than 120,000 barrels per day (bpd), or roughly 6 per cent of Nigeria’s nearly two million bpd output. Godwin Obaseki, the governor of Edo state and chairman of the ad-hoc Committee of the National Economic Council on Crude Oil Theft, Prevention and Control, warned the 22-million-barrel figure could double by the end of 2019, if nothing was done to combat hydrocarbon theft.

In its September 2019 report, NNPC admitted “a total of 186 pipeline points were vandalised representing an increase of 18per cent from the 158 points vandalised in August 2019. Out of the vandalised points, 30 failed to be welded while none was ruptured. Aba-Enugu axis accounted for 77per cent of the breaks while PHC-Aba, ATC-Mosimi and other routes accounted for 8per cent each.”

Although crude oil theft has long been the subject of intense media attention in Nigeria, the downstream theft of hydrocarbons has remained under the radar. Despite this, downstream hydrocarbon theft is big business in Nigeria.

A recent oilprice.com report, noted that Nigeria’s hydrocarbon theft has traditionally fallen into five main categories: small-scale theft and illegal local refining; large-scale illegal bunkering in the field; theft at export terminals; theft from fuel trucks; and, piracy and oil tanker hijackings. “Although the former category is pervasive, it almost exclusively involves low-level criminal elements and accounts for a minor percentage of the overall problem. The latter categories, however, are significant issues and involve more technical sophistication and sophisticated networks comprised of facilitators, local elites, militant groups, oil company workers, as well as military and political officials,” the report noted

The report goes on to critically analyse the methodologies used in oil theft. “The most frequently utilised method of hydrocarbon theft has been the tapping of oil pipelines or wellheads. Referred to as ‘hot tapping’ or ‘pressure tapping’, this method of theft involves accessing a high-pressure operational pipeline and diverting a percentage of the flow of oil. Accordingly, the flow is largely uninterrupted and the pipeline remains fully functional, meaning that the theft goes undetected.

“Oil infrastructure located onshore, or in the Niger Delta’s swamps and shallow waters – where oil pipelines crisscross the region in a grid-like pattern linking the region’s 22 petroleum storage depots and 4 refineries – is most frequently targeted in these tapping operations. This type of activity was originally identified by academics in 2008, and discussed in an African Security Review article. As a percentage of this hot tapping takes place underwater, it is largely hidden from company inspectors.

“Cold tapping is also a frequently employed mechanism by illicit networks to pilfer crude oil. In this instance, the illicit actors will blow up a section of pipeline, putting it out of commission for several weeks. During this time, an illegal underground tap will be installed, which will divert a continuous supply of oil to the criminals’ own storage facilities. As the supply is constant, when the pipeline is fixed the oil company will not detect any fluctuation in pressure in the main pipeline, and the flow will be able to continue unabated.”

It further noted that while the term ‘bunkering’ describes the process of loading oil onto a ship, it has become synonymous with oil theft, with most illegal bunkering occurring in Bayelsa, Rivers and Delta States, where international oil companies operate and run onshore export terminals.

Aside from tapping, there have also been numerous allegations of oil and premium motor spirit (petrol) disappearing from the country’s onshore export terminals, tank farms, and refinery storage tanks – many of which are operated by IOCs. In this ‘white collar’ oil theft scenario, excess oil products are transferred into tankers beyond the licensed amount via the manipulation of meters and the forging of bills of lading and other corporate documents.

Piracy and oil tanker hijacking also constitute part of the challenge of oil theft in the country.

But it goes beyond all these. In discussing oil theft in Nigeria, analysts tend to overlook how government and its institutions engage in large scale heist of oil and gas. Christina Katsouris and Aaron Sayne in their Chatham House report, noted that the “lines between legal and illegal supplies of Nigerian oil can be blurry. The government’s system for selling its own oil attracts many shadowy middlemen, creating a confusing, high-risk marketplace. Nigeria’s oil industry is also one of the world’s least transparent in terms of hydrocarbon flows, sales and associated revenues.

This is because NNPC’s approach to oil sales suffers from high corruption risks and fails to maximise returns for the nation. A 2017 investigation by Abuja based Daily Trust media, found that some indigenous companies not registered by the Corporate Affairs Commission (CAC) lifted Nigerian crude oil grades valued at $3.5 billion. The investigation further found that the deliberate failure by the Nigerian National Petroleum Corporation (NNPC) to provide clear and accurate identity of some companies it awarded multi-million-dollar oil lifting contracts that year was helping those companies to escape public scrutiny.

Early in 2014, the then Nigeria’s CBN governor, Mallam Sanusi Lamido Sanusi, raised an alarm that $20 billion in NNPC oil sale revenues had gone missing.

The management of NNPC’s oil sales has worsened particularly since 2010. A 2015 report by the National Resource Governance Institute, found that, “These shortcomings also characterise NNPC as a whole. Over 38 years, the corporation has neither developed its own commercial or operational capacities, nor facilitated the growth of the sector through external investment. Instead, it has spun a legacy of inefficiency and mismanagement. Its faults have been described by a number of scathing reports, many commissioned by government itself. Despite NNPC’s debilitating consumption of public revenues and performance failures, successive governments have done little to reform the company.

“The largest problems stem from the rising number of ad hoc, makeshift practices the corporation has introduced to work around its deeper structural problems. For instance, NNPC entered into poorly designed oil-for-product swap deals when it could no longer meet the country’s fuel needs. Similarly, it began unilaterally spending billions of dollars in crude oil revenues each year, rather than transferring them to the treasury, because NNPC’s actual budget process fails to cover operating expenses. Some of these makeshift practices began with credible goals. But over time, their operation became overly discretionary and complex, as political and patronage agendas surpassed the importance of maximising returns.”

A Nigeria Extractive Industries Transparency Initiative (NEITI) report disclosed that Nigeria loses an average of $11million daily which translates to $349 million in a month and about $4.2billion annually to crude and product losses arising from stealing, process lapses and pipeline vandalism. “While figures from government put the loss at between 150,000-250,000 bpd, data from private studies estimate the figure to be between 200,000-400,000 bpd. This implies that Nigeria may be losing up to a fifth of its daily crude oil production to oil thieves and pipeline vandals”, the report said.

NEITI further alerted the nation that crude oil and refined product worth $41.9 billion were stolen from Nigeria in the last 10 years. A breakdown shows that the nation lost $38.5billion on crude theft alone, $1.56billion on domestic crude and another $1.8billion on refined petroleum products between 2009 and 2018. The agency further expressed concerns that in the face of current dwindling revenues, paying priority attention to curb oil theft in the country’s oil and gas industry has become both necessary and urgent to expand revenue generation.

The agency warned that the value of crude oil and allied products so far lost are equal to the size of Nigeria’s entire foreign reserves. “Stemming this haemorrhage and leakages should be an urgent priority for Nigeria at a time of dwindling revenues and increasing needs”, the report stressed

According to the NEITI report, what the country lost in 20 months in fiscal terms is “Enough to finance the proposed budget deficit for 2020; in 15 months to cover total proposed borrowing or increase capital budget by 100per cent and in five months to cover pensions, gratuities and retirees’ benefits for 2020.”

NEITI added “In terms of volume, 138.000 barrels of crude oil was lost every day for the past 10 years, representing 7per cent of average production of two million bpd. Nigeria lost more than 505 million barrels of crude oil and 4.2 billion litres of petroleum products between 2009-2018. What is stolen, spilled or shut-in represents lost revenue, which ultimately translates to services that government cannot provide for citizens already in dire need of critical public goods”.

To stem this industrial scale losses, NEITI urged the government to embrace oil fingerprinting technology, the comprehensive metering infrastructure of all facilities, and other creative strategies to combat the growing menace of theft of Nigeria’s crude oil and refined petroleum products.

But it should go beyond these. There must be effective structural changes to the processes and systems that drive and support the oil and gas industry to vitiate this danger. The danger to the nation’s political economy makes reform both urgent and critical. The danger presents a window of opportunity to the government to pursue reforms that target NNPC’s management of oil sales to ‘stop the bleeding’ as well as deeper structural reforms to NNPC to ‘cure the patient’

As the National Resource Governance Institute posited, “NNPC oil sales are Nigeria’s largest revenue stream and face severe problems. Fixing them should come first in the reform queue, before revisiting upstream contracts with international oil companies.

“Repairing oil sale governance does not require omnibus legislation like the Petroleum Industry Bill (PIB). Rather, a bold and targeted agenda with a one-to two-year timeline better suits Nigeria’s political timetables.

“When overhauling oil sales, the government should prioritise simplicity throughout. Current governance problems thrive on byzantine arrangements which only a handful of people understand.

“The bad practices that undermine NNPC oil sale performance all have political interference at their root. Only sustained leadership from the very top will shift incentives towards performance and away from patronage.”