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Nigeria's Shut-In Oil Production Seen Hitting 1 Mln B/D

Nigerias Shut-In Oil Production Seen Hitting 1 Mln B/D
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Παρ, 8 Φεβρουαρίου 2008 - 02:58
Nigeria's shut-in oil production is expected to reach around 1 million barrels a day in coming weeks, market participants said Thursday.
Nigeria's shut-in oil production is expected to reach around 1 million barrels a day in coming weeks, market participants said Thursday.

Royal Dutch Shell PLC (RDSB) has been forced to declare force majeure for the second time in two months on its crude exports from the troubled Niger Delta region, contributing to growing pessimism over security of supply from Africa's largest producer. The force majeure, which indemnifies Shell from litigation if it fails to meet its contractual obligations to buyers, follows the discovery of leaks on the Nembe Creek pipeline that feeds key Bonny Light export hub.

Shell also declared force majeure last month on exports from its Forcados terminal for January and February because of pipeline sabotage.

Access to the damaged Nembe line is particularly difficult as it is located in such a remote area. The company discovered four leaks, one caused by rust that ruptured the pipeline from the inside, according to Shell spokesman Rainer Winzenried. He said the company didn't know yet how the other three leaks occurred.

"They have not been investigated fully," he said.

Shell owns 30% of the Shell Petroleum Development Corp. joint venture, which operates the export hub. State-run National Nigerian Petroleum Corp. owns 55%, and units of Total SA (TOT) and Eni SpA (E) hold 10% and 5%, respectively.

Traders of West African crude are increasingly skeptical Shell can reclaim its lost output any time soon.

One trader based in London said a deterioration of security in the immediate area around the site will no doubt hamper repairs. "It all sounds very similar to Forcados in Feb '06 and Shell had that shut in for what, 18 months, due to security," the trader said. "(It) makes me wonder if the force majeure will end up being extended."

"The extra 130,000 barrels a day that will now be shut in is a further concern for Shell, and an embarrassment for the Nigerian government," said Thomas Pearmain, an analyst at Global Insight. "(The government) appears to have done little in the last few months to curb the violence in the country's oil-producing region."

Shell faces tough choices in Nigeria, accessing the areas it needs to get to in order to carry out repairs while protecting its personnel has proved difficult and costly.

The Bonny Light fields can produce around 400,000 barrels a day, although traders said reports indicate so far only around 130,000 has been shut-in.

And while production is slowly returning from the Forcados crude fields, the force majeure issued earlier remains in place.

Forcados, combined with the adjacent EA field, can produce around 380,000 barrels a day, but after repeated attacks traders lack confidence in sustainability of this supply.

Shell's Bonga crude facility is the third headache. Only three 950,000-barrel cargoes of Bonga are scheduled to load for March. The field is scheduled to almost entirely shut down for maintenance next month. The field normally produces around 225,000 barrels a day and is generally relied on as a more secure source of supply by buyers due to its offshore location.

In the wake of the presidential election last April, shut-in production in Nigeria totaled around 950,000 barrels a day following a series of attacks by militia groups and local communities on various oil facilities.

There has been a marked deterioration in security situation in Nigeria in the last few months, following a brief hiatus while the new government tried to broker peace agreements with the main community groups.

The most prominent group, The Movement For The Emancipation of the Niger Delta has resumed its activities with renewed enthusiasm following the imprisonment of its leader.

Traders are concerned losses could escalate further if attacks persist. If President Umaru Yar'Adua's controversial victory in the election is annulled by the Elections Tribunal in coming weeks and a new poll is ordered an escalation in attacks is expected.

Differentials for key benchmark Nigerian grades Bonny Light and Qua Iboe available for March have soared above a $3.00 premium to the Dated Brent quotation in recent days.

Traders expect U.S refiner demand to steer prices for physical spot cargoes in coming weeks.

"The economics are not good, refining margins are very mediocre. There's a lot that says the U.S. refiners should pull back," a trader said.

A number of the major refiners such as Sunoco Inc. (SUN), BP PLC (BP) and Shell need a base load of Nigerian light sweet in their U.S. refineries. Although the latter two will often trade the crude on to another end-user.

This gives them the choice of waiting to buy later when full programs are available or earlier from limited availabilities at higher prices.

Arguably it would be better to wait to see everything that is available, however, refiners often run varied slates or mixes of crudes sourced from different regions.

A refinery often has to have a backbone of base crudes in the slate to run alongside the higher value grades. The whole crude slate has to be coordinated in terms of acquisition, scheduling and processing so the acquisition of base crude cargoes represents an important part of the refinery supply plan.

Only a handful of light, sweet crudes, such as Saharan blend, are interchangeable with Qua Iboe. That, amid a difficult security situation, makes trying to predict what stock will be available at the end of any given month in Nigeria a tricky problem for refiners.

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