Cape Town (Platts)--15Nov2012/934 am EST/1434 GMT

Nigeria's oil production had been on a roller-coaster ride after months of flooding in oil fields and a series of disruptions to vital pipelines.

While the recent events are a cause of concern in a country relying on oil for 75% of revenues, the biggest constraint to production growth has been the lack of investment caused by the failure to implement wide-scale reform.

The Petroleum Industry Bill, a piece of legislation intended to introduce reforms into Nigeria's oil and gas industry, has taken longer than expected to be passed into law, holding up billions of dollars in new investments while Nigeria's oil reserves plummeted.

"Oil reserves, including condensates, dropped to 36.5 billion barrels in the third quarter of this year, compared to 37.16 billion in the corresponding period in 2011," a spokesman for the state oil regulator, Department of Petroleum Resources said this week.

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"Exploration activities started dropping a long time ago, mainly due to cash-call constraint and associated funding challenges on the part of government. The state of the PIB may have compounded issues," Afe Mayowa, president of the Nigerian Association of Petroleum Engineers said.

The state-owned Nigerian National Petroleum Corp. has, for years, struggled to pay its share in the joint venture contracts with oil majors, which posed a serious challenge to investment in the energy sector.

The International Energy Agency on Tuesday said flooding combined with theft drove Nigerian output to the lowest levels in two years in October. Oil production fell to 1.95 million b/d in October but has since maintained a level of between 2.0 million and 2.5 million b/d, the Paris-based agency said in its latest report.

The drop from September to October was around 110,000 b/d, leaving Nigerian production at "the lowest level in around two and half years." Shell said Sunday that its output has been cut by 25,000 b/d following a leak in a pipeline, compounding the company's output losses in the country.

On October 22, Shell was forced to declare force majeure on exports of Forcados and Bonny crudes, citing damage to pipelines caused by oil theft.

Total has had to cut its output, and also declared a force majeure on gas supplies to the six-train Bonny LNG plant after shutting in 90,000 b/d of production because of flooding.

The impact of the worst flooding in decades and large-scale theft of Nigeria's crude cannot be underestimated.

Analysts warn that the poor of state of Nigeria's infrastructure likely exacerbated the damage caused by the flooding, and until this larger problem is addressed, the country could be at risk for repeated floods.

While official estimates state around 180,000 b/d are siphoned from pipelines in the Niger Delta and smuggled abroad on tanker loads, a presidential panel on Nigerian oil and gas revenues reported November 2 that Nigeria could be losing around 250,000 b/d of oil production to theft.

The theft of oil, known in Nigeria as bunkering, costs the government an estimated $7 billion in lost revenue a year.

Central to the theft is the growing activity of illegal refiners, who set up thousands of make-shift home-made tanks mounted over fire in a pit in the ground, where operators heat crude stolen from punctured pipelines and wellheads.

"Oil theft has been on the increase because of the thriving business of illegal refineries, the criminals are becoming more daring," a spokesman for Nigeria's special military unit, the Joint Task Force, said this week.

Analysts said the illegal refiners fill gap in product shortages in Nigeria, where supply from the four state-owned refineries have never been adequate. The refineries, with combined nameplate capacity of 445,000 b/d have never produced above average due to years of neglect and mismanagement.

Nigeria pays fuel importers a subsidy to keep domestic prices of fuel low, but at a heavy cost to the economy.

President Goodluck Jonathan wants to increase domestic fuel supply and cut imports, and last week gave the oil ministry and the state-owned NNPC marching orders to fix the state refineries by March 2013.

Corruption within NNPC and the wider Nigerian energy sector have also been highlighted in audits which have emerged since a public outcry over graft in January, following the controversial removal, then reinstatement, of fuel subsidies.

Meanwhile, the chairman of the House of Representatives on Tuesday criticized the "enormous powers" handed to Nigeria's oil minister, in the proposed PIB.

The proposed 223-page bill gives the oil minister supervisory power over all upstream and downstream institutions, a provision that has already stirred controversy.

Anyone who "obstructs or interferes" with the minister can also be imprisoned or fined, a provision the lawmakers says is open to abuse.

An even more worrisome development is the downsizing and sale of assets in the onshore by majors, active for decades in Nigeria's oil and gas sector.

French oil major Total is planning to sell certain assets in Nigeria, and is expected to name the buyer on Monday.

Recent media reports have suggested that Total is close to selling its stake in some onshore oil blocks to China's state-owned Sinopec although Total CEO Christophe de Margerie on Tuesday declined to identify the potential buyer.

Despite efforts in the past decade to strengthen Sino-Nigerian relations, the China is not yet among Nigeria's major customers.

This, however, is likely to change as Chinese companies take a foothold in exploration and production.

Oil operators appear keen to shift more of their focus offshore where the risks of sabotage are lower and financial rewards are greater. Local media earlier this month said oil majors pulled in more than $2.5 billion in sales of Nigerian blocks to local companies during the last two years.

Shell has just completed the company's divestment program, announced in 2010, which covered onshore eight blocks.

ConocoPhillips in May said it was selling all of its four onshore leases in Nigeria and its 17% stake in the Brass LNG project. Analysts say a deal is likely to raise up to $1 billion for the company.

Though the majors are likely to retain their footing in the offshore where the their expertise is most needed, the sale of onshore assets is likely to benefit local companies seeking a greater share in the sector.

The appetite for exploring in Nigeria has waned in recent year but analysts say the government's target of raising reserves to 40 billion barrels could be achieved if the political and security environment change.

In a country where most national budget revenues and nearly all foreign currency comes from oil exports, the stakes could not be higher.

--Jacinta Moran, jacinta_moran@platts.com
--Staff, newsdesk@platts.com
--Edited by Jonathan Dart, jonathan_dart@platts.com

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