Finance

Militants are controlling OPEC’s oil production

militant niger deltaAP/George OsodiMilitants patrolling the creeks of the Niger Delta area of Nigeria in 2006.

Oil watchers have been waiting for a production cut for almost two years.

But while OPEC hasn’t yet participated in a coordinated effort, the cartel of oil-producing countries technically has slashed its output.

Or, more accurately, Nigeria, one of its 13 members, has.

“Actually, we did have a de facto OPEC cut. Just — it was by accident,” Helima Croft, the head of commodity strategy at RBC Capital Markets, told Business Insider in an interview on Tuesday.

“Nigeria is that big supply-disruption story — and it can just go on,” she said.

Nigerian oil production has fallen by 31% this year to about 1.4 million barrels a day, down from 2.03 million barrels a day in January. That’s such a huge drop that Angola is now the No. 1 producer in Africa, as its production held steady in April at 1.8 million barrels a day.

Attacks on energy infrastructure by a new militant group called the Niger Delta Avengers have been the main cause of the production outages. Most notably, the group attacked a Chevron offshore facility earlier this month and the underwater Forcados export pipeline operated by Shell in late March.

Croft has since argued that even if Canada comes back from its devastating wildfires, Nigeria has essentially caused a rebalancing in the oil market all by itself.

Nigeria militantsGetty Images/PIUS UTOMI EKPEI/AFPFighters with the Movement for the Emancipation of Niger Delta preparing for an operation against the Nigerian army in 2008.

The Niger Delta Avengers’ rise has roots dating back to the 2000s, when armed militants in Nigeria’s oil-rich Niger Delta, including members of the Movement for the Emancipation of the Niger Delta, routinely kept hundreds of thousands of barrels of oil off the market.

At its peak, MEND slashed Nigeria’s output by half and cost the government $19 million in daily defense outlays, according to previously cited data by the RBC Capital Markets team.

In an effort to curtail the chaos and huge financial losses, the Nigerian government in 2009 signed an amnesty agreement and pledged to provide monthly cash payments and vocational training programs to the nearly 30,000 former militants in exchange for cooperation. Some of the more influential members like the ex-leader Government Ekpemupolo (referred to as Tompolo) also received lucrative security contracts worth nearly $100 million a year.

The arrangement was a pretty good Band-Aid. But it failed to address the fundamental drivers of instability in the region such as poverty, corruption, and the proliferation of weapons.

Fast forward to today: The Buhari administration has cracked down on corruption in the region by axing the expensive security contracts and issuing indictments for theft, fraud, and money laundering.

Even if the government wanted to pay off the militants today, it doesn’t exactly have the money for it, with oil prices still far below their peak and state resources redirected to counterinsurgency operations against Boko Haram.

“When people say the government can just pay them off — with what money?” Croft told Business Insider. “What president is running Nigeria right now? Now, if President Buhari folds to the militants, his whole reason for being in office then evaporates. He ran on a program of fixing Nigeria and ending the cycle of payoffs.”

Screen Shot 2016 05 20 at 1.39.39 PMRBC Capital Markets

Given that the Nigerian disruptions are at least partially a product of long-run structural issues, one can argue that they could last for some time. (As opposed to, say, the Canadian wildfires, which, while devastating, are only a temporary headwind.)

“I think we have to look at what happened in the past and say, well, could they potentially shut in production? … No company is going to keep their operations going when people show up with AK-47s,” Croft said. “You just wait it out. You don’t run a risk to your personnel or operations.”

These are structural problems in these oil-producing states,” she continued. “This not noise. This is not something that you can take your magic wand and make this thing go away.

“So this one, I think, fasten your seat belts. This one’s going to go on.”

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