One Reason Gas is Emptying Your Wallet: Nigeria

Please read this interesting piece in today's NYT Week In Review section about Nigeria's impact on world oil prices. It gives important insights into what is also going on in the Niger Delta.

NYT Week in Review

I am also reprising the article in full here:


June 29, 2008
THE WORLD
One Reason Gas Is Emptying Your Wallet: Nigeria

By GRAHAM BOWLEY
When armed rebels from the Movement for the Emancipation of the Niger Delta attacked an enormous oil facility 75 miles off the swampy West African coast on June 19, traveling hours by speedboat under cover of darkness and kidnapping an oil worker, their brazen assault underlined the perhaps underappreciated dependence of the United States — and the world — on oil from Nigeria.

Three days afterward, Nigerian officials said at a hastily arranged global energy summit in Jidda, Saudi Arabia, that recent attacks had cut Nigeria’s oil production to its lowest level in nearly two decades, giving oil markets the jitters and helping to send prices higher.

The attack also showed that Nigeria’s vast reserves of oil are being held hostage by a conflict that at best is little understood in the West. It is a three-way struggle, involving a government charged with negligence and corruption, oil companies blamed for terrible environmental damage that afflicts the region and an impoverished people.

Some of these people are acting on genuine grievances that they are not getting their fair share of the billions in oil wealth pouring into the country. But others are little more than violent thugs who see a lucrative opportunity among the rusting pipes and plants that dot the creeks and swamps of southern Nigeria not only to steal oil and smuggle it out of the country, but to kidnap foreign oil workers for ransom. The net effect has been that overall production has dropped sharply, largely because oil companies have found it too dangerous to operate in parts of the region.

Unlike the grand geopolitical struggles of Israel versus Iran or the burning oil towers of northern Iraq — some of the factors we usually imagine influencing world oil prices — Nigeria’s is a local tussle. But the events in Nigeria — Africa’s most-populous nation, and the world’s eighth-largest oil exporter, supplying nearly a tenth of America’s oil imports, according to the Department of Energy — have rippled across global energy markets nonetheless, and contributed to tighter supplies and higher prices at American gas pumps. (This is in addition to a long list of other variables, including sharply declining production in Mexico and slowing production in Russia, the North Sea and Venezuela, all in the face of steadily rising demand by fast-growing behemoths like China and India.)

“We always focus on the Persian Gulf but this is one of the key oil security issues in the world today,” said Daniel Yergin, one of the nation’s best-known energy experts and chairman of Cambridge Energy Research Associates, a consulting firm. “It’s tied up with Nigerian politics, regional and national battles for power, and criminality.” When Mr. Yergin spoke to lawmakers at a hearing in Congress last week, he was asked what would most help stabilize world markets. “Helping bring peace to the Niger Delta would be a major contribution,” he responded.

How does Nigeria — and the world, facing a $140 barrel of oil — get out of this mess?

Shell led the way in exploiting Nigeria’s oil wealth in the 1950s. From those early years on, there were local protests and armed struggles associated with the oil industry. The latest bout of violence led by local militias took off in 2003, with increasing sophistication and effectiveness.

According to J. Stephen Morrison, director of the Africa program at the Center for Strategic and International Studies in Washington, the government led by Nigeria’s new president, Umaru Yar’Adua, must break with decades of neglect and pay attention to the troubles of the southern delta region by promoting development but also cracking down on the rebels and “demonstrating that these guys cannot operate with impunity.”

He’s not very optimistic, however. “When you look at the delta, the overwhelming picture is that the situation has very little promise of being fixed,” he said.

The government controls oil revenues and it gives only a fraction back to the desperately poor regions that produce the oil. Even then, according to Chris Albin-Lackey of Human Rights Watch in Nairobi, most of the money is “squandered on white elephant projects” — such as the ones he set out to visit in 2007, a school for the handicapped, a fishpond for small-scale aquaculture and a sports stadium, which he found had either been abandoned or never built. Meanwhile, cash-rich local politicians have played a part in creating the local militia groups because the militants have proved useful as local muscle to take over voting offices and grab ballot boxes to control the periodic elections.

As the damage has mounted and some companies have closed down operations, Nigeria’s oil production has slipped to 1.8 million barrels per day, which is far below its production capacity of about 2.8 million barrels. .

One million barrels of missing oil each day is costly for Nigeria and for the rest of the world when the market is so tight.

The events in Nigeria have an added impact because its oil is especially prized: it is low in sulfur — what is known in the industry as “sweet oil” —“which is really helpful in meeting the sulfur standards we have put in place” in the United States, said Adam Robinson, an oil analyst at Lehman Brothers in New York.

“Nigeria outages barrel for barrel have more of an impact than additional Saudi output,” he said. “Nigeria has been on the minds of traders ever since 2003 and this attack last week was a particular worry because it opened up a new front in the conflict.”

The oil companies have responded by building local amenities like roads, hospitals and schools to win local hearts and minds. The president’s new government came into office early last year saying it would dispatch representatives including the vice president to talk to the protesters in the south.

A special envoy from the United Nations, Ibrahim Gambari, a Nigerian, is convening a meeting later this summer to bring together the national and local governments, oil companies and local communities.

“I believe it can be solved,” he said, in an interview. “The criminals can be isolated and the legitimate demands addressed.”

But the problem, said John van Schaik, an oil analyst for Energy Intelligence, a publisher of industry newsletters, is that as long as oil prices remain high, the rebels recognize the power they have and are not likely to give it up. And the rebels are one reason prices are likely to remain high.