Daily Champion (Lagos)

Nigeria: Yar'Adua's Health Triggers Concern Over Nation's Oil Output

The lingering uncertainty over the health of President Umaru Yar'Adua and the associated political intrigues surrounding his absence are raising fresh concerns over the sustainability of peace in the Niger Delta where militants are said to have started regrouping with fresh demands.

Government last week dispatched security forces to disperse protests at three points in the Niger Delta as the militants protested lack of attention to the presidential amnesty program. The militants also claimed a warning strike at an oil facility.

Although the oil companies have declined official comments on the unfolding development, trepidation is high in the industry over the incident, which represented the first such claim from Movement for Emancipation of Niger Delta (MEND) for three months since the group declared a unilateral ceasefire to allow for negotiations with the government.

Attacks by MEND on oil production facilities had cut Nigeria's oil production from 2.6 million per day (b/d) in early 2006 to around 1.2 million b/d prior to a government amnesty deal to try to end years of unrest.

However, the group responded to the amnesty in late October with an indefinite ceasefire but has continued to accuse government of slowing down the implementation of the terms of ceasefire.

The militants might also be sending subtle signals of in support of calls for vice president Gooodluck Jonathan to assume temporary powers in the absence of President Yar'Adua whose state of health has become a subject of constitutional debate.

Whereas the militants appear to want full consummation of their amnesty deal with the president they also appear to press for the ascension of the vice president should there be a power vacuum.

Ongoing talks between the government and militant groups raise renewed tensions in the Niger Delta.

The Movement for the Emancipation of the Niger Delta (MEND) attacked a pipeline in Rivers State as a warning to the government not to let the amnesty program fall to the wayside due to President Umaru Yar'Adua's illness.

In addition, former militants have taken to the streets to protest nonpayment of amnesty allowances.

Security forces were deployed to disperse the militants. Armored vehicles and four truckloads of armed police deployed in the Amarata neighborhood of Yenegoa in the Bayelsa state to break up the protesting militants.

Other protests took place in Warri in the Delta State.

The militants said that the government was not keeping the promises made during an amnesty period earlier in the year.

The protesting militants said government has failed to pay up the money which they were promised in exchange for laying down their arms, and warned that unless the government fulfilled its promises, mayhem might rebound.

Minister of Defense, Godwin Abbey, has in reaction to the militants' protests, warned that government security agencies would come down hard on any groups that continued to disrupt the relative peace prevailing in the oil-producing region.

The minister's warning came against a claim by MEND that it had carried out a "warning strike" against an oil pipeline Rivers state.

"The government is not unmindful of those trying to undermine the peace process but the Armed Forces will do what it is expected to do. I want to assure all Nigerians that the relative peace we now enjoy in the Niger Delta which has seen the country make giant strides will not elude us," Abbey said in Abuja.

MEND said it carried out the attack on the pipeline over a lack of progress in peace talks with the government.

The international oil companies, producer groups and export market players are also keen on the final outcome of the tough political negotiations in Nigeria and Iraq.

The latter part of 2009 has seen two significant developments in Nigeria and Iraq that should give OPEC pause for thought, however.

At its last meeting in the Angolan capital Luanda on December 22, members of the Organization of Petroleum Exporting Countries (OPEC) did not tamper with the current agreement on oil output ceiling as they expressed concern over low quota compliance by members in spite of weakening international prices of the commodity.

Oil prices, currently toward the lower end of a $70-$80/barrel range, are close to where they were in early December when Saudi Arabian oil minister Ali Naimi described them as "perfect."

But keeping a cap on production has not been as difficult as it might have been had Nigeria's output potential not been compromised by the conflict in the Niger Delta, while Iraq, although it does not participate in output agreements, has also been constrained by the cumulative effects of sanctions, war and insurgency.

In Nigeria, the amnesty deal between the government and militant groups in the Niger Delta has resulted in a sharp drop in attacks on oil installations, paving the way for shut-in production to recover alongside rising production from newer deepwater fields.

Not everyone is convinced that Nigeria will put its Niger Delta troubles behind, though. Washington-based consultancy PFC Energy said last month that it maintained its "pessimistic view that prospects for additional violence and production disruptions remain, with little upside to production growth in the short term."

It said that because the government, while having sufficient funds to finance its peace overtures, was unlikely to make any structural changes to the country's politics.

"This sets the stage for renewed violence as criminal groups again seek out illicit activities and young men are once again for hire by powerful political machines in the run up to 2011 elections," PFC said.

The Nigerian situation has been complicated by concerns over the health of President Umaru Musa Yar'Adua, who is being treated in Saudi Arabia for a heart condition.

"Should the President pass away, or cave to demands to resign, a power vacuum will be created-with critical implications for the redrawing of the Nigerian political landscape, as well as potential for resumption of violence in the Niger Delta and delays to outstanding legislation such as the Petroleum Industry Bill," PFC said earlier this month.

Indeed, Nigeria's main militant group said on December 16 that Yar'Adua's absence from the country for nearly four weeks had put the benefits from the ceasefire at risk.

A spokesman for MEND, the Movement for the Emancipation of the Niger Delta, stated in an email statement that follow-up meetings between the group's mediating team and Yar'Adua to negotiate the demands of the militants had been stalled because of the president's ill health.

Nevertheless, the International Energy Agency, citing "the unexpected success of the Nigerian government's ceasefire accord with key rebel groups," the week ended December 11 raised its previous forecast of Nigerian crude production capacity by 386,000 b/d between 2008 and 2014, saying it now expected output to climb by some 370,000 b/d over the period to around 2.9 million b/d rather than fall by 20,000 b/d as it had previously forecast.

Already in November, Nigerian crude output rose to its highest level in 15 months and accounted for 60% of OPEC's additional volumes last month after the government-brokered amnesty deal halted attacks on oil facilities, the IEA said, estimating that production climbed by 80,000 b/d, to just under 2 million b/d, as companies stepped up the pace of repair work to damaged oil infrastructure.

After the roller-coaster ride of 2008 that culminated in OPEC's biggest ever output cut, 2009 has turned out to be a relatively calm year for the oil producers' club, which appears to have weathered the global financial storm without too much pain.

Having implemented at the beginning of the year a package of output cuts dating back to autumn 2008, the group has been able to sit back and watch oil prices rise to levels between $70 and $80/barrel without having had to adjust production at all this year.

The group has never managed to achieve full compliance with any output agreement, and the current pact was problematic from the start, given the group's failure to publish a set of individual quotas under the 24.845 million b/d target.

In Iraq, production is now regularly reaching levels of around 2.5 million b/d, and while Baghdad is still far from boosting its capacity to the 12 million b/d in six years' time touted by oil minister Hussein al-Shahristani earlier this month, the awards of several giant fields to big international and national oil companies as part of the second bid round point toward substantial rises in Iraqi output in the not-too-distant future.

Revising its previous forecast upward by 390,000 b/d, the IEA now sees Iraqi production capacity climbing by 600,000 b/d over the next few years to reach 3.1 mb/d by 2014 "in light of the progress made on contract awards and the pressing imperative to increase revenues."

At the same time, though, the agency cautioned that the ongoing political and security challenges facing Iraq left the outlook "extremely vulnerable to future revision."

This potential for higher volumes from Nigeria and Iraq coincides with some more positive indicators for demand for OPEC oil, not least of which is the continuing strong outlook for non-OECD oil demand.

On December 11, the IEA raised its estimates for world oil demand over the next four years to reflect growing confidence over the pace of global economic recovery.

Back in June, using International Monetary Fund projections, the IEA said world oil demand could reach 89 million b/d by 2014, but was likely to drop this year to 83.21 million b/d from 85.76 million b/d in 2008.

The week ended December 11, however, the IEA said it now saw global oil demand growing from 84.9 million b/d in 2009 to 86.3 million b/d in 2010, and reaching 90.9 million b/d in 2014.

Needless to say, all of the projected growth comes from the non-OECD area, which overtakes the OECD to account for 51% of world demand by 2014 under the IEA's new medium-term outlook.

Thanks to the stronger demand baseline carried through the forecast, the IEA has raised its forecast of the call on OPEC over the medium term. It now sees the call on OPEC, plus movements in and out of stocks, rising from 28.7 million b/d this year to 32.2 million b/d in 2014.

All of which may not sound particularly problematical for OPEC. But rising volumes and capacity in Nigeria and Iraq could place renewed focus on individual output quotas, an issue that has always been a cause of tension within the group.

Nigeria's Delta woes may have taken Abuja's attention away from its previous quest for a production quota commensurate with its production capacity, in which it has invested heavily. But if production does climb as a result of a continuing ceasfire in the Delta, Nigeria could push its quota demands with renewed vigour.

Nigeria's current quota, as calculated by Platts, is just slightly above 1.7 million b/d--well below the various estimates of what it is currently producing.

The issue of a quota for Iraq could be more complicated because of Iran and whether the agreement in the late 1980s--after the eight-year-long war between Baghdad and Tehran and before Iraq's invasion of Kuwait--that the two countries should have quota parity should still hold. This complication could help to suppress any appetite OPEC might have in the short term for bringing Baghdad back into the quota system.

And although firmly embedded in the OPEC quota system, Iran has been unable to ramp up its own production. Its current quota, as calculated by Platts, is 3.334 million b/d. Actual production is higher, estimated by Platts at 3.77 million b/d in November and at 3.7 million b/d by the IEA.

The IEA takes a bleak view of Iran's future crude output prospects, forecasting that the country's sustainable capacity will fall from 3.97 million b/d in 2008 and 2009 to 3.92 million b/d in 2010, and will continue falling to reach 3.48 million b/d in 2014--the year in which Iran has targeted capacity of more than 5 million b/d.

Leo Drollas, Deputy Executive Director of the Centre for Global Energy Studies in London, believes OPEC quotas could become a serious issue in the years to come, with Iraq as the main catalyst and with implications for the entire oil sector.

"Rapidly rising production from Iraq could change the whole structure of the oil business in the years to come," Drollas says.

"On present trends, there will not be enough demand growth over the next 10 years to accommodate the existing excess capacity in OPEC, most of which is in Saudi Arabia, and the additional volumes from Iraq, Nigeria and Angola," he says.

"Either some of OPEC's Gulf members will have to cut back in order to keep p;rices up or, if they insist on preserving their production volumes, the price will have to drop to levels more commensurate with true long-term marginal costs, that is, around $35/barrel."

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