Wednesday, February 10, 2010

Nigerian Oil Production: Analog for Iraq?

In comments to the discussion the other day of the major international oil companies (IOCs) booking reserves in Iraq, Manolo suggested considering Nigeria as an analog for Iraq.  That intrigued me and so this morning I started exploring how strong an analogy can one draw between the two countries.

The chart above shows Nigerian oil production from 1965 through October 2009 from two different sources.  The period of interest is from 2005 on when production has been falling due to violence.  The EIA Country Analysis Brief explains:
Since December 2005, Nigeria has experienced increased pipeline vandalism, kidnappings and militant takeovers of oil facilities in the Niger Delta. The Movement for the Emancipation of the Niger Delta (MEND) is the main militant organization attacking oil infrastructure for political objectives, claiming to seek a redistribution of oil wealth and greater local control of the sector. Additionally, kidnappings of oil workers for ransom are common and security concerns have led some oil services firms to pull out of the country and oil workers unions to threaten strikes over security issues.

The instability in the Niger Delta has caused significant amounts of shut-in production and several companies declaring force majeure on oil shipments. EIA estimates Nigeria’s nameplate oil production capacity to be around 2.7 million barrels per day (bbl/d) but as a result of attacks on oil infrastructure, 2008 monthly oil production ranged between 1.8 million bbl/d and 2.1 million bbl/d. Additional supply disruptions for the year were the result of worker strikes carried out by the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) that shut-in 800,000 bbl/d of ExxonMobil’s production for about 10 days in late April/early May.
The major foreign producers in Nigeria are Shell, Chevron, ExxonMobil, Total, and Eni/Agip. Recent developments in the upstream sector include the start up of the Chevron-operated Agbami field in September 2008, with expected peak production of 250,000 by the end of 2009.
So Manolo is clearly correct that Nigeria is an example of IOCs being unable to maintain, let alone increase, oil production in the face of civil instability (though they certainly are getting quite a bit of oil out of Nigeria - production hasn't fallen to zero).

So how analagous are the two countries?  Well, violating my earlier promise, here is how the two countries stack up on the failed state index:

Sure enough, Iraq is more failed than Nigeria, though Iraq is getting better, while Nigeria is getting worse. (Note - as I discovered in the case of China - some of the ratings in the Failed State Index are pretty dubious, so take this data with a very large pinch of salt).

A more objective, if coarser, measure of how badly off a country is is the tendency for its people to flee the place. From the United Nations Human Development Index, here's Nigeria with a 0.8% emigration rate in 2007 - not bad at all:

By contrast, Iraq is currently such that the UN has been unable to gather statistics to prepare a human development index: clearly a bad sign.  The last available data from 2000-2002 shows Iraq with an emigration rate of 4%, and that's before we invaded the place and set off an insurgency/civil war.

So, these data points would lead you to think that Iraq was a worse operating environment than Nigeria.  Still, there's this:

One way or another, Iraqi oil production is increasing recently, whereas Nigerian oil production is decreasing.  One reason may be the presence of the US military.  But another may be that in Nigeria the insurgency is specifically about the oil industry, and perceptions of unfairness in the distribution of the revenues within the country, and so the main target is oil infrastructure.

Of course, you could argue this is a reason for pessimism about Iraq: the oil industry went into a country that didn't have an insurgency (Nigeria), and managed to operate in such a way as to create one that then limited oil output.  So then how well is it going to do in a country that's already as fragile as Iraq?

Update 12:55am PST.  Added a blow-up of the production graph for Nigeria just since 2005 (see comments for further discussion).  The black lines are hand-drawn to illustrate the decline from mid 2005 to early 2008, followed by stabilization since then.


james said...

Personally, I am coming around to Manolo's point of view. In particular I am struck by what Jeff Vail has to say about positive feedback loops and insurgency:

It is interesting that the Asia Times Online article talks about the Iraq government paying off insurgents by allowing them to siphon away oil. I think that Jeff Vail would say that the more that such insurgents are rewarded, the more such insurgency one can expect to see.

KLR said...

Stuart - could you drop me a line at klrietmann at verizon dot net?

james said...

Jeff Vail also wrote this piece that pushes me towards believing that Iraq is a perfect place to foster a petro-insurgency:

Time will tell. But I would think that as world oil production peaks (i) Governments will become more desperate and more willing to make concessions to insurgents to keep the oil flowing (thus attracting more insurgents to the business of petro-insurgency), and (ii) IOCs will become more desperate and more likely to take on projects that are less assured of success than ones they did in the past.

Stuart Staniford said...

James - thanks for reminding me of Jeff's piece on Nigeria which I just went and reread. His single-loop runaway positive feedback theory of Nigerian production would seem to have some difficulty accounting for the fact that production seems to have roughly stabilized in the last year, versus declining ever more rapidly as his theory predicts.

Stuart Staniford said...

I added another graph up above to illustrate the point about the stabilization since early 2008 more clearly.

Manolo said...

Great work, as usual, Stuart, and thanks for the credit! My point, as I said in a previous post, is that the proposed timeline of 6 years to ramp up to 12 Mbd is way to overambitious, given the complexity of the Iraqi situation.
Beyond the statistics and short term interests, one has to consider what the people of Iraq have been through over the last say 50 years. Never underestimate the human factor: there are very deep wounds not ready to heal, all the bloodshed still very present. And you need to consider the mentality and culture "attitudes" proper to the middle east. Any Western "forcing" will only accentuate the resentments. The complexity of the issues is, IMVHO,a lot bigger in Iraq than in Nigeria.
The way I see it right now, Iraq will be part of the "Fat Tail" in worldwide oil production, and will, in it's own time, have a highly predominant role to play. For sure, oil companies need to position themselves early on, no doubt.
Regarding the Niger Delta, there is a special report on CNN:
What i found revealing are the comments from the local people, full of resentment of oil companies, and very determined to take action. That's where you find the similarities: the human factor. Once you get the locals against you, things get usually messy...

james said...

Point well taken, Stuart. Thanks again for giving Iraq so much attention - I certainly agree with you about how important it is to the timing of a global peak.

Stuart Staniford said...


I agree that delays from the contracted schedule seem very likely on at least some of the projects. It's hard to see how so many huge projects can be carried out in parallel from such a weak base, without a fair amount of chaos, cost inflation, and delay.