How Nigeria's oil is stolen.While most readers will be familiar with the insecurity surrounding oil production in Nigeria's Delta region, not many will be aware of the massive scale of the oil that is stolen from pipelines. John Beattie recently investigated oil theft in the Niger Delta and discovered that the volume of oil stolen is in the region of 10,000-200,000 bpd amounting to an annual value of over $2bn. How is this possible; how is the oil taken; and where does it go?
Nigeria lost about im b/d of oil production during the height of the Delta crisis but just 10-20% of this was actually stolen. The remaining production capacity was suspended because of bomb attacks or general vandalism on industry infrastructure. Such damage was caused as part of a violent protest against the activities of oil companies; in reaction to attempts to stop oil theft; as part of local factional infighting; or even to secure cleanup contracts.
The amnesty to militants announced in 2009 has undoubtedly had a positive impact on the security situation in the Niger Delta. The number of kidnappings and bomb attacks has fallen, while oil production has recovered from 1.8m barrels a day (b/d) in 2008 to 2.4m b/d by the start of this year. But oil theft - also known as illegal oil bunkering or within the region simply as 'bunkering' - continues as before. The most common method of illegal oil bunkering is for oil to be stolen from licit pipelines that transport crude oil around the Delta, from wells to refineries, or from wells to official export terminals, where the crude is loaded on to oil tankers for distribution around the world.
Oil is usually stolen from pipelines by attaching an illicit spur pipeline that allows this oil to be transferred elsewhere, usually on to vessels controlled by the oil gangs. The technical difficulty comes in attaching the spur pipeline to a highly pressurised, volatile oil pipeline but two methods are regularly employed on a successful basis by the thieves.
Hot tapping, also known as 'under pressure drilling', requires perhaps the most technical know-how. It is employed as a means of providing a branch connection to a live pipe in constant operation, where the consequences of a shutdown would not be practicable.
This method uses a short section of pipe, to which an isolating valve is either welded or fitted mechanically. After fitting - and with the valve in the open position - the pipe is drilled to the maximum permissible size through the valve.
On completion of the drilling operation the valve is closed, and the drilling equipment removed. Among the most popular locations for hot tapping are river crossings, where pipelines emerge from the undergrowth or swamp. The personal risk to the thieves and the environmental dangers inherent in such a procedure are obviously great. Hot tapping requires expertise and is often carried out by former or even current oil industry workers.
Alternatively, oil gangs blow up a pipeline, putting it out of use and giving them the opportunity to attach their spur pipeline, with the intersection normally hidden underwater in a swamp or undergrowth, making it difficult for security patrols from the oil company to discover it.
Some very professional techniques are employed: closing wellheads and securing T-junction lines with valves that can be reused.
A security consultant working in the region but who preferred not to be named said: "There are numerous splinter groups involved, but the majority of the illegal bunkering - perhaps 8o% - is organised and controlled by local warlords, who all have their own territory and their own buyers."
He described the oil gangs as fixed rather than flexible and added: "Newcomers are violently being discouraged from entering the trade." He added that the warlords behind the illegal bunkering "have their ties with local political leaders" and have set territories for their operations "but can only move to another with the permission of the local group controlling the area".
Dimieari Von Kemedi, an academic and former politician in the Niger Delta, found a combination of physical threat, bribery and community support protected oil gangs. He argued: "The oil thieves ensure the tapping points are protected during night hours to prevent other illegal bunkering groups from taking over. The bunkered pipe location has to be controlled by 'settling' (paying) local communities and superiority of force.
"In addition to controlling the bunkering location, 'passage communities' - on the route to the offshore tankers - and the navy must be 'settled'. Not only are key people from nearby villages 'settled', but the thieves must hire boys from the local villages to do the bunkering work. In some cases this may also include hiring local armed boys to provide 'security'. More often, the security is provided by militia and agreed well before the proposed operation."
Some politicians and militant gangs work together in different ways to steal oil. Some police, military and oil company staff may also be members of these gangs but more often appear to be the recipients of bribes to either allow or assist the theft. Connections to the illegal oil bunkering gangs often result from political, ethnic or cult relationships. It is generally accepted that many of the armed groups have direct links with politicians.
Oil theft in Nigeria would not take place on such a large scale if there were not a market. The means of transporting and/or processing the oil suggests that it is marketed within Nigeria, the wider Gulf of Guinea region and further afield. A security officer at one of the majors confirmed the tankered oil is sold within the Gulf of Guinea and "probably also further afield on the international market, but there is a lack of information here. Most customers know what they are buying but not all". Fuel prices in most of the rest of West and Central Africa are significantly higher than in Nigeria and so there is plenty of motivation for theft and smuggling.
It seems clear that the illegal bunkering makes a huge profit for Nigerian syndicates and rogue international traders, but identifying those involved on the international marketing side of the equation is very difficult.
It is worth pointing out, however, that most of the tankers used in illegal bunkering operations are former European inland waterway tankers, capable of coastal journeys in West Africa but not of sailing across large bodies of open water. Their contents could, of course, by transferred to other, larger tankers, capable of trans-oceanic journeys.
A sizeable proportion of the stolen oil is sold within Nigeria. Anecdotal evidence suggests that crude oil, particularly the light sweet crude that is produced in Nigeria, could be used unprocessed as vehicle fuel.
More of the stolen oil is processed in rudimentary local refineries in the Niger Delta itself for local use. Such refineries first emerged during the Biafran War as a cottage industry, when there was plenty of oil but no refined fuel for local people. There are hundreds if not thousands of these tiny refineries in the region. Condensate, which is the liquid left over after natural gas has been processed, is also stolen, blended and sold as a local fuel. It requires less refining and could be used directly in an engine, although it would cause some damage. This is confirmed by several other sources, including a security officer in the Niger Delta, who said: "In some communities in the Delta, their only source of fuel is stolen crude, which they refine themselves as petrol stations are not available in such communities". He added that in the parts of the Delta with fuel stations, "some crude is refined locally, blended with good products from filling stations and sold by the roadside. Blended with good oil and sold, you won't know the difference unless you are told 'Use unblended, it could damage your car engine'."
The cost of oil theft
Estimates of the total cost of illegal oil bunkering and violence in the Niger Delta can only be speculative but speaking in December, the leader of the Nigerian Senate, Senator Victor Ndoma Egba, put the figure at $1.5.5bn.
The main question centres on the level of discount on offer for stolen oil. Much depends on where and to whom the oil is sold but there is a consensus that a large discount is given for the sale of stolen oil. However, a 300% increase in the price of crude oil does not necessarily translate into a 300% increase in the price of stolen oil product. Many countries subsidise the price of refined petroleum products, so local retail fuel prices have historically often been lower than international commercial rates. There remains a significant gap between the two in the era of the $100 barrel. Von Kemedi believes that the illicit price of fuel is roughly half that of licit crude oil. If high international oil prices push up the price of stolen oil, the motivation to both steal oil and to trade in it should be greater. Using Von Kemedi's simple formula, the theft of 150,000 b/d of refined fuel product at a price of $100 a barrel would yield $7.5m a day at a 50% discount. This would generate $2.7375bn a year in revenue although the total cost to the Nigerian economy would be much greater.
This illegal oil bunkering industry has an enormous impact on the regional economy. Billions of dollars are redirected away from the federal budget, although many in the region argue, as did a spokesperson for a human rights NGO, that "Abuja would waste the money anyway, through bribery and corruption. Although the stolen oil funds criminal activities - arms purchases and so on - much of it trickles down into the Delta economy through gang spending, bribes and community support". Nevertheless, the crime removes even the possibility that the government could spend the money in a more constructive manner. Not much has changed since a Human Rights Watch investigation into the subject concluded: "Illegal bunkering leads to the loss of billions of dollars in public funds ... Reducing illegal bunkering will not in itself necessarily improve government spending practices, but the diversion of revenues before they reach government coffers means that there is not even the possibility that these resources will be used for the public benefit."
However, the cost of illegal oil bunkering cannot only be counted in purely financial terms. It also helps to sustain the culture of armed insecurity in the region, and of organised crime both within the country and probably in the wider Gulf of Guinea region.
It both feeds and is fed by the culture of corruption that permeates many aspects of Nigerian society, and imposes further costs on private sector investors in the Niger Delta. In 2008 alone, oil companies operating in the Delta spent $3.7bn on security.
Oil theft also exacerbates the existing pollution problems in the Delta, partly through bomb attacks on pipelines that are designed to allow illegal bunkering gangs to connect their own pipelines undetected, but also through the use of inferior, inappropriate and ageing equipment and vessels.. Finally, it encourages organised crime both within the country and probably in the wider Gulf of Guinea region.
Illegal bunkering continues even without the cover of more general unrest. Yet the current decline in Niger Delta violence may not be sustainable. Bergen Risk Solutions, a Norwegian firm that specialises in Nigerian security, argues: "In the Niger Delta, President Good-luck Jonathan enjoys widespread support. But that support has a price tag attached and he must now be seen to deliver tangible benefits to the region if he is to prevent former militants from returning to the creeks." It continued: "Should the Jonathan government fail to provide former militants with jobs and long-term prospects, it is very likely that localised violence will accelerate.
If Jonathan fails to deliver on expectations, it is likely that significant numbers of former militants will remobilise." With or without remobilisation, the theft of oil is likely to continue on a massive scale. More oil is taken in the Niger Delta than is produced in the whole of Ghana. It seems only political will and the harmonisation of regional fuel prices can provide a lasting solution to the problem.
Oil theft in Nigeria would not take place on such a large scale if there were not a market for the oil that is taken. The means of transporting and/or processing it suggests that it is marketed in Nigeria, the Gulf of Guinea and further afield
Illegal oil bunkering has a huge impact on the regional economy. Billions of dollars are redirected away from the federal budget.