Violent Struggle Over Oil And Money Rattles Global Energy Market

Violent Struggle Over Oil And Money Rattles Global Energy Market
After years of relative peace, militants are again blowing up the pipelines that criss-cross the mangrove swamps of Nigeria's Niger River delta, reducing oil output to the lowest in almost three decades and fueling a rally in global crude prices.

(Bloomberg) -- After years of relative peace, militants are again blowing up the pipelines that criss-cross the mangrove swamps of Nigeria’s Niger River delta, reducing oil output to the lowest in almost three decades and fueling a rally in global crude prices.

The resurgent conflict in Africa’s largest economy has a long history, interweaving corruption and poverty with regional rivalries and presidential politics, but at its core is money.

Between 2006 and 2009, when the oil-rich region was rocked by similar campaign of violence, the then president, Umaru Musa Yar’Adua, came up with a controversial solution: He offered a pardon and monthly stipends to fighters willing to disarm. After his death in 2010, former President Goodluck Jonathan doubled down on the strategy, awarding security contracts worth millions of dollars to rebel leaders, who went from blowing up pipelines to protecting them.

The opposition at the time denounced the deal, but it worked. Thousands of fighters accepted the presidential amnesty, joining new private security companies formed by their leaders and enjoying monthly payments from the government. The revolt, which at its worst point had sunk oil production by about a third to 1.65 million barrels a day, quickly ended.

It hasn’t proved a long-term solution. President Muhammadu Buhari, a 73-year old former general elected last year on an anti-corruption platform, ended all pipeline security contracts and reduced the monthly stipends. In a wave of attacks this month, the militants responded by blowing up key pipelines, pushing oil output to a 27-year low of 1.4 million barrels a day.

Brent crude oil, the leading international benchmark, has rallied as a result, reaching the highest since November on Wednesday. Prices slipped 1.6 percent to $48.16 a barrel as of 9 a.m. London time Thursday.

The Nigerian military and the official in charge of the amnesty program didn’t respond to requests for comment.

The militants are trying “to arm-twist the new government to restore the pipeline deals,” said Dolapo Oni, a Lagos-based oil analyst at Ecobank Transnational Inc, one of Nigeria’s leading banks. “What it really is about right now is money.”

The new president, in contrast to Yar’Adua and Jonathan, is loathe to pay off the militants. Instead, he’s promised confrontation, vowing to "deal with them the way we dealt with Boko Haram,” a reference to a military onslaught against a seven-year Islamist insurgency that’s ravaged the country’s northeast.

“Buhari is willing to suffer the oil outages to crush the militants now,” said Helima Croft, the head of commodity strategy at RBC Capital Markets LLC, who followed the earlier wave of attacks as a West African analyst at the Central Intelligence Agency.

Even if he wanted to pay off the militants, the amnesty program and pipeline security contracts would be costly for Buhari. With oil below $50 a barrel, Nigeria is hemorrhaging foreign exchange reserves and the economy is slowing sharply. After peaking at nearly $49 billion in mid-2013, dollar reserves have fallen to less than $27 billion, the lowest since 2005, according to official data.

Under Buhari, the annual budget for payments to ex-militants has been cut back from more than 60 billion naira ($300 million) to about 20 billion naira. In addition, Buhari canceled a pipeline security contract worth $103 million a year between the government and a Nigerian company called Global West Vessel Specialist Ltd.

“The predictable result is that this has driven militants back to the creeks,” said Malte Liewerscheidt, senior Africa analyst at security consultants Verisk Maplecroft.

Economic Backdrop

While the rebels have shown themselves to be mainly motivated by money, the economic backdrop doesn’t help. The delta region accounts for the bulk of Nigeria’s oil and gas production and is home to its main export terminals. Sixty years after the first commercial oil discovery in the region, the area still suffers from acute deprivation, with youth unemployment as high as 40 percent and one of the worst rates of infant mortality in Nigeria.


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Copyright 2016 Bloomberg News.

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