Nigerian Oil Output Questioned as OPEC Cut Looms

LONDON Sep 25, 2006 (Dow Jones Newswires)

How much oil production is out of service in Nigeria, Africa's biggest oil producer?

The answer is a hot topic of discussion among energy analysts with the Organization of Petroleum Exporting Countries, of which Nigeria is a member, increasingly likely to formally cut production for the first time in two years to put a brake on the recent drop in oil prices.

Energy analysts and industry officials say that comments by Nigeria's oil minister, Edmund Daukoru, that the country has significantly more crude output out of service than previously thought, could be a ploy to shield the West African nation from an output cut if OPEC formally lowers its 28 million barrel a day production quota ceiling.

"This really could be maintenance issues behind Nigeria's increased (production) outage number, but it raises suspicions because of the timing," said one senior energy industry official, who declined to be named.

"Prices are falling and we know very well the reluctance of OPEC countries to lower their quotas. This is about revenues for them," the official said.

At OPEC's meeting in Vienna two weeks ago, Daukoru, who also serves as OPEC president, told reporters a total of 872,000 barrels a day of Nigerian output is shut-in. This is some 300,000 b/d of production above what markets had believed was out of service in the West African country.

Markets have assumed in recent weeks, based on calculations from the Nigerian government and foreign oil companies in the country, that between 500,000-600,000 barrels a day have been shut-in due to sabotage earlier this year on energy infrastructure by militants seeking greater control of oil resources.

Nigeria's OPEC quota allocation is 2.3 million b/d, roughly 100,000 barrels a day or so below where it was producing before Daukoru's announcement two weeks ago. But having another 300,000 barrels a day of production shut-in would take Nigeria's physical production below 2 million barrels a day, giving Nigeria a stronger argument with OPEC against forcing it to cut its official production, analysts say.

Such a significant loss of output would normally be strongly supportive of oil prices, but markets barely moved on Daukoru's comments, suggest that traders didn't put a lot of stock in the new numbers.

By contrast, oil prices bounced $1.60 a barrel when BP announced more than a week ago that first production from its 250,000 b/d Thunder Horse platform in the Gulf of Mexico would be delayed until mid-2008.

OPEC may announce an output cut in the days or weeks ahead to put a floor under oil prices and protect OPEC members' oil revenues. U.S. oil prices have tumbled almost 25% to a six-month low of about $59.50 a barrel from a record $78.40 in July.

Additional Outage Cuts From State-Run Projects

Officials from the state-run Nigerian National Petroleum Corp. (NNP.YY) defended Daukoru's comments, saying about 250,000 barrels a day of additional output was shut in recent weeks due to "technical" and "operational" issues.

All of those barrels are from state-run oil projects, not from international oil companies, the officials said.

But some industry analysts aren't wholly convinced about the increased outage figures.

"It (the 872,000 barrels a day of shut oil output) is a higher number than I think many people had thought and there doesn't seem to be a much of an explanation that accounts for how all of this has happened," one Western oil company official in Nigeria said, declining to be named.

Discussions inside OPEC to cut production quotas have always been a contentious affair, usually leading to in-fighting about which members should cut and by how much.

Cheating is also a by-product of official quota cuts as some members go on pumping more than their quota allocation to maximize revenues and raise market share.

There have been cases in past years when countries, such as Iran, were accused by some OPEC members of understating output in order to produce above their quota. Some analysts also say Algeria is overstating output so it has a higher baseline from which to cut if OPEC moves to lower output.

Still, Nigerian oil officials reject speculation the country may be artificially inflating production outages.

"Every one is entitled to their own opinion but any suggestion Nigeria is lying is telling a lie and is incorrect," said one NNPC official.

The NNPC official said Nigeria has provided the oil industry a breakdown of the status of Nigeria's current production, which the official said, "clearly shows that 872,000 barrels a day is off."

A senior Persian Gulf OPEC source also dismissed speculation that Nigeria was preparing to soften the impact of any future output cut may have on its revenues.

"None of these issues (about Nigeria) are relevant as to how much output maybe cut in the future. That is a political agreement amongst OPEC members and at this stage we have no agreement on a cut and from what basis that would start," the OPEC source said.

A clearer picture on the true state of Nigeria's shut production has only been muddied by comments from other Nigerian officials. Nigeria's finance minister said last week in Singapore that total shut-in oil production was about 600,000 barrels a day, in line with market expectations.

That was followed days later by a Nigerian oil official who told reporters in Amsterdam that about 700,000 barrels a day was shut-in.

"It doesn't make much sense. You have all these officials saying different things," said Sebastian Spio-Garbrah, a New York-based analyst at consultants Eurasia Group.

"Nigeria has a lot of production coming online this year and in 2007, so it would be convenient to (artificially) raise the amount of oil shut-in so they don't have to formally cut," if OPEC moves to cut, Spio-Garbrah added.

Nigeria is expected to have a production capacity of over 3 million barrels a day going into 2007 as several offshore fields ramp-up production.

Copyright (c) 2006 Dow Jones & Company, Inc.