Nigerian Oil Thieves’ Toll

THE WALL STREET JOURNAL

Stolen Output Inflicts Losses on Producers, Government and Jobs

By BENOîT FAUCON

LAGOS, Nigeria — Saboteurs are driving oil-industry jobs out of the Niger Delta, but some of the oil thieves are on a hiring spree of their own.

The Nigerian government estimates the amount of oil stolen countrywide is as much as 100,000 barrels a day — valued at about $1.5 billion a year at current crude prices.

While thieves have long tapped the country’s pipelines, their operations are becoming increasingly sophisticated and profitable, imposing heavy losses on major oil companies and Nigeria’s government.

Oil theft has contributed to a cycle of violence and disruption that has led to shrinking job opportunities. Last year, a subsidiary of Royal Dutch Shell PLC, the largest oil producer in Nigeria, cut 1,300 jobs. But some Shell managers have received offers to join what local residents call “illegal refineries,” cement shacks where petroleum goes through a raw distillation process in metal drums.

One young chemical engineer, speaking on condition of anonymity, was hired at an illegal plant owned by local gunmen and supplied with petroleum stolen from a Shell plant. He had been laid off from a foreign oil-services company after a wave of unrest.

The chemical engineer’s career shift underscores the increasing scope and ingenuity of petroleum theft — known locally as “bunkering” — that can have far-reaching consequences for global energy supplies. Originally focused on stealing from pipelines, “bunkering” has developed an integrated supply chain in which petroleum can be stolen from the wellhead, distilled and sold at gas stations.

In October, Shell’s Nigerian unit shut down its Soku processing plant — about 25 miles southwest of Port Harcourt — from which the chemical engineer’s illegal distillation point obtains its supply. The company said the shutdown of the plant — which it says may soon reopen — was due to the risks of explosion and spills triggered by oil theft.

The disruption at the Soku plant caused Nigeria LNG Ltd., jointly owned by the government-owned Nigerian National Petroleum Corp. and major oil companies Shell, Total SA and Eni SpA, to invoke force majeure to release Nigeria LNG from its delivery obligations.

The Nigeria LNG facility, to which Soku normally supplies natural gas, is the largest project producing liquefied natural gas in Africa and normally provides 10% of global liquefied-natural-gas production. Shell last week said the loss of such production cost Nigeria’s cash-strapped government $180 million a month.

On top of deferred natural-gas sales, Nigeria was losing 400,000 barrels of crude oil a day, either through theft or lost production stemming from sabotage or technical problems linked to theft, according to statistics from the country’s Department of Petroleum Resources.

Pipelines are tapped by drilling holes downward into them, inserting a metal plug to which a plastic hose can be connected, and siphoning out the petroleum. The hoses disappear deep into the delta’s meandering swamps and resurface to pipe the hydrocarbons into boats that transport the material to illegal refineries. “This is clever engineering,” a Shell official said.

Oil theft is also conducted increasingly at the wellhead in fields abandoned because of unrest, said Williams Ochogwu, head of antibunkering enforcement at Nigeria’s Economic and Financial Crimes Commission.

Historically, much of the stolen oil had been exported to be refined abroad. But the chemical engineer said Nigerian President Umar Yar’Adua’s comment last year that he wanted to track the stolen crude abroad frightened some bunkerers. “That has drawn a lot of attention….That has scared some people from doing it,” the engineer said.

Instead, the oil thieves are now focusing on illegal refineries where oil and condensates are heated in large metal drums to extract the lightest part of the barrel. Col. Sagir Musa, a spokesman for the Nigerian army task force that polices the delta, said 300 illegal refineries were discovered last year.

Some of the refineries turn crude oil into “half-pure diesel, a very crude product,” after subjecting it to high temperatures, Col. Musa said. But other refineries, for instance in Soku, use condensate — a liquid often contained in natural-gas deposits — that is easy to turn into kerosene, he said.

The chemical engineer said that the trade brings in hundreds of millions of naira (one naira equals one U.S. cent) on a daily basis and that some of the product ends up at gas stations.

Shell said that “the estimated volumes of crude oil stolen…have tended to increase again since 2006.” In 2007, the company lost between 30,000 and 50,000 barrels of oil a day from its Nigerian onshore joint venture. It didn’t specify how much it lost in 2006 or 2008.

Oil bunkering is becoming an attractive career in an environment in which demand for refined products is still high and legitimate job opportunities are shrinking because of unrest.

One former Shell Nigeria manager who recently left the company said the chemical engineer asked him to join his operation but he “declined the offer.” He said an illegal refinery typically pays 10 times more for an engineer than a major oil company.

A government official in the Niger Delta’s administration said he considered accepting an offer by a neighbor to join a distribution network for stolen petroleum. The official said his neighbor of about 20 years old, once an unemployed high-school graduate, had started to drive around in a jeep and upgraded his studio to a three-bedroom apartment after embracing the business. “He has gone from zero to hero,” he said.

Oil thieves also take advantage of the region’s infrastructure gaps. Even though Nigeria sits upon plentiful crude reserves, the country has to import the majority of its oil products, a problem compounded by the sabotage of its refined-products pipelines. To make matters worse, “petroleum product distribution doesn’t reach the heart of the delta…and they pay three to four times the price in the rest of the country,” a Shell official said. By contrast, oil thieves undercut official prices by 50%, people familiar with the business said.

Col. Musa said the majority of illegally refined products were used for generators, which make up for the lack of an electricity grid in the delta. When used in cars, the generators cause breakdowns, he said.

The poor-quality products aren’t damaging just car engines but the fabric of Niger Delta society itself, triggering personal injuries and environmental damage and financing an escalation of violence. A Shell official said burn victims have regularly visited the company’s health facilities after trying to steal oil.

The increased efficiency of oil theft may be behind a new wave of environmental damage in some Niger Delta areas. In 2008, the number of barrels spilled from Shell Nigeria operations because of bunkering and sabotage — already the largest cause of spills — rose to about 40,000 barrels, compared with about 15,000 barrels in 2007, according to a person close to the company.

Pictures of the Soku plant show how oil theft turned its green surroundings into a black and charred landscape.

—Guy Chazan and James Herron contributed from Londonto this article.

Write to Benoît Faucon at [email protected]

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