Wednesday, July 09, 2008

Nigeria's Blood Oil

World oil prices are central to global inflation, one of the great concerns of central bankers, politicians - and ordinary citizens - around the world. Crude oil supply disruptions, and fears of supply disruptions are crucial factors in this, and no country (except, perhaps Iraq) is more acutely affected by supply disruptions than Nigeria, where well-armed militants routinely take out hundreds of thousands of barrels per day from world markets in armed attacks and in lucrative "bunkering" operations - where oil is siphoned out of oil pipes and sold on world markets, with the proceeds feeding into criminalised politics in Nigeria and elsewhere.

We are heartened, then, to see that Nigeria's president, Umaru Yar'Adua, has called for an international effort to stop the international trade in "blood oil" from Nigeria's Niger Delta. He made the comparison with a campaign originally pioneered by the UK-based non-governmental organisation Global Witness which helped crack down on the international trade on "blood diamonds" (or "conflict diamonds") which were mined by rebel groups destabilising governments in countries like war-torn Angola and Sierra Leone, and made a meaningful dent in these trades and undoubtedly helped shorten and mitigate these terrible wars.

The comparison with "blood oil" is certainly apt: despite its enormous oil wealth, the oil-rich Niger Delta is one of the most dysfunctional and poverty-stricken parts of the world. We therefore warmly welcome President Yar'Adua's words. This must be done - and urgently.

It is important to understand that "bunkering" is much more than it seems. This blogger has interviewed politicians, security experts, analysts and many ordinary people on the ground in the Niger Delta, and it is clear that money from this "blood oil" not only goes to pay for arms (in quite large quantities,) but feeds directly into the Nigerian political system, pushing forwards the criminalisation of the Nigerian already badly distorted economy. And the quantities involved are quite astonishing - estimates range from about a few tens of thousands of barrels per day to half a million, on a bad day. The Nigerian navy appears to be politely looking the other way, as this massive theft goes on. As Dele Cole, a guest columnist in a recent Financial Times Survey on Nigeria commented:

"It is said in the Nigerian military that you will never find a poor admiral. It is easy to see why. Nigeria loses between $4bn and $18bn worth of oil a year to illegal bunkering, depending on the estimates you use. This theft began at about 20,000 b/d. In 2001, it reached 200,000 b/d and it may now intermittently reach 500,000. On a bad day, 25 per cent of Nigeria’s oil exports are illegal."

Think of the numbers here: let's take a very conservative estimate of, say, 100,000 barrels of oil per day being stolen. Today's oil price is around $135 per barrel: that is $13 million per day being channeled into a giant criminal enterprise. Dele Cole estimates a $20m daily turnover.

Someone is buying this oil. It is going into international refineries. Cole offers an interesting solution:

"We have to put in place a tracking system. This is not a new idea. In 2003, Shell proposed the certification of oil exports based on chemical fingerprinting to prevent stolen oil being sold on the open market. Companies operating in Nigeria have the technology to trace oil to individual flow stations. So, if a ship is stopped and contains oil that does not appear to have a legitimate source, a sample can be taken. If there is no record of a sale from the source to the operator of the vessel, then the government could confiscate the oil or require those purchasing it, such as refineries, to verify its provenance. In this way it should be possible to create a paper trail at least as effective as the Kimberley Process, established to curb the trade in conflict diamonds from Africa’s war zones. Even if this cannot stop bunkering altogether, it should at least mean that stolen oil is sold at greater discount, thus undercutting profits from the illegal trade."

A very good idea, and rather straightforward in practical terms. Unfortunately, the reason such a system has not been implemented is almost certainly due to resistance from very powerful political interests in Nigeria, which benefit from these sales of blood oil.

So in the absence of firm action on this in Nigeria, another possibility would be for a non-governmental group, or a media organisation, or some other, to trace a physical cargo (or cargoes) of this blood oil across the high seas, even as it is trans-shipped from one vessel to another, and then identify the refineries where this crude oil ends up, as it must do at some point. Then identify the owners of these refineries, and call them to account. It would not be easy: certainly costly and rather difficult, and more likely than not, rather dangerous.

How interesting it would be, too, to follow the money trails. You can be sure that tax havens, including tax havens linked to Nigeria's former colonial power Britain, figure prominently in the secret world of Nigeria's blood oil.

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