Delta Militancy: A Commercial Challenge

Since the 1990s the Delta has been home to several militant groups, largely a result of tensions between international oil companies (IOCs), the government and the local community, which is densely populated, ethnically diverse and low-income in comparison to the affluent and proximal south-west. Whilst the hitherto unknown Niger Delta Avengers (NDA) are not thought to stem from the ranks of those under the government’s troubled amnesty programme that followed the violent military insurgency of 2003-09, they are exploiting rising tensions. The NDA pledges to obtain a greater share of oil revenue for Niger Delta inhabitants, and its plan of action, ‘Operation Red Economy’, aims to cripple Nigeria’s economy through attacks on oil facilities here. Large in scale, and with a new level of sophistication, NDA attacks are impacting heavily on political and security stability. Yet in comparison to previous Delta militant activity, the NDA’s commercial impact has been amplified by Nigeria’s challenging macroeconomic climate.  
 

Despite Buhari’s focus on diversifying Nigeria’s economy, its healthy functioning still relies heavily on oil production, which contributes more than 60 percent of government revenue. The decline in international crude prices since 2014 has led to a 57 percent fall in government revenues in 2015 alone. Whilst most oil-producing nations have benefited from a relative rally in prices over the past six months, NDA attacks have made Nigeria’s production inconsistent, occasionally dropping to 30-year lows. The government has therefore had to raise substantially more debt than anticipated in order to finance an expansionist federal budget, with additional short-term public finance challenges presented by Nigeria’s state governments, the majority of whose funding relies heavily on the federal allocation of oil revenue. Concerns are also growing over the Central Bank of Nigeria’s (CBN) shrinking foreign exchange reserves, already depleted to potentially dangerous levels by the drop in exports since 2014.  

Current generation capacity of around 6,000 MW is already one of the lowest per capita in sub-Saharan Africa, and has long been a limiting factor on Nigeria’s economic growth. Shortages are being exacerbated by NDA attacks, which have targeted the gas pipelines that supply 80 percent of Nigeria’s electricity generation facilities. An estimated 19 out of 23 gas-to-power generators have entirely ceased operations at times due to pipeline attacks. As a result, electricity generation in May slumped to around 2,000 MW, with troughs as low as 104 MW. Shortages and ensuing blackouts are increasing commercial expenditure on the running of costly private generators. Even in 2014, the cost of private electricity generation in the face of the unreliable national grid was 6 percent of the total annual expenditure of Nigerian banks. These costs are set to grow as the NDA continues to target gas pipelines, highlighting the inability of successive federal governments to adequately provide power.

The fall in oil prices and, more recently, the direct loss in revenue caused by successful NDA attacks and higher costs posed by operational security requirements, means upstream oil and gas companies have increasingly struggled to meet their loan requirements. Many of these loans were agreed when oil prices were at least double their current level. The impact on bank profits of this upswing in non-performing loans is revealing the overexposure to the sector. Oil and gas represent approximately 28 percent of the total loans made by banks in Nigeria; First Bank, Nigeria’s largest bank by assets, has exposure as high as 47 percent. Similar waves of loan defaults and renegotiations are expected in the power sector following the plummeting revenues of Nigeria’s recently privatised electricity generation companies. Five years of privatisation of the sector was proudly majority-financed by local banks, but now represent another drag on their balance books. Following the almost doubling of non-performing loans across the sector between 2014 and 2015, banking equities on the Nigerian Stock Exchange have fallen twice as far as the capital market’s average. The only concrete casualty has been Skye Bank, a mid-sized Nigerian bank, whose management team was removed by the CBN at the start of July, reportedly on the basis of stability concerns. However, despite reassurances from the CBN, fears of contagion have spread to investors, and the CBN has admitted that “one or two” other banks have failed liquidity tests. The extent of the NDA demands, the opacity of the militant leadership structure, and the political stability risks if the Nigerian military were deployed against them make the likelihood of any impending reconciliation between the NDA and Nigeria’s federal government slim. Reports of a ceasefire in mid-June were shortly followed by five attacks in three days. The impact of the NDA on Nigeria’s commercial environment will therefore continue to gnaw at the Nigerian economy, and the faltering popularity of Buhari’s government.