Wednesday, March 2, 2011

Libya’s crisis could be Nigeria’s opportunity

By Javier Blas

Normally Nigeria is an unreliable crude oil supplier that refiners have learnt to avoid.

Over the past five years, chronic unrest in the oil-rich region of the Niger Delta has periodically crippled the country’s output of high quality light, sweet oil.

But with Libya’s own output of premium oil seriously disrupted, European refiners have gone into West Africa for a replacement. The premium price of Nigerian over Brent has surged to the highest in almost two years, suggesting that European refiners are ready not only to rely on the country, but to pay top dollars for its oil.

But the increased reliance carries risks, particularly as the West African country heads into elections in April.

If the past is a guide, the elections could lead to a return of violence to the oil-rich Niger Delta, disrupting output of premium, light, sweet oil.

Helima L. Croft, a geopolitical analyst at Barclays Capital, makes this point in a recent report. Entitled “Libya and beyond: the escalating risks”, it points out that the two previous election cycles in Nigeria were marked by sharp rises in attacks on the energy infrastructure in the months leading up to the polls and in the immediate post-election period.

In March 2003, armed militants attacked Chevron’s Escravos facility in Delta state, taking 0.8m barrels a day of production off line for several weeks. Almost 1m b/d of production was shut down in the weeks following the April 2007 polls.

For comparison, the current unrest in Libya has disrupted between 850,000 b/d and 1.2m b/d of premium quality light, sweet crude oil for the past week or so.

The sentiment is shared in the trading rooms in London and Geneva, where dealers are concerned about losing more supplies of high quality oil. “It says a lot about the state of the world that European refiners are seeking Nigerian oil as a haven against the turmoil in north Africa.” a senior London-based oil trader told me this week.

The concerns may not materialise, but oil traders are nonetheless keeping an eye in Nigeria as they observe the Middle East and north Africa. For sure, refiners are also paying some extra dollars as a “risk premium” to get their Nigerian oil early.

The premium paid for Nigeria’s high quality, low sulphur Bonny Light and Qua Iboe crude oil rose on Tuesday above $3.50 a barrel more than the Brent benchmark, the highest in two years, according to Reuters data.

The premium has risen almost vertically over the past week.

It is still below the highs of 2008, but some traders believe that it is only a question of time before the premium sets new peaks. True, refiners have other alternatives – notably the Caspian region – and refiners have more flexibility today to process lower quality oil than in 2008. Even so, the rapid rise in the cost of Nigerian oil above Brent suggests that there is a need for this crude oil.

So watch Libya and the rest of the Middle East, but do not forget about Nigeria. Nothing might happen. But the same was said only a week ago about Libya. In the new brave world of oil trading, dealers are not taking anything for granted any longer.

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