Higher US oil output over the past few years has not led to lower oil prices in part due to a rise in unplanned oil supply outages negating the impact of higher US output while also adding a risk premium to prices. Unplanned oil outages have become increasingly common, averaging 1-2 million b/d over the past few years. The reason for the escalation in disruption is multifaceted. Global oil production is concentrated in a few key regions with many of the countries involved scoring badly on the ease of doing business, meanwhile the growing cost and complexity of oil fields and overall tighter global supply has left less room for error increasing the odds of disruption. Supply outages have focused on North Africa, in particular Libya and this region is likely to be the focus of future disruptions.
Despite oil supply outages becoming increasingly common, they are also difficult to predict. Analysis from Morgan Stanley forecasts oil supply outages to remain around 1.5 million b/d for the rest for 2014 with Libya accounting for approximately 1 million b/d. This may well be an underestimate. According to research from Maplecroft since 2013 levels of conflict and political violence have jumped significantly in 48 countries as a consequence of popular revolutions and regime change, many of which are major oil producers (see map below). Of particular concern is now Nigeria, which produces around 2 million b/d.
The country is rated as ‘extreme risk’ in the CPVI for the fifth year running, due to persistent insecurity, including increasing risks of kidnapping and piracy. Violence in the country creates significant challenges for companies in terms of ensuring the safety of employees and facilities, as well as increasing their insurance and security costs. While the Islamist terror threat is likely to remain largely focused on the north-east, the Abuja bus station attack in April 2014, which left at least 75 people dead, demonstrates the ability of Boko Haram to carry out isolated attacks in the central or southern regions of the country.
The Niger Delta, home to the bulk of Nigeria’s oil resources, was thrust on to the world stage seven years ago when the Movement for the Emancipation of the Niger Delta (MEND) carried out a series of attacks on oil companies significantly cutting oil production and disrupting global oil prices. MEND, like Boko Haram, taps into a deep sense of grievance in the Delta over the region’s failure to benefit from the steady flow of petrodollars. Although Boko Haram don’t have any oil of their own their rise is symptomatic of trends occurring across North Africa with al-Qaeda tapping into the discontent to recruit militants. This discontent is likely to lead to an increased risk premium for oil companies operating in the region and a greater chance of disruption to oil supplies.
Related article: Oil prices caught in a vice