Nigeria: New approach reduces terrorism risk in Niger Delta
02 May 2017
A policy of engagement with stakeholders in the Niger Delta will reduce the risk of militant attacks on oil and gas infrastructure in 2017, and may lead to a negotiated settlement in the medium term. Nigeria’s economy will return to growth in 2017, as oil prices trend higher. However, a failure to devalue the naira this year will substantially undermine the positive growth outlook.
A more conciliatory approach taken by the federal government to militants in the Niger Delta has reduced the threat of damage to oil and gas infrastructure in recent months. During President Muhammadu Buhari’s medical absence from Nigeria in early 2017, his deputy Yemi Osinbajo engaged in dialogue with the Pan Niger Delta Forum (PANDEF), visiting the Niger Delta six times between January and March 2017. Osinbajo appears willing to meet some PANDEF demands, having issued a directive that all oil companies should relocate to the Niger Delta to bring jobs to the area.
The change in government policy towards the Niger Delta Avengers (NDA) will limit the risk of further attacks on underwater infrastructure in H1 2017, and could also result in a negotiated settlement with the militant group in 2017. However, oil and gas companies should be aware of the persistent threat posed to onshore pipelines by lower-capability splinter groups from the NDA.
Whilst the Nigerian government has claimed a technical defeat over jihadist group Boko Haram, the group retains the ability to launch terrorist attacks on security forces and public spaces in spite of a leadership split. The Boko Haram faction loyal to previous leader Abubakar Shekau, will be concentrated around Sambisa Forest in 2017. In contrast, the grouping centred on IS appointed leader Abu-Musab al-Barnawi will primarily target security forces around the Nigerian- Nigerien border. In October 2016, the group killed 20 Nigerian soldiers in an attack on Gashigar, northeast Nigeria.
In 2017 Nigeria’s economy will experience a modest return to growth, following a 1.7% contraction in 2016. Growth is forecasted at 1.7% in 2017, as global oil prices trend higher and oil production increases by 19%.
Despite a partial relaxation of exchange rate policy in June 2016, the currency remains overvalued and the government has had to continue import bans on 41 goods. A further devaluation of the naira is anticipated in 2017; however this will likely occur in H2 as the government seeks to protect the naira peg as oil revenues tick upwards. There is also a risk that the government will not devalue the currency in 2017, as the Central Bank of Nigeria continues to be pressured by Buhari to maintain the current peg. This would substantially undermine the positive growth outlook for 2017.
Increased oil revenues will moderately alleviate currency inconvertibility and transfer risks. Foreign currency reserves have been increasing in recent months, reaching USD 27.5 billion in January 2017, from USD 23.9 billion in October 2016. However, without further action on the currency, dollar shortages are likely to persist.
The risk of contractual agreement repudiation is elevated for foreign investors in a number of sectors in Nigeria. In the oil industry, strained government revenues in 2016 spurred legal action against international oil companies. In September 2016, a federal court in Abuja began to hear evidence against Agip and Total. The government claimed tax revenue losses of USD 635 million due to the misreporting of oil quantities. Cases against 15 oil companies are reportedly being prepared by the government.
Companies who fail to meet court-ordered repayments will face a significant threat of contract cancellation or alteration.
Contract enforcement in Nigeria is made difficult by a lack of specialised commercial courts, impeding the timely and fair resolution of contract disputes. However, Lagos state is a notable exception. In 2014, 10 high courts in the state became fast-track commercial courts, designed to deal with high-value cases involving foreign investors.
*** Pricing can depend on location. Insurers reported preference for Lagos/Central Nigeria and not Northern Nigeria or the Niger Delta. In addition, due to foreign exchange issues in Nigeria, the market is not keen to write CI/ET risks)
**** There is limited capacity in the market, and a number of insurers are full.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Russia, Trinidad and Tobago and Côte d’Ivoire, all of which have been the subject of recent enquiries from JLT's client base.
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