Mon, Dec 24, 2007 page10

• Unrest cutting into Nigerian oil profits

  DANGER ZONE The lack of security in Nigeria has cost it one-quarter of its production, while government plans to renegotiate revenue-sharing have oil companies worried

  • AFP
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  Despite being the world's eighth-largest petroleum exporter and sitting on huge gas reserves, Nigeria will not have it easy over the next two years, between persistent unrest in the Niger Delta and strained relations with oil companies.

  "In view of the current problems, their goal of 4 million barrels per day in 2010 seems inaccessible in the current situation," said the head of one multinational company operating in the delta, the oil region where violence and insecurity are endemic.

  This absence of security means that Nigeria, which ranks fifth among suppliers of crude oil to the US, lost one-quarter of its production last year and this year. Production is currently estimated at 2.1 million barrels per day.

  Oil from the Niger Delta continues to bring in 90 percent of Nigeria's foreign currency earnings and thanks to the recent rise in crude prices, the country's foreign reserves are close on US$50 billion.

  Nevertheless the government is pleading poverty and is trying to reduce its share in investments in the sector, asking oil majors to look for alternative forms of financing.

  "Nigeria is supposed to fund part of the onshore activity but hasn't actually put any money in for three years now," one foreign oil executive said.

  Oil Minister Odein Ajumogobia said that of the US$15 billion of projected total investments in the sector next year, the government was supposed to shoulder US$8.8 billion but that it had in fact allocated only around US$5 billion.

  The government has asked the oil companies to find the missing US$3.8 billion.

  Shell, Chevron, Exxon Mobil, Total and ENI/Agip point out that Nigeria's budget for next year was based on an oil price of US$53 per barrel, when it is close to US$100 and looks set to continue its rise.

  The majors are also worried about the Nigerian government's intention to renegotiate the oil revenue sharing agreement.

  "Given the massive investments entailed, notably in the deep offshore, our margins are already very narrow," the chairman of one oil group said.

  Another complained that when oil was at US$80 a barrel, his company was making a profit of US$3, with the remainder all going to the Nigerian government.

  "We were all in difficulty in 2007," said an executive at Shell, Nigeria's biggest producer.

  This past year Shell Nigeria (SPDC) spent US$1 billion on pipeline maintenance alone. The company had initially been looking at a total budget of US$6.6 billion but pruned it drastically, first to US$4.5 billion, then to US$2.7 billion.

  Last month the company announced 1,000 job cuts.

  "We're operating in an extremely difficult environment where production levels have been hard hit by the unrest," director-general Basil Omiyi said.

  In 2003 SPDC was producing 1 million barrels per day. By this year, that had fallen to 460,000.

  Another European operator noted that numerous projects have been postponed or put on hold because of the restructuring at Nigerian National Petroleum Corporation (NNPC), the partner with whom foreign companies are obliged to set up joint ventures if they want to operate in Nigeria.

  To complicate matters further Nigeria is now telling the oil companies to stop gas flaring early next year, on pain of sanctions.

  "They want everything tomorrow but in this industry we count in decades," one oil executive said.

  For Shell, oil-producing zones are one of three colors depending on the level of risk: red, yellow or green.

  Most of the Middle East is "red." Nigeria, despite all the difficulties, is still "green". But for how long?
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