Umaru Yar’Adua, the new President of Nigeria, wants to increase the share of oil wealth flowing to the state at the same time that the victimized natives of southern Nigeria’s Delta region from whence the oil flows want a bigger piece of the action too.  Yar’Adua thus faces a series of enemies, none of whom is insubstantial.  They include Shell Oil, the largest of the foreign oil companies that produce nearly all Nigerian oil, the rebel group MEND that represents the Delta region and has already succeeded in removing over 500 kb/d of oil production from the market, and …his former boss, the old President Abasandjo.  Doubtless there are other enemies who just haven’t made the headlines yet.  Is Pres. Yar’Adua in over his head… the George Bush of Africa?  If so, the implications for Nigerian oil production and global oil prices could be severe. 

Various reports over the past few months posted here summarize the problems he faces with Shell and MEND.  A more recent news item is that he seems to have opened a new front against the former President, accusing him of massive corruption and, presumably, the salting away of significant funds.  It seems odd that Yar’Adua would make an enemy of his former sponsor in the face of his more pressing problems with Shell and MEND.  I wonder if Abasanjo still has his finger in the oil revenue pie, which may be getting a little crowded with other fingers. 

With regard to Shell, we know his objective - to get a bigger share of the oil action a la Chavez and Russia.  So why doesn’t he just follow those models: make Shell get into “legal trouble” that can be resolved by renegotiating their royalty deal?  In other words, threaten to nationalize the oil. Instead, he seems to be withholding the funds from the Shell joint venture that the present agreement requires of the Nigerian government.  The funding denial is apparently causing operational problems for the oil company and threatens to restrict the exploitation of new oil fields, which in turn implies much lower oil production for Nigeria down the road, possibly reducing Nigerian flows by 30% by 2015.  

So is Yar’Adua cutting off his nose to spite his face by keeping needed funds from the joint venture with Shell?   If so, that would seem to be an odd strategy. He must have better options.  It seems unlikely that the funds are simply not available, given the enormous oil revenue income that Nigeria must be enjoying these days. 

Possibly the most dire implication of all this is the “George Bush” possibility: that Yar’Adua is simply not competent.  Given the plethora of challenges facing Yar’AduaIf, if the real problem is  simple incompetence and mismanagement the implications for potential chaos and lower oil production could be dire indeed.  As we know from the U.S. example, there is no limit to the problems that poor management and intellectual incapacity can produce.  Here are two articles from today’s Financial Times dealing with the matter:

Nigeria’s oil output ‘could fall by a third’

By Matthew Green in Lagos

Published: April 16 2008 23:09 | Last updated: April 17 2008 09:30

Nigeria risks losing a third of its oil output by 2015 unless it finds ways to boost investment in joint ventures with foreign energy companies, an internal report by President Umaru Yar’Adua’s energy advisers warns.

The progess report, seen by the Financial Times, highlights the government’s need to find ways to finance the oil industry in the country. It comes after an internal memo from the Shell Petroleum Development Company late last year that said funding problems could put the existence of the company’s joint venture with the Nigerian government at risk. The fresh warning could add to supply fears that have pushed oil prices to fresh records this week and saw prices reach a record $115.45 a barrel on Thursday.

Traders are already worried about Russia’s oil production, considered critical to keep up with Asian demand, after warnings from industry executives that production there has peaked at about 10m barrels a day.

Mr Yar’Adua’s advisers include former Opec secretary-general Rilwanu Lukman, who chairs a committee created to draft proposals for an overhaul of Nigeria’s energy sector. The government hopes the reform process will help double production in Africa’s biggest crude exporter from its current 2.1m b/d.

The report says funding shortfalls “portend a grave danger not just to the reform process, but to the continued well-being of the industry as a whole”, adding that even if funding levels are maintained “total oil and gas production will decline by 30 per cent from its current level by 2015”.

The government’s failure to pay its share of costs of the joint ventures with companies such as Shell, ExxonMobil and Chevron, is one of the biggest obstacles to raising production.

The Nigerian government and Shell declined to comment.

Copyright The Financial Times Limited 2008

Nigeria warned on oil spending

By Matthew Green in Lagos

Published: April 16 2008 23:09 | Last updated: April 16 2008 23:09

President Umaru Yar’Adua has made tackling funding shortfalls for Nigeria’s joint ventures with western oil majors a priority since he won elections a year ago.

But the scale of the problems building up as a result of the chronic failure of Nigerian governments to meet the state’s share of maintenance and exploration costs may have taken him by surprise.

An internal report seen by the Financial Times warns that production of oil, on which Nigeria depends for more than 90 per cent of its export earnings, will fall by a third unless the government boosts investment. Such a decline would see Angola overtake Nigeria as sub-Saharan Africa’s leading oil producer and give western governments, who see west African oil and gas production as essential to global energy security, pause for thought.

The warning was contained in an internal pro­gress report drafted in January by a committee Mr Yar’Adua set up to reform Nigeria’s energy sector.

“Indications are that, even if current funding levels are maintained, total oil and gas production will decline by 30 per cent from its current level by 2015,” it says.

The US, which already imports about half of Nigeria’s oil, hopes the country will play a growing role in reducing its dependence on the Middle East. European governments see potential in Nigeria’s gas reserves for reducing their reliance on Russian exports.

But such plans hinge on raising production in joint ventures between the state-owned Nigerian National Petroleum Corp and majors such as Royal Dutch Shell, Chevron, ExxonMobil and Total, which account for about two thirds of Nigeria’s 2.1m barrels per day.

Aware that the government’s failure to pay its share of costs in the joint ventures is one of the biggest brakes on growth, Mr Yar’Adua’s advisers are working on proposals to seek new sources of finance.

In the short-term, senior energy officials say they are close to agreeing terms under which the majors will extend loans to cover part of the immediate investment needs. The report says the shortfall in joint venture financing already stands at more than $3bn (£1.5bn, €1.8bn), and could grow to $8bn this year.

In the long-run, the government wants to change the way the joint ventures are structured to allow them to approach local and international capital markets to raise finance.

Jeroen van der Veer, chief executive of Royal Dutch Shell, said that the company had agreed the principles of the plan but more work was needed. Shell gave no immediate comment on the report.

Executives at western majors have, however, ex­pressed unease at how long it will take to make the legal and financial changes needed to get the new system working.

The progress report also proposes a 0.25 percent surcharge on each barrel of oil or gas equivalent to fund new, streamlined government energy agencies. Nigeria is already seeking to renegotiate contracts covering offshore production to win a greater share of profits to reflect soaring oil prices.

The report suggests hiring independent consultants to recruit operational staff for the joint ventures, prioritising Nigerians over expatriates. “Given the sensitivity of the staff selection process, special care has to be taken to discuss and agree with the joint venture partners to ensure that the process is not considered a form of nationalisation,” it says.

Other measures to promote Nigerian content include making it mandatory for energy companies to use local insurance companies and to seek to raise capital in the country before turning to markets abroad.

Tags: peak oil energy investments

This entry was posted on Thursday, April 17th, 2008 at 1:08 pm and is filed under Nigeria, Price of oil, oil supply. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.