Events in Nigeria may continue to impact oil prices but the exact nature of the forces affecting Nigerian oil is not completely clear.  One exception is the recent strike against Exxon that took 800 kb/d off the market.  As the report published in the May 10th Wall Street Journal reproduced below indicates, the strike is resolved now, but further labor actions against Shell or other producers are not unlikely if oil workers deem themselves at risk from the various para-military conflicts swirling around the Nigerian oil fields.

More opaque is the nature of these paramilitary actions.  As the WSJ piece indicates there are at least two organized forces “representing” the Niger Delta, the poor southern region where most of the oil originates.   There may also be additional militias and some of them may simply be gangs of for-profit marauders.  You could call them modern pirates.  Clearly a lot of the oil produced is hi-jacked and sold on the black market, perhaps by such groups.   Another oil related business is the kidnapping-for-ransom of oil workers, particularly foreign executives and their families.  

A further wrinkle is the role of the government itself.   As the Petroleum Review recently reported, it appears that the government’s own secret security service is well aware in advance of the kidnappings, which implies they know about some or all of the attacks on oil installations during which some of the kidnappings occur. Perhaps members of the government are benefiting personally from these crimes.  After all, even before the violence started there was an established tradition of top Nigerian government officials taking a share of oil revenues for their personal Swiss accounts.    

Stepping back, my sense is that a multitude of Nigerian miscreants - elected, appointed, and self-selected - are actors in the increasingly profitable world of oil related larceny in Nigeria.  Nobody knows how it all fits together and I suspect the potential iterations of cooperation and competition between these parties might rival a Dostoyevsky novel.  How can such a hellfire of greed and corruption possibly not “worsen” - to use the Journal’s word - as the value of its prize increases beyond the actors’ fondest dreams of avarice?

Between the kidnappings and the theft of oil itself and the further costs of “security,” the oil companies are paying an increasing price for their Nigerian crude.  In fact, the strikes themselves may turn out to be a form of cost-escalation-through-force by the workers, perhaps in league with some of the other bad guys. Are not all these Nigerian practices a new and more indirect flavor of expropriation? 

We are familiar with the Russian style of expropriation whereby a company is accused of some new crime and threatened with court ordered penalties until it agrees to a “deal” that effectively re-adjusts its ownership.  We are also familiar with the South American style whereby the dictator - Chavez or Morales or whomever - simply says, “contract renegotiation time, folks.  Here’s your new contract.  Your 75% interest just became 25%.” 

So what, exactly, is the difference between the Russian and South American versions of expropriation and what we see unfolding in Nigeria?   In the end, the western oil company still does all the work, but just books a much smaller part of the revenue at the end of the day.   Or the company decides to leave town altogether out of frustration - or principal. 

I would suggest that this expropriation process is likely to re-occur throughout that part of the oil producing world where a western style of rule of law is not a firm tradition.  The higher the price of oil goes, the more incentive there is to expropriate.   And the more countries that follow the practice, the easier it is for another country to do it.  I suspect there is not going to be much “international” left in the portfolios of International Oil Companies after a while.

Here is the report of the Journal:

Nigeria’s Production Woes Could Worsen

By ANGELA HENSHALL and MONICA MARK
May 10, 2008; Page A6

LONDON — The recent slump in Nigeria’s oil output may have been disastrous for Africa’s largest oil producer, but problems could worsen.

In a recent email to journalists, the Movement for the Emancipation of the Niger Delta — the group that claims credit for most of the attacks on crude-oil facilities in Africa’s largest producing country — said it will step up its campaign against the oil companies. MEND says its action is intended to force the government to remit more centrally controlled oil funds to their impoverished region.

In April, striking Exxon Mobil Corp. workers and a wave of attacks on oil infrastructure by militant groups knocked more than half of the nation’s quota for the Organization of Petroleum Exporting Countries — 2.16-million-barrels-a-day. That contributed to propelling the Nymex light sweet crude-oil contract above $125 a barrel this week.

Attacks have increased significantly in southern Nigeria in recent weeks and damage to pipelines has forced Royal Dutch Shell PLC’s Nigerian joint venture, Shell Petroleum Development Corp., to hold back more than 160,000 barrels a day from its Bonny Light oilfield.

When asked if Shell was concerned about escalation of security issues and the short-term outlook for production from the chief oil producing region, the Niger Delta, Rainer Winzenried, head of global media relations said, “We are engaging government on these issues and we remain hopeful of a quick resolution.” Mr. Winzenried added that despite the challenges, his company continues to explore “how it can conduct its business in a more effective manner thereby contributing more substantially, to the socio-economic development of the country.”

Previously as an emergency measure, state-owned Nigerian National Petroleum Corp. allocated additional monthly cargoes to smaller production facilities to counterbalance lost production from bigger fields such as Bonny.

“What the government is doing is increasing surveillance to try and prevent these attacks,” Odein Ajumogobia, Nigeria’s minister of state for energy, said.

The trial of Henry Okah, the man many believe to have been the leader of MEND, starts in June and is the second potential big threat to production. If found guilty of a treason charge, Mr. Okah faces the death penalty, a verdict that could ignite a new wave of violence.

Mr. Okah, who was arrested in Angola last year is also accused of procuring weapons for militants fighting the government in the Niger Delta, sabotaging oil installations, hostage-taking, piracy and killing foreign personnel, according to court filings.

A human-rights lawyer based in Abuja in Nigeria played down talk of unrest during the trial but said different political factions may seek to influence the verdict.

“Ordinary Nigerians are tired of the violence and this could actually help curb it, because I don’t think [Mr. Okah] has that same popular support as someone like Ateke Tom,” the lawyer said, referring to the leader of a rival militia group who remains at large despite a warrant for his arrest. Mr. Tom’s group, the Niger Delta Vigilante, predates MEND and was previously at the center of discussions with the government on restoring peace to the Niger Delta.

The third factor in the mix is the threat of further industrial action. The Exxon Mobil workers’ strike last month saw 800,000 barrels of crude a day taken out of the market overnight. “I could see the union’s strikes being repeated,” said Thomas Pearmain, analyst at Global Insight, adding that Royal Dutch Shell workers, the biggest group in the Delta, had also staged industrial action in the past.

“Working conditions were one of the main issues [for the Exxon Mobil strike] and if the security situation gets worse and workers feel unsafe doing their jobs, then I don’t think we’ve seen the end of industrial action,” Mr. Pearmain said.

Exxon Mobil declined to comment on the matter.

Write to Angela Henshall at angela.henshall [Email address: angela.henshall #AT# dowjones.com - replace #AT# with @ ]

Tags: peak oil energy investments

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