Shell Heading Toward Stormy Waters in Nigeria (Source: Resource Investor)

By Sven Ridley-Wordich
27 Jan 2008 at 02:19 PM GMT-05:00

AMSTERDAM (ResourceInvestor.com) -- In the next few days, British Dutch oil and gas major Shell [NYSE:RDS-B] could be faced with increased problems. Nigeria, Shell’s major upstream operations area, is set for new discussions regarding Shell’s operations and investments.

The last days, Nigerian news sites have been buzzing with assessments on the possibility of an increased crisis between the oil major and the Nigerian government, as both parties seem to be heading toward different targets. On Friday, January 25, Shell’s CEO Jeroen van der Veer and Nigeria’s president Umaru Yar’Adua will meet in Davos, Switzerland, where both are taking part in the annual meeting of the World Economic Forum.

Some days ago, Van der Veer said he is prepared to discuss all issues pending, such as renewed contract discussions, the gas flaring issue and possible new investment schemes. Analysts, however, think both leaders will also discuss the growing unease Shell and others are feeling about the unwillingness of the Nigerian government to deal effectively with the Niger Delta uprising, which has resulted in the shutdown of more than 450,000 bpd of crude oil.

The latter not only threatens the future of Nigeria as main producer in the region, but also costs the oil and gas operators billions of dollars. In a move to regain the overhand in the conflict, oil and gas companies have asked the Yar’Adua led government to set up effective ways of countering the uprising and bring back on-stream the vast amount of oil production. Van der Veer has repeatedly stated that Shell will not restart production or even assess new investments in the country if the current security situation improves. Shell and its compatriots have been hit by kidnappings, theft and total breakdown of operations due to the unrest in the Niger Delta.

Nigerian politicians have always been wary to address the unrest as main parts of their constituencies are supporting or actively involved in the growing unrest. International operators are currently facing lower production capacity, increased costs and out-right violence in the country. As a result, Shell has already stated that it will consider divesting part of its operations and cut costs and jobs in the country. The latter would mean that Nigeria would be faced by a part pull-out of its main international oil and gas operator in the worst-case scenario. Even a more subtle approach by Shell, such as cutting the overall workers volume, will have a negative impact in the already economically weak Niger Delta region.

In contrast to expectations, Nigerian officials have reacted with total rejection. In a move to quell possible violence in the area, the Nigerian government has announced it will implement new contract stipulations and investment requirements. The existing production contracts are to be reassessed, most probably resulting in less-favorable terms for the operators. If the latter will be put in place for the already existing multibillion offshore oil and gas projects, a crisis will emerge. International investors will not be interested anymore to put their own high value operations at risk if returns are not secure.

The depth of discussion of these issues between Yar’Adua and Van der Veer is unclear, but it seems the bilateral relation is heading for a breakup. Nigeria even has increased the pressure even more by stating that it would press Shell to invest more in the country’s downstream. The latter has been presented as a request, but is seen by some analysts as a new ultimatum. How far companies such as Shell are wiling or able to commit themselves to this new environment is unclear. No rational investor will increase his investment in a project while risks have gone up exponentially. At the same time, Shell cannot pull out totally without losing a huge part of its international production capabilities and reserves. In the past few years, national governments and their oil companies have learned that international operators are in a corner. Nigeria has the possibility to reap more rewards without losing too much, but Shell could lose its future.

The current stalemate seems to be heading for a crisis. Shell is not the only IOC in conflict with Abuja. In the coming weeks, a possible new issue could emerge related to the strict implementation of the gas flaring deadline set by Nigeria. IOCs all have indicated that the deadline is not feasible, but Abuja refuses to delay. Possible further production shutdowns or threats to end contracts could be the result. The already-low production volumes coming from Nigeria will be hit hard if no solution is being found. Oil prices will show an effect too, as other producers won’t be able to counter the loss of Nigerian oil the coming months.