James Kimer on January 4, 2012.
As the second largest energy company in the world after Exxon-Mobil, Royal Dutch Shell has been a major player in Nigerian oil and gas from the beginning, overseeing the first commercial export of oil from the country in 1958 from the Oloibiri Field. Their success over the years has been notable, with operations are spread over 30,000 square kilometres in the Niger Delta, including more than 6,000 kilometres of flowlines and pipelines, 86 oil fields, 1,000 producing wells, 68 flowstations, 10 gas plants and two major oil export terminals at Bonny and Forcados.
But after a number of accidents, attacks by militants, and political scandals, is Shell’s honeymoon with Nigeria coming to an end? Some recent events and transactions indicate a shift in the Dutch company’s strategy in the country, opening a window of opportunity for new operators.
The past year has battered and bruised Shell’s operations in Nigeria, with both environmental issues and political risk increasing. Just this week, the company was forced to conduct emergency repairs on a sabotaged trunkline pipeline in Nembe Creek, Bayelsa State, where more than 200 barrels of oil were siphoned off by thieves, forcing Shell to cut production by 70,000 barrels a day during the repairs. Sabotage and theft by militant gangs is currently on the rise following a brief lull since its height in 2005, while the company reportedly suffers the loss of between 70 to 200 barrels of oil stolen per day.
In December 2010, Shell also experienced its worst oil spill in Nigeria in the past decade, as more than 40,000 barrels of crude oil was spilled at the offshore Bonga Field (the accident being caused by tanker mishap instead of the usual sabotage). According to a report in the Washington Post, “Some environmentalists say as much as 550 million gallons of oil poured into the delta during Shell’s roughly 50 years of production in Nigeria — a rate roughly comparable to one Exxon Valdez disaster per year.”
As a result, political pressure against Shell has also been mounting from civil society. The Environmental Rights Action/Friends of the Earth (ERA/FoEN) has been on the offensive since the spill at Bonga Field, issuing statements demanding that the government secure independent verification of spillage data while enforcing clean-up payments. The company’s environmental and human rights record has been under scrutiny at the highest levels, with the United Nations Environment Programme (UNEP) issuing a harsh report in August 2011 that examined the ecological and public health ramifications of oil spills in Ogoniland. One of the UNEP report’s key findings included the following: “Control and maintenance of oilfield infrastructure in Ogoniland has been and remains inadequate: the Shell Petroleum Development Company’s own procedures have not been applied, creating public health and safety issues.”
Even before all these issues came about, there were indications that Shell may be scaling back its exposure to Nigerian energy. Shell is the 30% owner of the joint venture Shell Petroleum Development Company of Nigeria Limited (SPDC), which also features major stakeholders such as the state-owned NNPC with (55%), TotalFinaElf (10%) and Agip (5%), which together is responsible for a whopping 50% of all oil production in the country. However in November 2011, Shell completed the sale of its shares in two major oil producing blocks (OML 26 and OML 42), while at the same time they are working to close ongoing deals to sell their stakes to three other blocks (OML 30, 34 and 40).
Representatives from the company are keen to express that these sales do not represent the beginnings of an “exit strategy.” According to statements made by SPDC Managing Director Mutiu Sunmonu to NEXT Newspaper, “what we are doing is consolidating our operations to strengthen even our future in Nigeria. We are in Nigeria for the long haul. Some of these assets are of more value to indigenous companies than the multinationals. The sale of marginal oil fields is an exercise aimed at growing indigenous capacity in the upstream oil and gas industry.”
However, it appears that in fact the divestiture strategy is aimed at offloading the most vulnerable assets in the company’s portfolio – the ones located onshore, and therefore susceptible to attacks, kidnappings, theft, and sabotage, indicating a declining confidence in the state’s ability to maintain law and order in the Delta region. In recent years, Shell has experienced a steep decline in production among its onshore assets in Nigeria. In 2009 Shell CEO Peter Voser said that due to violence in the Delta region, production has slacked to 120,000 barrels per day from the previous 300,000 barrels per day.
“The overall security situation is still very fragile, the government had some success with their amnesty programme and we are looking now towards the next few weeks to see how this influences the whole security situation,” Voser told Reuters. “But it would be by far too early to say that it has improved. We are still dealing with the same kind of issues.”
Two years later, it looks like Shell might be losing patience. The sale of these marginal fields such as OML 40, referring to oil and gas assets that have yet to be developed due to difficult location, infrastructure, and access, are bringing about a sharp increase of participation by indigenous companies. New players in the Nigerian oil sector include Mike Adenuga’s Consolidated Petroleum, Femi Otedola’s African Petroleum (AP) Consortium, Elcrest, and Neconde Energy. There are other indigenous companies which are actually backed by international finance, such as Oando (China), Perenco (Afren – a Nat Rothschild entity), and Equinox Group (Gazprom).
But the reasons motivating Shell’s divestitures may be more complex than the challenges of violence, insecurity, and public scrutiny. After all, the company has survived some of the roughest periods of Nigerian history, including the murder of activist Ken Saro-Wiwa by the Abacha regime, which resulted in a $15 million lawsuit settlement. In 2008, attacks by militant groups such as the Movement for the Emancipation of the Niger Delta (MEND) had reached such heights, that Shell was forced to steeply cut production, driving global oil prices to record highs well above $120 a barrel. And yet, despite these harsh circumstances, the company persevered and held on up to the 2009 amnesty, which helped production recover.
The problem for the company may be bigger than just oil spills, theft, and attacks, as some observers point to the pending passage of the Petroleum Industry Bill (PIB), which would revolutionize the tax and royalty structure for international oil companies doing business in Nigeria, carving out a sphere of participation in production and exploration (as opposed to simply regulation) for parastatal companies. First proposed in 2008 by the presidential administration of Umaru Yar’Adua, the PIB is a complex, 100-page document that has been repeatedly stalled in the legislature due to controversy and disputes over its contents and purpose. According to the former Minister of the Federal Capital Territory of Abuja, Nasir El-Rufai, international oil companies such as Shell stoutly oppose the passage of the PIB and are actively lobbying against it because the bill contains new royalties structures for offshore production (because the Nigerian government forfeited these rights in a 1991 agreement).
And while the PIB remains stalled, much-needed foreign investment is put on hold. According to one analyst interview by The Financial Times, “The wait for the adoption of the PIB is very damaging. It’s why the big new investments have been put on hold. The impact becomes exponentially more problematic [because] if reserves don’t get replaced, there is the risk of production capacity in Nigeria dropping for the first time in 30 years.”
As demonstrated by the overwhelming protests and public outrage over President Goodluck Jonathan’s decision to remove the fuel subsidy at the New Year, there is a strong social aspect to the country’s economic policies concerning the energy sector. For most citizens, who live on less than $2 a day, the fuel subsidy was seen as the only way that the oil wealth was shared – and, with its removal, there could be increased public support for the passage of the PIB that aggressively targets the traditional energy players with higher taxes and more difficult conditions.
For the moment, public anger is directed toward President Jonathan and a small group of advisers. But if this pressure translates into real political costs for the administration, it is possible to imagine President Jonathan finding a scapegoat in the foreign oil companies, and satiating voters with promises to pass the PIB and enforce payments on environmental clean-up costs. If that’s the case, Shell’s divestitures may accelerate, while local companies – which are in no way more accountable – will take over more and more critical onshore production fields, posing an unknown risk to global energy supplies.
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