Violence in Nigeria forces Shell to cut output

Financial Times: Violence in Nigeria forces Shell to cut output

By Michael Peel in Lagos and James Boxell in London

Published: September 29 2004

Royal Dutch/Shell said yesterday it had suffered its first production loss as the result of violence in Nigeria’s oil-rich and troubled Niger Delta, where a militia leader has condemned oil multinationals and warned foreigners to leave the area.

The military taskforce set up in response to growing violence in the region called for calm but warned militia leaders to “stop stirring internal insurrection” and said “crack teams” of troops were ready to respond to trouble.

As oil prices have surged, international attention has turned to the situation in the deprived and polluted Delta. The conflict there has worsened amid public resentment of the government and oil companies, violent local politics and oil theft thought to be organised by cartels with official connections.

Shell, the producer of almost half Nigeria’s daily output of almost 2.5m barrels of oil, said it had shut down 28,000 barrels a day of production because of a technical problem at a facility that its support staff could not reach.

The company said it had “curtailed” movement of staff and supplies through the creeks of the eastern Delta, where Alhaji Mujahid Dokubo-Asari, leader of a militia group known as the Niger Delta People’s Volunteer Force, said this week he could not be responsible for the safety of foreign nationals beyond the start on Friday of a campaign known as Operation Locust Feast. The violence in the Delta is the latest threat to oil output in Nigeria, which supplies about 10 per cent of US crude imports.

Mr Dokubo-Asari has called for self-determination for his Ijaw people and claims he is being attacked by government forces as part of a security crackdown supported by oil multinationals. Shell has denied claims that it supplied maps to security personnel, while Eni of Italy has denied similar accusations that one of its helicopters was used by members of Nigeria’s armed forces.

ChevronTexaco, the third-largest producer, said it took Mr Dokubo-Asari’s threats “quite seriously” and that it was in touch with the government, which had the primary responsibility for ensuring security.

Chevron still has about 140,000 barrels a day of production shut down in the western Delta, where violence worsened last year and caused the temporary halt of more than a third of the country’s oil output.

Shell refused yesterday to speculate on whether the security threat meant more of its production could be closed down temporarily. The company is understood to be treating the situation seriously but believes it impossible to say how long the troubles could last. Last year social unrest forced it to cut production by 320,000 barrels a day.

Bruce Evers, oil analyst at Investec, said: “This has been an ongoing struggle for Shell for many years. The current shutdown is neither here nor there in terms of overall production but they will be nervous about the situation escalating.”

Italy’s Agip and France’s Total, which also have interests in Nigeria, said the threat did not affect production but was being monitored closely.

A new eastern Delta military joint task force – known as Operation Flush Out 3 – advised Nigerians and expatriates to go about their business normally, adding that it had troops on standby. “The joint task force is being catalysed to manifest full military colours in the creeks,” it said. “Any gang who doubts our resolve should strike first.”

Mr Dokubo-Asari has the highest profile of a number of gang leaders in Rivers state – in the Delta – who are widely thought to have been armed with rifles and machine guns by ambitious politicians ahead of controversial national elections last year. The polls were heavily criticised for ballot-rigging and intimidation.

A skilled and articulate self-publicist, Mr Dokubo-Asari is a maverick figure who converted to Islam and says he admires Osama bin Laden. His claims of ill-treatment of the Ijaw people, the largest ethnic group in the Delta, are widely echoed, although a number of members of his rag-tag army say they fight with him primarily because they were driven from their homes by members of a rival militia.

Financial Times: Fifty dollar oil: “…the world will have to get used to a future in which new oil no longer comes from stable areas such as Alaska and the North Sea but increasingly from risky and unstable parts of the planet.”

Published: September 29 2004

The oil market is behaving a bit like someone who, expecting trouble, jumps at every car that backfires. The Niger Delta People’s Volunteer Force could well be bluffing in telling western oil companies to stop pumping oil this week or risk getting caught in its “all-out war” for autonomy. So far this insurgency’s only impact on the ground seems to have been to cause Shell to shut in a mere 28,000 of the 2.3m barrels Nigeria produces on average every day.

But because this threat comes on top of much other adverse oil news, it briefly pushed the price in New York to more than $50 a barrel, the highest level (in nominal terms) since trading in oil futures started 20 years ago. Yet it was only a few weeks ago that the oil price went through the $40 barrier, at which point many felt the price would stabilise. So what or who is to blame?

An easy culprit would be the oil traders themselves. But, as far as the New York market is concerned, the net speculative long positions – taken by traders banking on an increase in the oil price – has declined this year, as the oil price has gone up. Against this generally declining trend, there may be a tendency for speculation to increase towards the expiry of the immediate next month’s oil futures contract, as may be happening now and did happen in late July.

But even speculators need some hard evidence to back their long positions, and there is plenty around. Deutsche Bank, for instance, estimates that the current oil price is at a $15 premium above where the balance of average supply and demand would ordinarily put it. But it cites several factors to explain this. Part of the premium, perhaps $3-$5, is just the result of the weaker US dollar in the last two years. This has hit Opec oil-producing countries, whose imports are largely in other currencies, and has inclined them to go for a higher dollar oil price.

But there are four other factors that Deutsche Bank estimates add another $2-$3 each on to the “normal” price. First is political worries about at least four big Opec producers: Iraq, Venezuela, Nigeria and Saudi Arabia. Second are the questions that continue to linger over the fate of Yukos, Russia’s largest company, which has had to curtail shipments to China. Third is the low level of commercial inventories in oil-consuming countries. Covering 53 days of oil import needs, these stocks could still be read as adequate, if it were not for the fourth factor – worries about Opec’s diminishing spare capacity. This is the market’s traditional cushion, but at only 1.5m barrels a day it is now painfully thin.

None of these factors is cause for panic. Some may quickly dissipate; the Yukos crisis could be resolved overnight, and a warm winter would boost stocks. Equally, however, the world will have to get used to a future in which new oil no longer comes from stable areas such as Alaska and the North Sea but increasingly from risky and unstable parts of the planet.

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