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Financial Times: The warriors of Warri: how oil in Nigeria is under siege

By Thomas Catan and Dino Mahtani
Published: April 7 2006 03:00 | Last updated: April 7 2006 03:00
Surrounded by sullen andhungry-looking young men, a rebel leader known only as Hendricks explains why Royal Dutch Shell has been the target of a series of crippling attacks in Nigeria this year.
“Shell is the major culprit,” he says from a makeshift office in Warri, an oil hub in Nigeria's troubled delta region. The “colonial company” has, he maintains, exploited local people, destroyed the environment and colluded with a corrupt “political ­contraption”.
Hendricks and people like him represent one of Shell's biggest headaches today. Having worked in Nigeria for 50 years, the Anglo-Dutch oil group is accustomed to dealing with the problems that come from doing business in one of the world's most corrupt and politically unstable countries. But a series of attacks on oil installations this year, along with the kidnapping of 13 foreign workers, has substantially raised the stakes for the world's third-largest publicly-held energy group.
“The situation has sharply deteriorated in the Nigerian delta over the past few months,” says Matthew Strong, a partner at JLT Risk Solutions, one of the leading political risk brokers in the London insurance market. “Where we are at the moment is unprecedented in terms of the level of unrest.”
The latest surge in violence has roiled international oil markets and deepened worries over energy security in the US, which buys 40 per cent of Nigeria's total exports. It has also highlighted the growing security problems faced by oil companies, which are having to work in ever more unstable parts of the world.
Terrorism in the Middle East, kidnappings in Latin America and political risk in Russia are making life increasingly uncomfortable. “There are no more holiday destinations where oil companies are heading,” says Angus Cooper, business development director at Thales, the French defence group. “It's all difficult terrain.”
Thales is seeing a surge of interest by oil companies in electronic surveillance systems such as radar, night vision cameras and unmanned aerial vehicles. JLT has also seen a “significant increase” in the oil companies' interest in political risk insurance. The three latest oil workers to be snatched by militants were released last week but the heavily armed and increasingly organised rebels have vowed to step up their action against oil companies.
The attacks have already halved the usual 900,000 barrels a day of oil production by the Shell Development Petroleum Company (SPDC), Nigeria's oldest and largest oil company, in which Shell is a 30 per cent shareholder. SPDC accounts for 43 per cent of Nigeria's total oil output.
Overall, recent attacks have cut more than a quarter of the country's oil production of 2.4m barrels a day at a time when global supplies are already tight. Amid worries over Iran's nuclear ambitions and Nigerian unrest, oil prices are again approaching $70 a barrel. But though the situation in Iran remains volatile, few people believe that its supplies will be immediately threatened. Nigeria is a different matter.
“Though all eyes of the public seem focused on the atomic ambitions of Iran, Nigeria is at the greatest risk of oil disruption today,” says Peter Tertzakian, chief energy economist at ARC Financial Corporation, a Calgary investment management company.
For now, he says, the world's oil supply and demand balance can handle Nigeria's lost production. But from May, oil consumption begins its seasonal rise again. “Around the time road warriors in North America kick-start the annual driving season, oil prices will become increasingly sensitive to any further rebel action in Nigeria.”
Shell is not the only international oil company doing business in Nigeria. Chevron and ExxonMobil of the US, France's Total and Italy's ENI all have substantial operations in the country. But as later entrants to Nigeria, many of their installations are located offshore, where they have been less exposed to rebel activity.
SPDC, by contrast, has dozens of oilfields dotted throughout the swampy Niger Delta, an area that produces the bulk of the country's oil but whose inhabitants have seen few of the benefits. The company, of which Nigeria's state oil company owns 55 per cent, has more than 6,000 kilometres of pipelines and flow lines, 87 flow stations, 8 gas plants and more than 1,000 producing wells in the region.
With Nigeria accounting for about 16 per cent of Shell's 2m b/d worldwide oil production, investors are becoming increasingly concerned. “I think it's worrying everyone,” says Bruce Evers, an oil analyst at Investec Securities in London. “It's a substantial part of Shell's production.”
Shell says that it will continue to take the “necessary measures” to ensure the safety and security of staff, contractors and the people in the communities where it operates, and to keep staff deployment under close review. “We have withdrawn staff from the western delta and will not return until it is safe to do so,” it said.
Senior officials at the company are known to be deeply concerned about the situation. At a presentation in London in October, a senior Shell security official said the government was struggling to keep control over the situation in the Niger Delta. He said that between 50 and 70 Shell employees had been kidnapped over the previous year and an estimated $1bn a year of oil revenues diverted to corrupt officials.
The source of Shell's latest problems in Nigeria is a relatively new insurgent group called the Movement for the Emancipation of the Niger Delta (Mend), which claims to represent the Ijaw, the majority tribe in the delta.
Many Ijaw leaders say oil companies – particularly Shell – have failed to fulfil promises to deliver benefits to communities in the oil-rich Niger Delta. They charge that oil companies collude with a central government committed to marginalising the Ijaw and stealing their resource wealth while they live in a quagmire of oil slicks and gas flares.
The militants are demanding $1.5bn in compensation for environmental pollution, as well as a greater share of oil revenues. But Shell and other oil companies say they have little control over what happens to the nation's oil wealth. Under Nigerian law, the country's share of the revenues goes to the federal government, which then passes on a percentage to the states.
In 2004, the 36 states received $6.2bn from the account, a third of which went to the four major oil-producing states. The amount in 2005, which has not yet been finalised, will be far higher due to soaring oil prices. However, corruption, theft and poor management at the state government level ensures that little of that money ever makes it to the local communities.
SPDC is losing up to 40,000 barrels of oil a year through theft from pipelines, known in Nigeria as “bunkering”. The company says that this, together with attacks on pipelines, accounts for most of the environmental pollution in the delta. Many security consultants also suspect that such activities are helping to finance the militant groups.
Mend has been reluctant to answer questions about where it gets its funding but says that it has nothing to do with bunkering. It is well-armed, equipped with machine guns, rocket launchers, assault rifles and heavy-duty outboard motors mounted on 25-foot fibreglass hulls. It kidnapped oil workers from an offshore oilfield – installations previously seen as secure.
“The more [Mend] succeeds, the more it will act as a magnet for other groups,” said Dimieari Von Kemedi, a security strategist who has advised Nigeria's president on delta-related issues in the past.
Military analysts say that Nigeria is woefully ill-equipped to handle militancy in the delta, a vast network of mangrove creeks and swamps that offer excellent hiding spots for pre-dawn raids on oil facilities. One Nigerian security analyst said the country would need 200 patrol boats to cover the 70,000 sq km of the main delta.
Nigeria currently has a fraction of that, although security analysts have said it is acquiring boats from China, partly because of the reluctance some western governments to fund a military seen as ill-disciplined and corrupt.
Many oil facilities are guarded by Nigerian security forces known as the “spy police”. They have been assigned to protect oil facilities but are effectively paid – and sometimes trained – by the oil companies. However, they are disliked by local communities and have so far failed to halt the attacks.
“They are perceived by communities as mercenaries for companies perceived to be despoiling the environment,” says Nowa Omoigui, a lecturer at Nigeria's national war college.
Oil companies have also brought in their own “security consultants” – often former soldiers from the US, UK and South African militaries – in increasing numbers. Erinys, the security company that guarded oil pipelines in Iraq, is known to be seeking to work for Shell in Nigeria. Olive Group, which has worked for oil companies in Iraq, is also active in Nigeria. So are other UK-based security groups such as Armour Group and Control Risks. The companies declined to discuss their clients, citing confidentiality agreements.
However, private security companies working in Nigeria are limited by a 1986 law that bars them from carrying weapons. “When supporting oil companies in these environments, our procedures allow for the use of western-trained armed personnel, but in Nigeria we're not able to do this,” says Martin Rudd of Olive Group. “If the militants are using arms and we're not able to respond in kind, it obviously puts us at a disadvantage.” Mr Rudd says that Olive has other procedures and technologies in place to ensure the security of its clients in Nigeria.
Oil companies are worried that they will not be able to attract top oil workers to Nigeria and fear lawsuits in the US if they cannot demonstrate they have provided adequate protection.
On the other hand, says Alex Turkeltaub of the Frontier Strategy Group, which advises oil companies on risk: “If your security company accidentally pulls the trigger or gets involved in a violent conflict with a local, you have a legal and a reputation liability.”
Ultimately, most people involved believe there will have to be a political solution to the problems of the delta, not a military one. In particular, the benefits of oil production must be felt by the communities in the region.
Shell also stresses that the responsibility for security lies with the Nigerian government. “As in any other part of the world, the government has a duty and an obligation to uphold the rule of law – while at the same time respecting the human rights of its people,” the company says.

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