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The Wall Street Journal: Unrest Besets Shell Project In Niger Delta

By BENOÎT FAUCON
January 3, 2007; Page A3

WARRI, Nigeria — Ten months after attacks shut down a key Niger Delta oil field, Royal Dutch Shell PLC still hasn’t figured out how to get the field running again.

Militants have sharply increased attacks on Nigeria’s oil industry in recent weeks, raiding oil facilities and kidnapping foreign workers. Last month, the U.S. State Department said violence in the Delta — the source of about 10% of the oil imported into the U.S. each year — was among the top security challenges U.S. businesses are likely to face in 2007.

On Dec. 21, Shell began evacuating the dependents of its foreign employees in the region for the first time since 2003.

Violence in the Niger Delta has hobbled oil production for years in Nigeria, one of the world’s largest producers of crude oil. In February, Shell joint venture Shell Petroleum Development Co., or SPDC, shut down its East Area offshore platform and its Forcados terminal and pipelines following attacks by the Movement for the Emancipation of the Niger Delta, or Mend, a recently created armed group that wants a larger share of local oil revenue. Nine Shell contractors were abducted during the attacks and were later released.

Since then, Shell has repeatedly failed to get those facilities, which together account for 477,000 barrels of oil output each day, back into action.

The Anglo-Dutch company owns 30% of SPDC, while the state-run National Nigerian Petroleum Corp. owns 55% and units of Italy’s Eni SpA and France’s Total SA hold 5% and 10%, respectively.

In November, Shell’s SPDC venture tried to strike a deal: It agreed to provide electricity to rural western Delta communities in exchange for their support for the company’s return to the oil-rich Delta, a difficult-to-access region of lush mangroves, swamps and creeks that accounts for nearly all of Nigeria’s petroleum output.

But Mend rejected the deal and warned it would kill any Shell employees who return.

Even if Mend agrees to talks, company policy forbids Shell from speaking to rebel groups, a person close to the company says. A spokeswoman for the company declined to comment on the matter.

As a result, Shell has had to rely on go-betweens for such contacts — all of which have been rejected by Mend.

Niger Delta oil-industry experts say reaching a deal with Mend may be difficult even for official negotiators, because it isn’t clear whether the rebel group has a central command. Oil minister Edmund Daukoru and the head of National Nigerian Petroleum, Funsho Kupolopun, have both said the government has held discussions with Mend, but Mend’s chief spokesman denies this.

Meanwhile, Shell has lost an estimated average of $10 million in potential crude sales each day since facilities it operates in the western Delta have been shut. A 40%-owned Chevron Corp. venture also has stopped production of 98,000 barrels a day in the Delta.

While those lost sales aren’t a huge problem for a company of Shell’s or Chevron’s size, the impact on Nigeria is significant: As of the middle of December, nearly a quarter of Nigeria’s 2.6-million-barrel-a-day capacity was shut due to violence.

Some industry experts are warning that the fighting could drive away oil-industry contractors despite sizable business opportunities.

Kevin Rosser, an oil-and-gas expert at Control Risks, a security consulting company, notes that signing deals with local contractors “is one of the means of buying peace” for oil companies in sensitive areas. Under these arrangements, oil companies offer lucrative contracts to community leaders in hopes that locals will stop supporting attacks against company facilities.

But when production is shut down, local contractors don’t reap expected benefits. And giving business to some locals may get only a few on board. For every contract awarded, “you have an almost limitless supply of people who will be left out,” with some of them ready to join armed groups, Mr. Rosser says.

Indeed, with more militant violence and oil-worker abductions expected ahead of Nigeria’s presidential election in April, companies are poised to take even tougher security measures to protect workers, company officials say.

Write to Benoît Faucon at [email protected]

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