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The Wall Street Journal: Shell Eyes $100 Million In Nigeria Cost Cuts

June 14, 2007 12:59 p.m.

LONDON — Royal Dutch Shell PLC is looking to cut at least $100 million in its Nigerian operations in the next few years to offset rising costs and prolonged and substantial oil revenue losses caused by security-related production curtailments, people familiar with the matter said.

The move appears to be a sign that Shell, Nigeria’s biggest foreign producer, is positioning itself for a period of continuing strife and production problems in the country.

Ahead of Nigerian elections earlier this year, some analysts had hoped escalating violence in the Niger Delta would ease if voting went fairly smoothly and a new government took power without incident. But badly marred elections in late April and a flurry of kidnappings and attacks immediately afterward have dimmed those hopes.

The retrenchment would likely include cutting a minimum of 200 jobs in the next three years, the people say, and are in-line with the tone of an internal message Shell distributed to its 4,500 Nigerian employees on May 30. In that announcement, which was made available to Dow Jones Newswires, Shell said the changes amount to “an austerity program for three years.”

“The measures will demand significant step change in performance at personal and organizational levels as well as focus on how to reduce costs,” Shell said in the message.

Since the end of 2005, when the current wave of militant violence began, Nigeria has lost an estimated $16 billion in export revenue due to production outages caused by Niger Delta violence, according to the U.S. Energy Information Administration in an April report. About 28%, or 710,000 barrels per day, of Nigeria’s effective production capacity of 2.5 million barrels a day is idle, according to Dow Jones Newswires estimates.

Around 475,000 barrels of daily capacity operated by the Shell Petroleum Development Co., a joint venture run by the Nigerian government, has been idle in Nigeria since February 2006. Shell has a 30% stake in the venture.

That has significantly crimped earnings in one of Shell’s biggest and most important profit centers. In May, Shell Chief Financial Officer Peter Voser said the company’s profit on oil output from the Niger Delta, where most of Nigeria’s oil is produced, was $3-$4 a barrel versus around $20 a barrel at its U.S. operations.

The cost cutting could include moving a chunk of Shell’s personnel from its Nigerian headquarters in Port Harcourt, Nigeria’s oil capital, to the country’s coastal commercial capital of Lagos if militant violence against oil workers and infrastructure doesn’t abate, a Nigerian-based source said.

The Shell cuts are small for a company planning capital expenditures totaling between $22 billion and $23 billion in 2007. But they are a significant departure for Shell, which has long relied on its vast Nigerian operations as a major component of its total oil output. Shell doesn’t break out budgets country by country, so it is unclear how significant the cuts will be for Shell’s overall Nigerian spending plans.

A Shell spokesman said it was “too early to report any details” of the company’s cost-cutting program. The spokesman called reports of Shell possibly moving staff from Port Harcourt to Lagos “pure speculation” and declined to comment further.

Peter Akpatason, leader of one of the two main unions representing thousands of oil workers in Nigeria, said he and other union leaders planned to meet with Shell to talk about its operational changes.

Shell, the biggest foreign oil company in Nigeria by production, has borne the brunt of militant attacks on oil installations the past 18 months in Nigeria, Africa’s biggest oil producer and exporter. The assaults have often included the abduction of Shell employees or contractors and have cost the company and the Nigerian government hundreds of millions of dollars in oil revenue.

The company has also been forced to trim additional production at its offshore Nigeria operations in the past several months because of output cuts implemented by the Organization of Petroleum Exporting Countries, of which Nigeria is a member. The Nigerian government is currently forcing Shell and ExxonMobil Corp. to operate “at a combined 120,000 barrels per day below capacity” at two big offshore fields operated by each company, according to a Deutsche Bank AG report released last week.

The report didn’t breakdown how much production Shell and Exxon were each being required to curtail at the two offshore fields.

OPEC announced two production cuts totaling 1.7 million barrels per day, around 6% of the 12-nation group’s output, starting last October. Of those cuts, Nigeria’s share is 142,000 barrels per day under OPEC’s production allocation system.

–Vincent Nwanma in Lagos and Benoit Faucon in London contributed to this article.

Write to Spencer Swartz at [email protected] and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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