The Wall Street Journal: Nigeria Unrest Dims Outlook On Oil Prices

Militant Attacks
Hurt Likes of Shell;
Strike Ends, at Least
By MASOOD FARIVAR
June 25, 2007; Page C3

The suspension of a four-day general strike in Nigeria comes as a relief to jittery world oil markets, but it won’t lead to significantly lower prices.

In fact, the outlook for oil production in Africa’s largest producer and a major source of crude oil for the U.S. has dimmed in recent weeks — raising the prospects of higher prices at the pump.

More than 25% of Nigerian oil production remains offline because of militant attacks over the past year, and the bulk of it isn’t seen coming back online until next year. A four-day strike that further threatened to add to supply uncertainty was suspended Saturday after the government agreed to hold off on raising fuel prices for a year and accepted an offer to halve the price increase that had sparked the strike.

The extended supply loss has led to the recent surge in benchmark oil prices and leaves prices susceptible to further increases in the event of an outage elsewhere. Nigeria’s light, sweet crude oil is coveted by U.S. refiners because it yields a higher amount of gasoline than the heavier variety from the Middle East. The outage comes as the U.S. summer driving season gets under way, with traders focused on tight stockpiles of gasoline.

Gas is selling for an average of about $3 a gallon and is already seen rising later this summer as demand picks up. Another production outage in Nigeria or elsewhere could send prices even higher.

“That’s why the world has $70 oil,” says Fadel Gheit, an analyst at brokerage Oppenheimer & Co., referring to Nigeria. “It will take a year or longer to restore production [in Nigeria], if everything goes well, if they have all the green lights.”

Benchmark crude prices haven’t quite hit $70 in the past week, though the front-month contract on the New York Mercantile Exchange came close and many analysts continue to expect a breach of $70. On Friday, the August crude contract ended up 49 cents at $69.14 a barrel after rallying as high as $69.50.

The bleaker outlook for Nigerian production contrasts sharply with the more rosy forecasts offered just a few weeks ago by analysts, government officials and foreign oil executives with predictions of a sharp decline in militant attacks on oil facilities in the Niger Delta following the April election of President Umaru Yar’Adua.

To be sure, Mr. Yar’Adua has pledged to make restoring stability to Niger Delta the centerpiece of his policy, leading to conciliatory gestures by militants. The Movement for the Emancipation of the Niger Delta, the main militant group in the delta, recently announced a one-month cease-fire, and the newly released militant leader Mujahid Dokubo-Asari vowed to stop all MEND-affiliated attacks on oil facilities.

But that hasn’t stopped attacks by other groups operating in the delta and it isn’t clear the security situation there will improve significantly in the foreseeable future. In the past week, gunmen seized some two dozen Nigerian workers and soldiers at a flow station operated by Italian energy giant Eni SpA unit Agip, while hundreds of angry villagers chased workers away from a Chevron Corp. oil transfer facility. What’s more, after more than a year of periodic attacks on facilities, damage appears to be far more extensive than thought.

All of this has led analysts and oil-company executives to predict a longer recovery period for Nigerian output. Royal Dutch Shell PLC Chief Executive Jeroen van der Veer, who as early as April predicted that production might be restored within months, told Bloomberg News on June 10 that he didn’t know when that would happen.

Shell, the largest foreign operator in Nigeria, has an estimated 477,000 barrels of capacity a day shut in, or inactive, at its Forcados Terminal, which it operates in a joint venture with the Nigerian National Petroleum Co., Total SA and Agip.

In all, Nigeria has lost as much as 880,000 barrels a day of production out of total capacity of 2.5 million barrels a day.

The bulk of the lost production went offline in early 2006, as MEND militants, angry over the imprisonment of Mr. Dokubo-Asari, began attacking oil facilities and abducting foreign oil workers, forcing Shell and other foreign companies to pull workers out of the region and shut in production.

Despite the cessation of attacks by MEND militants, “the security situation is still not at an acceptable level” for oil companies to return to the Delta, said Monica Enfield, an Africa expert at PFC Energy in Washington.

Write to Masood Farivar at [email protected]

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