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Financial Times: Nigeria oil reform pledge sparks unease

By Matthew Green in Lagos
Published: October 25 2007 04:03 | Last updated: October 25 2007 04:03

Nigeria’s pledge to review its relationship with major oil companies is likely to ring alarm bells among investors who fear soaring crude prices will tempt the government to demand a bigger profit share.

Rilwanu Lukman, chairman of Nigeria’s oil and gas reform committee, said this week the government wanted to take a fresh look at agreements signed with energy companies as part of a wider reform of the sector.

But analysts believe that ultimately companies may benefit, if the state devolves responsibility for funding investment in the sector.

Countries such as Venezuela and Bolivia, as well as African oil producers such as Chad and Equatorial Guinea, have taken an aggressive approach to international energy companies in recent years, particularly given surging oil prices.

Mr Lukman said he did not want to abrogate existing contracts, saying the agreements provided for periodic reviews of the relationships with companies.

Members of his committee have, however, privately signalled their desire to drive a harder bargain with oil companies, especially for agreements dating back to Nigeria’s long period of military rule, ending in 1999.

One plank of the government’s reform proposals is to take a fresh look at so-called Production Sharing Contracts, covering Nigeria’s offshore oil developments in the Gulf of Guinea.

Under such agreements, western majors such as Royal Dutch Shell, Chevron or ExxonMobil shoulder the cost of investing in developing an oil project.

Only once the cost of a development has been met do the oil companies start to share revenues with the government.

Some of these agreements have terms dating back to the early 1990s when oil prices were closer to $20 a barrel, leading many in the government to feel they have been short-changed, given the oil price rise to highs above $90 a barrel last week.

However, analysts say Nigeria has only limited leverage in driving harder bargains on these agreements, due in part to the legal framework, but also the risk of deterring investment in a country where the industry already faces big challenges.

Security constraints linked to unrest in the Niger Delta have driven up costs and shut down output by a fifth since early last year.

The kidnapping of seven workers from an offshore oilfield operated by Royal Dutch Shell during the weekend underscored the danger in spite of months of relative calm.

Mr Lukman also reiterated the government’s desire to reform joint-venture arrangements associated mainly with onshore projects in the Delta.

In these projects, the government acts as a majority partner alongside international companies with whom it shares revenues from the resulting oil production.

Energy companies have long complained, however, about a failure by the Nigerian National Petroleum Corporation, the state oil company, to provide its share of investment, leading to delays and lost production.

Meanwhile, Mr Lukman is keen to explore new ways of financing such projects, perhaps by creating companies that would raise money in Nigeria or abroad, reducing the burden on the state, and, in theory, making the projects much more efficient.

Copyright The Financial Times Limited 2007 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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