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Agence France-Presse: Clouds over Nigeria’s oil industry

23 December 2007

LAGOS (AFP) — Despite being the world’s eighth petroleum exporter and sitting on huge gas reserves, Nigeria will not have it easy over the next two years, between peristent unrest in the Niger Delta and strained relations with the major oil companies.

“In view of the current problems, their goal of 4.0 million barrels per day in 2010 seems inaccessible in the current situation,” said the head of one multinational company operating in the delta, the oil region where violence and insecurity are endemic.

This absence of security means that Nigeria, which ranks fifth among suppliers of crude oil to the United States, lost one quarter of its production in 2006 and 2007. Production is currently estimated at 2.1 million barrels per day.

Oil from the Niger Delta continues to bring in 90 per cent of Nigeria’s foreign currency earnings and, thanks to the recent rise in crude prices, the country’s foreign reserves are close on 50 billion dollars (73 billion euros).

Nevertheless the government is pleading poverty and is trying to reduce its share in investments in the sector, asking oil majors to look for alternative forms of financing.

“Nigeria is supposed to fund part of the onshore activity but hasn’t actually put any money in for three years now,” one foreign oil executive said.

Oil Minister Odein Ajumogobia said recently that of the 15 billion dollars of projected total investments in the sector in 2008, the government was supposed to shoulder 8.8 billion but that it had in fact allocated only araound 5.0 billion.

The government has asked the oil companies to find the missing 3.8 billion.

Shell, Chevron, Exxon Mobil, Total and ENI/Agip point out that Nigeria’s 2008 budget was based on an oil price of 53 dollars per barrel, when it is currently close to 100 dollars and looks set to continue its rise.

The majors are also worried about the Nigerian government’s intention to renegotiate the oil revenue sharing agreement.

“Given the massive investments entailed, notably in the deep offshore, our margins are already very narrow,” the chairman of one oil group said.

Another complained that when oil was at 80 dollars a barrel, his company was making a profit of 3.0 dollars, with the remainder all going to the Nigerian government.

“We were all in difficulty in 2007,” said an executive at Shell, Nigeria’s biggest producer.

This past year Shell Nigeria (SPDC) spent one billion dollars on pipeline maintenance alone. The company had initially been looking at a total budget of 6.6 billion dollars but pruned it drastically, first to 4.5 billion, then to 2.7 billion.

In November the company announced one thousand job cuts.

“We’re operating in an extremely difficult environment where production levels have been hard hit by the unrest,” Director General Basil Omiyi said.

In 2003 SPDC was producing one million barrels per day. By 2007 that had fallen to 460,000.

Another European operator noted that numerous projects have been postponed or put on hold because of the restructuring at Nigerian National Petroleum Corporation (NNPC), the partner with whom foreign companies are obliged to set up joint ventures if they want to operate in Nigeria.

To complicate matters further Nigeria is now telling the oil companies to stop gas flaring in early 2008, on pain of sanctions.

“They want everything tomorrow but in this industry we count in decades,” said one oil executive.

For Shell, oil-producing zones are one of three colours, depending on the level of risk: red, yellow or green.

Most of the Middle East is “red.” Nigeria, despite all the difficulties, is still “green”. But for how long?

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