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Financial Times: Nigeria: Unfulfilled potential

By Matthew Green
Published: January 28 2008 06:10 | Last updated: January 28 2008 06:10

Listening to Nigeria’s top energy officials, it would be easy to assume that Africa’s biggest oil exporter is cruising towards its goal of doubling output by 2010. Talk to oil company executives, however, and anxieties over rising costs, attacks by militants and the government’s push for a bigger share of profits make prospects seem distinctly gloomy.

Forty years after commercial quantities of oil were discovered in Nigeria, President Umaru Yar’Adua has launched the most ambitious reform process the industry has seen. At a time of record oil prices, his success or otherwise in raising output from its current level of about 2.3m b/d will affect the global economy and influence energy security in the US and Europe.

The question western majors are asking is whether his reforms will tackle problems that have eroded production for years, or create further uncertainty. The answers will emerge in three important areas: tackling the problems in the Niger Delta, boosting offshore production and finding ways to tap vast reserves of gas.

None will be easy. Royal Dutch Shell has the longest history of any oil company in Nigeria, but its plans to restructure operations to cut costs and sell two oil blocks are a reminder that the country remains one of the most difficult environments in the world from which to pump oil.

Mr Yar’Adua also has problems of his own. An election tribunal is due to rule in the next few months on whether to annul his victory at last April elections, described by European Union monitors as “not credible” due to the level of rigging and violence. Some question whether he will have the authority to tackle powerful vested interests with little interest in changes aimed at harnessing the energy sector for the benefit of all Nigerians, not just a venal elite.

Perhaps the toughest challenge is unlocking the huge potential of the Niger Delta, where attacks by militants seeking a greater share of oil wealth have shut a fifth of production since early 2006. Mr Yar’Adua sent his vice-president, Goodluck Jonathan, who comes from the region, to talk to community leaders and militants last year about a planned peace conference. But various armed groups have pulled out of the talks in the past few months, accusing the government of a lack of goodwill. Sporadic raids on oil facilities have resumed.

Jomo Gbomo, spokesman for the Movement for the Emancipation of the Niger Delta, one of the main militant groups, said 2008 would be the insurgency’s most destructive year. “It will begin with a calm before the storm. At the time of our choosing, an economic tsunami will sweep the entire oil industry,” he said in an email to the FT. “That day will be a date that will never be forgotten, like 9/11.”

Images of masked militants in speedboats have come to symbolise the oil companies’ woes. But the state-owned National Nigerian Petroleum Corporation’s failure to pay its share of costs in joint ventures with Shell, Total, ExxonMobil, Eni, and Chevron have also hit production.

Nigeria’s best hope of increasing output may lie offshore in the Gulf of Guinea, where multinationals have made huge investments in projects less exposed to the violence and funding issues in the delta. Shell’s giant Bonga field has been pumping 225,000 b/d since it came onstream in 2005, while industry analysts say Chevron’s Agbami and Total’s Akpo could add a combined 470,000 b/d of capacity in the next few years. Other fields could increase production by a further 300,000 b/d.

Cambridge Energy Research Associates predicts Nigeria’s overall capacity will grow from 3.14m b/d last year, to 3.99m b/d by 2013.

Nigeria’s push for increasing participation by local companies has caused delays to some offshore projects, while a lack of transparency in the awarding of exploration licences has also raised concerns. “In the late 90s there was a spate of very significant discoveries in the deepwater in Nigeria, but that huge balloon has not reappeared in the past three or four years,” says Andrew Hayman, an analyst at IHS. “So there is not this pipeline of really big discoveries to build production over the next 10 years, apart from the existing fields.”

The gas sector, too, is a story of unfulfilled potential. Plans to add to Nigeria’s single liquefied natural gas (LNG) export terminal by building new facilities at Brass and Olokola are on hold, partly due to uncertainties over the fiscal regime.

The government says it will table new rules within the next few months, but its insistence on harnessing gas for domestic use may deter investments from western majors intent on export. An offer by Gazprom, Russia’s state-owned energy giant, to co-operate over gas has, however, underlined growing interest from new operators from China, to India and Korea. Whether the newcomers can solve the problems of their western counterparts is still to be decided.

Copyright The Financial Times Limited 2008

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