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ResourceInvestor.com Shell Still in Stormy Waters in Nigeria and Saudi Arabia

By Sven Ridley-Wordich
08 Feb 2008 at 11:18 AM GMT-05:00

AMSTERDAM (ResourceInvestor.com) — After being confronted by increased political meddling by several national governments, such as Russia, Nigeria, Algeria and Venezuela, the Dutch-British oil and gas major is again hitting the rocks it seems.

In the last few days, financial analysts have been reasonably positive about the results reported over 2007. Royal Dutch Shell [NYSE:RDS-B; LSE:RDSB] has reported record revenues, showing the impact of high crude oil and natural gas prices, as being the main backbone of the current success. 
 
However, production and reserve figures have been left out of the connotation, resulting in slightly biased and unrealistic assessments. The success and future of Shell in this coming year is still in doubt. Current financial results are not a basis on which the oil major can build a sustainable future. Without having the opportunity of increased reserves, the pumping capabilities of the company will increasingly come under pressure.

Developments in Saudi Arabia and Nigeria are clouding the Alaskan success story. Positive news seems to be attracting more attention from the media if Shell’s operations are discussed. The news that Shell has been successful in the U.S. where it has been bidding for Alaskan oil concessions has generated a growing feeling of optimism. Shell’s bid of $1.4 billion for 275 concessions for oil and gas exploration land has been assessed as being the start of a new growth period. If the licensing rights, which have still to be approved, are given to Shell, the company is theoretically able to increase its oil reserves.

Most analysts agree that the Alaskan oil and gas reserves are of the utmost importance, very attractive and a bounty not to be refuted. Still, risks are plenty in the region, as harsh weather conditions and geological questions could prove to be major obstacles. However, Alaska is one of the only remaining vastly unexplored oil and gas regions, which has not yet been confronted by militancy, turmoil or political meddling. As compared with Shell’s other main regions, Saudi Arabia, Nigeria and Russia, Alaska is heaven on earth.

The company is however facing increasing pressure. Nigeria has openly stated that it wants to discuss with Shell a possible change of existing E&P contracts. This, as first details are showing, will decrease Shell’s total assets in Nigeria substantially, as the government wants to take a larger share of the whole cake. As Shell’s Nigerian operations are the current cork of global production capabilities, a new storm seems to be brewing. Militancy and unrest in the Niger Delta already has shut down around 250,000 barrels per day of Shell Nigeria’s production.

More bad news has emerged again in the last 24 hours alone. Shell’s other major growth target, Saudi Arabia, has been hit by a decision by French oil and gas major Total [NYSE:TOT] to end its operations in the country. Total has been in a joint-venture with Shell regarding the exploration (and possible development) of Saudi Arabian gas reserves. As Total officials have stated, until now all drilling operations in the south-eastern part of Saudi Arabia, the Rub Al Khali, have not found one single gas reserve. The concession area of the joint-venture is slated to be 200,000 square kilometres, five times larger than a country such as The Netherlands.

The decision taken by Total now confronts Shell and the other partner, Saudi national oil company Saudi Aramco, to make a decision to continue or not. Shell’s first reactions have been that the company “is fully committed to the project.” Shell also said that the three wells drilled are not enough to be able to assess the full potential in the area.

The coming weeks will be crucial, as the current partners will have to decide soon. Saudi Arabia will be keeping an eye on the process, as Shell and others have been told that if they are not continuing with investments in the gas sector, other possible projects will be out of reach. Shell’s hands seem to be tied at present, leaving Saudi Arabia’s oil and gas sector a non-option. To proceed, it will cost substantially more.

http://www.resourceinvestor.com/pebble.asp?relid=40347

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