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February 11, 2008

Few places give Big Oil a bigger headache than Nigeria. As the largest foreign producer in the African nation, Royal Dutch Shell forks out more than 95% of oil revenue to the state. In return, it has to deal with a creaky infrastructure, angry rebels, and now a government bent on taking an even bigger share of the profits. While Nigeria’s offshore fields look promising, Shell’s onshore effort could now be more trouble than it is worth.

The Anglo-Dutch giant entered Nigeria 70 years ago. Back then it minted money exporting the country’s sweet crude. But over the years, trouble in Nigeria escalated while profits declined. Rebels unhappy with the way oil revenue was distributed started bombing infrastructure and terrorizing Shell’s employees. Meanwhile, the government has gradually grabbed more and more of the profit. Shell now takes home just $2 to $3 for each barrel of oil produced onshore even though Nigerian sweet crude was recently valued at $91.93 a barrel, according to Argus Media.

The unreliability of supply has also angered Shell’s customers. In 2006, for example, two-thirds of the company’s onshore production was shut for most of the year. In the last quarter of 2007, Shell operated at about 50% of its 500,000-barrel-a-day capacity. In the latest blow, Shell has just lost an additional 130,000 barrels a day because of a leaky pipe. Fears over rebel activity are delaying the repair.

Moreover, Shell now has to deal with another threat in the form of Gazprom. The Russian energy giant wants to pump cash into Nigeria to develop the country’s natural-gas reserves. That hardly bodes well for Shell’s once-dominant position.

It’s true that access to new reserves has become increasingly difficult everywhere, with governments feeling nationalistic about their resources. Against that backdrop, the problems in Nigeria may just be the price of doing business. But it might make sense for Shell to look for a way out of its onshore joint venture with the Nigerian government — provided it can, at the same time, hold on to its role developing Nigeria’s offshore fields. They yield more profit per barrel for Shell and its Big Oil partners and are out of harm’s way an hour’s helicopter ride out to sea.

–Pierre Briançon, Cyrus Sanati and Antony Currie

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