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Financial Times: Shell hopes for Nigeria boost

By Matthew Green in Abuja
Monday 17 March 2008

Royal Dutch Shell hopes to boost oil output in Nigeria after agreeing a new plan to tackle chronic funding shortfalls hitting production at its joint venture with the government.

The Anglo-Dutch oil major has accepted the outlines of a presidential proposal under which the joint venture would raise its own financing rather than rely on cash from the government, say people familiar with the talks.

As an interim measure, Shell has offered to lend the government the money to back its share of the financing costs until the scheme is finalised. Terms have yet to be agreed, partly because Nigeria is reluctant to take on debt owed to Western majors.

Nigeria’s failure to pay its share of the cost of developing Shell Petroleum Development Company, in which it holds a majority stake, is one of the biggest problems facing Shell in the country. Last year, a senior Shell executive said the lack of financing posed a “big risk” to the existence of SPDC.

Umaru Yar’Adua, Nigeria’s president, has proposed tackling the financing gap for its joint ventures with Shell and other Western oil majors as part of a wide-ranging reform of the oil and gas sector he launched after coming to power last May.

Under Mr Yar’Adua’s plan, the system will be restructured to allow each joint venture to approach the international capital markets to raise funds. The new system should, in theory, reduce the burden on state finances and lead to faster, more efficient financing. The shortfall in government funding for joint ventures was about $3.8bn for this year alone.

Jeroen van der Veer, Shell’s chief executive, accepted the principles of the plan after meeting Mr Yar’Adua in Abuja, the capital, this month. Shell hopes the system will allow it to resume projects suspended for the past year, and is expected to highlight progress when it updates investors today.

While keen to resolve the shortfalls, Shell has expressed reservations about the plan, questioning how long it will take to implement. Experts say the scheme might only be practical after a planned restructuring of the state-owned Nigerian National Petroleum Corporation, which could in itself take years.

Mr van der Veer is also expected to tell investors today that the company is seeing improved security in areas where state and federal government have made a concerted effort, allowing the company to regain some production lost to attacks by militants. Shell declined to comment.

Additional reporting by Stanley Pignal in London

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