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Nigeria warned on oil spending

Financial Times: Nigeria warned on oil spending

By Matthew Green in Lagos
Published: April 17 2008 03:00 | Last updated: April 17 2008 03:00

President Umaru Yar’Adua has made tackling funding shortfalls for Nigeria’s joint ventures with western oil majors a priority since he won elections a year ago.

But the scale of the problems building up as a result of the chronic failure of Nigerian governments to meet the state’s share of maintenance and exploration costs may have taken him by surprise.

An internal report seen by the Financial Times warns that production of oil, on which Nigeria depends for more than 90 per cent of its export earnings, will fall by a third unless the government boosts investment. Such a decline would see Angola overtake Nigeria as sub-Saharan Africa’s leading oil producer and give western governments, who see west African oil and gas production as essential to global energy security, pause for thought.

The warning was contained in an internal pro-gress report drafted in January by a committee Mr Yar’Adua set up to reform Nigeria’s energy sector.

“Indications are that, even if current funding levels are maintained, total oil and gas production will decline by 30 per cent from its current level by 2015,” it says.

The US, which already imports about half of Nigeria’s oil, hopes the country will play a growing role in reducing its dependence on the Middle East. European governments see potential in Nigeria’s gas reserves for reducing their reliance on Russian exports.

But such plans hinge on raising production in joint ventures between the state-owned Nigerian National Petroleum Corp and majors such as Royal Dutch Shell, Chevron, ExxonMobil and Total, which account for about two thirds of Nigeria’s 2.1m barrels per day.

Aware that the government’s failure to pay its share of costs in the joint ventures is one of the biggest brakes on growth, Mr Yar’Adua’s advisers are working on proposals to seek new sources of finance.

In the short-term, senior energy officials say they are close to agreeing terms under which the majors will extend loans to cover part of the immediate investment needs. The report says the shortfall in joint venture financing already stands at more than $3bn (£1.5bn, €1.8bn), and could grow to $8bn this year.

In the long-run, the government wants to change the way the joint ventures are structured to allow them to approach local and international capital markets to raise finance.

Jeroen van der Veer, chief executive of Royal Dutch Shell, said that the company had agreed the principles of the plan but more work was needed. Shell gave no immediate comment on the report.

Executives at western majors have, however, ex-pressed unease at how long it will take to make the legal and financial changes needed to get the new system working.

The progress report also proposes a 0.25 percent surcharge on each barrel of oil or gas equivalent to fund new, streamlined government energy agencies. Nigeria is already seeking to renegotiate contracts covering offshore production to win a greater share of profits to reflect soaring oil prices.

The report suggests hiring independent consultants to recruit operational staff for the joint ventures, prioritising Nigerians over expatriates. “Given the sensitivity of the staff selection process, special care has to be taken to discuss and agree with the joint venture partners to ensure that the process is not considered a form of nationalisation,” it says.

Other measures to promote Nigerian content include making it mandatory for energy companies to use local insurance companies and to seek to raise capital in the country before turning to markets abroad.

Copyright The Financial Times Limited 2008

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