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Shell warns Nigeria of threat to confidence

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Shell warns Nigeria of threat to confidence

By Matthew Green in Lagos

Published: May 28 2008 03:00 | Last updated: May 28 2008 03:00

Royal Dutch Shellsaid yesterday that Nigeria’s government risked undermining investor confidence after a review of oil contracts recommended that Shell and ExxonMobil should pay the state almost $2bn.

Shell voiced its concerns shortly after agreeing, in a separate move, to lend the government $3.1bn (€2bn, £1.6bn) to help kick-start stalled projects in their Niger Delta joint venture – the Shell Petroleum Development Company (SPDC).

The apparent contradiction between voicing concern over the investment climate while lending the government a large sum reflects Shell’s increasingly delicate relationship with Abuja. The government’s failure to meet its share of development costs, coupled with militant violence, has sapped SPDC production, weakening Nigeria’s grip on its position as Africa’s top oil exporter.

In the past fortnight, the state-owned Nigerian National Petroleum Corporation (NNPC) has borrowed a total of $6.1bn from Exxon, Total, and most recently Shell, much of which will be used to provide their joint ventures with a cash injection.

In the midst of the loan negotiations last week, Umaru Yar’Adua, Nigeria’s president, issued a statement demanding that Shell and Exxon pay $1.9bn in unpaid taxes and revenues. This followed a review by a government committee investigating contracts for huge offshore fields, signed in 1993.

Under the deals – known as production sharing agreements – the companies recoup their investment before splitting revenue from oil production with the state. The committee concluded that Shell owed $850m due to the incorrect application of tax breaks and a further $414.6m from gas sales from its Bonga field.

In a statement to the Financial Times, Shell said it had yet to receive formal notification of the review committee’s findings.

“We would like to reinforce that following recent statements relating to retroactive changes to fiscal terms, we are very concerned about the future potential implications for investor confidence in Nigeria,” said Shell.

But analysts said the company’s statement appeared to suggest that it saw the review as an attempt to change the terms of the 1993 deals, rather than correctly enforce existing provisions.

Shell’s statement is likely to touch a nerve among energy officials in Nigeria, which prides itself on having a much better reputation for respecting contracts than Russia and Venezuela.

The government is hoping to find a long-term solution to the funding gaps hitting its joint ventures with Shell and other companies, which account for the bulk of Nigeria’s 2.1m barrels a day production. It has agreed to borrow money to meet its share of costs in the interim.

The NNPC said the Shell joint venture had agreed to lend it $1.3bn to cover the shortfall in government contributions for the 2008 budget. Shell is extending another $1.8bn to convert arrears owed from the previous two years into a loan. Shell said further details had to be agreed before the loans were executed.

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