Financing shortfall shackles output

Ann Pickard, the head of Royal Dutch Shell in Africa, pushes across her desk a map that appears to suggest Nigeria has broken out in an alarming rash.

Marking the location of oil and gas deposits, multi-coloured blobs pepper both land and sea, revealing the scale of untapped potential. “The future is huge,” says Ms Pickard. “You can see a lot of gas, but surprisingly there’s still a lot of oil left.”

Western majors rank Nigeria as one of the most promising frontiers in an increasingly frantic search for new sources of energy. There is rather a large snag. Nigeria has developed into a case study of how underinvestment, inefficiency and insecurity can conspire to stop fossil fuels leaving the ground, no matter how ravenous the world’s demand.

Fears over supply in Nigeria – one of the top 10 crude exporters – have helped hoist oil prices to record highs close to $140 a barrel this year. As if to underscore the depths of the decline, fast-growing Angola pumped more oil than its bigger brother for the first time in April, courtesy of a strike by ExxonMobil workers who temporarily paralysed a more than a third of production.

Umaru Yar’Adua, the president, wants to revitalise the industry by launching the biggest overhaul of the energy sector since Shell exported the first boatload of crude from the country 50 years ago.

His strategy is both bold and risky. The central thrust is to reform the Nigerian National Petroleum Corporation (NNPC), the notoriously opaque state oil company, to lay a long-term foundation for attracting more investment. But Mr Yar’Adua faces a more immediate challenge: soothing fears among energy companies that short-term uncertainty over his agenda may scare investors away. So far, he has shown few signs of doing so.

Last month, he ordered Shell and ExxonMobil to pay $1.9bn in revenues and taxes after a government committee reviewed agreements covering offshore fields signed in 1993.

Nigeria enjoys a good name for respecting contracts in the oil industry; suddenly its reputation seemed in doubt. Shell was in for another surprise this month when Mr Yar’Adua announced that its exploration blocks in Ogoniland, scene of the hanging of Ken Saro Wiwa in 1995, would be awarded to another operator by year-end.

But by far the biggest shock occurred last week, when speedboat riding gunmen navigated more than 100km of open sea in darkness to attack Shell’s giant Bonga vessel, forcing the company to shut in 200,000 b/d of oil production and shattering the hopes that Nigeria’s deepwater arena would be immune to the violence plaguing operations onshore.

While images of militants skimming through the Niger Delta in powerboats are the most obvious threat to the industry – where rebels have shut in a fifth of output since early 2006 – Mr Yar’Adua’s reforms aim to solve a lesser known but equally insidious problem: funding.

Despite the extraordinary gains in oil prices in recent years, Shell and other majors have struggled to develop their operations as quickly as they would like, in part because of the government’s failure to pay its share of costs for their joint ventures with NNPC.

The five joint ventures form the core of the industry, pumping just over 70 per cent of its crude. Mr Yar’Adua’s advisers warned in an internal report in January that unless Nigeria solves the financing issue, production could fall by a third by 2015.

Downplaying the risk of such a catastrophe, the government says efforts to improve security in the Niger Delta and tackle the funding issue will soon yield results. “I think the prospects are for Nigeria to be producing well over double its current production,” Odein Ajumogobia, petroleum minister, told the FT.

To tackle the immediate financing crisis, Shell, ExxonMobil and Total have agreed to lend NNPC a combined total of $6.1bn this year to cover arrears and kick-start projects.

But Mr Yar’Adua wants to find a more permanent solution by restructuring the system to allow each joint venture to approach the capital markets to raise funds. Shell has said it accepts the principles of the new plan, although industry insiders say there is a host of unanswered legal and financial questions.

Perhaps the biggest barrier will be reform of the NNPC itself. An agglomeration of agencies, ministries and departments, the company has earned a reputation as the place where oil, money and power fuse at the heart of Nigeria’s body politic, not always with savoury results.

Mr Yar’Adua wants to transform NNPC into a national champion along the lines of Saudia Arabia’s Aramco. The idea is to impose discipline on a sector where distortions in everything from the allocation of exploration blocks to fuel import licences have often served powerful businessmen rather than commercial logic.

Acknowledging that those benefiting from the current state of affairs will make reform “a major challenge”, Mr Yar’Adua says he is nevertheless hopeful of completing the restructuring within a year. Lawmakers have set up a panel to investigate the company’s operations from 1999 to the present, an exercise likely to illuminate something of the NNPC’s murky past.

Although recent attacks on pipelines have revealed the fragility of the situation in the Delta, Nigeria’s offshore prospects offer some succour. Chevron’s 250,000 b/d Agbami field is in the process of starting up, while Total could add more than 200,000 b/d from its Akpo field later this year.

But the real test will be whether Mr Yar’Adua can forge the kind of partnerships that will make companies confident enough to spend the sums needed to turn the green and red dots on Ms Pickard’s map into the black stuff.