The Times: Nigeria hampers Shell’s plans for output growth

By Carl Mortished, International Business Editor

March 23, 2004  

SHELL’S oil operations in Nigeria are threatened by a cash squeeze caused by government budget cuts and continuing arrears in state investment in joint venture oil projects, The Times has learnt.

The Anglo-Dutch group, which is under fire for misreporting its oil reserves, has launched a big cost-cutting initiative aimed at increasing the profitability of one of its largest oil provinces. Nigeria contributes about 10 per cent of Shell’s oil output but the troubled West African state also accounted for a third of the 3.9 billion barrel downgrade in proven reserves announced in January.  

But Shell’s efforts to raise its game in Nigeria — the oil company wants to increase output from 1 million to 1.5 million barrels per day — are being stymied by a shortage of investment funds from its state investment partner, the Nigerian National Petroleum Corporation. NNPC owns just over half of the Shell Petroleum Development Company (SPDC), Shell’s local operating company, and must contribute 55 cents out of every dollar that Shell invests in the Niger Delta.

Pleas from foreign oil companies to invest over $4 billion (£2.2 billion) in the oil sector this year have been ignored. Olusegun Obasanjo, Nigeria’s President, cut the Joint Venture Cash Call from $3.5 billion in last year’s budget to $3.2 billion for 2004. Sources close to SPDC suggest that NNPC cash call arrears are still a drag on investment plans.

In an effort to redirect funds into wells, SPDC is taking a knife to its corporate overhead. Local unions suggest the programme, “Securing our Future”, could hit 1,000 local jobs. Nigeria remains a core oil producing province for Shell but efforts to increase output are handicapped by the state cash call, Opec quota restriction and ethnic conflict in the Niger Delta. Analysts reckon that part of the 1 billion barrel downgrade in Nigeria related to delays in commissioning new oil projects, which in turn may relate to NNPC funding problems.

Separately, in London, Shell’s non-executive directors met a group of investors yesterday to discuss changes in the management structure of the company. The investor group is believed to have told Lord Oxburgh, the non-executive director who has become interim chairman of Shell Transport & Trading after the sacking of Sir Phil Watts, that it wants a smaller, more cohesive and responsive team running the company.

Oil prices lost ground as Opec oil ministers considered delaying their planned cut in output, set for April. Brent fell 72 cents to $32.54 per barrel after last week’s 13-year high over fears that terrorist attacks could disrupt supplies at a time of soaring demand for crude from China.

http://business.timesonline.co.uk/article/0,,8209-1048063,00.html