World - Slippery business of Oil

Why foreign oil companies find it harder than ever to operate in Nigeria
INTERNATIONAL oil companies have never considered Nigeria a most hospitable operating environment. Long burdened with eye-watering corruption and political instability, as well as two years or so of violent attacks from local militants demanding a bigger share of the country’s oil revenues, oil workers thought conditions could not get much worse for them.
But they have. Even with record oil prices, some companies are hinting that they may leave as they grapple with the double squeeze of increasingly effective militant attacks and a government hungry to secure a larger slice of the oil profits.
Last week, militants in speedboats carried out their first notable attack on an oil facility in deep waters off the Nigerian coast, previously considered beyond their reach. The attack on a giant floating production, storage and off-loading vessel, known as an FPSO, some 120km (75 miles) out to sea, forced the operators, Royal Dutch Shell, to halt production from its Bonga oilfield, blocking off some 220,000 barrels per day of oil, or around 10% of Nigeria’s crude production.
Security had already emerged as the chief reason for the rapidly dwindling operations on land: Christophe de Margerie, boss of Total SA, says his company has been thinking twice about Nigeria because of the violence. Just to hammer that point home, hours after the Bonga attack, unidentified youths blew a hole in an onshore Chevron pipeline, cutting production by another 120,000 barrels a day. These two attacks ensured that oil prices stayed high at around $140 a barrel this week, dampening hopes raised at meeting in Saudi Arabia that an increase in Saudi production would bring the price down.
But it is not only the insurgents who are prompting the reassessment. It is Nigeria’s government. Its reinterpretation of contracts linked to the much more lucrative offshore blocks has in any event forced companies to take a hard look at the disadvantages of operating in Nigeria.
In late May, President Umaru Yar’Adua told his government to recoup $1.9 billion from Exxon Mobil and Royal Dutch Shell in revenue and taxes on offshore projects. The government accuses oil companies of reaping excessive profits and benefiting unfairly from agreements made with long-departed military regimes. But analysts who have seen the documentation say Mr Yar’Adua’s administration is rewriting the rules and applying them retroactively.
Several governments around the world have been openly changing the rules under which oil companies operate to get a bigger cut of the revenues. But the Nigerian government’s more “questionable reinterpretation” of oil contracts is a big worry, says a Lagos-based analyst.
Offshore production, mostly in the deep waters of the Gulf of Guinea, is highly lucrative for oil companies such as Shell and Exxon. Favourable offshore contracts yield about 20% profit to oil companies on every barrel, compared to only around $3 on an onshore barrel under a formula that is less affected by high oil prices. Shell said recently that the government’s actions have “potential implications” for investor confidence in Nigeria.
With oil companies making record profits, no one expects them to beat a retreat just yet. Much of the latest skirmishing is part of a larger dispute over the government’s reluctance to stump up its full share of investment in the joint ventures under which foreign firms operate. The companies are being squeezed by the government for money owed for the upkeep of the ageing infrastructure needed to keep the industry going. In a rare outbreak of harmony after weeks of quarrelling, the companies agreed to lend the government $3.5 billion, which it promises to invest in the joint ventures.
Still, Shell received another recent blow from the government when Mr Yar’Adua announced the cancellation of the company’s operating rights in an onshore region called Ogoniland. Shell ended its production there in 1993 after local protests culminated in the hanging of an environmental campaigner, Ken Saro-Wiwa, by the military regime of Sani Abacha. So this announcement was mainly symbolic.
Mr Yar’Adua’s motive may have been to exploit local anger against the oil industry and score some easy political points. He certainly needs some, having accomplished little else in his first year in office. This week his peace initiative for the Delta, already rejected by the most active militant group, suffered a further setback when another armed group said it would boycott a peace summit due next month.
None of this makes the climate friendly for foreign oil firms. More than a quarter of Nigeria’s normal production of 2.5m barrels a day is kept off the market by militant violence. In a seemingly hopeful development, Nigeria’s largest militant group, the Movement for the Emancipation of the Niger Delta (MEND), which claimed responsibility for the Bonga attack, has called a “unilateral ceasefire” starting on June 25th. But this is not the first time MEND has called off attacks, and it remains opposed to government-organised peace talks. So world oil prices could soar again on the back of Nigeria’s instability.