Shell’s divestment plan and the Niger Delta question

Martin Ayankola, Lagos

Basil Omiyi, MD, SPDC

One thing that has actually indicated that the crisis in the Niger Delta is no longer a low level insurgence is the plan by Royal Dutch Shell, the parent Company of Shell Companies in Nigeria, to begin divesting from some of its offshore interests in the Country. Just last week, reports have it that the biggest Investor in the Upstream subsector of the Nigerian oil Industry is finalizing plans to sell its holdings in two offshore fields operated by Agip but in which it has some substantial interests.

According to the story, the Company wants to sell its $900 million worth of interests in Nigerian offshore blocks, OML 125 and OML 134 as it restructures its business in Nigeria and reduces its investments in the Country.

The two stakes, each of 49.8 per cent - and owned through Shell Nigeria Exploration and Production Co. Ltd. - are in deep water blocks OML-125 and OML-134, the latter formerly known as OPL-211. Agip, a unit of Eni, owns the remaining 50.2 per cent in each block.

Earlier recently , Shell had indicated that it was not really comfortable with happenings in its operations in Nigeria when it announced that it was going to streamline it operations in the Country. It says; "Shell Production and Development Company Limited (SPDC), Shell Exploration and Production Africa Limited (SEPA) and Shell Nigeria Exploration and Production Company Limited (SNEPCO) (together hereinafter referred to as "Shell") have announced to staff and stakeholders the intent to improve efficiency and reduce costs, taking advantage of synergies between companies and eliminating duplication, under a project called 'One Shell.

Under One Shell, there will, for example, be one Production organisation, one Development organization, one Projects organisation, in addition to the sharing of support services.

Mr.Basil Omiyi, the Shell Nigeria Country Chair and Managing Director of Shell Petroleum and Developing Company (SPDC) said: "We are operating in an extremely difficult environment where levels of production have been severely curtailed by the security situation for some time, where there is significant upward pressure on costs and where funding issues are having an impact on our operations. Under these circumstances we must take action in order to reduce costs, increase efficiencies and maintain a robust upstream business in the interests of both Shell, our partners and Nigeria in general."

Thus, Shell is focusing its mind on reducing cost after shutting in about 400,000 barrels per day in the Western Niger Delta, since February 2006. This is well over a year ago and the situation is not encouraging at all, either for Shell or for the Country. This might have informed its recent measure to begin to divest from some investments that it might have classified high risk. For both the Nigerian government and Shell, the circumstance in the western Niger Delta is a lose –lose situation. The Federal Government gets 55 per cent of what Shell produces in its joint venture production there plus petroleum profit tax and royalties. However, the situation has denied both parties the opportunity of making enough money from the high crude oil prices in the international market.

Shell Nigeria Country Chair, Mr. Basil Omiyi had said in its statement in the Company's people and Environment report for 2006 " Given the current situation in the Delta, our operations will continue to be challenged in 2007. We have started a series of intense consultations with various communities and Niger Delta governments, with a view to ensuring a peaceful and safe working environment. In the last quarter of the year, we embarked on a series of joint visits with communities and regulatory authorities to our facilities in the Western areas. These are helping us assess the state of our equipment and the environment, in order to determine the scope of restoration and repair programmes. During this period, new social investment programmes have been introduced. I represent Shell Nigeria on the Niger Delta Coastal States Council set up by the Federal Government to explore peaceful options among all stakeholders for resolving the current crisis. Progress is being made and it must continue until we have achieved the desired results".

When Nigerian Tribune contacted a Shell Official on the planned sale, he declined to comment. "The situation in Nigeria certainly isn't peaceful, but I don't think it is such as to push oil majors to leave," said Eni's Chief Executive Paolo Scaroni on the sidelines of a ceremony in Rome when asked to comment on Shell's possible exit from the blocks.

However, the streamlining of Shell operations in Nigeria may also cost some jobs, it means after a strong level of optimism, the Oil Companies are gradually looking at the situation from another perspective. In Mr. Scaroni's statement, the situation isn't so peaceful, but it is not bad enough to drive oil majors away. But it does not mean that the other oil Companies might also not take decision to reduce the risk to their investment portfolios in Nigeria. Companies like Chevron and Agip are also facing tough situations like Shell.

So, Shell, being a leader, is preparing to take a step indicative of what others might also do later. Although, the lure of the oil business is strong and powerful, this does not mean that continuos threat to oil operations in the Niger Delta may not result in the Oil Companies downscaling their opeartions in the region. Of course, from a capacity to produce 2.9 to 3 million barrels per day , Nigeria is doing an avearge of 2.2 million barrels per day now. Nobody should think this can't get worse if the Government does not solve the Niger Delta problem.

In the 2008 budget, the Federal Government has shown interest in pouring a lot of money into the Niger Delta. However, it must be ensured that the money meant for development does not end up in some people's offshore accounts. The militant youths should also be engaged with a view to bringing peace to the region. For buisness to thrive in the Niger Delta, there must be peace.

Can crude oil price be stabilised?

Komolafe Rasheed, Lagos

At a recent oil and money conference in London where important figures in global energy with over 700 participants brainstormed to assess the state of the global petroleum market, little did they know that Hubert peak oil output prediction some decades back will stare the world in the face so soon. Peak oil output according Dr Shokri Gbanem ,chairman of the peoples committee of the National Oil Corporation (NOC) of Libya is not about the time at which oil will be exhausted, but the time at which production can no longer be increased to cope with increasing demand and the only way the oil price can go is up.

The question of peak oil output, which was once the concern of few individuals ,according to Dr Ghanem has become a concern of some countries as well as several organisations. The worrisome aspect of Hubert peak oil prediction was that despite the fact that many people are unhappy with his predictions, most of his predictions on future oil price has always come to pass just like his 1970 peak oil theory for the United States of American turned out to be quite accurate, at the end of the century, peak oil prediction for the world also proved to be correct.

Yet despite the glaring reality of the peak oil price, some pessimists oil specialists are still holding the notion that peak oil has already been passed on or at best is here now, while others said it was going to happen around 2010. Another school of thought said the peak oil price would not arrive until 2030 but what is certain is that peak oil price is very near the next few decades.A time when there will be nothing much left for a world economy to be driven largely by oil.

This conclusion, according to Dr Charen, seems to be in line with the view held by the peak oil output advocates who argued that the ongoing oil price rises are mainly due to supply-demand imbalances. “This is because we are near the production peak of world oil supply, if not on the downward slope of Hubert’s peak curve. This is not to deny the role of other factors (such as geopolitiics), but only to stress the importance of supply and demand for crude oil as the prime factor in determining the price of the commodity.”

True to the production of Hubert, oil price on 7th November, 2007 surged to an unprecedented level as the price reached an all time level of $98.58 a barrel of crude oil for Brent crude oil similar to Nigeria Bonny Light settled for $ 95 a barrel. Last week surge in price to an unprecedented level did not happen suddenly. It is the result of a steady increased in price over the years. Since 2002, Organisation of PetroleumExporting Countries( OPEC )member countries have in response to stabilising the market, increased production by about 4.5 million barrel a day. Despite this effort, the oil price has continues to surge forward reaching an unprecedented level by November.

However each time oil price went up, analysts usually fall over themselves to give different predictions. When oil price reached $50 barrel , many analysts prediction brought about recession, higher inflation and rising unemployment. But to the surprise of everyone none of these predictions came to pass, infact the world economy moved on as if it was immune to the surge in oil prices and sailed on seemingly unaffected. When oil price hit $70 per barren, analysts were at work again, they predicted a slowdown of the world economy and deep recession with grave consequences but instead demand for oil continue to rise even though oil price surpassed their prediction of $70 per barrel mark.

Now that the price of oil has surpassed the $90 a barrel peak price recorded in 1980. some of the analysts have started predicing that $100 a barrel may still be cheap and that the world economy can cope with the peak price. The analysts argued that comparing recent oil prices in real terms with oil priced in the past indicate that the oil price is yet to his the peak price.

From the way the oil price keep skyrocketing nowadays, one may be tempted to ask a fundamental question. What is keeping the oil price high? The simple answer to this question ,according to Dr Gbanem, is first and foremost strong world oil demand “ We can see this growing demand in China, India and the United states, coupled with dwidling spare production and less economically viable recoverable reservoir capacity, other factors such as a lack of refining capacity, geopolitical uncertainties ,market speculation and natural disasters .Geopolitical problem seems to be the most important because of the uncertainties and supply disruption that are created

Supply poses serious concern about future .Some analysts are raising doubts about the collective abilities of the oil exporting countries in general and the OPEC countries in particular to deliver the increasing volumes of oil needed in the future to the world biggest and fastest growing economies namely the US and the OECD, China, and India.
Global shortage in refine petroleum capacity is tied closely to the issue of rising oil prices. Lack of capacity means that existing refiners are not able to cope with increased demand particularly demand for light refined product for the transport sector.” In addition refiners are also not able to handle the increasing demand by the producers to the oil refining market.

The uncertainties, risks and need for investments surrounding refining expansion and upgrading both globally and in the US are also important fact in making the over all energy market situation tighter.” Oil producing countries try all they can to allocate the oil market imbalances by using most of this spare capacity. This has led to increased escalation of the oil output capacity available to meet future increase in demand or any shortage in supply.

“Attempt to put more recently discovered oil fields into production, to improve recovery levels from existing oil fields and to result to unconventional oil resources, such as heavy oil may help reduce oil price rising as much as in the short term but in the long term these measures alone will not be able to keep up with increased global demand and consequently global demand and as a result the price increase will continue.

In a situation like this what then can the world do to bring down the price of crude oil?Analysts believe nothing short of a major world wide economic recession in the major consuming nations can do the magic but what is certain is that crude price can never go back to the era of $ 20 or $30 a barrel.

If current supply -demand imbalance for crude oil and refined petroleum products persist ,then one can only conclude that a return to $40-50 a barrel seems unlikely. $70 a barrel may be quite likely if the world economy continues to grow at the rates experienced in 2004 and 2005. These rates may cause demand for oil to increase proportionally and it may even start to exceed available supply. But if the current tension in many parts of the world such as Middle East and the Niger Delta in Nigeria persist or escalates and there is disruption in supply there will still exist a noticeable gap in supply and demand. If the world economy continue to grow at a higher rate and these two factors continue to grow discretionally then the world should prepare for the beginning of the end of an era of cheap oil.

If that is the case, what advantages would the world derive from the high price of crude oil. According to Dr Ghanem, high oil prices can lead to more aggressive exploration and production policies by the major international oil companies as well as the national governments of the oil producing countries ”.However ,the pursuit of such policies entail monumental financial commitment of the type required by truly enlarged exploration and production programmer’s. High oil price, Dr Ghanem stated further make enhance oil recovery methods more economical and stimulate interest in revisting ageing reservoir. It will also contime to improve petroleum engineering practices aimed at recovering most of the oil from existing reservoir as well as improve the feasibility of receiving more of the oil from the deeper offshore water in some parts of the world.

Higher oil price would also bring more natural gas to the energy market in the form of liquefied natural gas LNG “supplies from areas that have abundant gas reserves and are distanced from the energy consuming markets. Natural gas can be converted to hydrocarbon liquids suitable for the transportation sector, using gas to liquid technology. Another positive aspect of high oil prices would be to bring more non conventional crude oil resources into the market such as tarsands in Canada, the heavy oil or bitumen in Venezuela and the oil shale in the U S.

What then is the effect of high price on Nigeria , the 6th largest producing oil country. The executive chairman of the International Energy Services (I.E.S), Dr Oludiran Fawibe, said the increase in the crude oil price will definitely increase the price of fuel everywhere but that the increase will depend on the tax regime of the individual countries and the ability of the respected countries to absorb or pass on the bulk to consumers. But the big question is will it be possible f or the Nigeria government to pass the burden to the consumers especially when viewed against the background that President Yar’Adua has given his word that no single kobo will be added to the fuel price till June next years, a position the government regulatory body the Petroleum Products Pricing Regulatory Agency (PPPRA),corroborated through its Executive Secretary, Dr Oluwole Oluleye, that the government will make up for whatever difference that exist in the international market from the Petroleum Support Fund (PSF), but how long the country that import 100 per cent of its domestic petroleum product need from international markets remain to be seen especially when the president word was re-echoed from somebody as slippery as the PPPRA Executive Secretary.