The Financial Times reported this week that the outgoing Africa chief of Royal Dutch Shell issued a stinging public criticism of the Nigerian government over proposed legislation that could raise royalties from 1-2 percent to more than 20 percent.

The sale of oil exports contribute 95 percent of foreign earnings and about 80 percent of budgetary revenues, but in comparison to some other oil-producing African nations, Nigeria is highly populous (~150 million people) and per capita revenues are therefore substantially lower (see chart).  Nigeria needs the investment of foreign oil companies (Shell has $50 billion planned which it says could be jeopardized by the proposed legislation; Total plans to invest $20 billion over the next four to five years).  The nation has also been affected by long-term political instability and corruption.  In their dealings with the oil companies, they walk a fine line.  The situation is worsened by a reinvigoration of activities by the Movement for the Emancipation of the Niger Delta (MEND) who declared an end to the ceasefire less than one month ago, stating that “all companies related to the oil industry in the Niger Delta should prepare for an all-out onslaught.”  (Which clearly also raises the risk of investing in the region).

Just two months ago, it was reported (and noted here) that Shell was planning to sell oil fields in Nigeria valued at up to $5 billion.  It was reported that the auction was in response to the Nigerian government’s plan to impose harsher terms on foreign operators and hand greater control to domestic firms.  It appears that Shell is willing to forego potentially valuable investments if the political environment is simply considered too risky.  At a time when sources of oil are becoming more difficult (and expensive) to produce (e.g. Nigerian deepwater fields), the impact of a risky political environment is likely to be even more magnified.

From an international perspective (or world oil market perspective), these issues are a constant source of concern to consuming nations.  Potentially lower investment in Nigerian oil and gas development because projects are no longer considered economically viable, weakens the production outlook in the medium-term.  Global oil demand has already begun to recover since the economic downturn of 2008/2009 and the outlook from emerging nations is strong.  Prices too have risen steadily upwards over the past 12 months.

Reducing our exposure to the costs and risks of oil dependence must be a major energy policy goal for 2010 of businesses and the nation alike.

Previous Post  

Next Post

Keying on Keystone
January 19, 2012

Strait of Hormuz Tensions May Become Commonplace in 2012
January 11, 2012

Quaking in our boots over natural gas
January 9, 2012