HardAssetsInvestor

Written by HardAssetsInvestor.com  |

June 15, 2007

Shell Cuts Investment In Nigeria

Details

Nigeria just can't catch a break.? They finally had a peaceful (almost) transfer of power, and now it looks like the money might dry up.

On June 15th, the WSJ wrote this story, announcing that Royal Dutch Shell PLC (RDSA.LN) was looking to cut $100 million in it's Nigeria Operations. (The story was originally titled ?Shell Eyes $100 Million in Nigeria Cost Cuts? when it first hit the site on June 14th at 12:59pm. It is now titled ?Nigeria's Strife Forces Shell to Cut Outlay?) In the article, they cite a Shell-internal announcement that the Dow Jones News service somehow found, stating that the changes would be part of ?an austerity program for three years.? This announcement was made on May 30th to Nigerian employees.

May 30th? Why did it take so long to make news?

Probably because it is truly a drop in the bucket (or barrel) for a lumbering multinational giant like Royal Dutch Shell. But it is a change from how they've historically behaved. The RDS motto is ?invest, invest, invest in productive regions, then invest some more.?

Not that anyone would blame them for trying to recoup some of their losses. Heck, nobody would blame them for taking their marbles and just going home, given the violence and kidnappings and sabotage that practically define the Niger delta experience. But since Shell doesn't break expenses out by country, we lowly investors have no way to tell how significant a cut this really is. What we do know is that at least one of Shell's ventures with the Nigerian government ? the Shell Petroleum Development Co. -- is earning them 30% of nothing. Since February 2006, the 475,000 bpd capacity venture has not squeezed out a single drop of oil.

The article also quotes Shell CFO Peter Voser as saying in May:

?[T]he company's profit on oil output from the Niger Delta, where most of Nigeria's oil is produced, was $3 to $4 a barrel, compared with about $20 a barrel at its U.S. operations.?

Reason enough for cost cutting measures.

But perhaps we can read a comment on the region into this budget line item. Executives on the ground for Shell are in a much better position to gauge the reality of the petro-political situation post the election of the new president. Maybe they're voting with their pocketbook that things are going to get worse, not better. Unrest in Nigeria has already done its part in pushing oil prices into the high $60/range range by messing with production and delivery.

How are the cuts Shell is planning going to effect production ? you know, once some started to happen? If there is truly a heightened concern about the situation in Nigeria, will the other companies (Eni Spa, Total SA, Chevron, etc.) be making similar moves? How far would they go? Given the proven oil reserves in the region (36.2 billion barrels as of 1/07), in a worst case scenario, would the companies really just up and leave?

Well of course not. No way. But not to sound alarmist, its taken soldiers on the ground before. Check your history books for the answer folks. Say, 1991?

Additional Research
Nigeria's Strife Forces Shell to Cut Outlay WSJ.com June 15, 2007
Shell Begins Nigeria Ops Cost-Cutting Program to Offset Costs Rigzone.com June 11, 2007
Shell Halts Exports of 150,000bpd Due to Nigerian Unrest? Rigzone.com June 1, 2007
Shell Restores Some Nigerian Oil Output Rigzone.com June 4, 2007
Shell confident Nigerian Production Will Return by Year End Rigzone.com June 6, 2007
Oil Companies Eye Security Challenges in Nigeria Rigzone.com Nov. 29, 2006