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Why Shell Investors Shouldn’t Ignore The Ongoing Security Situation In Nigeria

 Oct. 4, 2017 5:28 AM ET

Summary

  • Attacks on oil & gas infrastructure in Nigeria pose a serious risk to Royal Dutch Shell.
  • Looking at Shell’s footprint in the country.
  • How it has been impacted so far.

Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) is a big player in Nigeria, a country that has been dealing with increases in civil unrest and sporadic violence over the past few years, particularly from the Niger Delta Avengers group that wants a larger portion of the oil & gas tax revenue to go to the Niger Delta region. This is on top of Nigeria’s ongoing fight against the Boko Haram insurgency in the northern parts of the country. The ongoing security situation is a major risk for Shell’s Nigerian operations, especially as the Niger Delta Avengers have shown the ability to repeatedly target bottlenecks like pipelines and force a lot of output offline. Let’s dig in by first going over what’s at stake for Shell.

Shell’s Nigerian footprint

In southern Nigeria, there is a major liquefied natural gas hub at Bonny, a small city located next to the Bight of Birafra. The hub is home to Nigeria LNG Limited’s massive LNG complex which houses six trains capable of churning out 22 million metric tons of LNG per year. On top of that, the complex has the ability to export 5 million metric tons of liquefied petroleum gas (butane and propane) and condensate (natural gasoline/ultra-light sweet oil). This is supported by the ability to take in 3.5 Bcf of natural gas per day.

The Nigeria LNG venture is an integral part of Nigeria’s export economy and the bedrock of Shell’s asset base in the country as it supports associated gas production from its upstream operations.

Nigeria LNG Limited is owned by Nigeria National Petroleum Corporation (49% stake, NNPC is Nigeria’s state-owned energy firm), Shell (25.6%), Total (NYSE:TOT) (15%), and Eni (NYSE:E) (10.4%). NLNG owns all of Bonny Gas Transport Limited and NSML (NLNG Ship Management Limited), which support the export side of the equation.

Bonny Utility Company provides water and electricity for the 10,500 homes on Bonny Island. Shell has a stake in BUC through its stake in the SPDC JV, which stands for Shell Petroleum Development Company of Nigeria. BUC is 50% owned by NLNG, 30% by the SPDC JV, and 20% by Exxon Mobil Corporation (NYSE:XOM).

For reference, the SPDC consortium is operated by Shell (30% stake), with NNPC (55%), Total (10%), and Eni (10%) also being partners. Oil and gas operations in foreign countries tend to have many partners to spread out development costs and risk. BUC, SPDC, and NLNG are three examples among many.

The SPDC JV owns 50 producing oil & gas fields, five gas processing plants, 5,000 kilometers of pipelines supporting that oil & gas output, and two main oil export terminals (the Bonny and Forcados terminals). As the operator of 17 onshore oil production leases (one is up for sale pending litigation), SPDC’s biggest worry is that those leases run out in 2019. Most likely the contract covering those leases will be extended, but that is something to keep on your radar.

SPDC expects those licenses to produce an additional 164 million BOE through 2019, with another 377 million BOE in proved reserves remaining beyond that. Assuming it takes two and a half years to produce that (from end of 2016 to mid-2019), that is equal to an average gross production rate of 180,000 BOE/d for Shell’s onshore upstream operations. Equal to 54,000 BOE/d of Shell’s net Nigerian upstream production.

In the waters of Nigeria, Shell’s SNEPCO (Shell Nigeria Exploration and Production Company Limited, which Shell owns in its entirety) represents the rest of Shell’s upstream production. That includes the offshore Bonga West Field(40,000 BOE/d peak production, came online in 2014) which is operated by SNEPCO (55% interest), along with the SNEPCO-operated Bolia and Doro fields (where SNEPCO also has 55% stake).

On the non-operated front, there is the Exxon Mobil operated-Erha North Field(peak production rate of 90,000 BOE/d, second phase came online in 2015, SNEPCO has a 43.75% stake), along with SNEPCO’s 50% stake in the OPL 245 license that covers the Etan and Zabazaba fields (which the firm is attempting to sell but legal hurdles have gotten in the way).

Produced gas is routed to the onshore processing plants owned by the SPDC JV, with that going towards servicing domestic demand and to the LNG complex. It appears that the vast majority of Shell’s Nigerian production comes from offshore fields, but the figures aren’t directly given.

Security issues

Now let’s take a look at how the ongoing security situation has been impacting Shell, starting with the large LNG complex. Shell’s 25.6% stake is equal to 5.632 million metrics tons of annual (or mpta) liquefied natural gas production capacity. During 2014 and 2015, 5 mpta (equal to 89% of the complex’s capacity) was being utilized. By 2016, that had fallen down to 4.5 mpta, or 80%.

That was most likely due to the attacks on Shell’s pipeline infrastructure. In early-August of 2016, SPDC declared force majeure on the gas supplies heading to the NLNG complex as a leak on Eastern Gas Gathering System was detected. Almost of of those gas supplies go to NLNG. By August 21, the fore majeure was lifted, but the impact was substantial as it is part of a broader trend.

Sabotage and security issues took Shell’s 2016 upstream output (upstream and integrated gas/LNG are two different divisions) down by 40,000 BOE/d versus 2015, as noted in its 20-F filing, which held its 2016 upstream production back at 258,000 BOE/d versus 278,000 BOE/d in the previous year.

Violence and militant activities have continuously forced Shell to declare force majeure on exports of light sweet oil from its Bonny Light Terminal. Various attacks on SPDC’s Trans Niger Pipeline, which was built to route 180,000 bpd to the terminal, are one of the main culprits. Reductions in Bonny Light exports due to midstream bottlenecks has repeatedly forced Shell to curtail its production. Attacks have continued throughout 2017, forcing SPDC to declare force majuere on Bonny Light exports for several months this year (current force majuere expected to be lifted soon, which was declared back in mid-September).

Leaks (could be a euphemism for militant activities) found on the Nembe Creek Trunk system in mid-July, which is the other oil pipeline that supports exports from the Bonny Light Terminal, have also held exports back this year.

Militant attacks on crude exports from the Forcados Terminal, mainly by certain groups targeting the Trans Forcados oil pipeline, are also at play. From early-2016 to mid-2017, Shell had a force majuere imposed on exports from its Forcados Terminal (briefly lifted in the Autumn of 2016). Limiting exports that usually came to 200,000-400,000 bpd.

There are some positives in the form of additional production volumes from the Gbaran-Ubie gas & condensate field, which is being developed by the SPDC JV. With Phase 2 now complete (Q3 start-up), production from 18 new wells is now travelling through a newly constructed pipeline to SPDC’s onshore processing facilities. At its peak, the second phase will produce 864 MMcf/d of gas and 26,000 bpd of condensate, giving the NLNG complex a lot more gas to cool down and export.

Final thoughts

Royal Dutch Shell is a big player in Nigeria and isn’t immune to the ongoing security situation. Ideally, some sort of peace agreement is worked out between the Niger Delta Avengers, all of the other groups involved in the attacks, and the Nigerian authorities. We’ll have to wait and see.

Nigerian unrest poses an ongoing threat to Shell, but the situation is improving and so far most of its operations have been able to stay up and running, aided by a large part of its upstream footprint being offshore. If there is a breakthrough on this front, while it may not boost Shell’s stock price, it will remove a significant downside. And it will be great news for Nigeria assuming a deal achieves sustainable peace.

To read more about Shell, check out its Permian footprint in the United States by clicking here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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