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Business Day (South Africa): Closure of Shell’s units pose long-term threat to Nigeria

John Kaninda
Africa Editor
OIL production cuts forced by the shutting down of Royal Dutch Shell’s production units in the Niger Delta have so far had a limited effect on stability, revenue and possibly ratings of Nigeria, says a recent report published by investment bank Merrill Lynch. But failure to deal with the incidents could be “extremely negative” in the long term for the west African country, the report warns.
Attacks on Shell’s platforms by members of the Movement for the Liberation of the Niger Delta, and the kidnapping of nine overseas oil workers last week, forced the oil group to shut down its entire western region operation, delivering a “massive knock” to production, estimated at 600000-barrels a day.
Six of the kidnapped workers were released late on Wednesday, but militants held back two Americans and one UK national. Nigeria’s daily production is 2,5-million barrels a day.
Although production is not yet in dire straits, Merrill Lynch sees these developments as negative for the country’s stability and progress on governance, especially as the government has thus far “failed to put forward a solid, public attempt at addressing the incidents”.
Recent ratings of Nigeria by rating agency Fitch and Standard & Poor’s could be affected as a result of instability. Nigeria has received a BB inaugural rating by the two firms, which the Merill Lynch report says were “prematurely high”.
“Until now, the response to the violence has been opaque and we therefore remain cautious on government’s commitment to address the issue quickly and effectively,” the report says.
“We recognise that a clampdown on rebel activity may exacerbate the violence but, in the absence of official statements to countries whose citizens have been affected, or the media or investors, government has failed to even appear to be taking control of these events.”
The report also says that lower oil revenue will not affect Nigeria’s ability to repay debts.
The national budget assumes production of 2,5-million barrels a day at a prudent oil price of US$35 a barrel, compared with Merrill Lynch’s forecast of $64,2 a barrel. If production is held at the lower level of 1,9-million barrels a day throughout 2006, Merrill Lynch’s average forecast still yields $10,8bn in excess revenue.
“In fact, oil prices would have to fall to $45 a barrel at current production levels or production would need to be cut a further 25% (for instance if Shell shuts down all Nigerian operations) before we would begin to see serious risks to debt repayment.
“And we see both of these outcomes as highly unlikely,” the report says.

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