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Financial Times: Security costs threaten oil contractors in Nigeria

By Dino Mahtani in Lagos
Published: September 16 2006 03:00 | Last updated: September 16 2006 03:00

Oil servicing companies in Nigeria’s violent delta region are having to shoulder rising security costs or consider walking away from essential engineering and drilling work with oil and gas multinationals.

Executives say the extra costs for companies that undertake exploration, drilling and engineering operations in the oil and gas industry could slow the completion of projects and affect oil and gas production targets.

Security analysts say militant attacks on facilities in the world’s eighth largest oil exporter this year – which have shut down a quarter of Nigeria’s output – followed by a wave of kidnappings of expatriate oil workers, have intensified efforts by multinationals to shift the burden of risk on to their service contractors.

“There is a trend among the multinationals to try and divest themselves of the risk,” said Roger Brown, a director at Erinys International, a private security company which recently opened for business in Nigeria. “And the bottom line for the contractors is that there are other places to do business with less risk.”

Violence in the delta has pushed up costs for all the companies operating there, from the multinationals – which already spendmillions of dollars on security – to the many servicing companies which range from global giants such as Schlumberger and Halliburton to small specialist companies.

But now even the smaller servicing companies face increased annual costs of hundreds of thousands of dollars to pay for security.

Willbros, a large US engineering contractor which has worked for multinationals in Nigeria including Shell, the country’s largest oil producer, announced last month it would divest its Nigerian interests. The company had abandoned some projects after nine of its expatriate workers were kidnapped for weeks by militants this year.

Mike Curran, the company chairman, said hostilities meant “commercial and operating risks” in Nigeria exceeded “acceptable risk levels”. Berger and Bilfinger, a relatively small German construction contractor, has also halted operations after one of its expatriate workers was kidnapped.

Fears of disruption to the industry were compounded this week when oil industry labour unions held a two-day strike in protest at the government’s failure to improve security in the delta.

Nigeria’s oil is mainly produced from onshore sites in the Niger Delta region, but multinationals are turning to more expensive deep water projects to meet production targets partly due to the security threat in the delta’s swamps and creeks, which often serve as militant hideouts.

“The higher costs mean slower access to oil and gas reserves. They mean the industry as a whole is turning towards deep water operations, and ultimately more expensive oil,” says one managing director of a major international servicing company in Nigeria.

Security analysts say the multinationals have been shrinking their overall security umbrella, which normally includes responsibility for evacuation procedures, calling for military support and threat assessments and placing more responsibility on their contractors.

Service company executives say they are spending more on surveillance and remote sensing equipment, and police protection in order to guarantee their working relationship with the multinationals andkeep their insurance costs down.

But security analysts say there is often confusion between multinationals and contractors over who is responsible for what, leaving some service companies exposed.

“Although there is unity of purpose in terms of the wider security picture between client and contractor in Nigeria, it does appear the contracting companies are under increasing pressure to provide their own tactical security measures,” says Ian Pilcher, Nigeria’s country manager for ArmorGroup, a leading international security company.

In a statement Shell said it expected its contractors to “meet Shell security policies and guidelines in delivering security at operating locations”.

Total, a French multinational, said it was asking contractors “to co-ordinate more rigorously on the logistical aspects regarding security”. Chevron and ExxonMobil, another US oil giant, did not comment, save to say they took security issues seriously.

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