Financial Times: Oil industry: Everyone could emerge a winner

By Matthew Green
Published: January 28 2008 06:10 | Last updated: January 28 2008 06:10

Emmanuel Egbogah is reluctant to say just how much money he will try to wring out of western majors when he starts renegotiating contracts covering Nigeria’s vast offshore oilfields. But it seems clear that any executives from companies such as Royal Dutch Shell, Chevron and Total which were hoping for a leisurely review will be in for a surprise.

“We don’t intend to sit around, we’re settling to business, and therefore we’re going to deliver on this as quickly as possible,” says Mr Egbogah, a special adviser to Nigerian President Umaru Yar’Adua on petroleum. “There’s a wide margin of areas that we could look for adjustment … With the price of oil as it is today, I think everyone will end up a winner.”

Nigerian officials signalled they would review the contracts late last year, joining producers such as Russia, Venezuela, Britain and Algeria who have sought better terms from energy companies to reflect soaring prices.

Mr Egbogah, whose 36-year career spans stints working for energy companies in Nigeria, Malaysia, Libya and Canada, will play a leading role in the negotiations, which he hopes to start within weeks.

Describing himself as a “consummate insider” in the oil industry, and pointing to his technical background in petroleum engineering, he says he aims to establish a friendly rapport with his counterparts from the majors.

But Mr Egbogah is nevertheless forthright about the government’s desire to improve the terms of agreements signed when oil prices were closer to $20 a barrel than the $100 a barrel they touched in January.

“It is really a ball for the oil companies,” he says. “There’s a lot of room for everyone to share, and the Nigerian government is not the exception … The oil industry scenario today demands that everyone gets a better share.”

The agreements in question are so-called production sharing contracts signed in 1993 and 2000. They cover giant offshore projects such as Shell’s Bonga, Exxon Mobil’s Erha, Chevron’s Agbami and Total’s Akpo, which are playing a growing role in production.

Under the deals, oil companies only start sharing revenues from crude when they recoup enough money to pay for the initial investment. The terms are far less favourable to the government than the joint venture arrangements that cover production onshore and in the shallow waters of the Niger Delta, which account for most of Nigeria’s output. Under the joint ventures, the state-owned Nigerian National Petroleum Corporation holds a majority stake, sharing revenues from the start.

“We consider that, so far, the production sharing contracts in Nigeria have not been really, truly progressive, and we want to negotiate truly progressive production sharing contacts,” Mr Egbogah says. “It means everyone will come out a winner.”

Mr Egbogah says he is keen to conclude the talks within the next few months, although some executives say the complex negotiations may take considerably longer.

Industry insiders say the government is likely to try to claw back money from tax breaks it granted to encourage exploration when oil prices were lower. The share of profits from each barrel is also likely to be on the agenda.

“I expect that everyone will come with great respect for the others,” Mr Egbogah says. “We’re going to negotiate in a very friendly mood, only for the best interests of one another.”

Oil industry analysts say majors accept that they will probably have to cede a degree of the profits from offshore fields, given the upward swing in prices. But they will be reluctant to make big concessions at a time of rising costs and uncertainty over Nigeria’s fiscal regime, particularly in the gas sector.

Executives working for the majors say moves to renegotiate contracts have contributed to a climate of uncertainty that could deter investment in Nigeria, where militant violence and gaps in the state’s funding of joint ventures have hit output.

Mr Egbogah downplayed the concerns, saying oil companies have been reassured by the government’s appointment of experienced figures to steer a wider process of reforms in the energy sector.

“There’s absolutely no reason for the nervousness. In a way, I think we’ve come to a great deal of maturity in the way we approach the oil and gas business in the country today,” he says. “We’re are going to be doing things that bring the Nigerian oil and gas industry to the edge of the 21st century.”

Nigeria, seeking to diversify its partners away from the western majors, has started talks with Gazprom, the Russian state-owned energy giant, about a gas gathering project. Mr Egbogah says Gazprom is offering to spend “significant numbers” of billions of dollars on a project with Suntera, the Russian-Indian energy company, to harness gas to generate electricity.

Gazprom, he believes, is seeking to gain a strategic foothold in Nigeria, regarded as an increasingly important source of gas by the US and Europe. “I think they are looking at the overall scenario of gas competition and the world market, and Europe in particular. I think their approach is to position themselves to be quite relevant in that market.”

Copyright The Financial Times Limited 2008