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Financial Times: Shell’s grip loosens on restive delta

By Matthew Green in Lagos and Dino Mahtani in London
Published: January 31 2008 02:00 | Last updated: January 31 2008 02:00

Royal Dutch Shell’s admission in an internal memo that its biggest oil operation in Nigeria may not survive is the starkest sign yet of the precariousness of the company’s position in the restive Niger Delta.

The question now is whether the “One Shell” restructuring plan to turn around its businesses in the country it ushered into the oil era half a century ago will deliver salvation.

Basil Omiyi, Shell’s country chairman in Nigeria, warned in the memo that the company was facing a “grave” situation and had lost its dominant position in Africa’s biggest crude exporter. The most striking admission was that a lack of funds was putting its joint venture with the government, known as the Shell Petroleum Development company, in peril.

With roots stretching back to 1958 when Shell exported Nigeria’s first crude, the SPDC is the biggest and oldest oil company in the country. At its peak it pumped more than 40 per cent of Nigeria’s oil output, but years of community resentment in the delta have gradually made it harder for the company to operate there.

In 2006 its woes intensified, when militant attacks in the western delta forced the company to shut in 189,000 b/d of its output, leading to a haemorrhage in its revenues.

Mr Omiyi told the FT in April that he planned to restore the lost production within six months, but the memo, circulated in an e-mail to staff on November 14, says production estimates for 2008 still remain below capacity. “We are slowly re-entering the west, but are a long way off from reaching normal production levels,” Mr Omiyi wrote, adding that the company’s cost base was “unsustainable” given the production outlook and that the 2008 budget would be set at a “much lower level”.

The admission will invite greater scrutiny of Mr Omiyi’s strategy of awarding contracts to delta communities, some of which harbour militants responsible for attacks. Mr Omiyi had said such a strategy would be key to harmonising relations, but acknowledged it would be impossible to “sieve out” militant sympathisers.

Shell has admitted awarding pipeline security and maintenance contracts to companies controlled by the same insurgents who have attacked its assets.

Some Shell executives complain privately that Mr Omiyi’s strategy of paying off communities is backfiring. Mr Omiyi was appointed the first Nigerian managing director of SPDC in late 2004, but left his post early this year as part of the company’s restructuring plan announced in mid-November. He remains as country chairman. The memo reveals that Shell released an unspecified but “significant number of expatriate” workers last year as part of the restructuring.

But for many staff, the biggest problem is the government’s failure to meet its funding obligations for the SPDC. Umaru Yar’Adua, Nigeria’s president, wants to address the shortfall by allowing Nigeria’s five joint ventures with western majors to approach the capital markets and raise funds.

But Jeroen van der Veer, Shell’s chief executive, expressed concerns over how long the new system would take to start working in a meeting with Mr Yar’Adua on the sidelines of the Davos summit last week, according to a Nigerian government official.

Mr Yar’Adua’s plan to renegotiate contracts covering growing offshore production to reflect surging oil prices is also creating uncertainty over revenues from Shell’s Bonga field, one of its most lucrative Nigerian assets. While Bonga is free of the funding headaches and violence plaguing the SPDC, Mr Omiyi warned in his note that offshore operations also needed to cut costs.

Shell yesterday declined to comment on the memo, which also says job cuts will be inevitable. Mr Omiyi said in the note he believed the “One Shell” restructuring programme, due to be implemented by April 1, would turn the company around.

But interest shown by China National Offshore Oil Corporation CNOOCand African Petroleum, a Nigerian company, in buying two oil blocks Shell offered for sale last year perhaps vindicates Mr Omiyi’s e-mail: “Our competitors are making use of any space that we leave.”

Copyright The Financial Times Limited 2008

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