Thursday, April 17, 2008

Nigerian Oil Output Could Fall by a Third by 2015

Nigeria’s oil output ‘could fall by a third’

By Matthew Green in Lagos
Published: April 16 2008 23:09

Nigeria risks losing a third of its oil output by 2015 unless it finds ways to boost investment in joint ventures with foreign energy companies, an internal report by President Umaru Yar’Adua’s energy advisers warns.

The progess report, seen by the Financial Times, highlights the government’s need to find ways to finance the oil industry in the country. It comes after an internal memo from the Shell Petroleum Development Company late last year that said funding problems could put the existence of the company’s joint venture with the Nigerian government at risk. The fresh warning could add to supply fears that have pushed oil prices to fresh records this week and saw prices reach a record $115.45 a barrel on Thursday.

Traders are already worried about Russia’s oil production, considered critical to keep up with Asian demand, after warnings from industry executives that production there has peaked at about 10m barrels a day.

Mr Yar’Adua’s advisers include former Opec secretary-general Rilwanu Lukman, who chairs a committee created to draft proposals for an overhaul of Nigeria’s energy sector. The government hopes the reform process will help double production in Africa’s biggest crude exporter from its current 2.1m b/d.

The report says funding shortfalls “portend a grave danger not just to the reform process, but to the continued well-being of the industry as a whole”, adding that even if funding levels are maintained “total oil and gas production will decline by 30 per cent from its current level by 2015”.

The government’s failure to pay its share of costs of the joint ventures with companies such as Shell, ExxonMobil and Chevron, is one of the biggest obstacles to raising production.

The Nigerian government and Shell declined to comment.

Nigeria warned on oil spending

By Matthew Green in Lagos
April 16 2008 23:09

President Umaru Yar’Adua has made tackling funding shortfalls for Nigeria’s joint ventures with western oil majors a priority since he won elections a year ago.

But the scale of the problems building up as a result of the chronic failure of Nigerian governments to meet the state’s share of maintenance and exploration costs may have taken him by surprise.

An internal report seen by the Financial Times warns that production of oil, on which Nigeria depends for more than 90 per cent of its export earnings, will fall by a third unless the government boosts investment. Such a decline would see Angola overtake Nigeria as sub-Saharan Africa’s leading oil producer and give western governments, who see west African oil and gas production as essential to global energy security, pause for thought.

The warning was contained in an internal pro­gress report drafted in January by a committee Mr Yar’Adua set up to reform Nigeria’s energy sector.

“Indications are that, even if current funding levels are maintained, total oil and gas production will decline by 30 per cent from its current level by 2015,” it says.

The US, which already imports about half of Nigeria’s oil, hopes the country will play a growing role in reducing its dependence on the Middle East. European governments see potential in Nigeria’s gas reserves for reducing their reliance on Russian exports.

But such plans hinge on raising production in joint ventures between the state-owned Nigerian National Petroleum Corp and majors such as Royal Dutch Shell, Chevron, ExxonMobil and Total, which account for about two thirds of Nigeria’s 2.1m barrels per day.

Aware that the government’s failure to pay its share of costs in the joint ventures is one of the biggest brakes on growth, Mr Yar’Adua’s advisers are working on proposals to seek new sources of finance.

In the short-term, senior energy officials say they are close to agreeing terms under which the majors will extend loans to cover part of the immediate investment needs. The report says the shortfall in joint venture financing already stands at more than $3bn (£1.5bn, €1.8bn), and could grow to $8bn this year.

In the long-run, the government wants to change the way the joint ventures are structured to allow them to approach local and international capital markets to raise finance.

Jeroen van der Veer, chief executive of Royal Dutch Shell, said that the company had agreed the principles of the plan but more work was needed. Shell gave no immediate comment on the report.

Executives at western majors have, however, ex­pressed unease at how long it will take to make the legal and financial changes needed to get the new system working.

The progress report also proposes a 0.25 percent surcharge on each barrel of oil or gas equivalent to fund new, streamlined government energy agencies. Nigeria is already seeking to renegotiate contracts covering offshore production to win a greater share of profits to reflect soaring oil prices.

The report suggests hiring independent consultants to recruit operational staff for the joint ventures, prioritising Nigerians over expatriates. “Given the sensitivity of the staff selection process, special care has to be taken to discuss and agree with the joint venture partners to ensure that the process is not considered a form of nationalisation,” it says.

Other measures to promote Nigerian content include making it mandatory for energy companies to use local insurance companies and to seek to raise capital in the country before turning to markets abroad.

Nigerians question motives for inquiries
By Matthew Green in Lagos

Published: April 16 2008 02:49 | Last updated: April 16 2008 02:49

When Olusegun Obasanjo, Nigeria’s previous president, anointed Umaru Yar’Adua as his successor, he was no doubt hoping the relative newcomer to the national stage would help defend his legacy.

A year later, Mr Yar’Adua is standing by as lawmakers unearth scandals from Mr Obasanjo’s eight-year tenure involving sums presented by the national press as mind-boggling even by Nigeria’s heady standards.

For Mr Obasanjo, who was feted by western leaders for his efforts to sanitise Nigeria’s finances, this public scrutiny by parliamentary committees and government bodies represents at the very least a humiliation.

Once one of the most influential leaders on the African stage, the name of the one-time political prisoner and founding member of Transparency International, the anti-corruption watchdog, is now rarely out of the headlines in connection with accusations of abuse of office or lurid family scandals.

The question becoming a national preoccupation is whether the zeal shown by Mr Yar’Adua’s 10-month-old administration in airing his predecessor’s dirty laundry represents a genuine step towards greater transparency, or part of a power struggle that is distracting him from the very pressing business of reform.

At a time when Nigeria is luring growing amounts of foreign capital on the back of surging prices for its oil, the answer is relevant not just for the 140m population, but also to potential investors.

Mr Yar’Adua’s supporters argue that the new government cannot hope to tackle priorities such as a chronic power crisis or restoring lost production in Africa’s biggest crude producer without first taking stock.

“I don’t believe there’s any deliberate witch hunt,” said Farouk Lawan, chairman of the Integrity Group of lawmakers pushing for cleaner government. “Former president Obasanjo did so many monumentally wrong or faulty things that any investigation, no matter how slight, would end up bringing out things that were not done properly.”

But Mr Obasanjo’s confidants accuse Mr Yar’Adua’s followers of staging a humiliating persecution of the former general that will not only jeopardise his achievements but also destabilise the political system.

Some of Mr Obasanjo’s enemies are even calling for him to stand trial. Last week, Iyabo Obasanjo-Bellom, his eldest daughter, was charged with involvement in an attempt to defraud the health ministry. She denies wrongdoing.

Mr Obasanjo had initially hoped to extend his eight- year tenure by attempting to lift a two-term limit to allow him to run again at last April’s elections.

When the plan failed and Mr Obasanjo nominated Mr Yar’Adua, a state governor from a prominent family in the predominantly Muslim north to succeed him as the ruling party’s candidate, there was speculation he would attempt to remain the power behind the throne.

But after emerging as the winner of elections widely perceived as the most flawed in Nigeria’s history, Mr Yar’Adua sought to build legitimacy on respect for the rule of law and distanced himself from his predecessor.

Mr Yar’Adua’s administration has followed previous governments by setting up inquiries to lay bare their predecessors’ failings.

People close to both men tend to agree that Mr Yar’Adua is not orchestrating the investigations.

The most sensational allegations surfaced during an inquiry begun by the house of representatives after Mr Yar’Adua told a visiting World Bank official in January that the previous administration had spent more than $10bn on the power sector with little result.

This month, the government cancelled the sale of the country’s biggest steel mill to an Indian company after a panel found evidence of abuses. The Senate is also investigating land allocations in Abuja, the capital.

Mr Obasanjo based his sleaze-busting credentials partly on his decision to create the Economic and Financial Crimes Commission, an anti-graft agency, in 2003. The EFCC says it is now processing claims against him.

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