Nigeria to Revise Foreign Company Oil Deals

LONDON Oct. 24, 2007 (Dow Jones Newswire)

Nigeria, Africa's largest oil producer, is looking to renegotiate several contracts with foreign oil companies, senior Nigerian oil officials said Wednesday, in a move to boost the government's share of oil revenues.

The planned changes will make it harder for foreign firms to pocket energy profits and to book crucial crude oil reserves in the West African nation.

The surprising development comes after a long period in which Nigeria had been a beacon of honoring contracts and not mimicking other oil nations around the world in recent years, like Venezuela, where the government has forced unfavorable contract changes on foreign operators.

"The oil contracts in place provide for periodic review and renegotiation. That time has arrived and the Nigerian government is doing that now," Rilwanu Lukman, an energy advisor to Nigerian President Umaru Yar'Adua, told Dow Jones Newswires.

Rewriting those contracts will take months to complete and will affect several major oil companies, such as Exxon Mobil Corp. (XOM), Royal Dutch Shell PLC (RDSA), Chevron Corp. (CVX), Total SA (TOT) and Eni SpA (E).

Shell, the biggest foreign oil operator in Nigeria, and Total are the most exposed to changes in contracts in Nigeria in terms of reserves, analysts at ING said in a research note. "Any actual change to fiscal terms in Nigeria would be negative for (Shell's) stock in particular, albeit there is perhaps a long way to go yet before any actual impact is proposed, negotiated or confirmed," ING said.

An oil and gas committee headed by Lukman is looking at various options for altering existing contracts, he said.

"We haven't completed our work. We'll take as long as we need to come up (with) the changes," said Lukman, a former Nigerian oil minister who served as OPEC Secretary General in the mid-1990s. Lukman declined to elaborate.

Nigeria is the world's 11th biggest oil producer, according to the U.S. Energy Information Administration, pumping about 2.2 million barrels a day, or 3% of the world's total.

Another senior official told Dow Jones Newswires the renegotiation of contracts would lead to the Nigerian government getting more oil revenues.

U.S. oil prices hit a nominal record of $90.07 a barrel last Friday, but are expected this year and in 2008 to average close to $70 a barrel, more than three times the oil price seen in the 1990s.

The planned contract changes come after President Yar'Adua announced plans in September to abolish the Nigerian National Petroleum Corp. and replace it with five new companies. The move, which the government ambitiously hopes to complete by February, is aimed at rooting out corruption and inefficiencies.

The senior oil official said a key element to renegotiations will entail modeling existing onshore contracts on dozens of offshore deals known as production sharing agreements that Nigeria has with many foreign companies. Nearly two-thirds of Nigeria's oil production comes from onshore areas. The country has about 36 billion barrels of oil reserves.

Such PSAs often require a company to fund 100% of the development costs of a project. Under these deals, the government allows a company to recover all those costs and splits the profit with the company. PSAs also typically entail the government receiving more revenue as oil prices increase.

Since the 1960s, the Nigerian government has been a joint-operator with companies like Chevron and Shell in developing its onshore resources. This has meant jointly coughing up millions of dollars to bankroll projects - something the government no longer wants to do.

"The government now wants the foreign companies to take on all the costs onshore. They no longer want to put up money in a joint-development role," the senior official said.

The official said converting onshore contracts to something like a production sharing agreement would likely mean that foreign companies would be unable to book those onshore oil and natural gas reserves as their assets. This would be a blow to U.S. and European companies at a time when they're struggling to increase their reserves, which many money managers view as a key investment criteria.

"Under PSAs, the companies are viewed as contractors so this would impact their reserves," the official said.

Asked about the reputational damage Nigeria is likely to incur as a foreign investment destination, the official was sanguine. "Our reputation is important to us, but there is a valid need to revisit these contracts and we hope this can be done in a balanced way."

Total said it hadn't received any notice from the government, but said it hoped the government would honor its contracts. "We hope they will respect their commitments towards Total," a company official said.

Shell and Chevron said the government hadn't notified them about planned changes. Eni declined to comment and ExxonMobil wasn't available to comment.

(Benoit Faucon in London, Adam Mitchell in Paris and Liam Moloney in Rome contributed to this report) Copyright (c) 2007 Dow Jones & Company, Inc.