Nigeria Seeks Bigger Slice of Oil Profits

Dec 13, 2007 (From The Wall Street Journal via Dow Jones Newswires)

Nigeria is beginning the deepest overhaul of its petroleum industry in decades, a move expected to make it tougher for big operators such as Royal Dutch Shell PLC to profit from tapping Africa's biggest oil-producing country.

Since coming to power in May, Nigerian President Umaru Yar'Adua has proposed changes such as creating a national oil company that he expects will help the state manage its oil and natural-gas resources better and pare the historical dominance of foreign oil companies in the country. Nigeria pumps about 2.1 million barrels a day, or about 2.5% of the world's daily oil needs.

The planned changes are also about "rebalancing the relationship" between the state and foreign energy companies, according to Nigerian oil minister Odein Ajumogobia. That is code for handing over more oil profits, analysts say.

The government is in the early stages of renegotiating billions of dollars worth of offshore exploration deals signed in the 1990s with companies such as Chevron Corp., Exxon Mobil Corp., Shell and Total SA. The contracts, up for renewal, were signed when oil traded at about $20 a barrel. Crude-oil futures in New York finished yesterday at $94.39 a barrel.

Shell declined to comment on the potential changes. Exxon and Total, also heavily involved in Nigeria, said they wouldn't speculate on how they might be affected. Chevron spokesman Michael Barrett said it would be "premature" to comment.

While many details of the overhauls remain to be worked out, Western oil companies are likely to face increasing head winds operating in a country where oil supplies are already crimped by violence and political instability. It also comes as other oil-rich countries move to have a greater say over their resources.

For the industry, increasing earnings is becoming harder as financial terms get tougher globally, access to prime oil sites shrinks and companies from China and India carve out their own deals.

Western oil companies "just have to play ball. There is nowhere else to go in today's opportunity- constrained playing field," said Oswald Clint of Sanford C. Bernstein in London.

Unlike some other countries, the Nigerian government has no plans to seize private assets. Some analysts say some of the changes in the pipeline send positive signals, such as a measure requiring that the country's energy finances be audited yearly instead of every five years to stem corruption, as well as an effort to inject predictability into financing energy projects.

The changes reflect a self-confidence on the part of the Nigerian government as high oil prices have generated healthy levels of economic growth and have helped the state clean up its finances by slashing debt.

"There's a need to re-evaluate the relationship between the Nigerian government and companies to see how it can be made better," said Rilwanu Lukman, energy adviser to Mr. Yar'Adua and a secretary general for the Organization of Petroleum Exporting Countries in the 1990s.

Analysts estimate that energy companies in recent years have sunk more than $15 billion in Nigeria's offshore waters, where much of the growth in Nigeria's oil and gas output is expected to be.

In addition to profit-shaving pressure from rising costs for drilling rigs and raw materials, companies have lost hundreds of millions of dollars in oil revenue in the past two years because of violence in the Niger Delta, where most of the country's oil is produced. The violence has shut about 20% of Nigeria's oil production capacity.

Early indications are that once the offshore contracts are renegotiated, profits for companies may end up "at least" 5% to 10% lower, translating into hundreds of millions of dollars over time, according to a senior Nigerian oil official.

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