NIGERIA: Royal Dutch Shell, one of Nigeria's largest foreign investors, says it is ready to vigourously defend profit-sharing agreements in that country

Royal Dutch Shell, one of Nigeria's largest foreign investors, says it is ready to vigourously defend profit-sharing agreements in that country. Sharply higher oil prices have seen Nigeria's government following the lead of oil producers world-wide in calling for a renegotiation of oil deals. Royal Dutch Shell is preparing for tough talks with Nigeria in a review of multi-billion dollar offshore oil contracts. That message came after the government of President Umaru Yar'Adua put its largest investors on notice that it wants a greater share of the profit from fields in deep water. Fields such as Shell's Bonga, pictured here, will account for a third of supply from Africa's top producer by the end of next year. Chima Ibeneche, managing director of Shell's offshore division in Nigeria said in an interview with Reuters that he was not surprised by the government's announcement because there was an option for a review in 2008 written into some of the contracts. "It (the industry) will not be taken (by) surprise really if government is thinking about reviewing the terms under which we work but we will wait and see," he said. Oil prices far above what anyone imagined when deals were signed in the early 1990s are a further reason to look again, he added. Oil producers Russia, Venezuela, Algeria and Britain have all modified terms with investors in the light of soaring prices, which hit a new record of 24 US dollars a barrel last Thursday (October 1). "The government is trying to see how it can improve the return it has from its assets at a time when the oil price is quite impressive," Ibeneche said. "Many governments all over the world are trying to do that so it's not surprising at all." Nigerian exploration licences awarded in 1993 or soon after have turned out a string of giant discoveries in deep water, including Shell's Bonga, ExxonMobil's Erha, Chevron's Agbami and Total's Akpo. Bonga cost 3.6 billion US dollars to develop and has been pumping 225,000 barrels per day (bpd) since it came on stream in November 2005. The other fields are all of a similar scale and together will produce 800,000 bpd by the end of 2008. The 1993 licences were the first to be awarded in water depths above 1,000 metres in the OPEC member nation and Ibeneche said investors took big risks by putting up all the capital. "Government has to balance short-term gains with maximising the production of hydrocarbons from the deep water region," he said, noting that costs had risen dramatically and there were still huge investments required in ever deeper water depths. Nigeria's production-sharing contract allows the investor to recoup all the costs before sharing profits with the government, and royalty in water depths above 1,000 metres is nil. Some in OPEC have argued that its members are ill-advised to sign complex contracts where fiscal revenue relies heavily on profits because civil servants are no match for investors' accountants. Ibeneche said Shell was still working through differences with the government over the exact terms of existing contracts, with talks focused on tax credits, royalty and the allocation of reserves in fields which extend outside licence areas. He said he could not estimate when the government would start sharing substantial profits from Bonga because Shell was continuously recouping investments in new drilling to keep output at the current rate for 20 years. An imbalance in the distribution of oil revenues and allegations of massive corruption have led to a rebellion in Nigeria's oil-rich Niger Delta, where villagers say they have yet to see any benefit from decades of oil production in the area.

ITN Source | November 7, 2007

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