Shell and the renewal of the Niger Delta

[update below]

I wasn't aware that Nigerian courts had ordered Royal Dutch Shell to compensate ethnic Ijaws in the Niger Delta, but they had. And Monday, Shell deliberately missed their deadline, choosing instead to withhold payment pending review by an appellate court.

The court had ordered Shell to pay $1.5 billion in compensation for "alleged environmental pollution." To the uninitiated reader, the word "alleged" used by the author of the BusinessWeek piece, is used only to keep Shell from writing an angry letter. The damage that has been done by Shell and other oil companies in full partnership with the Nigerian government whose revenues depend very strongly on mineral extraction, is monstrous and very, very real.

What's interesting about Shell's decision to withhold payment is that the Movement for the Emancipation of the Niger Delta (MEND), whose violence and kidnappings are what led to a 20-25% reduction in Nigerian oil production since January of this year, is composed primarily of ethnic Ijaws. And, of course, MEND has responded to the missed payment with a pledge to step up attacks. The BBC reports that MEND is forming a coalition with three other militant groups to increase pressure on Shell. These groups include the Niger Delta People's Volunteer Force (NDPVF), the Coalition for Militant Action in the Niger Delta (COMA), and the Martyrs Brigade. According to GlobalSecurity.org, the Niger Delta People's Volunteer Force is led by Moujahid Dokubo-Asari (about whom I have written previously), who is now held by Nigerian authorities on charges of treason. COMA took responsibility, with MEND, for the April 19 explosion near an army barracks in which approximately ten died.

So, having promised at their most recent stockholders' meeting that compensation to aggrieved Niger Delta peoples for "alleged" environmental damage was their first priority, knowing full well that militant attacks would continue if they didn't offer serious compensation, having requested that the Nigerian court permit them to postpone their payment, having that request denied on Friday, and having planned to withhold payment anyway, Royal Dutch Shell sets up a situation in which they know their oil production capacity in the Niger Delta will continue to be in serious jeopardy.

So what on Earth is their incentive to miss the payment?

One very shady answer to that question should be considered. Crude oil prices are now high for three reasons: the inability of OPEC nations to generate excess production capacity, our invasion and occupation of Iraq, and political and social instability in historically peripheral oil producing nations, such as Nigeria and Venezuela.

This final factor -- instability -- has a non-linear effect. That is, as demand approaches current supply capacity, a small twitch in oil supply, say from militant attacks in the Delta, leads to a disproportionately large increase in the "risk premium" oil traders are willing to pay in the expectation that there could be a catastrophic drop in supply. As the definition of "catastrophic" narrows to ever smaller drops in supply, the "risk premium" begins to explode. The "risk premium," according to Conoco-Phillips CEO James Mulva, is currently around $20 per barrel (out of $72 at the end of Tuesday's trading).

Assuming demand is inelastic in the face of a change in price (hey, we need our oil, don't we?), then violence in the Delta will lead to an increase in crude prices that more than compensates for the drop in export capacity. Shell wins.

Earlier this month, I argued that high crude oil prices make the governments of consumer nations -- like the US or EU countries which have good reason to fear inflation -- more likely to want to smooth out social and political crises in places like Nigeria and Iran. I still think that's true -- but the oil companies have no such incentive. If a "crisis" can lead to exorbitantly high oil prices, then they sit pretty (I have yet to see an argument that oil companies have an incentive to keep oil prices at their historic lows). And if a government is led by former oil or oil services executives ... well, I guess to them nuclear saber-rattling with Iran seems like a really great idea.

By missing their payment, is Shell simply avoiding responsibility for environmental damage that is merely "alleged"? Or is Shell gaming the system?

UPDATE: John Robb at Global Guerrillas has an interesting take on Shell's decision to withhold payment. Indeed, his entire blog has a take on conflict that I have not yet been able to wrap my brain around -- it's worth checking out.

(Photo The New York Times)