Friday, June 09, 2006

Unbelievably bad news for Nigeria's oil sector

According to an AP story reported by the Houston Chronicle, Nigerian officials are now admitting production losses in their oil sector due to violence and unrest in the Niger Delta were much deeper than previously reported [emphasis mine]:
A Nigerian government official said Friday that 800,000 barrels a day of oil production are shut in at the country's Niger Delta, higher than previously reported.

Speaking at an industry event in Lagos, Tony Chukwueke, director of Nigeria's Department of Petroleum Resources, said "This is a huge loss to Nigeria and we don't know what to do about it."

Until now it was thought that attacks by the region's militants, who are fighting for regional control of Nigeria's oil resources, had cut the country's crude oil output by more than 500,000 barrels per day, most of it from a joint venture operated by Royal Dutch Shell PLC .

This elevates Nigeria's fraction of lost oil production due to violence from between 20% and 25% to well over 30%.

Why was this not reported earlier? Were they hiding how bad the violence has been?

I argued in an earlier post that the production crisis in the Delta leads to a bifurcated set of incentives. Certainly, Royal Dutch Shell, which is the most exposed oil major in Nigeria, will be hurt the most -- but Shell's risk is spread far beyond Nigeria's borders.

Nigeria itself is not so lucky. While heading into a presidential campaign that promises to be particularly nasty, the new figures on the drop in their oil production capacity prefigures a serious budget shortfall that could only exacerbate internecine struggles, and broader geographic struggles between the North and Deltan states.

How these new numbers will affect incentives to meaningfully remedy social and environmental damage in the Niger Delta (the source of the conflict) is anybody's guess.

(Image AAAS)

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