Shell warns on Nigeria operations
By Matthew Green in Lagos and Ed Crooks in London
Published: January 30 2008 22:16 I Last updated: January 30 2008 22:16
The future of one of Royal Dutch Shell’s most important businesses is at risk because the Nigerian government has not funded it properly, an internal company memo has warned.
The government’s failure to finance its majority share in the Shell Petroleum Development Company, which is responsible for Shell’s onshore business throughout Nigeria, posed a “big risk” to its existence, according to the memo from Basil Omiyi, Shell’s country chair.
Nigeria was Shell’s second most important country for oil production in 2006, the latest year for figures, behind the US.
The SPDC, 55 per cent owned by the state-owned Nigerian National Petroleum Corporation, was once a symbol of Shell’s pre-eminent position in Nigeria.
But according to Mr Omiyi’s memo, circulated in a November 14 e-mail and seen by the Financial Times, it now “faces a severe under funding problem”.
“Funds made available by the government are very significantly short of existing requirements, leading to levels of borrowing and overdues that put the existence of the joint venture at a big risk,” he wrote.
The memo also dashed hopes the company would keep pledges to quickly restore production lost through militant violence in the Niger Delta since 2006, saying output would remain below capacity this year.
Militant attacks have cost Shell about a third of its oil and gas production in Nigeria, adding to its problems when, like all large western oil groups, it is struggling to raise output. In the autumn, production was 216,000 barrels of oil equivalent a day onshore, plus 175,000 b/d from deep water. About 189,000 b/d was held up in the Delta.
Nigeria has accumulated large arrears in its payments due to bureaucratic inertia and also because politicians have diverted resources elsewhere.
Shell on Wednesday declined to comment on the memo, which was sent to staff to explain plans to cut costs at its three Nigerian exploration and production businesses. The memo warned job losses were inevitable and SPDC was likely to face a “much-reduced” budget for 2008.
Shell’s problems have fuelled concerns about its reserves, which it will reveal in filings to the US Securities and Exchange Commission, probably in March.
Shell’s grip loosens on restive delta
By Matthew Green in Lagos and Dino Mahtani in London
Published: January 30 2008 22:23 I Last updated: January 30 2008 22:23
Royal Dutch Shell’s admission in an internal memo that its biggest oil operation in Nigeria may not survive is the starkest sign yet of the precariousness of the company’s position in the restive Niger Delta.
The question now is whether the “One Shell” restructuring plan to turn around its businesses in the country it ushered into the oil era half a century ago will deliver salvation.
Basil Omiyi, Shell’s country chairman in Nigeria, warned in the memo that the company was facing a “grave” situation and had lost its dominant position in Africa’s biggest crude exporter. The most striking admission was that a lack of funds was putting its joint venture with the government, known as the Shell Petroleum Development Company, in peril.
With roots stretching back to 1958 when Shell exported Nigeria’s first crude, the SPDC is the biggest and oldest oil company in the country. At its peak it pumped more than 40 per cent of Nigeria’s oil output, but years of community resentment in the delta have gradually made it harder for the company to operate there.
In 2006 its woes intensified, when militant attacks in the western delta forced the company to shut in 189,000 b/d of its output, leading to a haemorrhage in its revenues.
Mr Omiyi told the FT in April that he planned to restore the lost production within six months, but the memo, circulated in an e-mail to staff on November 14, says production estimates for 2008 still remain below capacity. “We are slowly re-entering the west, but are a long way off from reaching normal production levels,” Mr Omiyi wrote, adding that the company’s cost base was “unsustainable” given the production outlook and that the 2008 budget would be set at a “much lower level”.
The admission will invite greater scrutiny of Mr Omiyi’s strategy of awarding contracts to delta communities, some of which harbour militants responsible for attacks. Mr Omiyi had said such a strategy would be key to harmonising relations, but acknowledged it would be impossible to “sieve out” militant sympathisers.
Shell has admitted awarding pipeline security and maintenance contracts to companies controlled by the same insurgents who have attacked its assets.
Some Shell executives complain privately that Mr Omiyi’s strategy of paying off communities is backfiring. Mr Omiyi was appointed the first Nigerian managing director of SPDC in late 2004, but left his post early this year as part of the company’s restructuring plan announced in mid-November. He remains as country chairman. The memo reveals that Shell released an unspecified but “significant number of expatriate” workers last year as part of the restructuring.
But for many staff, the biggest problem is the government’s failure to meet its funding obligations for the SPDC. Umaru Yar’Adua, Nigeria’s president, wants to address the shortfall by allowing Nigeria’s five joint ventures with western majors to approach the capital markets and raise funds.
But Jeroen van der Veer, Shell’s chief executive, expressed concerns over how long the new system would take to start working in a meeting with Mr Yar’Adua on the sidelines of the Davos summit last week, according to a Nigerian government official.
Mr Yar’Adua’s plan to renegotiate contracts covering growing offshore production to reflect surging oil prices is also creating uncertainty over revenues from Shell’s Bonga field, one of its most lucrative Nigerian assets. While Bonga is free of the funding headaches and violence plaguing the SPDC, Mr Omiyi warned in his note that offshore operations also needed to cut costs.
Shell on Wednesday declined to comment on the memo, which also says job cuts will be inevitable. Mr Omiyi said in the note he believed the “One Shell” restructuring programme, due to be implemented by April 1, would turn the company around.
But interest shown by China National Offshore Oil Corporation and African Petroleum, a Nigerian company, in buying two oil blocks Shell offered for sale last year perhaps vindicates Mr Omiyi’s e-mail: “Our competitors are making use of any space that we leave.”
Shell reports record profits of $27.6bn
By Dino Mahtani
Published: January 31 2008 08:18 I Last updated: January 31 2008 08:18
Royal Dutch Shell on Thursday reported full-year current cost of supply earnings of $27.6bn (�14bn), a record for a European company, despite lower oil and gas production and weaker refining margins.
Higher oil prices and one-off items helped lift profits by 9 per cent from the previous year and offset lower production figures at Europe’s biggest oil company.
For the year oil, and gas production fell to 3.315m barrels a day of oil equivalent, down 4.5 per cent compared with 2006.
Fourth-quarter earnings on a current cost of supply basis were $6.7bn compared with $6bn a year ago, with fourth quarter production figures falling by 5.7 per cent to 3.436m boe/d in the same quarter last year.
“Overall these are satisfactory results,” said Jeroen van der Veer, chief executive, adding that the fourth quarter suffered from “weak refining margins”.
Exploration and production segment earnings rose to $4.9bn from $3.5bn a year ago, reflecting the impact of higher oil and gas prices on revenues.
But Shell said its fourth-quarter and full-year exploration and production results were held back by higher taxes, royalty charges and higher costs. In addition, earnings were hit by lower profits from the Sakhalin-2 project, its Russian joint venture with Gazprom, as a consequence of its partial divestment in the second quarter, as well as a fire at its 155,000 b/d Athabasca oil sands mine in Canada.
The oil products segment’s current cost of supply fell to $876m in the quarter, from $1.47bn a year ago, weighed down by lower refining margins and higher operating costs. Margins were hit by outages at refinery units, in particular the 458,000 b/d capacity Bukom refinery in Singapore.
Full-year results were also bolstered by “corporate” income, which books earnings from higher insurance underwriting income, improved interest income and favourable foreign exchange movements. Shell’s full year corporate earnings were $1.387bn against $294m in 2006.
Excluding a net gain to non-operating items of $963m, fourth-quarter current cost of supply net income was $5.74bn. This compares with an average forecast of $6.1bn in a Reuters poll of nine analysts.
Most analysts still rate Shell a “buy”, despite concerns over its falling output. The company has been battered by militant attacks in Nigeria, which have shut down 189,000 b/d of the company’s output there. Shell’s stake in Sakhalin-2 was also halved to 27.5 per cent last year, after Russia’s state-run Gazprom completed its purchase of a majority stake in the project.
The company also surprised analysts by not publishing a reserves update until it prints its annual report. “We regard this as regrettable,” said analysts at Dresdner Kleinwort.
Shell shares edged 0.5 per cent higher to �17.52.