Financial Times: Nigeria hitch caused Shell cuts

By Carola Hoyos, Michael Peel and David White in Lagos

Published: February 2 2004

Royal Dutch/Shell, Europe's second largest listed energy group, was forced to slash up to 1.3bn barrels of its proved reserves in Nigeria because of delays in investments in the natural gas it found.

"Some of those 1.3bn barrels were oil rims associated with gas developments," said a senior Nigerian government oil official. "It is those gas projects that are not yet ready for FID [a final investment decision]. The moment FID is reached on those gas gathering programmes, some of those will come back."

He now expects at least half of the fields to be developed in the next five years. Shell has said it is confident that eventually all the fields will be developed.

Sir Philip Watts, Shell chairman, is due on Thursday to give a full explanation of why the world's third largest listed oil company was forced to cut its proved oil and natural gas reserves by 20 per cent, the largest adjustment having been made in Nigeria and Australia. Investors slashed 8-10 per cent off Shell's share price after the admission and called for Sir Philip's resignation.

Financial Times interviews with oil and government leaders in Nigeria reveal that hesitance to invest in expensive infrastructure to deal with the natural gas that Shell found together with the oil it was seeking, slowed development of certain fields.

Chris Finlayson, chairman and managing director of Shell Petroleum Development Company of Nigeria, would not comment on the reasons for the reclassification, but did acknowledge there had been delays in natural gas investments critical to exploiting Nigeria's oil fields. "The primary constraint is the level of spending the government is willing to put in. To put in an integrated gas and oil development is more expensive than a simple oil development. In essentially a capital-constrained environment, with a limit on the funding going into the industry, clearly [that] does constrain how much you can do," he said.

Nigeria has outlawed non-essential flaring after 2008, halting the environmentally damaging way to get rid of gas found in oil fields. Much of the gas will instead be sent to be liquefied and exported. Shell has so far cut its flaring 60 per cent, in large part by supplying the gas to Nigeria's new Liquefied Natural Gas plant and exporting it to Spain, Italy and France.