FINANCIAL TIMES: Big potential profits outweigh high risks: “The reserves problem is just one of a host of issues facing Shell in Nigeria as it tries to restore its stock market reputation. (ShellNews.net) 19 Jan 05

By Michael Peel

Published: January 19 2005

A year on from Royal Dutch/Shell's 1.5bn barrels downgrade of its proved Nigerian oil reserves, the company's top exploration and production official in Africa makes another surprising disclosure: Shell has reported to the Nigerian government that reserves in 2004 showed "modest growth despite everything that has been going on".

The apparent discrepancy reflects the more generous standard on reserves booking set by the Nigerian authorities compared with the US Securities and Exchange Commission, says Chris Finlayson, Shell's chief executive officer for exploration and production in Africa.

"The challenge for us now is very clearly to get as much as possible of those non-SEC proved reserves back on to our [global] books," he says. "That will obviously be a key feature of our programme going forwards."

The reserves problem is just one of a host of issues facing Shell in Nigeria as it tries to restore its stock market reputation.

The company is having to deal with production disruptions, a controversial programme of job cuts and an internally commissioned report that said social unrest in the oil-rich Niger Delta could force the company to pull out within five years or break its business principles.

The Nigerian oil paradox is that the country - which accounts for the bulk of the 17 per cent of Shell global reserves found in Africa - is one of the world's most difficult operating environments but offers some of its most easily extractable and valuable oil. The chemical lightness of Nigeria's oil makes it easier to take out of the ground and refine than more viscous crudes, allowing it to trade at a premium on world markets.

Mr Finlayson insists the Nigerian reserves debooking - which accounted for about a third of the company's 4.47bn barrels worldwide cut - reflected delays to planned investments in production "rather than a fundamental change in the number of molecules in the ground".

Mr Finlayson offers no comment on whether further downgrades should be expected, saying only that he is "extremely confident" about the quality of a comprehensive reserves review that has just been completed.

Shell achieved its highest production in Nigeria for 20 years last year and hopes to increase its current "good day" output of 1.05m barrels to between 1.3m and 1.4m barrels over the next three years, Mr Finlayson says.

Much of the increase will come from the first of the country's long-awaited deepwater projects, including the 225,000 barrels per day Bonga field, where the start of production has twice been put back amid cost overruns and delays in fitting out facilities. Mr Finlayson admits Shell "overpromised" on Bonga but insists the field will be ready according to the revised schedule.

Onshore projects, including attempts to harness more of Nigeria's huge natural gas reserves, will remain "at the mercy to some extent" of government funding allocations, Mr Finlayson admits.

The oil industry has long complained of underinvestment in the joint ventures that are operated by multinationals but majority-owned by the government: the government's allocation for this year is still $300m to $400m short of the $1.65bn (£900m) requested by Shell.

Another longstanding - and deepening - problem in onshore production is the disruptions caused by oil theft, ethnic militias and local people angry at industry pollution and the failure of more than four decades of oil production to bring development.

Stoppages at Shell facilities are frequent, including one in the Kula community that shut down at least 80,000 barrels a day of output for several weeks over the Christmas period.

A Shell-commissioned report written by a group of outside consultants and widely leaked last year described a company that pursued a "quick-fix, reactive and divisive" approach to relations with the communities where it operated.

Unsurprisingly, Mr Finlayson disagrees with the many activists - and at least one Shell insider - who say the company has not taken the report seriously enough and has a huge and largely unaddressed corruption problem in Nigeria.

He admits, however, that the company has sacked an unspecified but "significant" number of people for corruption over the past few years.

For the first time, Shell Nigeria is cutting jobs on a non-voluntary basis, with some - though not all - of the lay-offs reflecting "significant concerns" about employees' attitudes and behaviour.

In the longer term, perhaps the most fundamental unresolved issue is Nigeria's membership of the Opec oil producers cartel and the effect the organisation's quotas will have on the big deep offshore production increases planned by Shell and other companies such as ExxonMobil and ChevronTexaco.

Mr Finlayson says he is optimistic that Shell Nigeria can overcome the many pressures and criticisms facing it and establish itself as one of the company's fastest-growing profit centres.

"We have had uncertainties here every year for the last 50 years," he says. "I don't think that has changed."