Last week, Nigerian militants staged attacks on oil facilities, taking an estimated 280,000 barrels per day (bpd) out of production. Yet, the market barely paid attention (it might have had other things on its mind).

On Friday, Royal Dutch Shell (NYSE:RDSA) announced its second force majeure breaking its Bonny Light Crude obligations, and said the slowdown of production in Nigeria would crimp profits. Royal Dutch Shell's share price reaction? Not a whole heck of a lot. The stock traded down during the day, but ended up - gaining roughly the same as the stock market as a whole. Obviously market news as opposed to company news was the bigger influence. So what's going on?

With the recent attacks, Nigeria is now producing around a million barrels less of the light, sweet stuff per day than it did in 2006. In 2007, oil from Nigeria accounted for 8.4% of U.S. imports - only three percentage points behind oil giant Saudi Arabia. Had this happened in a slow news cycle, Nigeria would be on every front page. But despite the relatively low media profile, if you hold oil stocks, especially Royal Dutch Shell, you might want to pay attention.

How important is the Niger Delta to Shell? It can be hard for individual investors to tell. Companies rarely, if ever, break down their statistics by country for their annual report, so it is hard to find data on exactly how much revenue comes from a single country. We do know that in 2007, 25% of Shell's revenue came from Africa, the Middle East, CIS [Commonwealth of Independent States] and Asia Pacific regions. According to the Wall Street Journal, investment bank Oppenheimer & Co. puts Nigeria responsible for about 4% of Shell's 2007 profit.

Nigeria is a tough, costly place to do business. A new government was installed last year, but President Umaru Yar'Adua may not be in the best of health, which makes his presence less than a stabilizing force. Agreements that were made with former governments are being renegotiated or reinterpreted to be much more favorable for the government and less favorable to the companies doing the work in country - a trick we've seen Crazy Uncle Hugo play to great effect down in Venezuela.

Of course, the government holds most of the cards - they control operating rights; so if a company wants access to oil, it has to play nice with whoever is in charge.

The second destabilizing factor is poverty. For a country with so much oil, its people are very poor: 90% of its population lives in poverty. Militant groups - mainly the Movement for the Emancipation of the Niger Delta (MEND) - regularly launch attacks on oil fields, pipelines and storage facilities in an attempt to shut down the industry as a kind of protest against this economic imbalance.

All of this makes Nigerian oil tough to bank on, something we've been hearing echoed by industry analysts and company officials.

Dirk Hoozemans of boutique investment manager Robeco was quoted by Bloomberg putting it this way: "Barrels produced in Nigeria aren't the most profitable. The impact on earnings will be relatively small." Onshore wells and infrastructure are expensive to protect and maintain. Offshore wells, once thought to be beyond MEND's reach, may hold the promise for greatest increased production, but after the attack in June, security has become a larger concern, and that means more money spent protecting the platforms. In the same article, an e-mail from Shell spokesperson Rainer Winzenried was quoted saying the effect of the raids "will ultimately add up to increased equipment downtime, repair and remediation cost and deferred earnings," on a local unit level. But no specifics where given for either how much production was impacted or any estimates of dollar loss after what MEND claimed was a week of successful attacks. The Nigerian government estimated that Shell had lost around 100,000 bpd of production. Shell itself had confirmed only two of the six attacks.

 Prev12Next