NIGERIA - The Shell-Led Group.

By far the biggest oil producing JV in Nigeria and usually accounting for half of the country's output, the Shell-led group has over 90 oil and gas fields in the country. Some of them are very small and idle. NNPC recovers these, together with idle fields held by other foreign firms, and offers them to indigenous companies (indies).

Shell Petroleum Development Co. (SPDC) holds 30% in the JV. Shell D'Arcy was the first major to pioneer Nigeria from 1936 and to put this country on the map of oil producers in 1958. Shell, the operator of the JV, plays many other roles. Most important among these roles are the following:

The CEO of Shell Nigeria, Basil Omiyi, acts as spokesman for all foreign majors involved in the five oil producing JVs and thus his views are taken seriously by Abuja. Addressing an industry conference in Abuja on Aug. 2, Omiyi said the government could either convert the JVs into PSCs on "favourable terms" or sell more of NNPC's equity in the five ventures to attract additional funding. He said the proposed reduction in government equity would not affect the amount of revenue the state earns because oil production would increase, adding: "It's a win-win situation. We would be able to grow the [oil] industry in such a way that joint venture partners are able to make more money". Nigerian Finance Minister Ngozi Okonjo-Iweala said the government would consider the proposal, but added that it required "political will and support". (Currently the government holds an average of 53% equity in the five JVs).

Reducing the government's stake in the five JVs would not reduce revenues because of the current royalty and tax regime, said Omiyi said, who argued that increased funding for the industry was necessary if Nigeria was to reach its target of achieving a reserve level of 40 bn barrels of crude oil and a production capacity of 4.5m b/d. Omiyi said that these targets would imply government investment of more than $6 bn a year, compared with the $4.23 bn Abuja allocated last year. However, Ms Okonjo-Iweala said the sector needed more than just extra cash. It also needed more transparency, she stressed.

Ms Okonjo-Iweala said the government had asked oil firms to pay the $300m they owe it because of high crude prices. She said the request followed a review of the MoU between the government and the companies, which revealed that the firms had failed to pay the correct amount due to the government given the current high oil price. She pointed to a clause in the agreements with the firms that as the price of crude oil rises, the companies are required to pay more to the government. She told reporters on the sidelines of the conference: "It's across the board - all the companies are involved". She said the government was working with the Federal Internal Revenue Service, as well as NNPC to recover the funds.

A spokesman for Shell in London said that all oil revenues above a $30/b for Brent crude oil go to the government but declined to comment further. Oil prices hit record highs on Aug. 1-2, with front-month Brent futures trading above $60/b. But prices began to decline subsequently, although speculators at NYMEX now predict that front-month WTI could go even above $75/b as the hurricane season has begun.

In a statement released last February by Shell, the company made it known that it had spent $2 bn on its Nigerian gas utilisation programmes in 2004 in its ongoing campaign to monetise gas and meet Abuja directives on stopping routine flaring. It said this investment was beginning to show some very positive results as Shell had cut flaring from 891 to 560 MCF/d over the year. Shell said only 3% of the volume of oil spills in 2004 resulted from equipment failure, corrosion or human error.

On Feb. 3 Omiyi said community unrest, crude oil theft, and concerns over funding were major challenges facing the Nigerian petroleum industry. He said investigations had revealed a link between crude oil theft and violence in the Niger Delta, home to most of Nigeria's oil and gas production. "Investigations had found a nexus between crude oil theft and illegal bunkering and much of the violence in the Niger Delta", he told the Nigeria Investment Forum. Omiyi spoke a few weeks after Shell reopened facilities shut down after protesting villagers invaded them, claiming that Shell had failed to meet their demands. Omiyi said NNPC and its partners would need annual investment of $10 bn over the next five years to attain the country's target of 40 bn barrels in oil reserves by 2010. He said budgetary constraints then faced by NNPC and its partners would make such investment "a major challenge". Partners contribute to the JV projects in proportion to their equity holdings. Omiyi noted that, although Abuja's ability to meet its obligations had improved, "a lot still needs to be done to ensure that this can be sustained no matter what government is in place".

Omiyi and his predecessor Ronald van den Berg have been warning Obasanjo's government since late May 1999 that failure to meet cash-calls by NNPC would result in a drastic reduction of work and staff, with the JV's capacity to fall as a result (see background in Vol. 61, OMT & Gas Market Trends No. 6).

In January 2002, Shell and its JV partners announced a three-year plan to invest $7.5 bn in this country's petroleum industry. A big part of this has been going into new phases of the Shell-led Nigeria Liquefied Natural Gas (NLNG) venture, the biggest energy investment in Sub-Saharan Africa (see Gas Market Trends No. 7), and Shell's is to raise its Nigerian oil production capacity to 1.6m b/d by 2010. Shell's share of the new investment was $2.4 bn.

On behalf of the group, Shell supplies almost 90% of all gas to industry and the power sector in Nigeria. A Shell priority is a set of projects to collect and utilise associated gas and end flaring in its areas in 2009.

Shell has an expensive multi-faceted plan to resolve numerous communal problems in the oil-rich areas, including projects to improve the environment in the Niger Delta. It has faced complex problems and violence in Nigeria since it came to this country.

NNPC holds 55% in the JV. This was reduced from 60% when the cash-starved NNPC was compelled to cede 5% to Elf (which now is part of Total). In return, the French firm increased its share in funding the group's expensive development plan.

Total holds 10% in the JV. Total (Elf) leads another producing JV in Nigeria (see Gas Market Trends) and its local unit has good knowledge of the country's geology, Elf having found major oil reserves off Angola. Total is also a partner in the LNG venture.

Agip holds 5% in the JV and is a partner in the LNG venture. It leads a JV with NNPC producing light/sweet crudes from a number of fields. Agip also produces 50,000 b/d of oil elsewhere in Nigeria under a PSC in partnership with NPDC.

Shell's production system consists of two regional units, with each led by a high-powered executive: the Eastern Division has the capacity to produce more than 520,000 b/d of the Bonny group of crude oils; and the Western Division which can produce another 500,000 b/d of the Forcados group. Most fields in the two units are onshore, with some extending to the shallow-water off the Niger Delta.

The Eastern Division has seven groups of fields yielding light/sweet crudes blended into Bonny Light and heavier ones blended into Bonny Medium. They include Nembe and its satellites (250,000 b/d cap); Cawthorn Channel and satellites (100,000 b/d); Ekulama and satellites; Imo River; Kolo Creek; Adibawa; and Etelebou. Bonny Light and Medium are exported from the Bonny island terminal.

The Western Division has six groups producing crude oils for the Forcados blend exported from the Forcados terminal, including Estuary South Bank and satellites (100,000 b/d); Jones Creek; Otumara; Olomoro; Sapele; and Egwa.

Bonny Light, 37.6 deg. API with 0.13% sulphur, is a gasoline-rich blend also known as Nigerian Light. Bonny Medium (Nigerian Medium) is rich in gasoil and gasoline: 25.7 deg. API with 0.24% S. Forcados, 30.5 deg. API with 0.2% S, is particularly rich in gasoil. The three blends are popular among European, US and Asian oil refiners.

A big number of discoveries made by Shell since 1985, after it introduced the 3-D seismic system in Nigeria, were developed quickly to replace small fields found in the late 1950s and early 1960s. Some of the large fields have since kept producing. A number produced at higher rates because Shell found Fms beneath them.

New fields in the Forcados group are Tunu which went on stream at end-1995 and Kanbo and Ogbotobo which went on stream in 1998. Discoveries made since 1990 have added over 1.2 bn barrels to the JV's proven oil reserves and there have been several gas finds. They include Gbaran-4, found in 1990, which was the biggest discovery in Nigeria for ten years, with 400m barrels of oil and 500 BCF of gas. Since it introduced the 3-D system, Shell has been revising estimates for existing oil and gas reserves. A re-evaluation of seismic data and well results from big fields is a constant process, as in the case of other major operators.

Shell has given contracts for 3D and 4D seismic acquisition work in the Niger Delta, to be done from early 2004 to late 2006 in its eastern and western units.

Shell is to spend $9 bn in Nigeria through to 2010 on its JV, PSC ventures, the LNG export system and gas utilisation projects to end flaring. Shell has revamped both the Bonny and Forcados terminals. It has modernised its network of pipelines.

Shell's offshore EA field in the Gulf of Guinea went on stream in late 2002 at its floating production storage and offloading (FPSO) vessel, 'The Sea Eagle' - then described as the third largest in the world. During violence in April 2003, Shell took the unusual step of advertising in local newspapers to highlight threats to attack this vessel by "criminal elements", who it said were planning to set fire to 'The Sea Eagle'. EA, on Block OML 79, is in shallow water and was first found in 1965. With reserves then estimated of 350m barrels, EA produces 140,000 b/d of oil and 100 MCF/d of gas. EA crude is light - 38 deg. API - with less than 0.1% sulphur contents. The gas, pumped through an offshore system, is converted to LNG at the Shell-operated LNG plant on Bonny Island. The partners in EA are Shell (30%), NNPC (60%), and Total (10%).

Bonga, Shell's massive deep-water field on Block OPL 212, is to be on stream next month after almost two years of delay. It will produce 150,000 b/d. In 2006 this should reach 250,000 of oil and 150 MCF/d of gas. Bonga is estimated to contain 700m barrels of oil. Shell is the operator (55%) in this $3.5 bn venture, partnered with ExxonMobil (20%), Agip (12.5%), and Total (12.5%). The field will be serviced by a 2m-barrel FPSO vessel. Because of delays, Shell has had to charter a housing vessel, Safe Caledonia, for another month from Aug. 5. This is providing hook-up and construction support to the FPSO vessel. Prosafe, a Norwegian service provider, said in early May this was the second of four possible 30-day extensions available to Shell under its existing contract and pointed out that the remaining options must be declared three months in advance (see background in Vol. 61, Gas Market Trends No. 6).

Bonga South West, found in May 2001 and containing about 1 bn barrels of recoverable oil, should be on stream by 2008 at 120,000 b/d and a peak of 150,000 b/d. It will have its FPSO vessel.Part of Bonga South West extends to Chevron's Aparo oil prospect on OPL 213, where the US major in August 2002 completed drilling of the Aparo-2 appraisal to a depth of 3,527 metres beneath 1,245 metres of water, 5.5 km north of the Aparo-1 discovery well which was drilled in 2001. Chevron said it had encountered a "substantial" amount of net oil sand and the well had been suspended following a "successful drill stem test", confirming the commercial viability of OPL 213. The Managing Director of Chevron's mid-Africa strategic business unit, Jay Pryor, was in August 2002 quoted as saying: "We will be working jointly with the OML 118 operator [Shell] over the next few months to ascertain the optimum development of these resources" - suggesting a joint development. But a Shell spokesman was quoted as responding that, while a "part of the [Bonga South West] accumulation may extend into OPL 213", it would be "premature to comment on whether this had any implications for development". So far, no new development on this has been reported.

Shell's other main PSC prospects under deep water are the Bolia field in OPL 219, being developed for a 50,000 b/d capacity, and the Doro gas field. Shell's partners in these are ExxonMobil, Agip and Total. The Bolia-1X discovery well, drilled under 1,100 metres of water 110 km offshore, in January 2002 flowed at 6,000 b/d. Doro, under 1,000-1,200 metres of water some 120 km offshore, was found in 1999. Later it was found that Doro extended to Statoil's OPL 218, where the Norwegian company had found the Nnwa gas field in 1999. The two are being developed jointly by Shell and Statoil. Statoil's partner in OPL 218 is Chevron's affiliate, Texaco Nigeria Outer Shelf Ltd.

Shell is targeting production of 174,000 b/d from dormant wells by 2008, according to its journal, The Shell Bulletin, in August 2004. Shell is producing over 110,000 b/d from more than 100 re-entered wells.

Abuja in early March returned to Shell four of 13 oil blocks it seized from it last year, when it accused the major of not making adequate progress on developing the areas. A total of 24 blocks were rescinded from Shell and Chevron in 2004. An official at the DPR, regulator of the industry, told Dow Jones on March 8 had made a presentation to the department on its development efforts. The companies had protested the government's action, arguing they were already undertaking to develop the affected blocks. Some of the blocks taken back were offered in this year's licencing round.

In January 2002 a $540m contract was awarded to Shell by the National Electric Power Authority for two major gas-fired projects at the Afam Power plant near Port Harcourt. Under the contracts - to refurbish, operate and transfer (ROT) the Afam I-IV plant and to lease, operate and transfer (LOT) the Afam V plant - Shell in 2002 took over the assets and began operating the Afam power plant for a period of 15 years. The projects were undertaken in conjunction with Eskom Enterprises of South Africa. Eskom is handling the daily running of the plant and has supervise the construction phase.

Shell Nigeria Gas is marketing natural gas in the country. In January 2003 Shell and its state-owned partner, Nigerian Gas Co. (NGC), connected 30 industrial firms in the Agbara/Ota areas of Ogun state to their $34m gas transmission and distribution project. Shell's JV in 2004 produced 1.97 BCF/d of gas sold to NGC and flared less than 730 MCF/d, up slightly from its 2003 output. Five gas utilisation projects needed to cut Shell's flaring will not be complete until 2009, a fact it blames on inadequate NNPC funding of the JV and cost overruns.

Abuja would not extend the deadline for an end to gas flaring beyond 2008, according to Remi Oyo, special media assistant to President Olusegun Obasanjo. Oyo said Obasanjo made the remarks on June 28 at a meeting in the Hague with a delegation from Shell. That came about a month after Shell said it would be unable to meet the 2008 deadline, citing shortfalls in government funding. Speaking at the company's annual shareholders meeting in London on June 28, Shell's E&P head Malcolm Brinded said Shell's gas-flaring project in Nigeria will not be ready before 2009 largely due to $4 bn of under-funding from its partner, the Nigerian government.

Previous measures by the government, including imposing fines, failed to get companies to end gas flaring. In June, oil producing communities in the Niger Delta sued the government over continued gas flaring, which they said had adverse effects on their people. Also joined in the suit were NNPC, Nigeria's attorney general, Shell, Total, Agip, Chevron and ExxonMobil.

Nigeria's impoverished Ogoni people on May 31 agreed to re-open talks with Shell about drilling on their land almost 10 years after the execution of minority rights activist Ken Saro-Wiwa. Shell and Saro-Wiwa's pressure group accepted a proposition from Abuja that Father Matthew Kukah, a respected Catholic priest, be appointed as a mediator between the two sides. Shell abandoned its wells and several billion dollars worth of unexploited oil in Ogoniland in 1993 amid protests that it was not putting enough development back into local farming and fishing communities. Two years later, Nigeria's then military dictatorship executed Saro-Wiwa and eight fellow members of his Movement for the Survival of the Ogoni People (MOSOP) after a show trial. Many in the area held Shell partly responsible for their deaths.

In a March 21 speech, Chima Ibeneche, the head of Shell Nigeria Exploration and Production Co., which operates Shell's deep-water projects, warned that proposed tax increases could cripple costly offshore ventures and hinder future investment. He added: "Not only would the passage of such a bill imply the government is reneging on existing agreements and eroding trust, but it would also render new [deep-water] projects unsustainable and liable to termination". A National Assembly committee had proposed raising the petroleum profit tax for offshore projects to 85% from 50%, a move IOCs say could make their investments unprofitable. ExxonMobil, Chevron, Total and Agip all have deep-water E&P operations in Nigeria.