Over the past few years, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has been plagued by a couple of major operational debacles. The first is its beleaguered oil campaign in Alaska, which the company recently decided to put on pause, and the second is its experience in Nigeria, where its operations have been plagued by oil theft, vandalism, and attacks on oil infrastructure that have cost the company some 60,000 barrels a day in lost production.
Well, it looks like Shell has carefully reviewed shareholder concerns and is determined to make its Nigeria operations a success story, rather than a reputational eyesore. Let’s take a closer look.
Shell plans to review Nigeria licenses
Last week, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) announced that it is contemplating a further reduction of its oil production in the eastern Niger Delta, the region plagued by decades of spills and oil thefts.
Royal Dutch Shell plc (ADR) (NYSE:RDS.A) said the review of its remaining licenses was part of a broader strategy to combat the scourge of oil theft and pipeline sabotage in the region and to concentrate its “operating footprint into a small, more contiguous area”. It may also be partially prompted by Nigeria’s growing assertiveness in taking ownership of its vast hydrocarbon resources.
The nation’s government has said it plans to boost ownership of domestic assets by its own state oil company or by domestic firms, a move that has encouraged foreign oil companies to sell some of their assets. Chevron Corporation (NYSE:CVX), for instance, announced last week that it would sell five oil blocks in Nigeria’s shallow waters.
At the same time, however, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is ramping up investment in two other Nigerian projects: the Trans-Niger Pipeline loop-line (TNPL) and phase two of the Gbaran-Ubie gas project. The two projects, estimated to cost roughly $3.9 billion, are intended to combat the issues of oil theft and vandalism that have plagued Nigeria for decades.
Shell’s existing operations in Nigeria
Currently, a joint venture led by SPDC produces 750,000 barrels of oil equivalent per day on acreage that lies across 28 licenses near the Niger Delta. Royal Dutch Shell plc (ADR) (NYSE:RDS.A) maintains a 30% interest in the venture, while state-controlled Nigerian National Petroleum Corporation controls 55%, TOTAL S.A. (ADR) (NYSE:TOT) holds 10%, and Italy’s Eni owns the remaining 5% interest.
The four joint-venture partners plan to spend some $1.5 billion to combat crude oil theft and vandalism on the Trans Niger Pipeline, as well as an additional $2.4 billion to fund five more gas pipeline projects. The oil theft and vandalism problem is so acute in the region that some companies have either scaled back or retreated entirely from their operations in the country.
For instance, in November, French oil major TOTAL S.A. (ADR) (NYSE:TOT) agreed to sell a 20% stake in an offshore Nigerian oil field to Chinese oil giant Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), while ConocoPhillips (NYSE:COP) sold its Nigeria unit to Toronto-listed Oando Energy Resources for about $1.79 billion in cash a month later. The Nigerian Petroleum and Natural Gas Senior Staff Association estimates that the country loses roughly $6 billion annually to crude oil theft.
The bottom line
It appears that Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is finally taking aggressive action to combat the oil spills, theft, and sabotage that have characterized its operations in Nigeria for decades. Though Shell has hinted that further asset sales in Nigeria may be forthcoming, its announcement suggests that it hasn’t given up on the region’s potential and may decide to invest further in deepwater licenses and onshore gas projects in the near future.
The article Shell Looks to Change Its Strategy in Nigeria originally appeared on Fool.com and is written by Arjun Sreekumar.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Chevron Corporation (NYSE:CVX) and Total SA. (ADR).
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