Wednesday, September 13, 2006

Reuters: Nigerian Output More Greatly Diminished Than Previously Thought; Questions About Chevron

An important story from Reuters spells out the vast extent of the loss of production suffered by Nigeria as the result of attacks on pipelines, vessels and flow stations owned by Royal Dutch Shell and others, Reuters said Tuesday.

The news deserves some speculation, and I'd like to offer some guesses about it.

The concealed numbers may have already had far-reaching consequences, I think, including a vote in Congress to open more of the Gulf of Mexico to drilling.

While the much lower numbers offered for public consumption appeared to be credible, it is likely that insiders in both the U.S. and Nigerian governments have known the real numbers all along, and taken steps to reduce U.S. exposure to what may be a chronic issue of long duration.

The story may also underlie a recent decision by Chevron to take a wild swing at the potential reserves it recently discovered in the Gulf of Mexico. The company's policy, which ERHC Energy investors learned about rather painfully when the company made a substantial find in Block 1, has been to cautiously state the potential of a strike and to give as little away as possible; it known for playing its cards very close to its vest.

Why then, did Chevron seem to suddenly reverse course, or at least policy, and publicly boost an estimate of the GoM find that ranged wildly across 12 billion barrels in guessing reserves of three to 15 billion barrels?

That very un-Chevron-like move may be setting some investors up for bad news that the company hopes will be overshadowed by the news of the GoM find. Indeed, the stock market's reaction to the find - a $1.76 rise in CVX share price - was not much different than to a $1 rise in the price of oil, while Devon Energy - a partner in the find - got a $7 boost (and had far fewer shares outstanding, too).

Chevron is not the central target of the attacks by militants on industry infrastructure, at least for now. It is better sited for safe production in the Gulf of Guinea than Shell, ExxonMobil and some other competitors, but not all. It seems all along to have a done a far better job of community relations than its competitors. So if the company was fudging on the find for reasons other than to help President George Bush and the Republicans overcome resistance to offshore drilling, what bad news could it be hiding?

If, as Reuters says, the volume of daily lost production is 870,000 barrels, Chevron's share of that has had to add up all through this saga beside those of Shell and others to yield a credible figure. If its figure now turns out to be not credible, how far off were Chevron's public statements about its losses? And what would the SEC do about such concealment to all of the firms that lied?

But I don't expect that this is really the nub of the issue. Chevron hasn't burped out those fantastic numbers of gain share price or new investors. It's my suspicion that a report is circulating around Washington that would shake a lot of assumptions about Nigeria's oil production capacity in the near future.

That would be consistent with CIA director Porter Goss'es dire predictions of a shattered Nigerian federation lying only a year or two ahead. The company may soon come within range of ERHC Energy's political influence, too, as the campaigns for president of Nigeria to replace Olusegun Obasanjo advance and loosen the reins of power while other leaders seek to grab them. That would be disastrous for Chevron, ExxonMobil and Anadarko.

Asd I often have, I urge investors to stay focused on political developments in Nigeria that may presage events ahead. Any development that indicates the placement of Sir Emeka Offor in the political pantheon needs to be studied with special care.

Here is the Reuters story:

VIENNA, Sept 12 (Reuters) - Nigerian officials estimate that Africa's biggest oil producer is losing between 800,000 and 872,000 barrels per day, more than a quarter of its output, because of militant attacks and pipeline leaks.

The figures, provided this week by Minister of State for Petroleum Edmund Daukoru and officials from Nigerian National Petroleum Corporation, are far above previous estimates given by Nigeria and top foreign operator Royal Dutch Shell.

"About 250,000 bpd is shut for operational issues," Aminu Baba-Kusa, head of oil marketing at state oil company NNPC, told Reuters on Tuesday. "Some are technical, at some they have pipeline vandalism, pipeline bursts."

On top of that, about 600,000 bpd of Shell output in Nigeria is offline, he said, speaking on the sidelines of an energy conference in Vienna.

The supply loss in Nigeria, the eighth-largest oil exporter, is one of the main drivers of oil's record run in 2006. Crude is trading around $65 a barrel in New York, down from a record $78.40 in July.

Baba-Kusa was elaborating on comments made by Daukoru on Monday shortly before a meeting of the Organization of the Petroleum Exporting Countries.

Daukoru put the amount of Nigerian oil shut in at 872,000 bpd. A third Nigerian official estimated on Tuesday about 800,000 bpd was offline.
When I say 800,000 barrels per day I mean ball park," NNPC group managing director Funsho Kupolokun said.


While the figures were higher than previous estimates, Shell and other firms that produce Nigeria's oil reported no fresh disruptions to output on Tuesday.

Shell said it was still losing 477,000 bpd in Nigeria. Its Forcados terminal and EA platform have been shut since militant attacks in February, wiping out that amount of Shell-operated output.

Chevron Corp. (CVX.N: Quote, Profile, Research) said it had no Nigerian production shut down except for about 70,000 bpd it had yet to restart since unrest in 2003 hit supplies.

Agip, a unit of Italian energy firm ENI (ENI.MI: Quote, Profile, Research), is losing another 50,000 barrels daily. Exxon Mobil Corp. (XOM.N: Quote, Profile, Research) said it was pumping at normal levels in Nigeria.

Government officials and oil companies working in the West African country often give different estimates of how much production is offline and when it will return.

Daukoru on Monday said output from Forcados and EA will restart within three to six months. Shell has not given a specific timeframe.

"For quite some months, the installations were not used," Shell Chief Executive Jeroen van der Veer said in Vienna asked when the fields will reopen.
"So you have to be testing, checking....Is all the equipment there? Does it work? You can't immediately produce at your old levels."

New offshore fields have partly filled the gap left by shut onshore sites, enabling Nigeria to pump about 2.3 million bpd in August according to Reuters estimates.

But violence in Nigeria's oil-producing delta ahead of April's elections may hinder oil output for months to come, keeping the heat under prices, analysts say.

"Nigeria has been a very important source of upside risk for the market because of the repeated supply disruptions," said Kevin Rosser of consultant Control Risks, whose clients include companies working in Nigeria.

"This is likely to last into the middle of next year."

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