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Same-Day Analysis

Shell Calls Force Majeure as Nigeria Shut-In Exceeds 700,000 b/d

Published: 28 July 2006
A ruptured pipeline has forced Shell to call a force majeure as more violence in the Niger Delta leads to a shut-in of over 700,000 b/d.

Global Insight Perspective

Significance

Shell has declared a force majeure on production of its Bonny Light blend of crude oil due to a ruptured pipeline that has forced the company to shut in 180,000 b/d.

Implications

Nigeria's oil sector has experienced a terrible week, with Eni's Ogbainbiri flowstation being seized by a militant group. An extra 240,000 b/d have had to be shut in this week alone, taking the country's total shut-in to over 700,000 b/d.

Outlook

The level of production being shut in is worryingly high, and could easily increase should the organised militant groups sabotage more facilities of oil companies operating in the Niger Delta. As the April 2007 presidential elections draw closer the Delta will witness an increase in violence that could lead to more shut-ins.

Shell has declared a force majeure on production of its Bonny Light blend of crude oil due to a ruptured pipeline, which has forced the company to to shut in 180,000 b/d (see Nigeria: 25 July 2006: Shell Shuts In 180,000 b/d After Oil Spill in Nigeria). A force majeure indemnifies a company from lawsuits for not meeting contractual obligations due to an event that is beyond its control. This particular one will affect all of July and scheduled August cargoes. The pipeline in question is the Sanbartch Krakrama pipeline, a section of the Nemba Creek trunkline that connects to the 390,000-b/d Bonny export terminal.

Shell was forced to call a force majeure earlier this year during an escalation in attacks in January on the company's operations in the region (see Nigeria: 16 January 2006:Shell Suffers Fourth Nigerian Attack in Five Days, Mulls Delta Pullout, Nigeria: 13 January 2005: Shell Declares Force Majeure on Nigerian Forcados Crude; Hostage Drama Continues and Nigeria: 12 January 2005: Shell Shuts In Offshore Nigerian Field After Workers Kidnapped).

Three months ago Italian company, Eni was forced to declare a force majeure on its Brass Creek exports in Nigeria, following sabotage to the company's 65,000-75,000-b/d Tebidaba-Brass trunkline (see Nigeria: 24 March 2006: Force Majeure Called by Eni on 200,000-b/d Nigeria Production and Nigeria: 20 March 2006: Eni Strike in Nigeria Takes Sabotage Losses to 600,000 b/d and Counting).

Violence in the Delta Continues

Italian company Eni's Ogbainbiri flowstation has shut down operations after it was stormed by an unknown group of militants on the evening of 25 July (see Nigeria: 27 July 2006: Militants Attack Eni's Ogbainbiri Flow Station in Nigeria). At the time of the raid about 40 employees of Nigerian Agip Oil Company (NAOC) were at work. It is thought that they are now being held there.

It is possible that the incident occurred due to Eni's alleged refusal to sign a new memorandum of understanding (MoU) with the Ogbainbiri community following the expiration of the current agreement, but Upstream reports that Eni could have been targeted due to its failure to clean up an oil spill in the area some time ago.

This is just the latest incident in which employees of companies operating in the oil industry in Nigeria have been taken hostage. In the past couple of months, there has been an increase in the kidnapping of foreign oil workers; so far this year 32 people have been taken hostage from facilities in the Niger Delta, all of whom have been released safely. This militant strategy has been one of the factors behind the deteriorating security situation in the Delta that has seen IOCs refusing to allow their employees access to Delta-based facilities (see Nigeria: 24 April 2006: Companies Still Wary of Operating in Niger Delta, Nigeria: 26 April 2006: Confidence in Niger Delta Security Plummets as ExxonMobil Asks Staff to Stay Away, Nigeria: 12 January 2006: Shell Shuts In Offshore Nigerian Field After Workers Kidnapped and Nigeria: 2 March 2006: Some Hostages Set Free in Nigeria; More Oil Sector Attacks Threatened). However, this strategy has proved so successful that hostage-taking has been adopted as a tactic by others, and was most recently used by a village community to voice their displeasure at their current situation (see Nigeria: 26 June 2006: Two Philippine Oil Workers Released by Kidnappers in Niger Delta).

The 700,000-b/d Shut-in

Following the ruptured Sanbartch Krakrama pipeline, Shell has shut in 180,000 b/d, and the affected pipeline is also forcing Chevron to shut in 30,000 b/d (see Nigeria: 26 July 2006: Shell Begins Repairs on Damaged Pipeline in Nigeria). Shell is also known to be shutting in production of 477,000 b/d from Forcados and EA fields since February. After Eni's Ogbainbiri flowstation was seized by militants the company released a statement saying the attack led to "a significant decrease in the amount of oil treated in the plant". If Eni has to shut in the full 35,000 b/d at the flowstation, then Global Insight estimates that the current total figure affected by shut-ins in the country is 715,000 b/d.

Outlook and Implications

It has been a miserable week for the oil companies operating in the Nigerian oil sector—one that has led to over a third of the country's production capacity being shut in. It would appear that another oil company working in the area caused the damage by accident to the Sanbartch Krakrama pipeline. Niger Delta militant groups such as the Movement for the Emancipation for the Niger Delta (MEND) have been quiet lately, which suggests that when the organised militant groups are ready to strike again at oil-company facilities the shut-ins could increase substantially.

Shell chief executive Jeroen van der Veer stated yesterday that Shell has hopes of allowing staff to return to the Delta in the second half of the year. If this could happen then production that has been shut in since February could be restarted. However, as the April 2007 presidential election draws closer, the violence in the Delta looks set to increase. Earlier this year van der Veer admitted that the company will need a new strategy to deal with the deteriorating security situation (see Nigeria: 16 May 2006: Shell to Consider New Strategy to Combat Deteriorating Security Situation in Nigeria).

The election in 2007 is likely to see further disruption to oil production as the competition to claim the presidency, and the petrodollars that accompany it, intensifies. The Niger Delta is awash with guns and various militant groups formed by unemployed youths, and the activities of these armed groups will be crucial in deciding the election result. If the oil companies operating in the Delta believe the levels of violence to be intolerable then production could shift entirely offshore. However, even offshore facilities have not proved impenetrable to militant activity: last month a group of youths arrived at an offshore rig by speedboat and took hostage a group of eight foreign oil workers—an American, six Britons and a Canadian—who were released after three days (see Nigeria 5 June 2006: Eight Foreign Oil Workers Released in Nigeria after Weekend Kidnapping).

President Olusegun Obasanjo's creation of the Presidential Committee on Socio-Economic Development of the Niger Delta has gone a little way towards dampening the crisis in the Delta (see Nigeria: 19 April 2006: Niger Delta Committee Convenes; Employment in the Region Promised). President Obasanjo promised Delta residents 20,000 new jobs as well as the construction of a US$1.8-billion highway and improvements to the Delta environment. This month at the group's second meeting, he was able to report that hundreds of Delta indigenes had been successfully recruited to the Army, Navy and Air Force, as well as the police force.

However, as the April 2007 elections get closer Obasanjo's influence will decline, and many more will begin to see him as the lame-duck figure that his critics already paint him as; a man who is unable to achieve the somewhat impossible mission of controlling the violence and the militants in Nigeria's oil-producing region.

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