Why Nigeria Will Rock Oil Markets Again

Just about anything will scare oil traders these days. So it's not surprising that fighting between the Nigerian military and a rebel militia group in the Niger Delta, Nigeria's key oil-producing region, helped push prices over $50 per barrel in late September. Then, on Sept. 29, the rebels announced a temporary cease-fire with the government of President Olusegun Obasanjo, and the upward pressure on oil briefly eased. End of story? Hardly. Other threats to the oil supply in Nigeria are bound to occur, given the fractious state of regional politics in that huge African country. What's more, Nigeria, Angola, and other West African nations are becoming increasingly important producing areas for the major oil companies. In 2003, for instance, output from Royal Dutch/Shell's joint venture in Nigeria accounted for about 10% of its world output. Paris-based Total (TOT ) is a big player, too. All told, proven reserves in West Africa come to 47 billion barrels. And the companies are investing heavily in liquefied natural gas facilities in the area.

Slippery Terrain

The U.S. as well is taking a greater interest in Nigeria, and providing the government with military training. The Bush Administration sees Nigeria's oil as a promising alternative to Mideast crude. But given the turbulence in the Niger Delta, greater reliance on Nigerian oil poses its own set of risks. The Delta people, who comprise many ethnic groups and number 10 million to 15 million, have long blamed Big Oil and the government for turning their riverine home into a wasteland and for not sharing enough revenue to compensate. "They have done the least well out of so-called economic development," says Richard Jeffries, a lecturer on African politics at London's School of Oriental & African Studies. In the Delta, however, the line between criminality and politics is muddy: Criminal gangs try to extort money from the oil companies and steal some 9 million barrels of oil a year, say industry sources.

"The Potential to Get Worse"

The ferocity of the recent strife has been alarming. Hundreds of people have been killed since the military cracked down on the Niger Delta People's Volunteer Force. The militia, which is well organized, wants self-determination for the region and control over the local oil industry. Recently the militia leader, Mujahid Dokubu-Asari, warned expatriate workers to leave the area for their own safety: He repeated his threat even after agreeing to the cease-fire. Shell evacuated more than 200 nonessential employees and shut down about 28,000 bbl. per day of production at one installation.

Despite the cease-fire, the larger question of stability remains. Earlier this year a consultants' report commissioned by Shell raised the question of whether the violence would one day drive it out of the area. Shell acknowledges that the conflict has "the potential to get worse" and says it is trying to ease tensions. But a spokesman says it remains committed to Nigeria.

What's the worst-case scenario? Roger Diwan, an analyst at PFC Energy in Washington, thinks that if serious fighting erupts again the rebels might be able to disrupt 300,000 to 400,000 bbl. per day of Nigeria's 2.3 million bbl. production. A more likely outcome would be chronic unrest that sends prices skyward at critical moments. With supplies as tight as they are, that's a troubling scenario as well.

By Stanley Reed in London

Edited by Chris Power

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