Investing In The Chaos Of Nigerian Oil

Written by Bruce Vanderveen

Nigeria’s troubles are once again in the news. Oil theft (ongoing) and flooding (temporary) have driven the country’s oil and gas production down over 20%. As Africa’s largest producer and OPEC’s 2nd largest oil exporter, Nigeria has strategic importance. It is one of the few countries not in the Middle East which has a large and readily available source of oil.

Royal Dutch Shell

Shell is, and has long been, the dominant oil company in Nigeria. In 1999 Shell produced more than 90% of the country’s oil. Since Nigeria derives some 95% of its foreign exchange from oil, Shell and Nigeria seem inextricably bound together. It’s not, however, a marriage made in heaven.

Nigeria is rich, very rich, in oil and gas and its high quality oil sells at a premium to Brent. The problem? Mix vast oil wealth, 389 ethnic groups, a population which is half Christian, half Muslim and you have all the ingredients for disaster. Not surprisingly, the country is beset with ethnic strife, crime, pollution, poverty, violence, and corruption. Since the U.S. is the largest importer of Nigerian crude, it too is entangled – to a degree – in the mess.

It’s sad that in a country so rich in oil and natural gas 1/2 the population goes without electricity due to lack of infrastructure. Much of the gas is simply flared off.

It should be noted that Exxon-Mobil (XOM), Chevron (CVX), Statoil (STO), Petrobas (PBR), Total (TOT), and Eni (E) have all recently increased their presence in Nigeria – mostly offshore. Chevron, for example, has a 68% interest in Nigeria’s newest deep water oil field, the Agbami.

The Niger River Delta: Lots Of Oil, Lots Of Trouble

Nigeria’s onshore Niger River Delta and adjacent offshore areas hold most of its considerable reserves of oil and gas. A single offshore Nigerian well can produce an amazing 10,000 barrels a day of oil. Compare that to Texas’ Permian basin where 150,000 wells produce an average of 6-7 barrels of oil a day.

Problems for Shell in the delta run deep and span decades. They include ethnic protests, bribery charges, lawsuits, corruption, and rampant pollution. Especially problematic is oil theft. Oil theft is so entrenched an estimated 20% (150,000 barrels a day) of all Nigerian production is stolen. The Economist calls Nigeria is “The world capital of oil theft.” Well organized gangs steal the stuff wherever they can, often causing spills, fire, and at times death. They then spirit it off to clandestine refineries for sale on the black market. Huffington Post has a summary of Shell’s current and past problems in Nigeria.

One might think Shell would find refuge from its Nigerian problems offshore – where the risks of sabotage and oil theft are lower. No such luck. On December 20, 2011 Shell Nigeria Exploration and Production Company (SNEPCO) had a 40,000 barrel oil spill and now faces a $5 billion fine. Also, taking a cue from Somalia, pirates mounted over 50 piracy attacks in the Gulf of Guinea in 2011.

Shell, of course, is much more than Nigeria, but since Nigeria supplies the lion’s share of Shell’s oil a withdrawal would severely impact the company’s reserves and profits.

Is Mart Resource A Viable Investment Option?

Mart Resources is an investment alternative. The company, so far, seems to have avoided most of Shell’s problems and has been doing well lately. Mart has an excellent balance sheet with no debt, lots of cash, good cash flow, and an excellent return on equity. It now is paying an 11% dividend. The company has a dominant position in the newly discovered (2008) Umusadege oil field. The Umusadege, like many of Shell’s fields, is located in the Niger delta.

Mart prides itself on working well with local, indigenous companies. Perhaps it does well because it does not have Shell’s legacy of ill will, perhaps because management is more attuned to local concerns.

Mart, however, may not be immune to Nigeria’s problems. The company is starting the process of building an alternative, second pipeline, partially to circumvent disruptions (reasons unspecified) in the original.

Nigeria’s LNG

Nigeria LNG (NLNG) ships natural gas – 8% to 10% of world production – from Africa’s largest LNG export facility on Bonny Island located just offshore the Niger Delta. NLNG is jointly owned by Nigerian National Petroleum Corporation (49%), Shell (25.6%), Total LNG Nigeria Ltd (15%) and Eni (10.4%) Europe is its largest customer. The first shipment was in 1999. The company has a wholly-owned subsidiary, Bonny Gas Transport, which provides NLNG shipping services.

Disruptions also affect Nigeria’s LNG exports, see here and here. Allegations of bribery surfaced in the awarding of construction contracts when the export facility was built. Nigerian LNG, like the country’s oil exports, is often adversely affected by instability in the Niger Delta.

Oil and Gas Investment Options

So, if you have the chutzpah for it, go ahead and consider investing in Royal Dutch Shell or Mart Resources. Any outbreak of hostilities in the Middle East will have all the world coveting Nigeria’s vast reserves of readily accessible, sweet crude. Shell is the major most involved, while Mart is a more speculative “pure play.”

Maybe the best investment in Nigerian oil is the admittedly speculative Mart Resources. Mart does not have Shell’s “baggage” of ill feelings and I, at least, could find little negative commentary on Mart’s relationship with either the government or ethnic groups in the area in which it operates. Nonetheless, be aware that Mart is dependent on a single field and (for now) a single pipeline. Any disruption of either will quickly drop Mart’s share price.

Considering all Nigeria’s risks, investing in Permian oil may not be such a bad idea after all.

Bruce Vanderveen writes at Seeking Alpha. The Federal Reserve has pegged interest rates to all time lows. This leaves fixed income investors in trouble.with very little income plus principal loss risk when rates eventually rise. Bruce looks at replacements to fixed income which have both safety and income: utilities, MLPs, Business Development Corporations,select energy companies, REITS and others. Bruce has degrees from Calvin College and the University of South Dakota