Oil Theft in Nigeria Continues to Plague This Company

What Royal Dutch Shell plans to do about the ongoing oil theft and attacks on oil infrastructure that continue to plague its operations in Nigeria.

Mar 28, 2014 at 5:00PM

Despite Nigeria's vast oil riches, the sector has been plagued by persistent oil theft and vandalism over the past several years. According to some estimates, this so-called "bunkering" of oil robs Nigeria of an estimated $6 billion in annual revenue.

For a nation that relies on the oil industry for roughly 80% of its government revenue, continued theft and disruptions to crude oil pipeline networks are an overwhelming challenge. They're also a huge problem for the international energy companies that operate in the country, particularly Royal Dutch Shell (NYSE:RDS-A).


Photo Credit: Wikimedia Commons.

Shell's woes in Nigeria
Shell's Nigerian operations have consistently weighed down its financial performance and have been one of the main reasons behind its recent spate of earnings misses. The Hague, Netherlands-based energy major estimates that oil theft and vandalism at its oil and liquid natural gas operations in Nigeria last year resulted in lost output of as much as 100,000 barrels of oil per day, in total costing the company an estimated $1 billion.

Most recently, Shell was forced to shut down crude oil exports from the 400,000 barrel-per-day Forcados terminal in the Western Niger Delta, one of Nigeria's main export terminals, after it discovered a leak in one of the subsea crude export pipelines supplying the facility on March 4. As the company repairs the line, it has declared a "force majeure" on its Nigerian oil exports, which relinquishes the company from contractual obligations due to unexpected developments beyond its control.

The incident is the latest in a spate of episodes that have forced the company to temporarily suspend production. For instance, late last month, Shell shut down its 150,000 barrel-per-day Nembe Creek pipeline due to attacks that had resulted in the loss of more than 60,000 barrels of oil per day, according to Mutiu Sunmonu, head of Shell's Nigeria unit.

How Shell plans to address the threat
With these incidents suggesting that oil theft and attacks on company infrastructure will remain a problem for the foreseeable future, Shell is more eager than ever to turn things around. As part of a strategic review of its Nigerian operations, it has put up for sale its stake in four oil blocks that it owns jointly with French oil major Total (NYSE:TOT) and Italy's Eni (NYSE:E) in the sabotage-prone Niger Delta region. It also hopes to find a buyer for its troubled Nembe Creek pipeline.

Several of Shell's peers are also scaling back their Nigerian operations due to security concerns. Total, for instance, sold a fifth of its stake in an offshore Nigerian oil field to state-owned China Petrochemical (NYSE:SHI)for roughly $2.5 billion in November 2012, while Chevron (NYSE:CVX) last year announced the sale of five oil blocks in Nigeria's shallow waters. ConocoPhillips (NYSE:COP), meanwhile, sold its entire Nigeria unit to Toronto-listed Oando Energy Resources for $1.8 billion in cash in December 2012.

Commodity traders including Glencore and Mercuria are among the organizations to express interest in purchasing Shell's Nigerian oil assets, including its 30% stake in the four Niger Delta oil blocks and its 60-mile Nembe Creek oil pipeline. A Shell representative said the company has generated interest from more than 100 bidders for the assets, with 20 bidders still in contention.

If the company can attract a fair offer from one of these bidders, it will move closer toward its asset sale target of $15 billion through 2015 -- a strategy that should help it close the gap between its spending and operating cash flow.

A long overdue, yet good move for Shell
Though one could argue that Shell, which has been operating in Nigeria for decades, should have sold its sabotage-prone Niger Delta assets long ago, at least the company is finally taking the necessary steps to address the situation. Its decision is shaped by Shell's new "fix or divest" strategy, which seeks to either improve or unload underperforming businesses.

The move should pan out to be a good one. Not only will it reduce the company's exposure to continuing security concerns in Nigeria, it will generate much-needed cash to meet its $15 billion divestment target. As Shell follows through with its new strategy for dealing with underperforming businesses, the company should gradually improve its returns on capital and cash flow, allowing for stronger dividend growth over the next few years.

OPEC is absolutely terrified of this game-changer
While Shell struggles with security concerns in Nigeria, one energy company continues to mint profits. Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Chevron and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers