Nigerian conflict a warning for Big Oil in Iraq

[October 07, 2008]  BAGHDAD (AP) -- Recurrent violence in oil-rich parts of Nigeria may provide a sobering lesson for oil companies hoping to work in Iraq -- a place that is much more dangerous despite the fact that attacks are at their lowest level in more than four years.

Representatives of 35 international oil companies will meet with Iraqi government officials in London on Monday to discuss the bidding process for eight enormous oil and gas fields. If the contracts are approved, they could lead to the biggest foreign stake in Iraq since the industry was nationalized more than 30 years ago.

About 4,000 miles from Baghdad, oil companies are doing damage control in Nigeria -- arguably the most dangerous place in the world where firms like Royal Dutch Shell PLC and Exxon Mobil Corp. currently operate.

Three years of attacks in the country's Niger Delta have cut oil production from 2.5 million barrels per day to around 1.5 million -- demoting Nigeria to Africa's second largest oil producer behind Angola.

The violence in Nigeria pales next to Iraq, even now.

"The differential is enormous in terms of the physical threat of being killed by a militant," said Ian Pilcher, a private security consultant who has advised oil companies in both Nigeria and Iraq. "Nigerian hostages are rarely harmed, if at all, and I can't really see West Africans ever setting up roadside bombs."

The risk of death while pursuing oil in Iraq, however, comes with the potential for rich rewards.

Current estimates put Iraq's proven oil reserves at 115 billion barrels -- more than three times the 36 billion barrels held by Nigeria.

Experts believe Iraq's proven reserves could rise by an additional 70 billion to 80 billion barrels once security conditions stabilize enough to allow renewed exploration. That would give Iraq the world's second-largest proven oil reserves after Saudi Arabia.

"Even if the security situation is a problem, the potential is so great that if you are a major oil company, you have to have an Iraq strategy in your portfolio," said Leila Benali, director of the Middle East and Africa department at Cambridge Energy Research Associates.

And oil companies are maneuvering to gain access.

The Iraqi government recently signed a $3 billion deal with the state-owned China National Petroleum Corp. to develop the Ahdab oil field in southern Iraq.

In September, Shell signed a deal to establish a joint venture with the state-run Iraqi South Oil Co. to tap natural gas in southern Iraq and is expected to spend $3 billion to $4 billion over five years on the project.

That deal was announced three days after Nigerian militants attacked a pipeline in the Niger Delta -- part of a stepped-up "oil war" the fighters waged for a week before agreeing to a fragile cease-fire.

Militants in the Niger Delta have repeatedly bombed oil pipelines and kidnapped hundreds of oil workers in an attempt to force the central government to allocate more oil revenue to the southern states where the petroleum is pumped.

They have also set up a vast smuggling network to sell hundreds of millions of dollars of oil stolen from pipelines -- often with help from corrupt security officials and local politicians.

That same scenario in Iraq is not farfetched.

"Oil companies can negotiate with the central government, but if the local government and local people are not happy, the oil companies are not going to be able to do what they want to do," said Amy Jaffe, an energy expert at Rice University's James A. Baker III Institute for Public Policy.

The situation may be even more combustible in Iraq because most of the country's oil is located in the predominantly Kurdish north and Shiite south -- leaving Sunnis at the mercy of the central government to distribute the nation's resource wealth.

Iraqi lawmakers have been deadlocked over a national oil law to do just that.

"When you have a country with private militias and you have resource wealth, it is much harder to manage," said Jaffe. "You are always going to have someone who is disgruntled, and they are armed."

Oil companies must also be careful when trying to quell violence. Human rights activists have accused oil companies in Nigeria of attempting to buy off the militants, only to exacerbate the violence as rival groups fight for the payments that allow them to purchase more weapons.

"If you hope the violence is going to go away or try to buy off the militants or are seen as hopping further into bed with the government ... you are going to make it a lot worse," said Michael Watts, a Nigeria expert at the University of California-Berkeley.

Watts said the oil companies would be better served to begin with a proactive community development program -- something the firms failed to do in Nigeria until it was too late.

But he and others acknowledge that even these programs have risks. Some perceive that the oil company programs in Nigeria benefit local chiefs and people with connections, which breeds further resentment. Companies also risk taking on responsibilities that rightfully belong to local governments, ensnaring international corporations in foreign affairs.

The potential for an effective central government is one area where some see a positive difference between Iraq and Nigeria.

"In Iraq, you still have the seeds of a potentially strong central government if things go well, which you don't really have in Nigeria," said Benali. "The problems in the Niger Delta are not really under the control of the central government."

Iraq also has a better chance of establishing a security infrastructure that is able to protect oil companies and facilities -- including private security firms and the Iraqi military.

In Nigeria, companies are required to use the Nigerian military or Nigerian security firms. Both groups are seen as corrupt and often complicit in the violence.

"This is where Iraq is probably ahead of Nigeria because over the last couple of years the Iraqis have made a conscious effort to capacity build security forces in a highly proactive way by engaging with Western militaries or Western military companies to give them first-world training," said Pilcher.

[Associated Press; By SEBASTIAN ABBOT]

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