Nigeria: Why the African Oil Connection is Still So Attractive
by MONEYMORNING on 30 APRIL 2012
There are three reasons why Nigeria remains one of the most difficult in which to conduct business. The first addresses security amidst regional differences and a delta region that is a tinder box of revolution, secession, tribal warfare, and flat out criminal activity. It is hot, sticky, bug-infested, and dangerous…

But it holds a great deal of light, sweet crude.

Such oil is highly desired these days. There is little of it left worldwide. It requires less processing, since it does not have much sulfur to remove or weight to thin out.

And that increases profit margins.

What Comes With the Territory in Nigeria

Still, it also guarantees competition, political intrigue, and ecological damage, along with kidnappings of company personnel, attacks on rigs and pipelines, inter-village conflict, and even the occasional revenge homicide.

The second factor making life difficult for oil extraction in Nigeria is the corruption. We’re talking about one of the most corrupt nations on the planet. There are laws on the books, plenty of them. But they are regularly ignored by officials who see an easy opportunity to make a lot of money for themselves.

A Nigerian newspaper editor summed it up a while back by telling me (in all seriousness), “If the amount of the bribe is less than $10 million U.S., it isn’t even worth the newspaper space to report it. We would also need to double the size of a daily edition to cover them all.”

Third is the criminal factor. Whenever there is a great deal of money available, that attracts fraud, deception, and worse, especially when it is a developing country with deep-seated historical divisions.

Remember, Nigeria is the place that invented those email frauds requesting assistance in moving money for an apparent “can’t miss” chance to make some big bucks quickly. After all, all you need do is set up an empty bank account, right? These are known around the globe as “409 scams” – after the Nigerian Commercial Code section they violate.

But the crime goes deeper. Little, if any, importing of oil products takes place outside organized crime. Sounds strange that one would import into an oil-wealthy country like Nigeria, doesn’t it? But the fact is, there is little refinery capacity. So most oil produced there is shipped out as crude oil. Then, the country produces only 15% of the electricity needed daily. That means 85% must come from private generators operating on diesel, and that fuel must be bought into the country.

The diesel traffic into the Nigerian market may be the most criminally controlled and nasty business anywhere in the world. The tankers park (that is, “bunker”) out beyond the eight-mile national jurisdiction zone, and shuttle craft – directed by the Nigerian mob – ferry the fuel to shore.

So, with all these problems, why bother setting up operations there?

Huge Oil Reserves in Nigeria

Simple, Africa is one of two places left in the world where there is a great deal of potential oil, needed by a world becoming concerned over supply constriction. The other place is the Arctic.

Africa is much cheaper.

In West Africa, Nigeria and Angola have ushered in an oil rush that has spread to neighbouring countries as the true expanse of these basins comes to light. In addition, the deep water off the coast of the region is developing into one of the most promising large field locations remaining in the world. Royal Dutch/Shell (NYSE: RDS-A), Chevron (NYSE: CVR) and ExxonMobil (NYSE:XOM) are already there with huge projects.

But it is a range of smaller companies (mid and small cap) that are likely to make the biggest impact for investors.

Others will be coming into play shortly.

Problems in places like Nigeria have developed over generations and will be very difficult to displace.

But the oil riches coming from Africa will oblige us to keep going back and trying.

Dr. Kent Moors

Contributing Editor, Money Morning

Source: Nigeria: Why the African Oil Connection is Still So Attractive