Dated extraction technologies and poor maintenance are only partially to blame for Royal Dutch Shell's decision.
After operating oil exploration in Nigeria for 85 years, Royal Dutch Shell announced plans to divest itself of all its shallow-water and onshore fields in order to focus on offshore extraction and green energy.
The decision follows a January 2020 ruling by the District Court of The Hague, which found Shell liable for oil spills that occurred in the Niger Delta in 2006 and 2007. In August, a Nigerian court fined Shell the equivalent of $111 million for the environmental damage suffered by the Ejama-Ebubu community more than half a century ago.
Dated extraction technologies and poor maintenance are only partially to blame, according to Damilola Sunday Olawuyi, professor of Energy and Environmental Law at Hamad Bin Khalifa University in Doha: “The Nigerian oil and gas market is particularly more vulnerable due to perennial challenges relating to insecurity, crude oil theft, sabotage and collapse in host community relationships occasioned by many years of weak implementation of environmental protection laws.”
These factors exacerbate the legal risks and expenses associated with developing those assets. According to some estimates, while on average it costs roughly $8 to produce a barrel of crude oil in Saudi Arabia and about $9 in Iran and Iraq, the price soars to $17 in Nigeria.
Nigeria’s recently enacted Petroleum Industry Act provides a new fiscal regime, with significantly lower oil royalties and taxes, as well as a clear and comprehensive commitment toward environmental restoration, which will benefit new lease holders.
“There is an increased focus on good governance, transparency and sustainability, which is gradually improving host community confidence and good relationships,” says Olawuyi. These developments could create significant upside for competent investors, he argues, but they will still need to carefully consider issues relating to financing, energy transition risks and the declining price of oil and gas commodities.