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Nigeria Is Sabotaging the Global Oil Market

By Matt Badiali, editor, S&A Resource Report
Wednesday, February 3, 2010

Nigeria's oil industry is about to implode.
 
The coming destruction will have a disastrous effect on the global oil market... But I've got a good idea exactly how this will play out, and I'm getting my readers ready. Before we get into that, let me give you a little background.
 
In the last few years, civil unrest in the Niger Delta scuttled several high-profile oil projects. (We've discussed Nigeria's declining output in the Commodity Q&A here and here.) The most recent news came from Chevron, which has seen its production cut by 20,000 barrels per day thanks to sabotage.
 
Let me put that in perspective. With oil at $75 per barrel, Nigerian bandits are costing Chevron and its partners about $1.5 million per day, more than half a billion if it lasts a year.
 
That's what these bandits count on. Chevron will decide it's cheaper to pay them off to stop the sabotage... for a while.
 
It's not just Chevron. Royal Dutch Shell dominated oil production in Nigeria for 50 years. But since 2008, bandits have destroyed 50,000 barrels per day of Shell's production. Now, it's had enough. The company will put 10 onshore fields up for sale, worth between $4 billion and $5 billion.
 
Since Shell's announcement, rumors came out that its partners, French oil company Total and Italian oil company ENI, would soon follow. Both companies cite problems in Nigeria for their poor performance in 2009.
 
Shell and Total currently produce around 10% of Nigeria's oil and gas. If they leave, there will be a vacuum of talent and expertise. We saw the same thing happen in Mexico, Venezuela, and Ecuador. When the giant Western oil companies leave, all the experts go with them.
 
With those companies gone, Nigerian oil production will collapse before the paint dries on the new company logos.
 
According to Western oil companies' engineers, the Nigerian oil fields that produce 80% of the country's production require $15 billion in new wells, pipelines, and maintenance. So the Nigerian National Petroleum Company, which owns 55% of those fields, needs to come up with its share – $8.5 billion – to keep the field producing optimally. But the Nigerian government only gave the company $4.5 billion to spend on those projects.
 
This isn't a new story. Stealing national oil companies blind is a sport in Mexico, where government mismanagement destroyed Cantarell, one of the world's largest oil fields. By refusing to invest the money to keep it going, the government wrung the golden goose's neck.
 
Mexican oil production has fallen 25% since 2004. Its oil output will shrink another 5% in 2010, according to the country's finance minister. If 5% is the "official" estimate, things are truly terrible. Nigeria's headed down the same path if Shell and its allies pull out.
 
In 2008, the latest data available, Nigeria exported around 2.2 million barrels of oil per day, an important piece in the global oil market. (Nigerian imports made up 4% of all the oil we used in the U.S. in 2009.)
 
If Nigeria's production declines, oil prices will go higher in the coming years. And volatility will increase as well. Bad news out of Saudi Arabia will send prices soaring. If Iraq can't bring on new production as quickly as promised, prices will rise. If Venezuela screws over its new Russian and Chinese partners, prices will rise.
 
That's why we're going oil heavy in my Resource Report. Our portfolio features the best domestic oil companies who can capitalize on higher oil prices. We bought companies that hold 70% of their reserves in oil. You should consider doing the same.
 
Good investing,
 
Matt




In The Daily Crux
Market Notes
Gold miners bounce... mining fund GDX rebounds 6% in two days.
 
Homebuilders D.R. Horton, Pulte, and Lennar touch three-month highs.
 
Taiwan fund EWT hits three-month low... down 8% since January 1.
 
Earnings today... Cisco, Comcast, Pfizer, Polo Ralph Lauren, Time Warner.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%