Friday, September 23, 2011

Play Nigerian Oil Through Chevron And Shell


http://seekingalpha.com/article/295159-play-nigerian-oil-through-chevron-and-shell

The United States has excellent trade relations with our neighbors, Canada and Mexico. After all, they’re two of our largest economic trading partners. They’re the top two suppliers of foreign crude oil to the Unites States.
Saudi Arabia, our number three supplier, continually lies about its remaining reserves. And as the country that produced the terrorists who masterminded the 9/11 attacks, it’s not exactly on our top 10 list of most-favored nations.
In terms of oil, Canada is likely to remain our number one foreign supplier. The country continues to increase output from the Alberta oil sands (expected to reach three million barrels per day by 2020). New pipelines are being constructed to transport the oil to U.S. refineries.
Mexico will likely drop to number three in just a couple of years, as its Cantarell field – once the world’s third-largest – saw its output peak at 2.1 million barrels per day (bpd) back in 2004. Less than a decade later, that field’s annual production is a paltry 464,000 bpd. Most of Mexico’s foreign oil exports head north of the border to the United States. It provides us with about 1.25 million bpd.
As you can see from the graph below, courtesy of the Energy Information Administration, Saudi Arabia provides us with just over 1.2 million bpd.

So let’s review U.S. oil import dynamics:

Canada is stable politically and friendly to the United States, and its exports of oil are on the rise.

Mexico is also friendly, but its level of exports is continuing to drop.

We don’t care much for Saudi Arabia, but at 1.2 million bpd, they’re a key foreign supplier of crude.

But the real wild card in U.S. crude import supplies is supplier number four, and its future output could have a real impact on what you pay at the pump.
Nigeria: U.S. Crude Oil Supplier No. 4
Last year, Nigeria, our number four supplier of crude oil, exported just over 1 million bpd of crude and petroleum products to the United States. That amounted to about 9 percent of total U.S. crude imports, and about 40 percent of Nigeria’s 2010 exports.
Nigeria’s crude is especially desirable, since it’s of the light, sweet variety, which means it's easy to process into gasoline. Given the problems in Libya (also a light, sweet crude supplier), Nigeria’s crude prices have been on the rise. Oil exports are the main GDP generator for the country. Its oil is seen as a replacement for Libya’s until the latter can get its oil export act together again.
Nigeria is a member of OPEC, and as such is subject to production quota limits. Currently it is set at 1.673 million bpd. But the real problem with Nigeria’s production has nothing to do with production limits. The unrest in the Niger Delta is the real obstacle for Nigerian crude oil production and subsequent exports.

The country’s actual production capacity is about 2.9 million bpd. But constant attacks on oil infrastructure keep production well below that figure. This past July, output hit 2.17 million bpd. For all of 2010, it averaged 2.15 million bpd. Since 2005, oil production in Nigeria has been fraught with risk. Kidnappings of oil company workers for ransom, serious pipeline vandalism and military takeovers of oil facilities have been the norm.
The Gulf of Guinea has also experienced significant piracy activity. All this instability has an average of 800,000 bpd of capacity offline at any given time. In spite of all of this, exports to the United States have remained relatively constant over the past few years.
How to Invest in Nigerian Oil
One of the best ways to play the future oil boom in Nigeria is via Royal Dutch Shell plc (RDS.A). Shell is Nigeria’s largest oil producer, accounting for over 50 percent of its production. RDS has active exploration activities ongoing in the country as well as offshore, and its production comes from more than 80 oil fields.

The second-largest player in Nigeria is Chevron Corporation (CVX) through its Chevron Nigeria Limited subsidiary. It operates in the Warri region and in offshore shallow water areas.
Should we even care about Nigerian oil? You bet. As our number four supplier, Nigeria is a key component of the American crude oil supply chain. With an estimated 37.2 barrels of proven reserves, Nigeria is a big player in the world’s crude supply.

Nigeria has the potential to increase its output despite the ongoing political instability in the country. The two companies mentioned above are relatively safe ways to play the upside of Nigerian oil, while limiting downside risk.
Disclosure: none

This article is tagged with: Macro View, Commodities, Basic Materials, Major Integrated Oil & Gas

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