The Nigerian Government has scrapped an oil bonus scheme that rewarded Royal Dutch Shell in a further escalation of the confrontation over the financing of Shell's operations in the Niger Delta.

Shell confirmed today that it had received a letter from the Nigerian Government notifying the oil company that it intended to cancel a memorandum of understanding between them. The MOU, which was signed in 2000, created an incentive regime awarding Shell a premium of $2.50 per barrel of oil discovered. In its place, the Nigerian Government said that Shell would be subject to the "regular Petroleum Profits Tax Act regime".

The scrapping of the incentives regime occurs in the middle of a confrontation between Shell and its host over a massive funding shortfall affecting Shell Petroleum Development Company of Nigiera (SPDC), the joint venture between the Nigerian state oil company, NNPC, and the Dutch multinational. A Shell spokesman today said that government funding of the joint venture was "significantly short of existing requirements".

The SPDC joint venture has become a thorn in the side of Shell, beset by continuing funding crises, its operations hamstrung by insurrection and conflict in the Niger Delta. Founded in the 1950s, SPDC houses all of Shell's onshore operations in the Niger Delta region and the company, of which Shell owns 30 per cent, has the capacity to pump 1 million barrels per day, more than 40 per cent of Nigeria's total oil output.

However, SPDC's Western Division suffers from the continuing violence, kidnappings and insurrection from ethnic groups opposed to Nigerian federal government control of the region. Currently, more than a third of Shell's share of SPDC production, some 140,000 barrels per day is shut in, because of the risk of violence and kidnapping. NNPC is the majority shareholder of SPDC with 55 per cent but Shell manages the company. Other shareholders include France's Total with 10 per cent and ENI of Italy with 5 per cent.

In a bid to improve the profitability of SPDC, Shell embarked on an austerity programme last year, aimed at saving $100 million in overheads. The retrenchment in Shell's historic Nigerian heartland contrasts with big investments offshore where the company operates under a different regime and is not dependent on the Nigerian Government for funding.

Times Recommends

• Toyota recalls 437,000 cars including Lexus
• Myners says bonuses are bleeding pension funds
• Japanese company faked safety reports on seats