Royal Dutch Shell is close to a deal with Nigeria's Government that will fund a billion-dollar shortfall in the financing of its Nigerian operations.

Shell is expected to lend NNPC, the Nigerian state oil company, the funds to cover the State's share of the budget of SPDC, the troubled joint venture company that houses Shell's onshore business.

Reports from Nigeria late yesterday indicated that NNPC was close to agreement with its joint-venture partners on a short-term solution to the mounting financial crisis over Nigeria's funding of its oil industry.

The Nigerian Government owes the foreign joint-venture companies a total of $3.8billion (£1.9 billion), including about $1 billion owed to SPDC. The remainder is believed to represent sums owed to joint ventures with ExxonMobil and Chevron.

The SPDC joint venture, in which NNPC has a 55 per cent interest, has become a thorn in the side of Shell because of constant wrangling with the Nigerian Government over the latter's failure to meet cash calls for investment. The Government is hoping to tap the international capital markets to try to seek a long-term solution to its cashflow problems. This would allow NNPC to borrow to fund its obligations.

The state oil company is a cash generator for the Government because it owns between 50 and 60 per cent of all the joint ventures, but it is obliged to fund its share of the joint venture investments. These total about $15 billion.

Shell operates SPDC, which owns the older-generation onshore oil wells and infrastructure and has become a target for militants in the Niger Delta fighting against the federal government. SPDC is capable of producing one million barrels per day, but kidnappings and attacks on oil pipelines and pumping stations have forced it to withdraw from parts of the western region of the Delta, leading to cuts in oil output. Shell is forgoing 141,000 barrels per day, just over a third of its share of SPDC production.

Funding shortfalls have worsened the disruption, preventing badly needed infrastructure from being completed. Work has stopped on Shell's Afam power station, a gas-fired plant that is very close to completion and will generate 950 megawatts of electricty. A project to end the flaring of gas in the Niger Delta suffers continued delays.

The failure of the Nigerian Government to meet cash calls has been a constant source of friction between foreign oil companies and the State. Yesterday, the Government scrapped an oil bonus scheme that gave the foreign investors companies extra cash for increasing oil reserves.

Shell confirmed yesterday that it had received a letter from the Nigerian Government notifying the company that it intended to cancel a memorandum of understanding between the Government and Shell.

The memorandum, which was signed in 2000 and was intended to compensate investors at a time of low oil prices, created an incentive regime, awarding the joint-venture companies a premium of $2.50 per barrel of oil discovered.

In its place, the Nigerian Government said, Shell would be subject to the “regular Petroleum Profits Tax Act regime”.

In an attempt 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.

Half a century of strife

1956: Shell D'Arcy, a Shell-BP joint venture drills first successful well Oloibiri

1961: Shell opens Bonny oil terminal in Delta

1967: Biafra civil war starts with secession of three states in oil-producing delta region

1974: Nigerian government takes 55 per cent of foreign joint venture oil companies

1979: BP stake nationalised, Shell retains 20% in joint venture, later increased to 30%

1993: General Sani Abacha seizes power.

1995: Ken Saro-Wiwa, leader of the Ogoni people and campaigner against the oil industry, is executed Shell launches Nigerian liquefied natural gas industry.

1998: Sani Abacha dies

1999: Democratic elections. Olusegun Obasanjo elected president

2006-7: Unrest in Niger Delta forces Shell to shut a third of oil production.

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