Could be time to go oil heavy

Nigeria's oil industry is about to implode.

The coming destruction will have a disastrous effect on the globaloil 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 target="blank">here.) The most recent news came from Chevron (NYSE: CVX, Stock Forum), 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 oilcompany 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 oilcompanies 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.