The report, by oil industry watchdog Platform and a coalition of non-government organizations, implicated the oil giant in a decade of human rights abuses, The Guardian reported.
Platform said Shell likely knew thousands of dollars it paid each month to militants in the town of Rumuekpe sustained a conflict between armed gangs battling over access to oil money, which Platform said "Shell distributed to whichever gang controlled access to its infrastructure."
An estimated 100,000 barrels of oil flower each day through Rumuekpe, about 10 percent of Shell's daily production in the country.
The oil giant distributed "community development" funds and contracts through Friday Edu, a youth leader and Shell community liaison officer, and that increased the risk of tension and conflict, the report said.
Edu's monopoly over resources of Shell Petroleum Development Company of Nigeria led to a leadership battle with a gang led by S.K. Agala, the report said. The violence killed about 60 people, including women and children, from 2005-2008 and left thousands of others displaced, many of whom still suffer severe malnutrition, poverty and homelessness, the report said.
After a counter-raid by Agala left Rumuekpe "littered" with corpses, Shell switched sides and began paying Agala, the report said.
The local conflict led to regional instability, the report said, with displaced villagers hunted down in the regional capital, Port Harcourt, and killed in their homes, schools and workplaces.
In 2009 and 2010, the report said, security workers guarding Shell facilities were responsible for extra-judicial killings and torture in Ogoniland.
Platform has called on Shell to sever ties with government forces and other armed groups guilty of abuses and to clean up environmental damage.
Shell defended its human rights record and questioned the accuracy of evidence in the report.
"We have long acknowledged that the legitimate payments we make to contractors, as well as the social investments we make in the Niger Delta region, may cause friction in and between communities," a spokesman said.
The spokesman said the federal government is majority owner of oil facilities and deploys forces to "protect people and assets" and that it's "completely untrue" Shell directs or controls military activities.
The spokesman said Shell would "carefully examine" the report's recommendations.