US embassy cable - 01ABUJA1529

NIGERIA: AMBASSADOR'S MEETING WITH SPECIAL ADVISOR ON PETROLEUM; PREDICTIONS OF INCREASING ROLE FOR U.S. COMPANIES

Identifier: 01ABUJA1529
Wikileaks: View 01ABUJA1529 at Wikileaks.org
Origin: Embassy Abuja
Created: 2001-06-29 15:05:00
Classification: CONFIDENTIAL
Tags: EPET ENRG EINV PGOV NI OIL
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 001529 
 
SIPDIS 
 
 
E.O. 12958: DECL: 06/28/2006 
TAGS: EPET, ENRG, EINV, PGOV, NI, OIL 
SUBJECT: NIGERIA: AMBASSADOR'S MEETING WITH SPECIAL ADVISOR 
ON PETROLEUM; PREDICTIONS OF INCREASING ROLE FOR U.S. 
COMPANIES 
 
REF: A. LAGOS 01290 
     B. STATE 15002 
 
 
1. (U) Classified by Ambassador Howard F. Jeter; Reasons 1.5 
(B) and (D). 
 
 
2. (SBU) SUMMARY: On June 22 Ambassador Jeter, DOE Energy 
Advisor, and Econoff (notetaker) met in Abuja with Special 
Advisor to the President for Petroleum Affairs and Energy, 
Dr. Rilwanu Lukman.  Dr. Lukman indicated that negotiations 
for the ongoing Year 2000 Production Sharing Contracts (PSCs) 
would soon be finalized.  A "marginal field" bid round also 
will occur in the near future and the Year 2001 deep water 
round will take place in September.  Dr. Lukman commented on 
the GON's desire to broaden participation in the oil sector 
by awarding additional concessions to U.S. firms and by also 
encouraging new entrants.  With regard to President 
Obasanjo's promise to increase Nigerian oil exports to the 
U.S., made during the President's Official Visit to 
Washington in May, he stated that contracts with 
international oil traders expire in September, and as a 
result the GON is seeking to re-establish direct crude sales 
to the U.S. to fulfill the President's promise.  Nigeria's 
role in OPEC and GON plans to double oil production and 
reserves by 2010 were also discussed.  Deregulation efforts, 
USG technical assistance, and climate change will be reported 
septels.  END SUMMARY. 
 
 
3. (SBU) PSC NEGOTIATIONS: Ambassador Jeter opened the 
meeting by commenting that the USG was pleased with the level 
of U.S. participation in the Nigerian petroleum sector.  We 
hoped that this participation would expand beyond investments 
in the oil sector and include the natural gas sub-sector. 
However, the Ambassador pointed out, the USG was aware of 
some problems.  One of these is concern over the ongoing Year 
2000 Production Sharing Contract (PSC) negotiations. 
Successful oil block bidders believe that the GON changed the 
rules of the process mid-game, and these negotiations are yet 
to be completed six months later. 
 
 
4. (SBU) PSC BACKGROUND: During the Year 2000 bidding round 
the GON indicated to bidders that the previous 1993 PSC 
arrangement would serve as the model for the Year 2000 round. 
However, when the oil block winners were announced in 
December and PSC negotiations commenced the GON put forth two 
key PSC changes (Ref A).  One change was adjusting the Profit 
Oil Split (POS) ratio to the GON's advantage.  The other was 
GON insistence that the Nigerian National Petroleum 
Corporation (NNPC) also be included in a Stability of Law 
Clause.  The Profit Oil Split change meant that the 
companies' economic analyses, upon which they based their 
bids, changed, and the oil blocks now look less profitable. 
 
 
5. (SBU) PSC BACKGROUND CONT: Jointly including the NNPC in 
the Stability of Law Clause is contradictory, according to 
the oil companies.  The companies point out that this clause 
is meant to protect the investor (oil block operator) from 
future changes in host government legislation.  This is a 
standard industry clause, which allows the operator to 
renegotiate a contract if future legislation negatively 
impacts the profitability of the investment.  To include the 
NNPC within this clause would in fact be protecting a 
government parastatal from government action. 
 
 
6. (SBU) PSC NEGOTIATIONS: Dr. Lukman's response was that the 
important aspect of any agreement was the intention behind 
it.  He believes that both sides should have the right to 
modify an agreement without the opposite party feeling 
cheated.  He stated that the GON would not make drastic 
changes to any agreement, and claimed that in past 
negotiations some changes had been to oil companies' benefit. 
Other changes had been to the GON's advantage.  Lukman 
stated that when the 1993 PSC agreements were negotiated, no 
one imagined the oil discoveries that would take place in 
Nigeria's offshore.  These major discoveries and the nature 
of deep offshore exploration now required a new type of PSC 
arrangement. 
 
 
7. (SBU) PSC NEGOTIATIONS: Lukman went on to explain that 
with the reintroduction of democracy came the oversight of 
the National Assembly.  He stated that National Assembly 
members have traveled to other oil-producing countries to 
learn more about the industry, and to ensure that the GON was 
receiving its fair share of oil revenues.  As a result, it 
was the National Assembly that pushed for the 70/30 Profit 
Oil Split between the oil companies and the NNPC 
respectively, not his office or the NNPC. Lukman stated "we 
can defend 70/30, but with 80/20, we are in trouble." 
Lukman indicated that in his view this ratio (for the first 
tranche of 350 million barrels of oil produced) was fair and 
a compromise will soon be reached.  On the Stability of Law 
Clause Dr. Lukman stated, "Don't worry...we can take care of 
that," implying the GON will drop its demand that the NNPC be 
included. (Comment: Lukman's optimism on this issue contrasts 
with the gloom of Chevron's MD Ray Wilcox, whom the 
Ambassador saw briefly on June 27.  Wilcox said he had "no 
reason" to think there would be a quick resolution of these 
issues.  Moreover, he characterized the GON's attitude toward 
the PSC negotiations as bordering on indifference, with 
little show of flexibility in meeting the oil companies half 
way.  End Comment.) 
 
 
8. (C) OPPORTUNITIES FOR U.S. FIRMS: Continuing the 
discussion, Ambassador Jeter commented that Royal Dutch Shell 
still remains a major player in Nigeria, but American firms 
appeared to be taking the lead, especially on new offshore 
exploration.  Dr. Lukman agreed and stated that this was a 
positive development.  The GON believes that such a trend 
provides balance, and Dr. Lukman suggested that in five or 
six years we may see a new configuration of the Nigerian oil 
sector with American firms as the leading producers.  Lukman 
pointed out that the GON was encouraging two significant 
American investments in the gas sector, an ExxonMobil-led 
Western Niger Delta Liquefied Natural Gas (LNG) Plant, and 
the Chevron Gas-to-Liquids project.  Lukman suggested that as 
these projects develop it would only be natural for product 
exports to be directed to the U.S. market.  He explained that 
the existing Shell-led Nigerian Liquefied Natural Gas Plant 
supplied the European market, and hoped that a U.S. LNG plant 
would supply the United States.  Lukman went on to reiterate 
a GON goal first stated by Lukman during President Obasanjo's 
recent May visit to Washington: to capture 5% of the U.S. gas 
market. 
 
 
9. (SBU) MARGINAL FIELDS/YEAR 2001 OFFSHORE ROUND: The 
upcoming "marginal field" round was also raised.  Dr. Lukman 
stated that this round will take place in the near future, 
and that a separate deep off-shore round will take place in 
September 2001.  The "marginal field" round will not only 
provide opportunities for indigenous operators, but also for 
U.S. independents.  Independent American companies may bid as 
technical partners alongside Nigerian firms. This exercise 
should broaden the Nigerian oil sector, and could potentially 
bring a new type of American oil firm to Nigeria. 
 
 
10. (C) OCEAN ENERGY: Following on the topic of independents, 
Ambassador Jeter raised the case of Ocean Energy, and 
explained that the USG had still not received an explanation 
for the revocation of its oil block award.  (Note:  Ocean 
Energy was awarded a share of OPL 250, this award was later 
revoked for reasons still unknown. (Ref B).  End Note.) Dr. 
Lukman replied that he didn't know what had happened, and 
that the question should be directed to President Obasanjo. 
Lukman offered that "he hoped people did not mess things up 
again, because the President has been clear to give them 
(Ocean Energy) another chance."  Lukman said he believed 
Ocean Energy "to be a good company, but someone may have 
given President Obasanjo inaccurate information."  However, 
Lukman encouraged Ocean Energy to bid again, but to do so 
independently.  Ambassador noted that this was previously the 
advice we had given to Ocean Energy, and had urged them to 
become better known in Nigeria prior to the net offshore 
round.  Lukman emphasized opportunities for U.S. independents 
in general by pointing out that "we don't want all the big 
boys." 
 
 
11. (C) OPEC: In response to questions regarding Nigeria's 
role in OPEC, Dr. Lukman stated that he remains the head of 
the Nigerian delegation.  He is also the Alternate Chairman 
of the Conference of OPEC Ministers.  Lukman believes that 
the Iraqi action and the present crude shortfall will be made 
up by OPEC members, but as a contingency OPEC members agreed 
to meet in July.  Lukman indicated the price band mechanism 
in place would automatically trigger a 500,000 barrel a day 
increase if necessary.  When asked if the GON would be in 
favor of increasing production beyond 500,000 barrels if the 
price of crude continued to increase, Dr. Lukman replied that 
"we would have to do something." 
 
 
12. (SBU) DOUBLING NIGERIAN PRODUCTION: On the domestic 
front, Dr. Lukman explained that the GON has embarked upon a 
plan to nearly double current production capacity from 2.5 
million barrels a day and reserves of 25 billion barrels to 4 
million barrels a day and 40 billion barrels of reserves by 
2010.  The GON intends to gradually increase production and 
reserve levels in tandem. Then as the demand for OPEC oil 
grows, the GON will be in a position to increase crude 
exports as OPEC quotas increase.  (Presently, Nigeria has 
some spare capacity on the order of several hundred thousand 
barrels per day.  In addition, Nigeria produces 120,000 
barrels of condensate a day that is not included within the 
OPEC quota.)  Dr. Lukman indicated OPEC countries eventually 
want to establish a reserve equivalent to 10 percent of their 
production capacity as a "market cushion." 
 
 
13. (C) COMMENT: The meeting with Dr. Lukman was very 
positive and very productive; however, he is obviously a 
skilled diplomat who was careful to emphasize the positive 
future ahead for U.S. companies.  If his statements are 
correct, we could see an early end to the Year 2000 PSC 
stalemate.  This will clear the way for a "marginal field" 
round and an additional deep offshore round.  Investment 
opportunities for U.S. companies are real. We hope that the 
GON is sincere in its desire to reconfigure the oil sector so 
that over time U.S. firms become the leading producers. 
Ambassador Jeter stated that such a move would clearly 
illustrate that the U.S. - Nigeria bilateral relationship is 
indeed a "special" one. 
 
 
14. (C) We still have no answer on Ocean Energy, but are told 
that the U.S. independent should try again.  Lukman agreed 
that a regular dialogue with the Ambassador would be helpful, 
and we intend to take him up on that offer. 
Jeter 

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