US embassy cable - 03LAGOS2467

UNCLAS SECTION 01 OF 02 LAGOS 002467 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: NI, ECON, EINV, EPET, ENRG 
SUBJECT: FUTURE OF NIGERIAN OIL & GAS 
 
1. Cable is sensitive but unclassified.   Please protect 
accordingly. 
 
 
2.(SBU)  Summary: On July 11 and 12, Econoffs met with a 
variety of oil producing and servicing companies to gain 
insight into the current state of the Nigerian oil and gas 
industry and assess the country's potential contribution to 
world oil supply over the next ten years.  Companies 
expressed very positive views on future exploration and 
production opportunities, highlighting their new investments 
in deep water and natural gas projects.  Oil companies 
unanimously agreed they could meet the GON's ambitious 
target of 40 billion barrels of reserves and 4 million 
barrels/day of production by 2010. While all believe Nigeria 
has the capacity to contribute a larger share of world 
supply, actual production will depend on OPEC quota 
restraints and the country's ability to ttract investment. 
End Summary. 
 
 
-------------------------------------- 
Companies Look to DeepWater 
------------------------------------- 
 
 
.(SBU) In a series of meetings with ChevronTexaco,Conoco, 
ExxonMobil, Shell, and Halliburton repreentatives,  Econoffs 
received a detailed view ofthe Nigerian oil and gas sector, 
especially the ompanies' plans to seriously increase 
production. In order to speak more freely, the 
representatives asked that they not be identified directly. 
Most of the increase in production will come from deep water 
blocks, which are areas with water depths between 500-1500 
meters.  All companies expressed great enthusiasm over the 
future production possibilities of these blocks.  Wells 
drilled from the first round of deep water licenses, awarded 
in 1993, are scheduled to begin producing next year.  The 
first of those fields, Shell's Bonga, could produce as much 
as 225,000 b/d at full operation.  The government recently 
completed agreements from the 2000 round of deep water 
licenses.  Companies believe deep water exploration in 
Nigeria has only just begun.  With more exploration and 
advances in technology, many more substantial discoveries 
could be made. 
 
 
---------------------- 
The Future of Gas 
---------------------- 
 
 
4.(SBU)  Encouraged by the government's ban on routine 
flaring by 2008, investment in the gas sector is on the rise. 
 Although the Nigerian economy is heavily dependent on oil 
today, gas could be the future.  According to a government 
study published last year, Nigeria has an estimated 182 
trillion standard cubic feet (tcf) of recoverable gas 
reserves. However, sources say the country could possess as 
much as 300 tcf. Currently the ninth largest source, some 
companies believe Nigeria could become the second or third 
largest producer as the industry develops and world demand 
for cleaner fuel increases. Currently, most of the gas will 
be exported to the European and American markets.  Companies 
also expect to supply gas to the West African Gas Pipeline 
once it is brought online. 
 
 
5.(SBU)  One potential short-term impediment to gas 
development is the absence of gas provisions in the 
Production Sharing Contracts (PSC), the contracts that govern 
the deep water projects.  At the moment, the contracts make 
no provision for who owns or has the right to develop the 
gas.  The government and the companies will have to negotiate 
a solution.  Failure to reach a timely compromise could 
hamper future operations. 
 
 
6.(SBU)  In the future, many believe that Nigeria, given the 
right conditions, could develop a very successful gas 
industry.  To encourage the process, oil companies suggest 
that the Nigerian government develop a national energy plan, 
including policies aimed at increasing domestic gas 
utilization.  Companies cited deregulation of the gas market, 
specifically market driven pricing, as a prerequisite to a 
successful market.  Companies would also like the government 
to create fiscal incentives for private investment in the 
sector. 
 
 
---------------------------- 
OPEC : Feeling the cut 
---------------------------- 
 
 
7.(SBU)  While capacity building investment continues, this 
year's OPEC cutbacks have not gone unnoticed in Nigeria. 
Even indigenous oil firms have been affected, unlike previous 
years when multi-national companies took most of the hit. 
During the cutbacks, companies are focusing on capacity 
building rather than production.  With billions of dollars 
being pumped into deepwater and gas projects companies could 
be, as one company representative stated,  "on a collision 
course with OPEC" if the quota levels remain unchanged. 
 
 
8.(SBU)  The question of where OPEC quotas will be allocated 
in the future is on the minds of all companies.  Some fear 
that the government will first allocate production to joint 
venture projects, not the deep water PSC blocks, because of 
the instant revenue benefit.  Under the joint venture 
arrangement, the government gets a share of oil revenue 
immediately unlike PSCs where the oil companies recover costs 
over time before sharing a portion of the profits. 
Substantial production cutbacks could have a very negative 
impact on the oil companies' large and time sensitive deep 
water investments. 
 
 
--------------------------------------------- ---------- 
Impact of Community Issues on Production and Investment 
--------------------------------------------- ---------- 
 
 
9.(SBU)  While investment in deep water and gas projects 
continues at full speed, companies continue to wrestle with 
the challenges that come with operating in Nigeria.  One of 
the most significant issues is community relations.  Even 
though the companies all expressed concern over the daily 
impact of community disturbances on operations, they all 
believed tht problems were manageable and would not 
significantly impact production levels over time. But even 
figuring in community interruptions to production (one 
company figured 40 percent of total capacity could be offline 
at any time), Nigeria's production future still looks 
robust. 
 
 
-------------------------------------------- 
The NNPC as a Business Partner 
-------------------------------------------- 
 
 
10.(SBU)  In addition to community issues, many 
representatives expressed frustration in their business 
dealings with the NNPC.  Even beginning a business venture 
with the government can be difficult.  One problem expressed 
was "contract erosion," meaning that the NNPC has a 
tendency to change the rules of the game after contracts were 
signed.  Lack of transparency in awarding energy sector 
contracts was also cited as a serious problem. 
 
 
11.(SBU)  Once ventures begin, general bureaucratic delays 
over the course of a project have a significant impact. To go 
from winning the license to beginning production can be a 
long and frustrating process. Due to bureaucratic 
impediments, the first deep water wells will take 10 years to 
begin operations, an unusually long period of time according 
to company representatives. 
 
 
12.(SBU)  As for future relations, one company representative 
stated that the government does not have enough money to 
continue all planned projects.  This uncertainty creates a 
difficult investment climate. As of April 2002, the NNPC was 
$1.78 billion behind on its joint venture cash calls, the 
government's contribution to costs.  However, he stated that 
the private sector possesses the capital and the appetite to 
increase its share of investment.  Companies encouraged 
efforts by the USG to support a more stable investment 
climate in Nigeria. 
 
 
------------ 
Comment 
------------ 
 
 
13.(SBU)Comment:  All the oil companies we spoke with gave 
the picture of a very robust and expanding Nigerian energy 
sector. Despite the obstacles, companies appear undeterred by 
potential hurdles such as OPEC quotas, security problems in 
the Delta, and frustrating relations with the government. 
While investments in capacity building are in full swing, 
Nigeria's share of OPEC quotas seems too small given the 
level of current investment and the government's own targets 
for production. If Nigeria's quota share does not increase, 
companies could face difficulties recovering the cost of 
their current investments. 
 
 
14.(SBU)  Nigeria remains a committed member of OPEC, giving 
every indication they plan to remain within the OPEC fold. 
Rilwani Lukman, Obasanjo's oil advisor and current OPEC 
President, recently said that Nigeria would like to increase 
production but only if the move will not depress prices.   It 
remains to be seen what the government will do if the 
increase in Nigeria's production capacity does not translate 
into a greater share of OPEC quotas.  In all likelihood, 
Nigeria will remain with OPEC and fight for a larger quota 
share.  However, in the past Nigeria has frequently produced 
above its quota and could certainly do so again in the 
future.  End Comment. 
HINSON-JONES