US embassy cable - 04LAGOS704

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000704 
 
SIPDIS 
 
E.O. 12958: DECL: 03/31/2014 
TAGS: EPET, EINV, PGOV, PREL, ECON, NI 
SUBJECT: NIGERIA - SAO TOME JDZ: EXXONMOBIL BIDS BLOCK 1 
 
REF: LAGOS 82 
 
Classified By: J. GREGOIRE FOR REASONS 1.5 (B) (D) AND (E) 
 
1. (C) SUMMARY: ExxonMobil has exercised only one of its 
preferential bids for crude oil exploration and development 
in the Nigeria - Sao Tome and Principe Joint Development Zone 
(JDZ).  ExxonMobil matched ChevronTexaco's bid on Block 1, 
leaving the Joint Development Authority to determine the 
final number of stakeholders for what is considered the JDZ's 
most valuable block and which company will become the 
operator. Chrome Energy is in the process of exercising its 
preferential bids. Meanwhile, an ExxonMobil official 
cautioned that the Government of Sao Tome may not be prepared 
to deal with the complexities of modern oil development.  END 
SUMMARY. 
 
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EXXONMOBIL'S PREFERENTIAL BID FOR BLOCK 1 
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2. (U) On or about February 20, 2004, ExxonMobil exercised 
its preferential bid for crude oil exploration and 
development rights in the Nigeria - Sao Tome and Principe 
Joint Development Zone (reftel).  ExxonMobil and Chrome 
Energy were allowed preferential bids based on exploration 
work the companies had done under separate agreements with 
the Democratic Republic of Sao Tome and Principe (DRSTP) 
before it entered into a joint development treaty with 
Nigeria in 2001. The Joint Development Authority (JDA) 
administering and regulating the zone ended a licensing round 
in October 2003 for nine blocks within the JDZ, by which time 
20 companies had submitted bids for eight of the blocks.  The 
bids included signature bonuses due when awards are 
announced.  ExxonMobil was then allowed to exercise its 
preferential right, and Chrome will follow suit. ExxonMobil 
was given a preferential right to shares in any three blocks 
within the JDZ equaling no more than 40 percent, 25 percent, 
and 25 percent of the equity, respectively. The company had 
to match the highest bonus offered in the licensing round for 
the blocks it sought, but the percentage it will pay of the 
associated bonus will equal its share of a block. 
 
3. (C) Mary Feeley, ExxonMobil's General Manager for 
Exploration, confirmed to ECONOFF on March 11 that the 
company had matched ChevronTexaco's signature bonus of $123 
million for Block 1.  Feeley also said that ExxonMobil did 
not exercise its right to bid on two additional blocks.  She 
suggested that ExxonMobil chose to focus its resources and 
efforts on Block 1, considered the most valuable of this 
licensing round, because of the number of surprisingly high 
bids submitted  and the relative uncertainty regarding actual 
deposits and potential development and production costs in 
the JDZ. 
 
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WHO WILL JOIN IT? 
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4. (C) Feeley said the JDA will soon consider the other bids 
for Block 1.  ChevronTexaco's $123 million bid should have 
placed it in a position to take a majority share in the block 
and thus become operator.  But a surprisingly high bid of 
over $100 million by Nigeria's Consolidated Oil (Conoil) may 
cause the JDA to divide the remaining stake in Block 1 
between the two companies, in effect making ExxonMobil the 
majority stakeholder and operator if it is granted 40 percent 
equity.  Conoil's financial capability is suspect, according 
to Feeley; she had heard, however, that Conoil has partnered 
with Norway's Statoil on the bid, which may ease JDA fears of 
Conoil's ability to participate effectively in development of 
the block.  Feeley said ExxonMobil is not concerned about it 
or Chevron acting as operator.  She said either company will 
lead the project effectively and the two companies will work 
well together via operating and technical committees formed 
to administer joint projects. 
 
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AMATEURS IN SAO TOME 
-------------------- 
 
5. (C) When asked how well the Government of Sao Tome and 
Principe is handling its entry into the world of oil 
producing states, Feeley cautiously opined that many people 
in the DRSTP involved in the JDZ and domestic oil sector are 
amateurish in their approach and expectations.  For example, 
some government officials still cling to expectations of 
rapid wealth accumulation by the DRSTP once the JDZ bids are 
finalized.  She said this expectation persists regardless of 
how often and carefully she and other corporate 
representatives explain that, under the production sharing 
contracts (PSC) that will govern the licenses, the 
Governments of Nigeria and the DRSTP will not receive revenue 
from oil production until five to ten years after first-oil. 
 
6. (U) Under a PSC, a private oil company bears the total 
cost of developing a project, such as drilling wells, 
installing well heads, building piping and platforms, and in 
the case of deep offshore projects, bringing in floating 
production, storage and offloading vessels (FPSO).  Once 
production begins and oil is pumped and sold, the company 
shares revenue from crude production with a government entity 
only after the company has recouped its development costs. 
After the initial period of producing "cost oil" from which 
the company keeps all revenue (but on which it pays taxes), 
the company and the government split the revenue from the 
production of "profit oil."  Usually the profit oil ratio is 
very favorable to the company in the early stages of 
production, but the ratio inverts steeply over time as 
production markers are reached. 
 
7. (C) For example, Feeley disclosed that ExxonMobil 
negotiated an initial 80/20 split of profit oil with the 
Nigerian National Petroleum Corporation (NNPC) in 1993 for 
the Erha offshore project in Block 209, with ExxonMobil 
receiving 80 percent.  That ratio will shift to 70/30 after 
production reaches 350 million barrels.  As production 
increases, the ratio will shift further to the advantage of 
NNPC increasingly fast. 
 
8. (C) Feeley said the typical cost of developing a deepwater 
project at 2,000 to 3,000 meters, the water depth of portions 
of the JDZ (the water depth of Block 1 is approximately 1500 
meters), is two to three billion dollars.  She estimated that 
the JDA and the two constituent countries will not see 
revenue from the JDZ, other than the initial bonus payment 
and ongoing taxes, for a period of five to ten years after 
first-oil is marketed. 
 
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JUST WHO ARE THE OTHER PLAYERS? 
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9. (C) Feeley also reiterated a concern voiced by other 
companies involved in the JDZ licensing round, including the 
JDA (reftel), that the qualifications and credibility of the 
bidders other than the international oil companies (IOC) are 
questionable, and their intent to develop the blocs as soon 
as possible is suspect.  Following ExxonMobil's preferential 
bid, the JDA will give Chrome Energy its opportunity to 
exercise preferential bids on six blocs, for shares of 15 to 
30 percent.  After Chrome's bids are submitted, the JDA will 
assess all bids in this round and award contracts in all 
blocks. 
 
HINSON-JONES