US embassy cable - 04LAGOS2384

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002384 
 
SIPDIS 
 
STATE FOR AF/W 
STATE FOR EB/ESC/IEC/ENR/BLEVINE 
STATE FOR DS/IP/AF 
STAT FOR INR/AA 
STATE PASS DOE FOR DAS JBRODMAN AND CGAY 
STATE PASS TREASURY FOR ASEVERENS AND SRENENDER 
STATE PASS DOC PHUPER 
STATE PASS TRANSPORTATION FOR MARAD 
 
E.O. 12958: DECL: 11/24/2009 
TAGS: EPET, EINV, NI 
SUBJECT: HALLIBURTON BAN LIKELY TO BE REVERSED; FIRM 
CRITIQUES BARITE IMPORT BAN AND JV UNDERFUNDING 
 
REF: ABUJA 1663 
 
Classified By: Classified By: Consul General Brian L. Browne for Reason 
s 1.4 (D & E) 
 
Summary 
------- 
 
1.  (C)  Halliburton has indicated the GON is likely to 
quietly lift the ban against the firm's activities in 
Nigeria.  The move was facilitated by the October 5 return to 
Nigeria of radioactive sources stolen in 2002 but later 
recovered by Halliburton. Halliburton also expressed concerns 
regarding funding constraints for joint venture petroleum 
operations with the Nigerian National Petroleum Corporation 
(NNPC).  The Halliburton Business Development Manager noted 
the NNPC often curtails oil service company operations 
mid-year, due to the GON's failure to meet budget 
allocations for NNPC.  Halliburton also expressed alarm at 
the ban on the importation of barite, a mineral used in 
drilling mud.  Instead, oil service companies are being 
directed to a Nigerian firm awarded an exclusive import 
license, which charges three times the world price for 
barite. 
 
GON Likely to Lift Halliburton Ban 
----------------------------------- 
 
2.  (C)  Energy Off met Halliburton's Business Development 
(BD) Manager Jim Mills and Halliburton (outside) legal 
counsel Oghogo Akpata on 18 and 19 November.  Both indicated 
the ban against Halliburton entering into new oil service 
contracts is likely to be lifted soon.  They indicated 
President Obasanjo was likely to approve a carefully brokered 
agreement that would allow the company to enter new 
contracts.  Halliburton is currently waiting for the 
President and Attorney General to meet to conclude the 
agreement.  Halliburton legal counsel indicated the return of 
the radioactive sources to Nigeria on 5 October played a 
central role in the GON's apparent about face.  (Note: The 
sources had been stolen from a Halliburton site in Nigeria, 
and shipped as scrap in Germany. Halliburton's decision to 
ship the sources to the U.S. for examination in the firm's 
laboratories raised the ire of the GON; President Obasanjo 
voiced intense displeasure that the sources were not returned 
immediately from Germany to Nigeria.  End Note.) 
 
Quiet Reversal of Ban Likely 
---------------------------- 
 
3.  (C)  Given the GON's public pronouncements against 
Halliburton, the reversal in GON policy is likely to be 
downplayed.  In recent weeks, Halliburton has attempted to 
get its side of the story out, to prepare public opinion for 
an eventual reversal of the ban.  Halliburton states that the 
radioactive sources were imported with the knowledge and 
consent of GON for use in normal petroleum production 
activities, and that the firm immediately reported the 
disappearance to the GON. However, in a reversal from an 
earlier position, Halliburton legal counsel did admit that 
the radioactive sources were licensed, but incorrectly so, as 
the recent establishment of a Nigerian Nuclear Regulatory 
Authority seems to have created temporary confusion regarding 
which entity had the authority to license nuclear materials 
in Nigeria. 
 
Halliburton Suffers Severe Business Impact 
------------------------------------------- 
 
4.  (C)  The BD Manager stated Halliburton suffered a severe 
business impact from the ban, but overall oil production did 
not suffer as Halliburton's competitors swiftly picked up 
its business.  He was frustrated that the GON, perhaps to 
gain additional negotiating leverage, tried to link 
resolution of the ban on new contracts for Halliburton Energy 
Services Company with the TKSJ (an international consortium 
involving Halliburton division Kellogg, Brown, and Root, or 
KBR) bribery scandal on the construction of the NLNG plant. 
Mills noted that Halliburton Energy Services Company is a 
separate legal entity from KBR, the Halliburton entity 
charged in the bribery scandal.  He believes that all 
Halliburton divisions have been unfairly smeared in the 
scandal. 
 
Serious Concerns with JV funding 
-------------------------------- 
 
5.  (SBU)  Echoing common industry concerns, the BD Manager 
expressed frustration with the joint venture (JV) funding 
situation in Nigeria.  JV funding constraints are the largest 
impediment to additional oil and gas exploration and 
production in Nigeria.  The BD Manager is concerned about the 
downward trend in JV funding by the GON, noting that there 
are fewer rigs running in Nigeria than two years ago due to 
JV funding constraints. (Note: The parastatal Nigerian 
National Petroleum Corporation, NNPC, is typically the 
dominant equity partner in joint ventures with international 
firms.  Oil production in Nigeria is currently under the 
joint venture model, although deepwater fields currently 
under construction are under a production sharing contract 
model.  As the dominant equity partner, NNPC is required to 
contribute the majority of the equity capital.  NNPC does not 
retain its own revenues from year to year, and hence funds 
all equity shares with allocations from the GON budget. 
Increased petroleum revenues from this year's high oil 
prices do hold out hope of at least temporarily ameliorating 
the JV funding issue during the next year.)  The BD Manager 
noted a yearly pattern, in which NNPC does not receive the 
full amount of funds allocated to it.  In September or 
October of a given year, the GON announces the budget data, 
including an allocation for NNPC.  By about April of the 
following year, the GON does not have sufficient funds, and 
NNPC is forced to curtail the budget.  In turn, U.S. 
contractors are ordered to curtail their operations.  Rig 
operations are halted, and expensive equipment often has to 
be re-located to projects outside of the country, causing 
significant losses for affected firms, including American oil 
service companies (OSCs).  The BD Manager noted that, unlike 
some other parastatals, NNPC is not willing to be "carried" 
through alternate financing arrangements when it does not 
have cash on hand to complete planned projects; rather, the 
NNPC simply stops operations. 
 
Sole Legal Barite Importer Charges 3 Times World Price 
--------------------------------------------- --------- 
 
6.  (SBU)  The BD Manager also expressed his concerns with 
the Nigerian import bans in general, and the ban on barite 
importation in particular.  Barite is used as a weighting 
agent in drilling mud for oil and gas exploration.  It has 
been banned by the GON, allegedly in the interest of 
fostering a local barite industry.  However, Nigeria does not 
have the infrastructure to mine it in industrial quantities, 
and the small-scale hand mining that does exist is inadequate 
to meet the needs of petroleum operators in Nigeria.  The BD 
Manager noted that Nigeria does not have large quantities of 
barite, and would run out of the mineral in a little more 
than three years, if it were produced in-country in 
industrial quantities.  (Note: It appears to be an open 
question whether the relatively small quantity of barite 
found in Nigeria would economically justify capital intensive 
mining investment for barite exploitation.)  The BD Manager 
stated that barite can be purchased on the world market for 
approximately $120/ton, but the Ministry of Solid Minerals is 
now pressuring firms to purchase it from a Nigerian company 
awarded an exclusive import license for $350/ton.  The import 
ban has not resulted in any industrial quantity barite 
production. 
7.  (C)  According to the BD Manager, Halliburton and other 
OSCs are in danger of failing to meet their contractual 
obligations with multinational energy firms to carry out 
drilling operations, due to the lack of barite in the market. 
 
Comment 
-------- 
8.  (C)  Concerns about barite importation are not limited to 
Halliburton, and have been voiced by a variety of companies 
at industry conferences.  Inflated pricing for barite and 
other inputs for the petroleum sector also exacerbates the 
problems caused by GON inadequate JV funding, as operators 
and their contractors are forced to divert scarce project 
funds to pay higher than market values for essential inputs. 
The ban on barite may violate WTO policies, and may be 
causing significant financial losses for American firms. The 
ban on barite, like the other import bans, raises serious 
concerns about the GON's commitment to liberalizing its 
trade regime, and creating an enabling environment to support 
credible local industry as well as attract needed foreign 
investment.  The award of sole rights to import barite to one 
firm also raises issues of rent seeking through manipulation 
of Nigeria's trade regulations. 
 
9.  This cable has been cleared by Embassy Abuja. 
BROWNE