US embassy cable - 04LAGOS2447

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002447 
 
SIPDIS 
 
STATE FOR AF/W 
STATE FOR EB/ESC/IEC/ENR/BLEVINE 
STATE FOR DS/IP/AF 
STATE FOR INR/AA 
STATE PASS DOE FOR DAS JBRODMAN AND CGAY 
STATE PASS TREASURY FOR ASEVERENS AND SRENENDER 
STATE PASS DOC PHUPER 
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STATE PASS TO EXIM, OPIC, AND TDA 
 
E.O. 12958: DECL: 12/06/2014 
TAGS: EPET, EINV, NI 
SUBJECT: CONVERSATION WITH EXXON MOBIL MANAGING DIRECTOR 
 
 
Classified By: Consul General Brian L. Browne for Reasons 1.4 (D & E) 
 
Summary 
-------- 
 
1.  (C)  Exxon Mobil Managing Director for Nigeria John 
Chaplain said the challenges facing Nigeria's energy sector 
are: 1) under-investment in JV funding; 2) civil unrest; 3) 
specific pending legislation governing local content and gas 
fiscal terms; and 4) a corrupt and overly bureaucratic 
Nigerian business culture.  End summary. 
 
Chronic Under-investment for 30 Years; Next Year Better? 
--------------------------------------------- ---------- 
 
2.  (C)  Pol/Econ Chief and Energy Off met Managing Director 
(MD) of ExxonMobil Nigeria, John Chaplain, and External 
Relations Director Udom Inoyo.  Chaplain said one of the 
largest problems confronting energy firms in Nigeria is the 
significant under-investment by the GON's parastatal Nigerian 
National Petroleum Corporation (NNPC) in petroleum 
operations.  Chaplain estimates the sector has suffered from 
30 percent under-investment for 30 years.  The MD noted that 
the energy sector historically received 70 percent of the 
budget recommended by the National Petroleum Investment 
Management Services (NAPIMS), NNPC's investment unit.  This 
underfunding leads to significant delays in projects, he 
said.  However, the MD noted that the $4.3 billion the GON 
has allocated for the sector for the coming year, if 
actualized, would represent an upward shift in investment. 
 
3.  (U)  Not everyone agrees JV funding should be a top 
priority.  There are compelling arguments for many sectors 
that historically have also been underfunded.  Senator Udoma 
noted at a recent industry conference that the $4.3 
billion/580 billion naira budget proposed for JV funding was 
more than the GON's combined budgetary allocation of 540 
billion naira for education, health, power, and 
infrastructure.  He urged that approximately 10 to 11 billion 
naira be re-allocated for these needs.  He argued the JV 
funding only represents about 60 percent of the GON funding 
for the energy sector, and that the GON will actually spend 
950 to 980 billion naira next year in the sector.  While 
acknowledging that oil and gas are capital-intensive 
industries, he called for additional jobs in the sector for 
Nigerians. 
 
4.  (C)  External Affairs Director Inoyo said the Nigerian 
fiscal regime is highly favorable to the government, with 
petroleum profit tax and royalty rates of 85 percent.  He 
stated that overall, about 95 percent of the energy returns 
flowed to the GON.  Yet, the Delta region remains 
underdeveloped lacking in almost all basic infrastructure. 
Both Chaplain and Inoyo said the Niger Delta Development 
Commission (NDDC) was improving, but it had a long way to go 
before it would be effective.  Inoyo noted that majors give 
the NDDC three percent of oil revenues; in Exxon Mobil's 
case, the contribution amounted to $100 million in 2003.  It 
is unclear where that money and the other petroleum related 
tax revenues eventually end up. 
 
Unrest in the Delta Second Major Challenge 
------------------------------------------ 
 
5.  (C)  The MD pointed to unrest and instability in the 
Delta region as the second major challenge.  He noted, 
however, that ExxonMobil is more insulated from these 
pressures than the other majors because its operations are 
off-shore; the closest operation to land is 11 miles from 
shore. 
 
New Legislation is Third Major Challenge 
----------------------------------------- 
 
6.  (C)  Chaplain voiced concern with pending legislation, 
including local content and downstream gas bills, and a 
proposed model production sharing contract for the gas 
sector.  Chaplain said that in the quest to increase national 
content, NNPC is asking that large contracts be broken into 
smaller bits to be handled by Nigerian firms.  This 
reductionist strategy would discourage construction of 
integrated capabilities among local firms, and lead to the 
mushrooming of many small firms with only limited 
capabilities.  He also noted that operating with many small 
contracts increases costs, and makes it complicated for the 
majors to manage the larger pool of contracts. 
 
7.  (C)  Chaplain raised significant concerns regarding 
pending legislation on downstream gas and a new model 
production sharing contract (PSC) for the gas sector.  He 
stated that the proposed gas PSC would ?totally kill the gas 
sector.?  He indicated that proposed policies on joint 
venture projects and associated gas projects were also 
troublesome.  The proposed fiscal terms were 
simply taking too much out, leaving nothing for the 
investor, Chaplain argued.  (Comment: The MD and External 
Relation Director's comments regarding pending legislation 
are reflective of general industry opinion.  There is concern 
regarding all pending legislation mentioned, but there is 
particular concern that the proposed gas fiscal terms will 
stifle the development of this industry.  The major energy 
firms, including Exxon Mobil, are discussing with the GON how 
to resolve their differences over the pending legislation and 
model contracts.  End comment.) 
 
The "Nigeria Factor," Fourth Major Challenge 
-------------------------------------------- 
 
8.  (C)  The MD pointed to the Nigerian business climate, or 
what he termed the "Nigeria factor" as the fourth major 
challenge facing operators in country.  Operations take about 
twice as long to mount in Nigeria as in other countries where 
EM operates, significantly increasing production costs.  Due 
to excessive bureaucracy and corruption, decisions and 
approval processes in Nigeria may take 18 months instead of 6 
to 9 months elsewhere.  GON actions, such as import bans, 
create doubt regarding its commitment to a positive 
investment climate.  These factors, coupled with security 
concerns and infrastructure challenges, lead to production 
costs higher in Nigeria than in other countries where EM 
operates. 
 
World Oil Prices Could Alter Challenges 
---------------------------------------- 
 
9.  (C)  Finally, the MD pointed to world oil prices as 
the "wild card" which could alter the relative importance of 
any of the challenges facing the industry.  For example,if 
world oil prices remain relatively high, the GON and NNPC are 
likely to face fewer problems funding JV projects.  However, 
if a glut in world oil capacity were to drive down prices, 
the GON would likely face intense pressures in balancing its 
JV budget with funding for pressing social needs. 
 
Comment 
------- 
 
10.  (C)  Chaplain's cited challenges beg the question: why 
work in Nigeria?  For now, Nigeria's pros apparently 
outweight her cons.  Chaplain waxed optimistically as he 
discussed Nigeria's untapped oil and gas reserves. 
Nigeria, he said, is like the Gulf of Mexico in the 1970s. 
The industry is pushing into new frontiers, particularly 
deepwater exploration.  In addition, the high quality of 
Nigerian sweet crude commands a premium price, which allows 
the majors to realize significant economic returns, despite 
high production costs.  ExxonMobil paid the NDDC more than 
$100 million last year only because its revenues totaled more 
than $3 billion.  Nonetheless, the GON will need to make some 
adjustments to allow the sector to approach its potential. 
Immediate steps in that regard would be redressing the 
proposed gas fiscal terms 
and local content legislation. 
 
11.  (U)  This cable has been cleared by Embassy Abuja. 
BROWNE