US embassy cable - 05LAGOS1340

C O N F I D E N T I A L SECTION 01 OF 05 LAGOS 001340 
 
SIPDIS 
 
STATE FOR AF/W 
STATE FOR CA/OCS/SDENYER 
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 FOR KBURRESS 
STATE PASS TRANSPORTATION FOR MARAD 
STATE PASS OPIC FOR ZHAN AND MSTUCKART 
STATE PASS TDA FOR BTERNET 
STATE PASS EXIM FOR JRICHTER, ZHAN 
STATE PASS USTR FOR ASST USTR SLISER 
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ 
 
E.O. 12958: DECL: 08/25/2015 
TAGS: EPET, PGOV, NI 
SUBJECT: NIGERIA TO CONCLUDE 2005 BID ROUND FOR 88 BLOCKS; 
MAJORS CONCERNED WITH TIGHT FISCAL TERMS, BUT DEEPWATER 
CONTINUES TO GENERATE SIGNIFICANT INTERNATIONAL INTEREST 
 
 
Classified By: Consul General Brian L. Browne for Reasons 1.4 (D & E) 
 
Summary 
---------------- 
 
1.  (C)  On August 26, Nigeria will hold a bid round for 88 
oil blocks.  Bidders will  be judged on both commercial and 
technical bids in a Brazilian style competitive process. 
Changes to the Deep Offshore fiscal regime include the 
introduction of a royalty as well as an 80 percent cost 
recovery cap. GON has received 379 bids from about 278 
companies for the blocks on offer.  U.S. majors operating in 
Nigeria will participate in the bid round, but their 
enthusiasm is considerably diminished by tightened fiscal 
terms.  However, several U.S. independents seem pleased with 
the blocks on offer, and are willing to consider the 
diminished fiscal terms.  Significant interest is also 
expected from new entrants from China, India, and Korea. 
Some of them will receive preferential access in exchange for 
commitments to construct refineries or independent power 
plants in Nigeria,s beleaguered downstream sector. 
 
61 Blocks Up for Bid in 2005 Round; More may be Added Later 
--------------------------------------------- -------------- 
 
2. (U) A total of 88 exploration and production blocks, will 
be offered during the 2005 bid round.  These include the last 
of the deepwater blocks in exclusively Nigerian waters.  Some 
of the blocks, with Ministry of Petroleum Resources estimates 
of their prospectivity are listed below: 
 
--12 Deep Offshore (High) 
--6 On the Niger Delta Continental Shelf (High-Moderate) 
--6 On-Shore in the Niger Delta (High-Moderate) 
--9 In the Anambra Basin (Moderate-Low) 
--16 In the Benue Trough (Low) 
--12 In the Chad Basin (Low) 
 
 
GON Pleased with Level of Interest in the Bid Round 
--------------------------------------------- ------ 
 
3. (U)  Department of Petroleum Resources (DPR) Director Tony 
Chukwueke told us the GON is pleased with the level of 
interest in the bid round.  GON has received 379 bids from 
about 278 companies.  He noted keen interest in blocks 321 
and 323, with blocks 257, 215, and 214 also generating 
significant attention. 
 
4. (U) The Bida and Sokoto basins are not included in the bid 
round, because technical specification data is unavailable. 
Up to 20 additional blocks in the Niger Delta may become 
available, once pending legal issues are resolved.  Full 
details on all blocks currently on offer will be available at 
the 2005 Bid Round website.  Relevant technical data 
including seismic, well, gravity, topographical, satellite 
photo, maps, geological and geophysical studies will be 
available to bidders according to MPR. 
 
GON's Goals for the 2005 Bid Round 
---------------------------------- 
 
5. (U) MPR's goals for the round include: 
-- Pursuing and realizing national production targets and the 
oil reserve base to support them. (Note: The GON hopes to 
double its production of approximately 2.4 million 
barrels/day by 2010.); 
--Expanding opportunities for gas development; 
--Attracting new international players, while continuing to 
encourage traditional players; 
--Attempting to reverse the migration of oil and gas 
exploration from the Delta towards the deepwater; 
--Providing an opportunity for strategic downstream projects 
to attract investors by giving such investors preferential 
treatment of upstream projects; 
--Implementing a viable and comprehensive Local Content 
strategy; and 
--Using the opportunity of the 2005 bid round to reinforce 
Nigeria's commitment to transparency and the principles of 
EITI. 
 
Changes in Commercial Measures 
Alter Fiscal Regime in Favor of GON 
----------------------------------- 
 
6. (SBU) The introduction of a royalty element and a ceiling 
on oil cost recovery are designed to increase GON's revenues 
in the early years of PSC projects; hitherto, the operator 
took all the revenue for several years to recapture capital 
investment expenditures.  The MPR recognizes  international 
best practice for attaining maximum well like and optimal 
production is for government to take its share of project 
revenues after first oil and full cost recovery.  Dr. Edmund 
Daukoru, Minister of State for Petroleum Resources, 
acknowledges the royalty payments violate these principles, 
and can "kill wells" prematurely.  However, the GON finds 
itself constrained by the exigency of current budget demands 
base; over 80 percent of GON revenues flow from the petroleum 
sector and any appreciable dip in these revenues immediately 
diminish the governments fiscal strength.  As the first 
generation of PSC projects (e.g., Bonga, Ehra, and Agbami) 
come on-line, the GON will face low revenue flows on these 
projects for several years while the operators recover costs. 
 The GON is determined not to find itself in the same fiscal 
bind with the new blocks up for bid in 2005.  Dr. Daukoru 
also argues the Nigerian deepwater is no longer frontier 
territory, and future projects do not merit the same investor 
incentives as the high-risk early projects. 
 
MPR Will Follow Brazilian Local content Model; 
Using Pre-Qualification to Avoid Speculators 
--------------------------------------------- - 
 
7. (U) The MPR has examined a number of national models for 
development of local content, such as those used by the UK 
and Norway to develop their petroleum sector.  However, the 
MPR Believes the Brazilian system most applicable to Nigeria. 
 Recently a MPR team including Dr. Daukoru, traveled to 
Brazil to learn more about their local content efforts. 
Through pre-qualification of national firms, the MPR sought 
to avoid the "hawking of Nigerian assets overseas" by 
Nigerian companies selling acreage to foreign concerns, it 
believes occurred in past bid rounds. This is just one change 
instituted as a result of their study of the Brazilian model. 
 In past years, the GON found that some indigenous firms had 
received rights to develop acreage which they had neither the 
skills nor intention to develop, but only the desire to sell 
for a quick profit.  The MPR designed the qualification 
system to make sure indigenous firms had the requisite 
technical, financial, and managerial competence, prior to 
being admitted to participate in the bid round with a foreign 
partner. 
 
 
Local Content Vehicles 
------------------------ 
 
8. (U)  In its quest to increase the level of national 
content in the petroleum industry, the GON has mandated that 
all bidders take on a minority technical partner.  After an 
evaluation of their competency and work histories, the DPR 
pre-qualified a number of firms to participate as &local 
content vehicles,8 (LCVs).  LCVs can acquire up to a 10% 
stake in a project.  DPR Director Tony Chukwueke admits not 
all firms will be able to obtain 10 percent of the equity for 
their project, and he expects some firms will be &carried8 
financially by their foreign partners.  Conoil, a large 
presence in the downstream sector, and well represented in 
the Nigerian petrol station market, is the lone indigenous 
firm which qualified to participate in the bid round as a 
full bidder in its own right, and not as a LCV minority 
partner. 
 
9. (SBU)  The screening and approval LCVs has been 
problematic.  Finally, with less than a month left before the 
bid round, DPR released a list of pre-qualified LCVs to 
prospective bidders.  DPR and Ministry of Petroleum Resources 
have been encouraging a number of the &one man shops8 to 
merge, in order to meet the technical and financial needs of 
their foreign partners.  While majors continue to complain 
about the low technical and financial capability of the LCVs, 
most majors appear committed to working with the current 
situation. 
 
Majors, Large Independents Dubious about Bid Round; 
ExxonMobil Expects its Bid may Disappoint GON 
--------------------------------------------- ----- 
 
10. (C)  Ian Fischer, General Manager Exploration for Esso, 
ExxonMobil Nigeria,s deepwater subsidiary, speaking of the 
deepwater blocks on offer, &There were enormous 
expectations, but we don't see the prospectivity, and the 
(fiscal) terms are worse.8  To underscore EM,s concerns 
regarding fiscal terms, Fischer shared an EM document, which 
showed the total government &take8 from the blocks 
auctioned under 1993 fiscal terms was 43% of the revenue; 
under 2003 62% of the revenue; and under the 2005 fiscal 
terms, 70% of the revenue.  He explained the proposed 
&take8 in this round was too high, given that under the 
terms of Nigeria,s production sharing contract, the majors 
assume the sole risk for billions in exploration and 
development costs for deepwater. 
 
11. (C)  Fischer elaborated on the poor prospectivity, noting 
most deepwater blocks in Nigeria currently under exploration 
were on the &inner shelf,8 along a contour in about 2000 
meter of water.  Some of the blocks in the current bid round 
(and in last fall,s Joint Development Zone bid round) are in 
the &outer shelf,8 in about 3000 meters of water.  Fischer 
stated that, &Most wells in the outer bank have so far been 
a disappointment.8  While noting both EM and rival firms are 
loath to advertise their failures, he believed about six 
wells in the outer shelf had come up &dry.8 
 
12. (C)  Based on EM,s assessment the blocks on offer may 
have poor prospectivity along with tough fiscal terms, 
Fischer anticipates the GON may well be disappointed with 
EM,s participation in the bid round, as "there is an 
expectation ExxonMobil will be in full force for the bid 
round.8  He added Government,s minimum bid of $50 million 
per block was &a problem,8 noting firms might have been 
willing to submit low, non-conforming bids for certain 
blocks, but now appeared to be prevented from doing so. 
 
Chevron Echoes Pessimism re: Bid Round 
-------------------------------------- 
 
13. (C)  Chevron Nigeria Planning Manager Kevin Lyon stated 
that Chevron would likely only bid on 2 blocks, both of which 
would leverage existing Chevron assets in neighboring blocks. 
 He too indicated tightened fiscal terms were a significant 
deterrent to Chevron,s fuller participation.  Lyon 
continually stresses the stiff competition within Chevron for 
investment capital; Nigerian projects compete with projects 
from around the world for funding.  With returns in Nigeria 
ranking near the bottom for Chevron,s worldwide operations, 
the firm is making the decision to allocate scarce investment 
capital elsewhere.  (Comment:  Industry interlocutors 
consistently indicate in this era of record-high oil prices, 
the additional economic rent from these revenues completely 
accrues to the GON, creating a disincentive to invest in 
Nigeria at this time.  For example, the industry can 
currently earn much higher returns of U.S.-based projects in 
the Gulf of Mexico, where returns are among the highest in 
the world.  End comment.) 
 
Independents Weigh In with Negative Views on Round 
--------------------------------------------- ------ 
 
14. (C)  The larger independent firms appear to share similar 
views about the bid round.  Devon Energy Nigeria Managing 
Director (MD) Raymond Marchand stated they were still 
&running its numbers8 for the bid round during our last 
conversation, but his analysis regarding the Devon,s 
participation was decidedly pessimistic.  MD of Canadian firm 
Nexen, Richard Owens, shared a similarly negative assessment. 
 
 
New Entrants Seem More Enthusiastic 
------------------------------------ 
 
15. (C)  However, there are a number of new American firms 
entering the Nigerian market for the first time in this bid 
round.  While cautious, they appear more optimistic about the 
prospects for Nigerian deepwater than do the established 
players.  In recent months, the mission has hosted a series 
of visitors from U.S. independents Occidental and Amerada 
Hess.  Amerada Hess, for example, is showing some caution by 
entering Nigeria initially as a non-operating partner, but 
both firms are upbeat about the commercial potential of the 
blocks on offer.  U.S. independent Pioneer is also apparently 
planning to bid, but has not engaged the mission in its trips 
to Nigeria. 
 
Nigeria Moves onto the World Stage; 
Chinese Firms, Other New Entrants Participate Vigorously 
--------------------------------------------- ------------ 
 
16. (C)  The Ministry of Petroleum Resources seems to view 
this bid round as Nigeria,s move onto the world stage. 
Seeking to broaden the Nigerian market beyond the traditional 
&Big 58 (Shell, Chevron, ExxonMobil, ENI/AGIP, and Total) 
by which Nigeria has often felt itself dominated, the GON has 
worked hard to attract interest from both new countries and 
new entrants, including U.S. independents not yet represented 
in Nigeria.  The bid round road show traveled to London, 
Houston, and Singapore to attract international 
participation.  The Ministry of Petroleum Resources believes 
its efforts have been worth it: they expect 4-5 Chinese firms 
to bid, as well as a firm from India.  The Korean National 
Oil Company will also bid.  Several U.S. independents will 
also participate.  (Comment: Unfortunately for U.S. firms, it 
appears from press reports the Chinese firms may well have 
secured preferential access to certain blocks, based on their 
parastatal firms, commitments to the GON to finance the 
downstream sector projects (refineries and independent power 
plants).  China, concerned with its long-term energy 
security, appears to be willing to underwrite potentially 
unprofitable downstream investments to secure strategic 
access to upstream blocks.  U.S. firms, concerned with the 
profitability of the still price-regulated Nigerian 
downstream, are incapable of making such commitments.  End 
comment.) 
 
BROWNE