US embassy cable - 05LAGOS1341

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 001341 
 
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 PHUPER 
STATE PASS TRANSPORTATION FOR MARAD 
STATE PASS OPIC FOR ZHAN AND MSTUCKART 
STATE PASS TDA FOR BTERNET 
STATE PASS EXIM FOR JRICHTER 
STATE PASS USTR FOR ASST USTR SLISER 
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ 
 
E.O. 12958: DECL: 08/22/2015 
TAGS: ECON, EPET, NI 
SUBJECT: NNPC ATTEMPTS TO FORCE MAJORS TO SELL, REFINE 
CRUDE IN-COUNTRY AT CONTROLLED PRICES 
 
Classified By: Consul General Brian L. Browne for Reasons 1.4 (D & E) 
 
Summary 
------------ 
 
1.  (C)  U.S. major oil firms are concerned about new 
Nigerian National Petroleum Corporation (NNPC) proposals to 
mandate in-country refining.  In a series of meetings with 
ExxonMobil, Chevron, and ConocoPhillips, as well as with 
Shell, top executives raised alarm over a recently proposed 
regulation mandating in-country refining.  If passed as is, 
executives report the actions could significantly reduce 
investment in the Nigerian petroleum sector.  NNPC held 
hearings on the proposal on 24 August.  Right now, we don't 
know whether the GON is serious about enacting these 
regulations or whether it is being used to leverage other, 
less ambitious concessions from the majors.  Mission will 
report industry read-out on hearings septel.  Additionally, 
at the request of industry, Mission is attempting to arrange 
a meeting between Ambassador Campbell and Minister of State 
for Petroleum Daukoru to raise these important concerns. 
 
Proposal for Mandatory Domestic 
Refining Takes Industry by Surprise 
-------------------------------------- 
 
2.  (C)  In an August 5 letter to major oil companies 
operating in Nigeria, NNPC Group Managing Director Funsho 
Kupolokun forwarded a proposal for mandatory in-country 
refining of oil for those companies producing over 50,000 
barrels per day of crude.  The proposal would require the 
majors to meet 80 percent of the country,s domestic refining 
capacity by 2006, and 90 percent of its capacity by 2007. 
NNPC said it would hold hearings on the proposal on 24 
August.  While we do not know his position on the specific 
regulation at hand,  President Obasanjo previously has 
expressed his belief, in principle, that oil majors should 
contribute to Nigeria's refining capacity. We have seen 
similar measures proposed in the National Assembly. However, 
this proposal may be a more imminent threat because, as an 
NNPC regulation, it does not need to go through the slow 
moving legislative process.  As a regulation, this proposal 
could be enacted very quickly, simply by the Executive or 
NNPC, with little right to public comment or review. 
 
Majors Universally Opposed to Proposal; 
Requests USG Assistance 
-------------------------------------- 
 
3.  (C)  In a series of separate discussions, ExxonMobil 
Nigeria Managing Director (MD) John Chaplin, Chevron Nigeria 
General Manager for Asset Management Chuck Taylor and Public 
and Government Affairs General Manager Femi Odumabo, 
ConocoPhillips Managing Director Todd Creeger, and Shell 
Petroleum Development Corporation MD Basil Omiyi, universally 
expressed alarm at the recent proposal.  In an August 19 
meeting, Chaplin indicated the industry was worried.  He 
stated &this is very serious,8 if the proposal were 
approved, &we would stop investing in Nigeria.8  As the 
Chairman of the Lagos Chamber of Commerce Oil Producers, 
Trade Sections (OPTS), the industry's advocacy group, he 
indicated the industry was drafting a common response to the 
proposal.  He also requested intervention from the USG to 
assist, specifically noting a meeting between Ambassador 
Campbell and Minister of State for Petroleum Daukoru would be 
helpful. 
 
OPTS Views Proposal as Expropriatory 
--------------------------------------------- ---- 
 
4.  (C)  Chaplin indicated OPTS opposed the proposal on 
constitutional, statutory, and contractual grounds.  OPTS 
considers the proposed regulation as expropriatory. By 
demanding in-country refining, the regulators would 
effectively seize and control a portion of the crude oil to 
which the majors are legally entitled under their Memorandums 
of Understanding and Joint Venture Agreements.  The majors 
note NNPC, as the dominant equity partner in the joint 
venture (JV) area, already owns 60 percent of the crude 
produced under most JV arrangements with the majors entitled 
to only 40 percent.  They believe NNPC and the Nigerian 
Government should first look to their own crude to meet the 
government's in-country refining targets.  Chaplin stated the 
NNPC already possessed far more crude than domestic 
refineries could handle. However, he noted President Obasanjo 
(and Minister of Petroleum Resources) &sees this as a social 
obligation8 on the part of the majors. 
 
Proposal Appears to Force Crude Sales at Controlled Prices 
--------------------------------------------- -------------- 
 
5.  (C)  The downstream sector in Nigeria remains 
price-controlled, and Chaplin said NNPC had indicated majors 
would not receive the world market price for domestically 
refined product under this new proposal.  (Note: In large 
measure, due to price regulation, Nigeria,s refining sector 
is moribund, with its four parastatal refineries operating 
well below capacity.) Additionally, the proposal sets fees 
for domestic refining, termed an &incentive8 fee.  Majors 
note that a set refining fee, with no competition, simply 
forces them to subsidize an uneconomic and wasteful refining 
industry, and would delay any meaningful reform in the 
Nigerian refining sector. 
 
Chilling Impact on Future Investment 
------------------------------------- 
 
6.  (C)  Chaplin, Taylor, and Creeger all claim the proposal 
would chill the investment climate in the petroleum sector. 
By acting as an additional tax on the sector, it would stall 
additional investment necessary to grow oil production in 
Nigeria, undermining the GON,s goals of doubling oil 
production by 2010.  For firms such as Conoco Phillips, which 
currently produces less than 50,000 bpd (and hence would not 
be subject to the mandate as currently constructed), it would 
put the brakes on additional production which would take them 
over the threshold. 
 
Industry Decries Investment Climate in Sector 
--------------------------------------------- 
 
7.  (C)  Chevron,s Chuck Taylor noted the proposal was 
typical of the type of proposals the sector has seen recently 
from the GON, stating he was &horribly concerned with the 
overall trend in the last 12-18 months.8  Echoing comments 
from other industry figures, he pointed out &the industry 
operates here with profit margins which are the smallest or 
among the smallest in the world.  There is not a lot of room 
before investment will be impacted." 
 
Comment 
------- 
 
8.  (C)   In addition to the potentially negative 
consequences of the proposed regulation, NPPC's attempt to 
make such an existential change via administrative regulation 
and not through the legislative process is troubling.  While 
we have yet to determine if the GON is completely earnest 
about this regulation or whether it is a cat's paw to induce 
other less fundamental concessions from the companies, we are 
concerned that such a proposal has even been put on the 
table.  This type of suprise is becoming frequent in Nigeria. 
 A bad strain of economic populism or nationalism seems to be 
advising the GON's approach to the oil majors. The GON 
appears to be giving contract sanctity and creation of a 
favorable investment climate short shrift.  Many in the 
industry believe President Obsanjo is behind this latest 
move.  We are not sure of that assertion.  However, President 
Obasanjo is stuck between a moribund refining sector, demands 
by the Nigerian citizens for affordable crude products, and 
international crude prices which show no signs of falling. 
We do know President Obsanjo expects the majors to play a 
greater role in helping him resolve these conflicting 
problems than they believe is within their ambit or their 
margin of profit.  Finding a sustainable balance will be 
tough and will likely need the help of some will-timed 
advocacy efforts on our part. 
 
9.  This cable was cleared by Embassy Abuja. 
BROWNE