US embassy cable - 05LAGOS1369

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 001369 
 
SIPDIS 
 
DOE FOR DAS JBRODMAN AND CGAY 
TREASURY FOR ASEVERENS AND SRENENDER 
DOC FOR KBURRESS 
USAID FOR GWEYNAND AND SLAWAETZ 
STATE PASS TRANSPORTATION FOR MARAD 
STATE PASS OPIC FOR ZHAN AND MSTUCKART 
STATE PASS TDA FOR NCABOT 
STATE PASS EXIM FOR JRICHTER 
STATE PASS USTR FOR ASST USTR SLISER 
 
E.O. 12958: DECL: 08/31/2015 
TAGS: EPET, EINV, ECON, NI 
SUBJECT: NNPC HEAD TELLS OIL MAJORS - CONSTRUCT REFINERIES, 
OR FACE MILLIONS IN FINANCIAL PENALTIES 
 
REF: LAGOS 1341 
 
Classified By: Consul General Brian L. Browne for Reasons 1.4 (D & E) 
 
Summary 
--------- 
 
1.  (C)  ConocoPhillips Managing Director (MD) Todd Creeger 
briefed us on an August 25 meeting between the Nigerian 
National Petroleum Corporation Group Managing Director (GMD) 
Kupolokun and the MDs of Nigeria's major energy companies. 
Kupolokun told the MDs he was under intense pressure, 
apparently from President Obasanjo, to conclude an agreement 
on domestic refining by the majors.  In an initial move that 
seemed to hold some promise, Kupolokun signaled willingness 
to pay the going international rate if the majors agreed to 
domestic refining. However, the prospect of compromise 
quickly faded when he revealed the GON's real objective -  in 
the name of corporate social responsibility, the majors 
should construct new refineries, or face multi-million dollar 
penalties. 
 
Kupolokun Outlines Demand for Domestic 
Refining Agreement within 30 Days 
----------------------------------------- 
 
2.  (C)  During an August meeting with the Energy Officer, 
ConocoPhillips Managing Director (MD) Creeger summarized an 
August 25 meeting between the NNPC GMD Kupolokun and 
Nigeria's major energy companies. Kupolokun hold the oil MDs, 
"I'm under pressure; I've been given a month to conclude an 
agreement," to ensure the majors refine some of their crude 
domestically.  He explained the GON was looking to link the 
oil industry with the rest of the economy through additional 
local content.  Apparently under marching orders from 
President Obasanjo, who has made a political decision on this 
issue, he warned, "there is no legal argument that can wish 
this away." 
 
Kupolokun Fills in Technical Details on NNPC Proposal 
--------------------------------------------- --------- 
 
3.  (C)  During the meeting, Kupolokun explained new 
technical details concerning NNPC's proposed regulations 
circulated in early August (reftel).  NNPC wants the majors 
to deliver 380,000 barrels/day to the national refineries, a 
little over half of Nigeria's estimated 700,000 barrel/day 
demand.  While the nameplate (maximum) capacity of Nigeria's 
four refineries (Port Harcourt I and II, Warri, and Kaduna) 
is actually 445,000 barrels/day, Kupolokun acknowledged the 
refineries were not working at capacity. (Note: In reality, 
the refineries are working at about 50 percent capacity, and 
would have to sweat and strain to reach production of even 
380,000 barrels/day.  Refinery capacity careens wildly from 
month to month, depending on whether NNPC has provided funds 
for maintenance.  During the last year, reports indicate the 
refineries have fluctuated between twenty to eighty percent 
capacity.  The refineries are unable to retain revenues they 
generate to cover operational and routine maintenance 
expenses.  Instead, they depend on infrequent transfers from 
NNPC headquarters.  For example, the Managing Director of the 
Port Harcourt refineries told us he waited 14 months for 
funds to repair the Port Harcourt II refinery.  End note.) 
 
Kupolokun Offers Olive Branch - 
Payment in Line with International Prices 
------------------------------------------- 
 
4.  (C)  MD Creeger indicated during the first phase of 
Kupolokun's meeting, there was significant positive movement. 
 Kupolokun for the first time agreed NNPC would pay the going 
 rate for the majors' crude.  (Note: The majors' singular 
objection to selling their crude to Nigerian refineries, or 
to building greenfield refineries, has consistently centered 
on their refusal to sell into a price-regulated market.  End 
note.)  Kupolokun assured the MDs he "would make them whole," 
i.e., he would commit NNPC to paying the majors the going 
international rate for their crude, minus relevant transport 
costs.  With this assurance, Creeger indicated most of MDs 
(excepting AGIP's) began to warm to Kupolokun's proposal. 
 
The Other Shoe Drops: Build Refineries, 
Take over Downstream, or Face Millions in Penalties 
--------------------------------------------- ------- 
 
5.  (C)  Just as the interlocutors seemed on the verge of 
making progress, Kupolokun dropped a bomb, revealing the 
GON's true demand.  Within the next month, the GON wants the 
majors to commit to construct refineries, as well as assume 
responsibility for distribution and sales of petroleum 
products.  If they did not play ball, the majors would face 
severe financial penalties in the tens of millions of 
dollars.   Kupolokun told the MD's Nigeria needed to balance 
its domestic consumption and domestic refining capability, 
and that all problems in the downstream sector needed to be 
fixed, not just access to sufficient crude.  He chastised the 
MDs for thinking that access to upstream crude was the real 
issue, pointing out, "I could divert my own (i.e., NNPC's) 
production to fill the refineries."  Instead, Kupolokun 
explained refinery maintenance and downstream distribution 
were also serious concerns the majors needed to help the GON 
tackle. 
 
"Corporate Social Responsibility doesn't Equal 
Refineries"; Kupolokun Dismisses Protests with a Threat 
--------------------------------------------- ------------ 
 
6.  (C)  MD Creeger reported the Total MD then protested 
corporate social responsibility did not require building 
multi-billion refineries (with no hope of a profitable 
return).  Kupolokun replied, "I strongly encourage you to 
take part in the privatization of the parastatal refineries 
and to conclude agreements to build refineries - or you'll be 
left exposed."  The Total MD then argued the proposed 
penalties would cost his firm a post-tax $50 million loss per 
year.  (Note: As Total is a relatively small operator, 
potential losses to ExxonMobil and Chevron would be much 
higher.  End note.) 
 
Kupolokun Threatens Harsher Action by the National Assembly 
--------------------------------------------- -------------- 
 
7.  (C)  Kupolokun also threatened action by the National 
Assembly if the majors comply.  He asserted the National 
Assembly was prepared to pass a bill "within a week" to 
mandate domestic refining.  Kupolokun cautioned any bill 
passed by the National Assembly would be harsher than the 
proposed regulations from NNPC.  (Note: Kupolokun could be 
right.  While the NNPC proposal is very bad, some of the 
proposed legislation making the rounds in the Assembly is 
worse.  A current National Assembly proposed Petroleum Act 
amendment would mandate the majors to refine half of 
Nigeria's crude in country - more than a million barrels a 
day, far in excess of the country's installed refining 
capacity.  Even Kupolokun considers this bill ill-advised, 
and has helped in holding this bill in stasis for several 
months.  However, should Kupolokun and Petroleum Minister of 
State Daukoru release the executive branch throttle, the 
legislature may likely rush the measure towards passage.  End 
note.) 
 
Moving Forward - Meeting to Re-Convene Soon 
--------------------------------------------- 
 
8.  (C)  Kupolokun indicated this week he would send out a 
revised  proposed regulations, reflecting the majors' 
feedback.  He told the MDs they would re-convene within two 
weeks to reconsider the amended document. 
 
Comment 
-------- 
 
9.  (C)  Call it what you will, Kupolokun is putting a tight 
squeeze on the oil companies.  This portends to be a high 
stakes game of which side will back down first.  The majors 
were deeply concerned with NNPC's push for them to refine 
some product domestically.  This new demand for multi-billion 
outlays for at best, marginal refineries, is even more 
alarming.  The proposal threatens investor rights, including 
contract sanctity and effective ownership and control of 
private property.  The proposed regulations would further 
damage Nigeria's investment climate in general, and the 
investment climate in the petroleum sector more specifically. 
 There are indications the oil majors' patience with the GON 
may be thinning.  For now, an encounter between the unstable 
forces of Nigerian domestic politics, and the immovable 
object of the majors' financial logic, seems to be in the 
offing.  The sides will have to find a meaningful and 
significant course adjustment to avoid a showdown over this 
issue of the refineries. 
 
10.  (U)  This cable was cleared by Embassy Abuja. 
BROWNE