US embassy cable - 05ABUJA1677

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 001677 
 
SIPDIS 
 
TREASURY FOR SEVERNS/RENENDER 
USDOC FOR HUPER 
ENERGY FOR DAS BRODMAN AND CGAY 
STATE PASS TO USTR 
STATE PASS TO OPIC 
STATE PASS TO US EXIM BANK 
 
E.O. 12958: DECL: 09/09/2015 
TAGS: EPET, EINV, ETRD, NI, OIL 
SUBJECT:  NIGERIA: EXXON MOBIL CHIEF ON REFINING DEMANDS, 
NEW MOU 
 
REF: A: LAGOS 1341 B: LAGOS 1369 
 
Classified By: AMBASSADOR JOHN CAMBELL FOR REASONS 1.4 A,B, and D 
 
1. (C) Exxon Mobil Nigeria Chief John Chaplin told the 
Ambassador on September 6 that oil majors were in the midst 
of renegotiating their MOU with the Nigerian government 
(GON), which would allow them to keep a part of the revenue 
over $30 per barrel, all of which now goes to the GON. They 
also are negotiating to reduce severe tax penalties on 
increased production costs. Chaplin planned to inform the GON 
that Exxon Mobil was selling its retail operations in 14 of 
26 African countries, though not Nigeria, to Total.  While 
Chaplin said oil producers were very unhappy with proposed 
government regulations to force large producers to refine 
some crude in-country and invest in refining, he did not 
request the Embassy to engage the GON on the issue. When 
pressed, he said the Embassy should continue to make the case 
for downstream deregulation and a good investment climate. 
Exxon Mobil's CEO would be visiting Nigeria soon and hoped to 
meet President Obasanjo, while the oil producers planned to 
discuss refining and other issues at a high level at the 
upcoming World Petroleum Congress in Johannesburg. 
 
2. (C) It was clear that the oil majors' priority were the 
MOU and tax negotiations, and at this point they did not want 
to rock the boat by calling for USG pressure on the refining 
issue. Instead they will first try to address it themselves 
in upcoming high-level meetings. Though for the moment they 
have backed off a request for the Ambassador to raise the 
refining proposals directly, if the GOU were to issue the 
proposed regulations, they might be knocking on our door 
demanding immediate high-level action, both here and in 
Washington.  We will want to be prepared. End summary. 
 
Getting a Better Deal 
--------------------- 
 
3. (C) Exxon Mobil, Nigeria chief John Chaplin called on 
Ambassador on September 6 to discuss issues facing the oil 
industry in Nigeria. He told the Ambassador the majors' 
current focus was on an inter-ministerial group that was 
looking at renegotiating the Memorandum of Understanding with 
the oil producers to split the revenue above $30 per barrel. 
Currently all revenue above that level goes to the Government 
of Nigeria. The oil producers also are having meaningful 
discussions about tax penalties on operating costs and 
capital costs above a set threshold. To keep costs down and 
profits high, the GON imposes a 50% tax penalty on operating 
costs above $2.40 per barrel, and a similar tax on capital 
costs that exceed a certain threshold. Costs are rising, in 
some cases imposed by the government, and many companies 
exceed the threshold. In total, with various new taxes and 
levies, the Government of Nigeria gets 95% of the profit from 
oil production. Nonetheless, Chaplin said production, 
including new production, is still attractive in Nigeria as 
long as oil prices exceed about $25 per barrel. Still, the 
terms must be right, and Chaplin pointed out that majors did 
not compete for new blocks in the recent bid round. 
 
Pulling Out of Retail 
--------------------- 
 
5. (C) Chaplin said he was on his way to deliver the news to 
the Nigerian National Petroleum Corp. (NNPC) that Exxon Mobil 
was selling off its retail business in 14 of the 26 African 
markets where they had a presence. The entire stakeholding 
was being sold to the French firm Total. Exxon Mobil would 
keep its retail operations in Nigeria, but the subtle message 
would be that they would pull out of countries where the 
investment did not pay off. 
 
Oh Yes, and That Refining Issue 
------------------------------- 
 
6. (C) A good forty minutes into the conversation, Chaplin 
got around to what we had expected to be the main topic of 
the meeting--GON proposals to require oil producers to refine 
some crude in country.  Chaplin said the GON had long been 
pressuring the majors to engage in refining, preferably by 
buying refineries being privatized, or by building new 
refineries.  Given the poor state of refineries and their 
huge legacy of environmental, workforce, and community 
issues, western firms were absolutely unwilling to touch 
them. Now the GON wanted them put crude in and take off 
product, which NNPC Managing Director Kupolokon believed 
would force majors to invest in the refineries, since they 
were nearly moribund. The industry saw this as creeping 
expropriation, both by commandeering their crude, and by 
trying to force investment in a money-losing sector. The 
industry was talking to the GON about the issue, but did not 
believe the discussion was going anywhere. The oil producers 
believe Kupolokon was responding to pressure from the 
President to get the majors involved in refining. He was 
threatening legal action by the National Assembly if the 
majors didn,t comply. 
 
7.  (C) The Ambassador asked how the majors intended to 
address the issue.  Chaplin said they were trying to maintain 
a common front, and to assess the costs to them if the 
regulations were issued, and what their bottom line was in 
terms of what they could accept. The industry was lobbying 
the government on various issues, but Chaplin acknowledged 
that there were currently many separate discussions on 
different issues, which were not integrated.  Together all of 
the potential problems could add up to significant new costs. 
The refining issue, in particular would hurt the investment 
climate. The oil companies had not engaged the President 
recently, in the past he tended to pound tables and demand 
the oil company step up to the table. Chaplin said Exxon 
Mobil's new CEO would be coming to Nigeria soon and hoped to 
meet with President Obasanjo. Further high-level meetings 
would take place involving all the oil majors at the upcoming 
World Petroleum Congress in Johannesburg. When the Ambassador 
asked what Chaplin wanted the Embassy to do, he asked that 
the U.S. continue doing what it already did -- encourage 
deregulation and improving the investment climate. 
 
8. (C) Comment: Earlier Chaplin had suggested to ConGen Lagos 
that the Ambassador meet with Deputy Energy Minister Dakoru 
on behalf of the industry to raise concerns about the 
refining issue (ref A). We expected to Chaplin to reiterate 
this request and possibly upgrade its urgency. Instead, he 
appeared relaxed and hopeful that the MOU and tax discussions 
would bear fruit. This was clearly the priority issue for the 
oil majors. It was further clear that the oil companies did 
not want to annoy the GON by getting the USG to raise the 
refining issue while the MOU negotiations were ongoing, and 
they hoped that upcoming high-level industry meetings with 
the GON might defuse the refinery issue. 
 
9. (C) It is not unusual for the U.S. oil companies to blow 
hot and cold.  They put a great deal of energy into nurturing 
their relationship with the GON, and for the most part prefer 
to try to address industry specific issues themselves.  They 
may turn to the Mission, only to back away from requests on 
further consideration. If their efforts fail to achieve a 
resolution or problems become more acute, they can quickly 
return demanding action.  At this point the government could 
issue new regulations, possibly within a few weeks, and then 
to begin imposing fines for non-compliance. In this case 
major U.S. oil companies could demand immediate action here 
and in Washington.  The Mission will continue to follow the 
issue closely and Mission personnel will meet with the NPPC 
and the Ministry for Energy to learn the GON's positions and 
express concerns about the consequences of this proposal. We 
will continue to keep Washington agencies informed so that we 
are prepared to take appropriate steps if requested by 
industry. 
CAMPBELL