US embassy cable - 03LAGOS99

UNCLAS SECTION 01 OF 03 LAGOS 000099 
 
SIPDIS 
 
 
PARIS FOR OECD/IEA 
 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EFIN, ECON, PINS, NI 
SUBJECT:  Nigeria: Biweekly Energy Report No. 1 
 
 
(This is the first in a series of biweekly reports on the 
energy sector in Nigeria.  Information for these reports 
will be culled from open sources as well as contacts by the 
Mission with key players, official and commercial, in 
Nigeria's oil and gas-producing community.) 
 
 
1. Summary.  In late December, the Government of Nigeria 
(GON) released 24 billion Naira to its international oil 
joint venture partners in payment of arrears outstanding 
since the last era of military rule (l994-99).  The deferral 
of payments had slowed investment by Nigeria's joint 
partners in the oil and gas sector in recent years.  Seeking 
to increase local content, the GON is pressing for 
indigenous companies to account for at least 40 percent of 
human and material inputs in new projects, and is 
encouraging Nigerians to raise local content in the sector 
by funding areas where they have expertise. Gas flaring is 
down and use of natural gas is up. President Obasanjo 
announced a 2004 target for ending gas flaring, but some 
companies may be exempt from this deadline, at least 
temporarily.  A fire at the Nigeria National Petroleum 
Company (NNPC) headquarters completely gutted the building 
the day before Christmas.  Theories for the cause run from 
arson to cover up wrongdoing to another tragic accident. 
Septel will provide details. End summary. 
 
 
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Cash Calls 
---------- 
 
 
2.  The longstanding delay that foreign oil companies had 
encountered in obtaining cash call payments for the period 
1994-99 has been partially resolved, according to press 
reports.  In late December, the NNPC reportedly made 
payments totaling 24 billion naira (about 185.0 million USD) 
to operators of joint ventures.  Cash call payments defray 
the government's share of operating costs under joint 
venture arrangements in which the GON holds a 57 percent 
share.  The arrears date back to military rule during the 
Abacha years. 
 
 
3.  While the arrears in nairas have been liquidated for 
1994-1999, an industry source told us January 6 that the 
NNPC has not liquidated the foreign exchange component of 
the arrears outstanding for that period.  There is 
disagreement over the amount owed.  The foreign companies 
put the amount at 500 million USD while the government 
claims 300 million USD is owed.  The deferral of the dollar 
payments has meant slower development of new fields.  The 
naira component allows companies to make local purchases and 
pay local staff salaries.  The U.S. currency permits 
companies to obtain needed services and supplies offshore. 
 
 
4.  Our source added that the cash call payment to his 
company last month meant that the payments that it received 
in 2002 were the largest in fifteen years.  Our source said 
the NNPC is current in its naira and dollar cash call 
payments to the company going back to the year 2002.  Some 
dollar arrears for the period before 2000 remain 
outstanding. 
 
 
5.  The delay in cash call payments had seriously restricted 
foreign oil companies' ability to expand production and had 
added extra costs to their operations.  The companies had 
partly compensated by reducing the number of rigs operating, 
retiring staff prematurely or cutting back on the work 
force, merging departments, and dropping some employee 
perks. In the future, the issue of cash call arrears should 
be eliminated, as the GON shifts to Production Sharing 
Contracts (PSC's) as the means to develop hugely capital- 
intensive deep off-shore fields. 
 
 
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Indigenous Investment 
--------------------- 
 
 
6.  The GON is encouraging Nigerian entrepreneurs to 
participate actively in the oil and gas industry.  Toward 
this end, the GON wants to see the local content of current 
and future projects raised to at least 40 percent.  Part of 
the problem facing start-up firms has been lack of capital. 
One of the ways of getting a foothold in the industry has 
been through purchase of existing fields with proven 
reserves.  This usually has meant acquiring marginal fields 
or acquiring part or all of the GON's equity in a joint 
venture. Marginal fields are fields that foreign companies 
have abandoned because they appeared no longer to be 
commercially viable.  The GON requires that marginal fields 
be set aside for indigenous companies with expertise in 
specific technical areas. 
 
 
7.  Another avenue of entry into the market for Nigerian 
entrepreneurs is through the provision of services to the 
oil and gas industry. However, most Nigerian firms do not 
have the financial ability to compete with the international 
firms that provide services to the industry.  Few Nigerian 
firms can do this now because sophisticated technical skills 
and advance equipment are required.  Most Nigerian 
entrepreneurs lease equipment at present.  Nigerians are 
nonetheless hoping to find a niche through which to supply 
selected services to the industry. 
 
 
8.  Because Nigeria's primary source of revenue and means to 
"good" employment is the oil and gas industry, businessmen 
are learning about opportunities for partnerships, and 
entrepreneurs are emerging.  Since Nigeria's focus in the 
coming years will be on offshore production of oil and gas, 
some Nigerian entrepreneurs may specialize in deep-sea 
diving services.  Other Nigerian firms are considering 
arrangements for provision of leased drilling rigs to 
production companies.  Some have opted to supply pipes for 
oil and gas lines.  Other Nigerian firms want to produce 
drilling mud and associated chemical products.  The 
challenge for these firms will be producing chemicals that 
conform to American Petroleum Institute standards. 
 
 
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Natural Gas Sector 
------------------ 
 
 
9.   President Obasanjo recently announced plans to end gas 
flaring by 2004 while he was attending the January 7 
commissioning of an industrial gas project in Ogun State. 
The President conditioned his statement, saying "some of the 
oil companies might be exempted from the 2004 deadline." 
Technical Assistant to the NNPC Group Managing Director, 
Austen Oniwon tells us that most flaring will not end by 
2004. Oniwon predicted the next significant reduction of 
flaring will occur when the LNG Trains 4 and 5 become 
operational in 2005 or 2006. (Note: About 50 percent 
associated gas is now flared compared to more than 70 
percent in the mid-1990s.) 
 
 
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NNPC Fire 
--------- 
 
 
10.  The Lagos office of the Nigerian National Petroleum 
Corporation (NNPC) was completely gutted by fire on December 
24.  The building, located on Ikoyi Island in Lagos, housed 
the offices of the Nigerian Petroleum Investment Management 
Services (NAPIMS), which is responsible for GON investments 
in the oil industry, and the Pipelines and Products 
Marketing Company (PPMC), whose mandate is marketing 
petroleum products. The leader of the Youth Democratic 
Movement (a previously unknown group) claimed responsibility 
for what is commonly believed to have been arson.  Some of 
our industry sources have speculated that NNPC employees 
seeking to cover up details of long-term fraud within NNPC 
set the building on fire. 
 
 
11. While the implications of the fire are being sorted out, 
it should be noted that joint ventures (JV) account for 
approximately 90 percent of Nigeria's oil production. 
NAPIMS supervises the JV operations so the destruction of 
NAPIM's records may have an adverse impact on oil production 
capacity, especially for new fields for which NAPIMS is 
presently processing contracts.   The fire purportedly began 
on the eighth floor of the building, which housed NAPIMS, 
and later re-ignited on the second floor, where PPMC was 
located.   Although the files of the GON's oil investments 
and joint venture activities are reportedly backed up at 
NNPC's headquarters in the capital and at the international 
oil company offices, it remains to be seen how many of the 
NNPC records can be validly and reliably reconstituted. 
 
 
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Comment 
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12. The payment of cash calls to companies was long overdue. 
While the Obasanjo Administration has made efforts to pay 
legitimate debts incurred during military rule, the 
international oil companies still suffered when their cash 
call payments were held up.  The NNPC's foreign partners 
have had to delay development of projects, shut down rigs, 
downsize and retrench in other ways to cut expenditures. 
Added to this has been the uncertainty of when payment in 
dollars will be made for the years prior to 1999 and in what 
amount. That said, the Obasanjo Administration has done a 
much better job in cleaning up cash call arrears than any 
contemporary Nigerian government. 
 
 
13. Given that many indigenous companies will work marginal 
oil fields, we plan to address the political and economic 
importance of progress on these fields in septels.  The GON, 
in its effort to encourage local content, may have to move 
cautiously since most indigenous companies lack funds and 
expertise. 
 
 
14. We have reason to believe that the investigation of the 
NNPC fire is not being conducted in a serious manner and 
will never determine the cause of the blaze (see septel). 
We also do not know yet what the eventual cost of the NNPC 
inferno will be.  In recent years, major suspicious fires 
consumed the Lagos offices of the Ministry of Defense and 
NITEL (Nigerian Telecommunications).  With or without facts, 
the general assumption is that arson to cover up misdeeds 
was the cause and the investigation will flicker and 
eventually die out. 
 
 
Hinson-Jones