US embassy cable - 03LAGOS384

UNCLAS SECTION 01 OF 03 LAGOS 000384 
 
SIPDIS 
 
 
PARIS FOR OECD/IEA 
 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EFIN, ECON, EINV, PINS, NI 
SUBJECT: NIGERIA: ENERGY UPDATE, FEB 20 
 
 
1. (U) This periodic update covering energy issues includes: 
--Oil Strike Suspended, No Effect on Exports 
--Wellhead Blows in Ogoniland 
--Local Content Rule Gives U.S. Firms Opportunity and Risk 
--Gas Developments, and 
--Almost Never Ever Power Anywhere 
 
 
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OIL STRIKE SUSPENDED, NO EFFECT ON EXPORTS 
------------------------------------------ 
 
 
2. (U) The strike by Department of Petroleum Resources (DPR) 
employees has been suspended before reaching a full week. 
Oil producers reprted no effect on production.  DPR efforts 
at placing managers in the field to conduct the inspection 
and gatekeeper functions of DPR appear to have kept all 
lifting and exporting processes on track.  Meetings between 
the various oil industry unions and government and 
legislative officials apparently resolved the strike, at 
least temporarily, which DPR called in response to 
outstanding salary payments and its assertion that DPR must 
be granted autonomy from GON influence.  Reports indicate 
that the GON agreed to immediately pay salary and allowance 
arrears and to continue talks to develop a mechanism to give 
DPR more autonomy. 
 
 
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WELLHEAD BLOWS IN SOUTH SOUTH 
----------------------------- 
 
 
3. (U) On Monday, February 17, a Shell Oil Company wellhead 
ruptured in the Ogoni region of Rivers State east of Port 
Harcourt.  Shell no longer extractsoil from Ogoniland, but 
maintains old wells and  pipeline in the area.  A news 
story the following Friday reported a major blowout with 
significant spillage and potential environmental damage, but 
a Shell representative had informed Post earlier in the week 
that the situation was under control and spillage minimal. 
 
 
4. (U) Shell reported that a young man tampered with the 
device known as a Christmas tree attached to the wellhead 
and broke open a valve.  This caused a tremendous release of 
gas pressure and noise, frightening the man who ran from the 
site, but also alerting nearby townspeople who apprehended 
him and turned him over to police.  Shell reported that 
because of the high gas content of crude in that region, the 
resulting spill was not as serious as past incidents, 
including a 2001 blowout in the same Yorla field, which 
raised tension between Shell and the Ogoni people.  Shell 
reported that a joint investigative team from the company 
and state and federal governments was on-site by Thursday 
and considered the spill manageable.  Other sources, 
including the Movement for the Survival of the Ogoni People 
(MOSOP), confirmed that the incident appeared contained and 
that local residents had cooperated in Shell's efforts. 
 
 
5. (U) COMMENT: In previous oilfield incidents in Ogoniland 
and elsewhere, local residents sometimes had tried to 
extract cash payments from oil companies in exchange for 
access to a damaged facility or spill site.  This practice 
raised tensions in the Niger Delta region as oil companies 
and workers were often unwilling to respond immediately to a 
reported crisis, which, the companies claimed, were often 
acts of sabotage to undermine production and extract a 
ransom.  This time, Shell and local residents cooperated, a 
positive sign in the often-troubled region. END COMMENT. 
 
 
--------------------------------------------- ----------- 
LOCAL CONTENT RULE GIVES U.S. FIRMS OPPORTUNITY AND RISK 
--------------------------------------------- ----------- 
 
 
6. (U) Chevron Nigeria Ltd. recently brought representatives 
from ten companies, most of which are U.S.-based, to Nigeria 
to explore business opportunities in its supply chain. 
Representatives from companies including G.E., Solar 
Turbines, and Universal Compression were shown fabrication 
facilities in Lagos, Warri, and Onne in order to provide 
them a realistic understanding of what it would take to 
establish operations in Nigeria. Chevron hosted its 
preferred suppliers in Nigeria to instruct them on the needs 
of the company in meeting its local content obligations, and 
on the challenges they would face in establishing operations 
here.  For the most part each company would have to set up a 
joint venture or locally-owned business to supply Chevron, 
and would face the infrastructure and security challenges 
Nigeria poses.  Regardless of the companies' interest or 
capacity to establish operations in Nigeria, Chevron is 
committed to meeting its local content target. Chevron has a 
joint venture agreement with the Nigerian National Petroleum 
Corporation (NNPC) that obligates it to comply with a GON 
target of having 40 percent local content in its projects by 
2004. 
 
 
7. (U) A manager in Chevron's supply chain division told 
Econoff that while the visiting companies did not signal an 
immediate interest in establishing Nigerian operations, they 
did seem to take away what Chevron intended to demonstrate; 
that is, while the oil producer is obligated to use local 
content, it would prefer to continue using its known 
suppliers, but the challenges of establishing business 
operations in Nigeria are significant.  The companies 
invited to Nigeria were those suppliers with which Chevron 
does the largest volume of business worldwide, and from 
which Chevron can demand a price advantage.  The manager 
indicated this strategy will be used later in the year in 
Angola since the company faces local content requirements 
from developing countries around the globe and is dealing 
with them in a similar fashion. 
 
 
8. (U) COMMENT: GON local content requirements raise issues 
with respect to Nigeria's compliance with the WTO Agreement 
on Trade-Related Investment Measures, but the immediate goal 
of providing opportunities to domestic companies likely is a 
higher priority for the GON than is paying close attention 
to its international trade obligations.  The willingness of 
companies like ChevronTexaco to not only acquiesce in local 
content rules but also expend resources to convince their 
international suppliers to work within those parameters may 
make it harder for the USG to press for compliance with WTO 
and other trade agreements that these major oil companies 
believe provide no scaleable economic advantage.  If the oil 
majors can help establish workable Nigerian-based business 
entities, it is possible that small American firms or firms 
not having established business ties to the major oil 
producers in Nigeria may not be able to compete fairly for 
future contracts under GON rules or practices.  Should that 
come about, the direct economic power of the big oil 
companies may overshadow USG advocacy efforts and undermine 
trade negotiations.  END COMMENT. 
 
 
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GAS DEVELOPMENTS 
---------------- 
 
 
9. (U) The economic promise of Nigeria's natural gas 
reserves continues to grow as several projects move into new 
phases.  ChevronTexaco recently announced the discovery of 
new gas reserves in the OPL 218 field it controls jointly 
with Norwegian oil producer Statoil offshore of Rivers. 
ChevronTexaco and Shell Oil, owner of the nearby OPL 219 
block, previously signed an MOU for a feasibility study for 
a Floating Liquefied Natural Gas (FLNG) platform to develop 
these fields, and the discovery of deepwater gas in OPL 218 
increases the viability of an FLNG project. 
 
 
10. (U) Several West African countries have signed an 
agreement to bring the West African Gas Pipeline (WAGP) 
closer to reality.  Representatives from Nigeria, Benin, 
Togo and Ghana signed a treaty at the West African Summit in 
Dakar, Senegal, to establish a legal and fiscal framework 
for the project.  To that end, the West African Gas 
Administration will be established to oversee the WAGP from 
its headquarters in Accra, Ghana.  Jay Pryor, Managing 
Director of ChevronTexaco Nigeria, was quoted in press 
accounts as lauding the agreement as an important step for 
establishing conditions necessary for future direct foreign 
investment in the region. 
 
 
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ALMOST NEVER EVER POWER ANYWHERE 
-------------------------------- 
 
 
11. (U) The National Electric Power Authority (NEPA) 
continues to be plagued by power distribution problems. 
Recent reports indicate that slow progress on repairs to gas 
supply lines to NEPA generators is hampering power supply, 
causing increasingly frequent power outages, particularly in 
the Lagos zone.  One NEPA manager was quoted in the Vanguard 
Newspaper as disclosing that while  daily demand for power 
in the Lagos metropolitan area is 1200 megawatts (MW), NEPA 
has been averaging 800MW of production during  the last 
month. 
 
 
12. (U) COMMENT: Power outages and severe fluctuations in 
current and voltage are becoming ever more frequent 
throughout Nigeria.  As the weather continues to grow 
warmer, the rumble of backup generators will become nearly 
constant in wealthy neighborhoods, while darkness will 
settle over poorer areas.  Until Nigeria can provide a 
stable, affordable source of power, it will not attract the 
kind of industrial investment it requires to diversify its 
economy.  Even corporate giants like ChevronTexaco might not 
lure their suppliers to Nigeria if fabricating firms cannot 
keep their machines running. END COMMENT. 
 
 
HINSON-JONES