US embassy cable - 03LAGOS677

UNCLAS SECTION 01 OF 03 LAGOS 000677 
 
SIPDIS 
 
 
SENSITIVE BUT UNCLASSIFIED 
 
 
PARIS FOR OECD/IEA 
TASHKENT FOR BURKHALTER 
 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EFIN, ECON, EINV, PINS, NI 
SUBJECT: TFIZ01: NIGERIA ENERGY UPDATE, March 31 
 
 
REFS:     A: Abuja 558 
          B: Lagos 624 
          C: Lagos 568 
          D: Abuja 555 
          E: Lagos 499 
 
 
1. (U) This update includes: 
 
 
-- When Will the Oil Flow? Delta Crisis Update 
 
 
-- Running on Empty: Refineries, Power Company and 
Consumers Face Same Plight 
 
 
-- Deep Water Deals: Joint Development Zone Advances 
 
 
------------------------------------------- 
When Will the Oil Flow? Delta Crisis Update 
------------------------------------------- 
 
 
2. (U) Although the violence that has wracked the 
Escravos region of the Niger Delta the last two weeks 
appears to have subsided, oil companies remain hesitant 
to return their employees to facilities in the swamps. 
This situation is causing Nigeria's crude oil 
production to be at least 800,000 barrels per day (bpd) 
below normal(ref A).  The DOE's Energy Information 
Administration (EIA) has put the loss as high as 
900,000 bpd. Unconfirmed reports indicate that Shell 
has told its customers that it may delay loading of 
crude oil from the region through May. 
 
 
3. (SBU) A ChevronTexaco representative told Econoff 
March 31 that the company has left a very small care 
and maintenance crew in place at the tank farm in 
Escravos, and will decide within the next two or three 
days if it is safe to begin re-staffing the facility. 
After such a decision is made, the company will ship 
food, supplies and fuel to the facility in advance of 
workers.  The representative admits the pressure to 
reopen operations is enormous, and personally discounts 
reports that ChevronTexaco or Shell Oil will wait until 
after the elections to start lifting from the region 
again.  Officials from both companies have said they 
would need specific assurances that their people would 
be safe before returning them to the Delta.  In a 
separate conversation, the Dutch Consul General told 
the ConGen that Shell is demanding those assurances 
from the highest levels of the Nigerian government and 
from leaders of the warring communities in the Niger 
Delta. 
 
 
4. (SBU) Our ChevronTexaco contact also reported March 
31 that calm has been restored in the area for several 
days, as both federal and state government officials 
negotiate with Ijaw representatives over ways to keep 
the peace.  Our contact said the federal government 
deployed additional troops to maintain order, but the 
facilities to maintain and transport the troops are so 
poor that this fact causes problems. Because the oil 
companies are sometimes asked to assist with lodging 
and moving troops, they fear they may appear complicit 
in military operations. 
 
 
5. (U) According to a Reuters dispatch, Delta State 
governor James Ibori attributes the recent attacks on 
Itsekiri villages by militant Ijaws to a government 
effort to check illegal oil bunkering.  Ibori 
reportedly claimed that prominent persons employ local 
youths to tap into oil pipelines and siphon products 
for sale on the black market.  Shell Oil is 
particularly vulnerable to such practices as it 
utilizes an extensive aboveground oil pipeline network. 
Other reports indicate that the violence broke out 
after an Ijaw ultimatum for redrawing electoral wards 
expired, after which armed youths blockading the 
Escravos River exchanged gunfire with military and 
police forces escorting vessels through the waterways 
(refs B, C). 
 
 
6. (U) Comment: While it appears that the situation in 
the swamps between Warri and Escravos has been calm for 
four or five days, the oil companies will not rush to 
return their workers to the region without greater 
assurances of safety and restoration of relative peace. 
Some Ijaw leaders have indicated a willingness to cease 
hostilities if the military refrains from retaliation 
against Ijaw villages.  But othe Ijas arecalling for 
mass action to disrupt national elecions scheduled to 
begin in two weeks, including ttacks against oil 
facilities, which so far have enerally been spared in 
the ethnic clashes.  Whie the military forces 
initially appeared unwillig to egage or pursue the 
Ijaw militants (ref D) President Obasanjo declared 
that he will bring o justice the persons responsible 
for the conflict and for the death of military 
personnel.  The ucertainty of the likely courses of 
action by theplayers creates a precarious security 
situation in the region.  The oil companies will 
carefully weigh the risk of renewed violence against 
the need to move oil out of the Delta facilities. 
Predicting how soon oil flows will return to normal 
remains as difficult as predicting the likelihood that 
peace will last in the Delta.  End comment. 
 
 
--------------------------------------------- -- 
Running on Empty: Refineries, Power Company and 
Consumers Face Same Plight 
--------------------------------------------- -- 
 
 
7. (SBU) Recent clashes in the Delta have highlighted 
Nigeria's woefully inadequate refining capacity. 
According to a Chevron-Texaco representative, the 
closure of that company's Escravos transfer station and 
tank farm effectively shut down the government's 
refinery at Warri, as it and the refinery at Kaduna 
began running on their reserves sometime last week. 
Meanwhile, Nigerian National Petroleum Corporation 
(NNPC) reported that it was forced to cut power to much 
of Lagos last week when a gas feeder pipeline that 
fuels the Egbin power plant was vandalized.  While 
Nigeria's aggregate refining capacity is 445,000 bpd in 
theory, chronic maintenance problems plague Nigeria's 
four refineries.  Consequently, Nigeria imports almost 
half of the refined petroleum products it consumes. 
 
 
8. (U) Last month, in response to worldwideincreases 
in the market price of refined petroleum products, 
suppliers diverted Nigeria's expected imports to higher 
paying customers.  This action caused a massive fuel 
shortage and gasoline queues not seen since Nigeria 
returned to democratic rule three years ago (ref E). 
Although the Managing Director of NNPC reportedly 
claims there is no fuel shortage, gas lines and power 
outages continue.  Angry consumers accuse filling 
station owners of employing street boys to extort extra 
money from consumers waiting in line to buy fuel.  The 
Managing Director of Mobil Oil told the ConGen that 
although his station managers control the forecourts, 
the queues of cars that stretch for blocks belong to 
opportunistic thugs selling places in line. With no 
reprieve in sight, black market fuel sellers are 
becoming increasingly prolific throughout urban areas 
like Lagos as consumers scramble to keep their cars 
running and their back-up generators for homes and 
businesses humming. 
 
 
9. (U) About two weeks ago at a meeting called by the 
NNPC, executives of the major downstream operators said 
they would not re-enter the fuel importation business 
unless the government allows for import price parity. 
The federal government sets the maximum price that can 
be charged at the pump for fuel.  The company 
executives said that to cover their costs, they would 
need to charge 37 naira per liter of gasoline, well 
above the current 26-naira pump price. Consequently, 
the NNPC remains essentially the sole importer of fuel. 
One daily paper reported last week that the NNPC lost 
52.4 billion naira ($416 million) on fuel imports in 
the first nine months of 2002. 
 
 
10. (U) Comment.  The ongoing fuel shortage and recent 
trouble in the Delta have focused new light on the 
utter inefficiency of Nigeria's oil refineries.  The 
crises have also rekindled discussion of the possible 
sale of these government owned enterprises to private 
downstream operators, which might then establish import 
price parity (ref E). Since the national elections are 
only a few weeks away, we will not likely see any 
movement in this direction.  The industry unions 
vociferously oppose privatization, and no government 
leader will want to be responsible for a 43 percent 
increase in consumer pump prices. End comment. 
 
 
--------------------------------------------- ---- 
Deep Water Deals: Joint Development Zone Advances 
--------------------------------------------- ---- 
11. (U) Nigeria and Sao Tome and Principe are moving 
closer to developing resources in the Joint Development 
Zone (JDZ) established in the waters of the Gulf of 
Guinea.  The treaty establishing the JDZ was signed in 
2001, but disagreements over details of the treaty and 
an accompanying memorandum of understanding stalled 
progress last year. 
 
 
12. (U) Estimates of the total crude oil reserves in 
the zone range from six to ten billion barrels.  The 
treaty calls for the two countries to share most 
revenue from the zone on a 60/40 split in favor of 
Nigeria, but it must provide additional concessions to 
Sao Tome and Principe in exchange for total rights over 
the most prolific exploration bloc.  Last year, Sao 
Tome President Fradique de Menezes expressed 
dissatisfaction with the terms of the MOU and what he 
felt was Nigeria's slow fulfillment of other pledges. 
These disagreements were apparently resolved in 
February of this year, and seismic and exploration 
agreements are being renegotiated.  It is expected that 
nine blocs will be offered when the countries' 
negotiators approve a licensing round anticipated in 
the coming months.  We understand that ExxonMobil has 
secured a preferential oil bloc through negotiations 
with Sao Tome and Principe.  A representative of a 
Nigerian firm, Chrome Energy and its Houston-based 
subsidiary Environmental Remediation Holding 
Corporation, told Econ staff two weeks ago that his 
company is moving forward with exploration in the zone 
(septel to follow). 
 
 
HINSON-JONES