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Cablegate: Chevron and Exxon Face Challenges, Continue

VZCZCXYZ0006
PP RUEHWEB

DE RUEHOS #0041/01 0391506
ZNR UUUUU ZZH
P 081506Z FEB 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 9714
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHHH/OPEC COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9447
RUFOADA/JAC MOLESWORTH AFB UK
RUEKJCS/SECDEF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC

UNCLAS LAGOS 000041

SIPDIS

SENSITIVE
SIPDIS

STATE FOR AF/W, INR/AA, DS/IP/AF, DS/ICI/PII, DS/DSS/OSAC
DOE FOR GPERSON, CAROLYN GAY
TREASURY FOR ASEVERENS, SRENENDER, DFIELDS
COMMERCE FOR KBURRESS
STATE PASS USTR FOR ASST USTR FLISER
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR NCABOT
STATE PASS EXIM FOR JRICHTER
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ

E.O. 12958: N/A
TAGS: EPET ENRG PGOV NI
SUBJECT: CHEVRON AND EXXON FACE CHALLENGES, CONTINUE
EXPANSION IN NIGERIA

This cable contains business proprietary information.

1. (SBU) Summary. Based on their operating locations,
Chevron and ExxonMobil (EM) face distinct challenges in
operating in the Niger Delta. Deputy Assistant Secretary
(DAS) Todd Moss, the Ambassador, and Econoff (note taker)
visited Chevron's Escravos oil and gas complex in Delta State
and EM's East Area Project 20 miles offshore of Akwa Ibom
State on January 28. Chevron believes its community
development model has contributed in part to its ability to
operate successfully in Delta State. DAS Moss and the
Ambassador saw active oil bunkering clearly visible near
Chevron's location. Chevron noted it had contact on security
matters with the militants via phone and text messages. Both
Chevron and EM sites were flaring large amounts of natural
gas, highlighting the difficulties both companies will have
in meeting the GON's flareout deadline now "set" for December
31, 2008. Both companies explained about the need for the
GON to either pay long overdue joint venture arrears or find
another mechanism to resolve the financial differences and
disputes. While there are numerous problems facing the
hydrocarbon sector in Nigeria, the country will remain an key
location for international oil company investment. Whether
that investment can translate into better socio-economic
conditions for residents of the impoverished Niger Delta
remains to be seen. End Summary.

----------------------------------------
Oil Bunkering: Easy to See, Hard to Stop
----------------------------------------

2. (SBU) Chevron's Managing Director Fred Nelson hosted the
DAS, the Ambassador, and Econoff (note taker) at Chevron's
Escravos facility, home to an oil export terminal, a natural
gas processing facility, and the future site of a
gas-to-liquids plant that will convert natural gas to diesel
fuel. Plant managers and company executives described in
detail their operations and the problems they face.
According to the executives, Chevron currently produces
302,000 barrels of oil per day (bpd) from its Escravos area
fields. On top of that, an average of 17,000 bpd is stolen
or bunkered, with a record 32,000 barrels stolen the day
before the visit. The briefers supplied photographs of oil
bunkering barges the environmental damage they cause. The
DAS and Ambassador saw actual bunkering and resulting oil
spills and environmental degradation during a subsequent
helicopter tour of the area, where at least ten barges
involved in oil theft were clearly visible. Chevron
executives complained that government security forces (GSF)
make only half-hearted attempts to stop the thieves despite
receiving detailed information from the company, noting their
complicity in the lucrative business The company produced a
slide showing the exact location of known, active oil theft
points and an executive told the DAS that they know exactly
when and how much is being stolen by observing drops in
pipeline pressure. In addition, decrepit oil tankers waiting
offshore to receive the stolen oil often present a hazard to
company activities. On more than one occasion, Chevron has
had to send boats to assist oil tankers that have lost power
and gone adrift in the middle of Chevron offshore oil
platforms. Chevron senior executives asked for USG
assistance in tracking the oil tankers and determining their
final destination. The Ambassador noted that some thought
had gone into an oil tagging and identification process, and
maybe something like a Kimberly process could be done to
counter oil bunkering and ensure that only oil sold through
export terminals was purchased on international markets. The
Ambassador also said she would pass their oil bunkering
information to relevant offices to see if they could
determine the landing location of the tankers.


--------------------------------------------- -----
Chevron's Community Development Paying Dividends?
--------------------------------------------- -----

3. (SBU) Chevron described for the DAS and Ambassador its
local community development efforts. Chevron works through
eight regional development councils (RDC) established near
the company's major operations in the Niger Delta. Through
grants and contracts these RDCs, composed of local community
leaders and stakeholders, are supposed to take ownership of
development in their region, with Chevron playing a
supporting role by providing training and capacity building
in addition to some funds. Additionally, Chevron directly
funds several education and health initiatives in communities
near it facilities. All told, in 2006, Chevron spent USD 43
million directly on community projects and contributed
another USD 28 million to the government's Niger Delta
Development Commission. The company estimates that its
contribution to the oil revenues shared by the Federal
Government with oil producing states totaled USD 233 million
in 2006.

4. (SBU) Chevron believes that its community development
efforts have paid off, at least in the short term. It says
it enjoys a much better relationship with local communities
and suffers less than neighboring Shell from militant
activities in the region. Chevron admitted it maintains
regular contact with members of Tom Polo's militant
organization, going so far as to occasionally call militants
before river-borne supply convoys pass by militant camps to
make sure the situation is stable enough for the convoy to
arrive at Escravos intact. (Note: Tom Polo's "Camp Five"
lies 12 kilometers from Escravos along the river supply route
from Warri. There are no roads leading to or from Escravos.
End Note.)

-----------------------------------
Tom Polo: Militant and Businessman
-----------------------------------

5. (SBU) Near the Escravos gas-to-liquids plant construction
site along the river's edge sat dozens of large house boats
used to house construction workers. The house boats are
rented from local community contractors. As the DAS pointed
out, clearly visible on one of the house boats was the name,
"Tom Polo Limited", the same militant leader responsible for
much of the unrest in the region. The Chevron teamed
commented that they didn't have much choice; in addition to
his militant activities Tom Polo was a local businessman and
his houseboat went through the same vetting process as those
from other companies. (Note: Chevron executives also
remarked that several of the houseboats are leased from a
company owned by former governor James Ibori, currently under
indictment on more than 100 counts of corruption. The
executives said that Chevron had been unaware that the
leasing company belonged to Ibori at the time the boats were
leased. The executives were concerned about this connection
and said Chevron was investigating its options with regard to
these leases. End Note.)

6. (SBU) The Escravos facility is the main gas hub for
Chevron's western fields and is the starting point for
Chevron's gas that flows through the pipeline serving Lagos
and the West African Gas Pipeline. However, militants have
vandalized the Nigerian Gas Company-owned pipeline in several
locations and repairs are slow and repeatedly delayed. As a
consequence, Chevron is flaring virtually all the gas that
arrives at Escravos. The single flare stack launches a flame
that reaches hundreds of feet into the air with a roar like a

jet engine that can be heard all over the complex. Heat from
the flare is noticeable from several hundred yards away,
forcing some workers on the construction site to take 15
minute rest breaks every hour to avoid heat-related
injuries. Ascot Ltd, the contractor hired to repair the
pipeline, is in financial distress and Chevron is unsure if
it is capable of completing the repairs. (Note: Nigerian
company Ascot bought Willbros's troubled subsidiary in 2007
after that company decided to exit the Nigerian market. A
Chevron executive described Ascot as minor machine shop
before its purchase of Willbros Nigeria and he questioned its
ability to operate a major pipeline repair contractor. End
Note.)

------------------------------------------
ExxonMobil: Offshore and Happy to Be There
------------------------------------------

7. (SBU) The DAS and Ambassador accompanied by EM's Managing
Director John Chaplin then toured EM's East Area Project
(EAP). This USD 4.2 billion facility, located 20 miles
offshore of Akwa Ibom State, gathers natural gas currently
being flared, removes the condensate, and then re-injects the
dry gas into the oil fields. The facility is partially
operational with the final portion, the natural gas liquids
(NGL) extraction plant, scheduled to come on-line this year.
Gas reinjected by EAP will allow EM to recover an additional
500 million barrels of oil from surrounding fields and add
275 million barrels of NGL reserves. Additionally, EAP is a
major component in EM's plan to reduce its gas flaring by
gathering gas currently stranded and expanding compression
capability. However, flares resulting from equipment outages
account for the vast majority of EM's flaring total and will
be part of the issue into the future.

8. (SBU) While its offshore oil fields means EM has fewer
community issue than Chevron, it is not entirely free from
problems. Supply boats using Bonny River are repeatedly
attacked by militants. EM now runs its boats in convoys to
facilitate protection, but Chaplin complained that the JTF
was still not up to the task of providing adequate security.
When asked about moving its offshore support operations to a
proposed Lagos deepwater base, Chaplin said the Lagos
facility had run into trouble. Its competitor in Onne is
better connected with the current administration while the
Lagos developers have connections with the out of favor
previous administration. Still, Chaplin asserted that for
security purposes a base in Lagos is preferable and would be
more cost effective in servicing its deep offshore fields
located in the west.

--------------------------------------------
Funding, Policy, Security, and Rising Costs
--------------------------------------------

9. (SBU) While they face different operational and management
challenges, the two major oil companies have similar concerns
about fiscal, policy, and security issues and are plagued by
rising costs. Joint venture arrears were repeatedly
mentioned as a major impediment to future hydrocarbon
development. While generally supportive of the GON efforts
to restructure the joint ventures to permit third party
financing, neither was optimistic that a solution was
imminent and Chevron in particular was pressing for repayment
from Nigeria's excess crude account. Similar sentiments were
expressed about the restructuring of the Nigerian National
Petroleum Corporation (NNPC)- a good idea in theory, but not
likely to be completed in the near future.

10. (SBU) Chaotic policy development and implementation by

the GON was also cited as a concern. Chevron and EM both
commented on the difficulties in long term planning in an
environment of uncertain regulation. They cited unrealistic
Nigerian content rules, equivocation on flare out deadlines
and penalties, and a delayed national natural gas plan as
examples of poor policy planning and implementation that have
hampered hydrocarbon development. Additionally, poorly
written tax rules are often subject to dubious interpretation
by capricious regulators. On a positive note, Chaplin
commented that Nigeria has a good reputation for honoring its
contracts with the oil companies. As an example, he said the
GON had recently rebuffed Chinese demands that Nigeria turn
over one of EM's oil blocks to a Chinese firm in exchange for
Chinese investment in railroads and other infrastructure.

11. (SBU) Comment. Despite the litany of complaints from the
oil companies about how hard it is to work in Nigeria, it was
evident that both Chevron and ExxonMobil view Nigeria as one
of the most important countries in their portfolios and they
continue to make significant investment in exploration and
production. The positives of large potential oil and gas
reserves and a government willing to let them explore for,
produce, and book those reserves clearly outweigh the
negatives, serious as they may be.

12. (SBU) However, the visit to Chevron's facility
highlighted a disheartening aspect of hydrocarbon investment
in the Niger Delta. A multi-billion dollar construction
project in other places would usually mean new jobs, economic
growth, and an increased local tax base as workers and their
families moved to the area and businesses, schools, and
community organizations sprang up to support them. In
Nigeria that simply doesn't happen. Escravos is fenced off
from surrounding communities and provides little direct
economic benefit to the immediate area beyond oil company
"investment" in community development projects. While those
projects may be laudable in their intent, the sustainability
of economic development that depends on commissions, grants,
five year plans, and aid workers, rather than market forces
is debatable. End Comment.

13. (U) This cable cleared by Embassy Abuja.
BLAIR

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