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Cablegate: Nigeria: Biweekly Energy Report No. 1

This record is a partial extract of the original cable. The full text of the original cable is not available.

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.


----------
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.


---------------------
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.


------------------
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.)


---------
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.


-------
Comment
-------


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

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