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Cablegate: Tfiz01: Nigeria Energy Update, March 31

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 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

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