Cablegate: Future of Nigerian Oil & Gas

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

UNCLAS SECTION 01 OF 02 LAGOS 002467

SIPDIS

E.O. 12958: N/A
TAGS: NI ECON EINV EPET ENRG
SUBJECT: FUTURE OF NIGERIAN OIL & GAS

1. Cable is sensitive but unclassified. Please protect
accordingly.

2.(SBU) Summary: On July 11 and 12, Econoffs met with a
variety of oil producing and servicing companies to gain
insight into the current state of the Nigerian oil and gas
industry and assess the country's potential contribution to
world oil supply over the next ten years. Companies
expressed very positive views on future exploration and
production opportunities, highlighting their new investments
in deep water and natural gas projects. Oil companies
unanimously agreed they could meet the GON's ambitious
target of 40 billion barrels of reserves and 4 million
barrels/day of production by 2010. While all believe Nigeria
has the capacity to contribute a larger share of world
supply, actual production will depend on OPEC quota
restraints and the country's ability to ttract investment.
End Summary.

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Companies Look to DeepWater
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.(SBU) In a series of meetings with ChevronTexaco,Conoco,
ExxonMobil, Shell, and Halliburton repreentatives, Econoffs
received a detailed view ofthe Nigerian oil and gas sector,
especially the ompanies' plans to seriously increase
production. In order to speak more freely, the
representatives asked that they not be identified directly.
Most of the increase in production will come from deep water
blocks, which are areas with water depths between 500-1500
meters. All companies expressed great enthusiasm over the
future production possibilities of these blocks. Wells
drilled from the first round of deep water licenses, awarded
in 1993, are scheduled to begin producing next year. The
first of those fields, Shell's Bonga, could produce as much
as 225,000 b/d at full operation. The government recently
completed agreements from the 2000 round of deep water
licenses. Companies believe deep water exploration in
Nigeria has only just begun. With more exploration and
advances in technology, many more substantial discoveries
could be made.

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The Future of Gas
----------------------

4.(SBU) Encouraged by the government's ban on routine
flaring by 2008, investment in the gas sector is on the rise.
Although the Nigerian economy is heavily dependent on oil
today, gas could be the future. According to a government
study published last year, Nigeria has an estimated 182
trillion standard cubic feet (tcf) of recoverable gas
reserves. However, sources say the country could possess as
much as 300 tcf. Currently the ninth largest source, some
companies believe Nigeria could become the second or third
largest producer as the industry develops and world demand
for cleaner fuel increases. Currently, most of the gas will
be exported to the European and American markets. Companies
also expect to supply gas to the West African Gas Pipeline
once it is brought online.

5.(SBU) One potential short-term impediment to gas
development is the absence of gas provisions in the
Production Sharing Contracts (PSC), the contracts that govern
the deep water projects. At the moment, the contracts make
no provision for who owns or has the right to develop the
gas. The government and the companies will have to negotiate
a solution. Failure to reach a timely compromise could
hamper future operations.

6.(SBU) In the future, many believe that Nigeria, given the
right conditions, could develop a very successful gas
industry. To encourage the process, oil companies suggest
that the Nigerian government develop a national energy plan,
including policies aimed at increasing domestic gas
utilization. Companies cited deregulation of the gas market,
specifically market driven pricing, as a prerequisite to a
successful market. Companies would also like the government
to create fiscal incentives for private investment in the
sector.

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OPEC : Feeling the cut
----------------------------

7.(SBU) While capacity building investment continues, this
year's OPEC cutbacks have not gone unnoticed in Nigeria.
Even indigenous oil firms have been affected, unlike previous
years when multi-national companies took most of the hit.
During the cutbacks, companies are focusing on capacity
building rather than production. With billions of dollars
being pumped into deepwater and gas projects companies could
be, as one company representative stated, "on a collision
course with OPEC" if the quota levels remain unchanged.

8.(SBU) The question of where OPEC quotas will be allocated
in the future is on the minds of all companies. Some fear
that the government will first allocate production to joint
venture projects, not the deep water PSC blocks, because of
the instant revenue benefit. Under the joint venture
arrangement, the government gets a share of oil revenue
immediately unlike PSCs where the oil companies recover costs
over time before sharing a portion of the profits.
Substantial production cutbacks could have a very negative
impact on the oil companies' large and time sensitive deep
water investments.

--------------------------------------------- ----------
Impact of Community Issues on Production and Investment
--------------------------------------------- ----------

9.(SBU) While investment in deep water and gas projects
continues at full speed, companies continue to wrestle with
the challenges that come with operating in Nigeria. One of
the most significant issues is community relations. Even
though the companies all expressed concern over the daily
impact of community disturbances on operations, they all
believed tht problems were manageable and would not
significantly impact production levels over time. But even
figuring in community interruptions to production (one
company figured 40 percent of total capacity could be offline
at any time), Nigeria's production future still looks
robust.

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The NNPC as a Business Partner
--------------------------------------------

10.(SBU) In addition to community issues, many
representatives expressed frustration in their business
dealings with the NNPC. Even beginning a business venture
with the government can be difficult. One problem expressed
was "contract erosion," meaning that the NNPC has a
tendency to change the rules of the game after contracts were
signed. Lack of transparency in awarding energy sector
contracts was also cited as a serious problem.

11.(SBU) Once ventures begin, general bureaucratic delays
over the course of a project have a significant impact. To go
from winning the license to beginning production can be a
long and frustrating process. Due to bureaucratic
impediments, the first deep water wells will take 10 years to
begin operations, an unusually long period of time according
to company representatives.

12.(SBU) As for future relations, one company representative
stated that the government does not have enough money to
continue all planned projects. This uncertainty creates a
difficult investment climate. As of April 2002, the NNPC was
$1.78 billion behind on its joint venture cash calls, the
government's contribution to costs. However, he stated that
the private sector possesses the capital and the appetite to
increase its share of investment. Companies encouraged
efforts by the USG to support a more stable investment
climate in Nigeria.

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

13.(SBU)Comment: All the oil companies we spoke with gave
the picture of a very robust and expanding Nigerian energy
sector. Despite the obstacles, companies appear undeterred by
potential hurdles such as OPEC quotas, security problems in
the Delta, and frustrating relations with the government.
While investments in capacity building are in full swing,
Nigeria's share of OPEC quotas seems too small given the
level of current investment and the government's own targets
for production. If Nigeria's quota share does not increase,
companies could face difficulties recovering the cost of
their current investments.

14.(SBU) Nigeria remains a committed member of OPEC, giving
every indication they plan to remain within the OPEC fold.
Rilwani Lukman, Obasanjo's oil advisor and current OPEC
President, recently said that Nigeria would like to increase
production but only if the move will not depress prices. It
remains to be seen what the government will do if the
increase in Nigeria's production capacity does not translate
into a greater share of OPEC quotas. In all likelihood,
Nigeria will remain with OPEC and fight for a larger quota
share. However, in the past Nigeria has frequently produced
above its quota and could certainly do so again in the
future. End Comment.
HINSON-JONES

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