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Cablegate: Nigeria Threatens Fines On Gas Flaring; Proposes

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DE RUEHOS #0667/01 2781549
ZNR UUUUU ZZH
P 051549Z OCT 07
FM AMCONSUL LAGOS
TO RUEHZK/ECOWAS COLLECTIVE PRIORITY
RUEHUJA/AMEMBASSY ABUJA PRIORITY 9245
RUEHC/SECSTATE WASHDC PRIORITY 9477
INFO 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

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DOE FOR GPERSON, CGAY

E.O. 12958: N/A
TAGS: ENRG EPET SENV NI
SUBJECT: NIGERIA THREATENS FINES ON GAS FLARING; PROPOSES
INCREASED PRICES

1. (SBU) Summary: A World Bank workshop on gas flaring in
Nigeria turned into a discussion on possible increases in
prices for export natural gas. The Nigerian government
accused oil companies of dragging their feet on eliminating
gas flaring and said stiff fines would be imposed at the
start of the year. Oil company representatives countered
that the government had failed to fund gas related projects
and said eliminating flaring by 2008 would increase the
amount of shut-in oil. End Summary.

--------------------------------------------- -------
Top Nigerian Oil Leaders Show Resolve in Gas Flaring
--------------------------------------------- -------

2. (SBU) The World Bank (WB) sponsored a one day workshop on
eliminating gas flaring as part of its Global Gas Flaring
Reduction Initiative. Among the twenty Nigerian government
participants at the meeting were key petroleum officials
including Olatunde Odusina, State Minister for Energy (Gas),
H. Odein Ajumogobia, Minister of State for Energy
(Petroleum), and Tony Chukwueke, Director of the Department
of Petroleum Resources (DPR). No heads of major
international oil companies (IOCs) attended.

3. (SBU) With the goal of stopping gas flaring in Nigeria in
2008 just around the corner, the government of Nigeria (GON)
took a hard-line, as articulated by Odusina. The Minister
refused to consider any further delays in the deadline and
said by January 1, 2008 gas flaring must be eliminated, "or
else." The "or else" was articulated by a DPR
representative as an increase in fines for gas flaring to USD
100 per mscf flared and USD 500 per mscf for companies caught
misrepresenting the amount of gas flared. Additionally,
willful or repeated violations could result in the loss of
concessions and the imposition of criminal penalties on
company executives.

--------------------------------------------- ------
IOCs: 2008 Deadline Would Cause Halt in Production
--------------------------------------------- ------

4. (SBU) Charles Adeniji, Chevron's General Manager for Gas
Commercialization, acted as the lead spokesman for the IOCs.
In his presentation, Adeniji said eliminating gas flaring by
2008 would require the oil companies to stop production from
117 wells until sufficient associated gas (AG) gathering
projects came on line in 2012. According to IOC numbers,
that would result the loss of 480 million barrels of oil over
the four years.

5. (SBU) The IOCs proposed moving the target back to 2012 to
allow time for completion of new AG gathering projects.
Adeniji cited three reasons for failure to reach the 2008
goal. First, and most important, was the failure of the
Nigerian National Petroleum Corporation (NNPC) to fully
provide its share of the joint venture funds for AG projects.
Also hindering the goal were ongoing security problems in
the Delta and a tough domestic content law that resulted in
inadequate numbers of qualified Nigerian subcontractors. A
DPR representative questioned the IOCs' shut-in numbers on
specific details, but claimed the GON was willing to accept
shut-in wells. The DPR representative said stopping
production on those wells would simply defer income and that
would be an "investment in our future."

6. (SBU) In a side bar with Econoff, one high level industry
participant said he anticipates the terms of the fines will
be reduced, but he also expects the GON to make good on its
threat to impose them. As they stand now, the proposed fines
would make AG flaring wells uneconomical and force the IOCs
to cease production from them. During the meeting the IOCs
expressed serious concern about proposed criminal penalties.
Both sides agreed that the IOCs would have a chance to voice
their concerns and provide input as implementing legislation
wound its way through the National Assembly.

---------------------------------------------
Nigeria: Export Gas Prices Increases Possible
---------------------------------------------


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7. (SBU) Talk turned to funding and both sides readily agreed
that natural gas pricing was the crux of the problem.
Chukwueke of the DPR floated the idea of an increase in the
transfer price of export gas to USD 2.50 per mmbtu, up from
approximately USD 0.50 per mmbtu. With higher returns to the
upstream, the GON hoped to attract more third party investors
in gas gathering projects. IOC representatives were
enthusiastic, but non-committal. They said higher prices
would help in the longer term, but delays obtaining
government approval for projects, the difficult work
environment, and the complexity of such projects would mean
that gas flaring would continue into 2008 unless the IOCs
stopped some production.

8. (SBU) As part of the future Gas Master Plan, the GONs all
encompassing plan for developing a natural gas industry, a
NNPC representative described a three tier gas pricing
system. Gas prices for domestic industries and the
electricity sector would be set well below prices established
for gas sales to the international market. DPR and NNPC
representatives were adamant that domestic gas prices were
not likely to rise in the short term, particularly for gas
supplied to the politically sensitive domestic electricity
generation market. In the long term however, NNPC predicted
more price parity between domestic and export prices as the
Nigerian non-oil economy grew.

9. (SBU) Both sides debated the current fiscal terms for gas
projects in Nigeria. Chukwueke accused the IOCs of taking
advantage of terms that permitted offsetting gas project
expenses against current oil revenues. Those terms, he
claimed, had been intended to promote AG projects, but
instead IOCs had used them to build non-associated gas (NAG)
projects. New fiscal terms may eliminate that tax advantage.
The IOCs countered that long term gas contracts demanded a
reliable supply and NAG projects, which tend to be offshore,
were developed to augment often unreliable onshore AG
sources.

-------------------
A Committee is Born
-------------------

10. (SBU) Almost as an afterthought, the participants
returned to the immediate issue of gas flaring. WB
facilitators proposed the idea of establishing yet another
committee. This Flare Reduction Committee, to be hosted by
the Minister of State for Energy (Gas), would consist of IOC
and GON representatives and would coordinate gas flaring
initiatives from both sides. Participants acknowledged
however that the committee could do little to stop flaring by
the 2008 deadline. The WB Country Director Hafez Ganhem
wondered if failure to eliminate flaring in 2008 would bring
a credibility problem to the IOCs and GON. Participants
agreed to include communications strategy as a part of the
new committee. (Note: Although the workshop was billed as a
meeting of stakeholders, no local community representatives
were in attendance. According to one Western NGO
representative, none were invited. End Note.)

11. (SBU) Comment: Some accommodation on the fines will be
reached since neither side wants to see additional wells
shut-in. Where this accommodation will take place is another
issue. Industry representatives expressed confusion over
whether the legislature or the DPR would have the lead on
setting penalties. The GON was notably vague in answering.

12. (SBU) The security situation in the Delta is just one
part of the problem in eliminating gas flaring, and if the
workshop is any indicator, not necessarily the most serious.
Financing problems, a Byzantine policy making apparatus, and
complex and inflexible price controls all contribute to the
failure to end gas flaring and retard the development of the
natural gas industry in general. Gas related legislation and
implementation of the Gas Master Plan will hopefully clear up
some of the regulatory and policy uncertainty. End Comment.
HUTCHINSON

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