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Cablegate: Experts Assess Nigerian Petroleum Industry Bill

VZCZCXRO3555
PP RUEHMA RUEHPA
DE RUEHOS #0393/01 2921515
ZNR UUUUU ZZH
P 191515Z OCT 09
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 0988
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 0570
RUEHLO/AMEMBASSY LONDON 0813
RUEHTC/AMEMBASSY THE HAGUE 0665
RUEHVI/AMEMBASSY VIENNA 0079
RUEAIIA/CIA WASHINGTON DC
RHMFISS/HQ USAFRICOM STUTTGART GE
RHEFDIA/DIA WASHINGTON DC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 LAGOS 000393

SENSITIVE
SIPDIS

COMMERCE FOR KBURRESS
AFRICOM FOR CGAY
TREASURY FOR DPETERS, RHALL, RABDULRAZAK
STATE PASS USTR FOR LISER, AGAMA
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS
STATE PASS TDA FOR EEBONG, DSHUSTER
STATE PASS EXIM FOR JRICHTER
STATE PASS USAID FOR NFREEMAN, GBERTOLIN
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: EPET ECON EFIN EINV PGOV NI
SUBJECT: EXPERTS ASSESS NIGERIAN PETROLEUM INDUSTRY BILL

REF: A. ABUJA 1836
B. ABUJA 1764

SENSITIVE BUT UNCLASSIFIED -- PLEASE HANDLE ACCORDINGLY
-------
SUMMARY
-------

1. (SBU) Industry experts continue to review the pros and
cons of the proposed Petroleum Industry Bill (PIB).
Increased GON revenue, and excluded credits for security,
contracting, and finance costs remain key concern for oil
companies. The GON has retained the consulting services of
an oil and gas expert to better understand the concerns of
the oil companies and advise the GON on how to fine tune the
PIB. END SUMMARY.

------------------------------------------
Many Facets of the Petroleum Industry Bill
------------------------------------------

2. (SBU) A Lagos Business School roundtable on the Nigerian
oil and gas industry on September 29 focused on the proposed
PIB. Energy and taxation law expert Adeoye Adefulu briefed
on the PIB version submitted to the National Assembly in
December 2008 and which is now back at the committee stage
following its second reading. Adefulu said there are now
several versions of the bill due to the continued work on the
PIB by the Ministry of Petroleum Resources and its
interagency team. He said a fourth version, significantly
different from the original version, was later submitted to
the National Assembly as a memorandum. Adefulu concluded the
latter version was an improvement in that it favored the
Nigerian government and Nigerian oil companies.

3. (SBU) KPMG partner on tax and regulatory services Victor
Onyekpa said the PIB aims to increase the
government's take, energize the gas sector, and integrate oil
and gas into the Nigerian and global economies, but fails to
balance increased government take with sustained industry
investment. Onyekpa said a government take of 91 percent
under the PIB is too high to allow for industry investment,
and this could lead to a decline of GON revenue. He also
faulted the need for the Minister of Petroleum Resources to
approve the articles of association and dividend payment of
the Incorporated Joint Ventures (IJVs), as proposed in the
PIB. Onyekpa questioned why private IJVs should require a
government official's approval to disburse dividends.

------------------------------------------
How Nigerian Fiscal Terms Compare Globally
------------------------------------------

4. (SBU) Wood Mackenzie principal analyst Stewart Williams
compared the current and proposed fiscal terms for upstream
projects in Nigeria with those in the United States, Brazil,
Canada, and Venezuela. He concluded that the GON's share of
over 90 percent is among the highest globally and is a
disincentive to new investment under the existing JV regime
in Nigeria. Williams said Nigeria's share of the pre-take
(project revenue, less costs) cash flow has remained high at
92-97 percent over the years despite varied levels of
profitability in the joint ventures. He estimated the GON
had also received $20.7 billion or 66 percent of pre-take
cash flow from Production Sharing Contracts (PSC) projects
between 2000 and 2009, as compared with the $10.5 billion in
revenue retained by the companies.

------------------------
Pros and Cons of the PIB

LAGOS 00000393 002 OF 003


------------------------

5. (SBU) Williams continued that the PIB seeks to generate
more revenue for the GON and restructure the Nigerian
National Petroleum Corporation (NNPC). It introduces
flexibility in the government share, and enhances the
economic viability of smaller (20 million barrel) fields,
which are mostly operated by Nigerians, through a more
progressive and generally lower GON share for such fields.
Williams said the PIB should create a more transparent and
accountable legal framework for procedures, contracts, and
payments to modernize the NNPC and make it more able to fund
projects.

6. (SBU) Williams said a high government take under the PIB
fiscal terms is unfavorable for larger (100 million barrel)
oil fields and renders deepwater (500 million barrel) oil
fields uneconomic even at $90 per barrel. As much as a third
of costs may be disallowed as deductions for tax and fiscal
administration of the terms will be more complex with the use
of multiple collectors. Williams opined that the PIB's
emphasis on local content will likely result in higher costs
and project delays in the short term, while gas projects will
remain uneconomic even if the GON's share were zero.

----------------------------------------
PIB May Kill Nigeria's Critical Industry
----------------------------------------

7. (SBU) Financial Derivatives Company Managing Director
Bismarck Rewane called the PIB a "mixed blessing." Rewane
emphasized that Nigeria's non-oil earnings are not enough to
fund its development plan and that Nigeria risks losing
investments if the PIB is passed as is. Rewane said the
motives of the PIB were noble and nationalistic, but
Nigeria's current bargaining power is much lower than it used
to be given the prevalence of alternate investment
destinations in the Gulf of Guinea. He noted that the robust
oil industries in Angola, Sao Tome and Principe, and now
Ghana have eroded Nigeria's attraction to foreign
investments, especially in light of Niger Delta unrest. He
observed that there were deep political undertones to the PIB
but urged Nigeria to decide what it really wants from the oil
sector (more revenue, better technology transfer, or better
deals from multinational oil companies) and align this with
current policies like local content and gas flare-out to get
the critical balance required in the PIB.

----------------------------
GON Moves to Engage Industry
----------------------------

8. (SBU) According to multiple industry contacts, the GON
has retained oil and gas expert Pedro Vermeer to help
fine-tune the PIB. Vermeer is expected to consult with oil
companies to understand their reservations about the bill and
advise the GON on how to accommodate such concerns. Onyekpa
of KPMG cited this as progress since the GON had previously
rebuffed dialogue with the oil companies under the aegis of
the Oil Producer's Trade Section (OPTS). Onyekpa also
advised the oil companies to buy more media airtime to
educate a broader audience on the shortfalls of the PIB.

-------
COMMENT
-------

9. (SBU) The PIB's progress has slowed down in the National
Assembly, as more outside experts weigh in on the plusses and
minuses of the bill. An IMF delegation that his been asked

LAGOS 00000393 003 OF 003


to look at the PIB is in Abuja now. The Minister of
Petroleum Resources has stated his intent to garner the
support of the World Bank by year-end. The Mission will
report on the results of the IMF and World Bank review as
soon as their reviews are available.

10. (U) ConGen Lagos has coordinated this telegram with
Embassy Abuja.
WALSH

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