NIGERIA: AMBASSADOR'S MEETING WITH SPECIAL ADVISOR

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 001529

SIPDIS


E.O. 12958: DECL: 06/28/2006
TAGS: EPET ENRG EINV PGOV NI OIL
SUBJECT: NIGERIA: AMBASSADOR'S MEETING WITH SPECIAL ADVISOR
ON PETROLEUM; PREDICTIONS OF INCREASING ROLE FOR U.S.
COMPANIES

REF: A. LAGOS 01290

B. STATE 15002



1. (U) Classified by Ambassador Howard F. Jeter; Reasons 1.5
(B) and (D).



2. (SBU) SUMMARY: On June 22 Ambassador Jeter, DOE Energy
Advisor, and Econoff (notetaker) met in Abuja with Special
Advisor to the President for Petroleum Affairs and Energy,
Dr. Rilwanu Lukman. Dr. Lukman indicated that negotiations
for the ongoing Year 2000 Production Sharing Contracts (PSCs)
would soon be finalized. A "marginal field" bid round also
will occur in the near future and the Year 2001 deep water
round will take place in September. Dr. Lukman commented on
the GON's desire to broaden participation in the oil sector
by awarding additional concessions to U.S. firms and by also
encouraging new entrants. With regard to President
Obasanjo's promise to increase Nigerian oil exports to the
U.S., made during the President's Official Visit to
Washington in May, he stated that contracts with
international oil traders expire in September, and as a
result the GON is seeking to re-establish direct crude sales
to the U.S. to fulfill the President's promise. Nigeria's
role in OPEC and GON plans to double oil production and
reserves by 2010 were also discussed. Deregulation efforts,
USG technical assistance, and climate change will be reported
septels. END SUMMARY.



3. (SBU) PSC NEGOTIATIONS: Ambassador Jeter opened the
meeting by commenting that the USG was pleased with the level
of U.S. participation in the Nigerian petroleum sector. We
hoped that this participation would expand beyond investments
in the oil sector and include the natural gas sub-sector.
However, the Ambassador pointed out, the USG was aware of
some problems. One of these is concern over the ongoing Year
2000 Production Sharing Contract (PSC) negotiations.
Successful oil block bidders believe that the GON changed the
rules of the process mid-game, and these negotiations are yet
to be completed six months later.



4. (SBU) PSC BACKGROUND: During the Year 2000 bidding round
the GON indicated to bidders that the previous 1993 PSC
arrangement would serve as the model for the Year 2000 round.
However, when the oil block winners were announced in
December and PSC negotiations commenced the GON put forth two
key PSC changes (Ref A). One change was adjusting the Profit
Oil Split (POS) ratio to the GON's advantage. The other was
GON insistence that the Nigerian National Petroleum
Corporation (NNPC) also be included in a Stability of Law
Clause. The Profit Oil Split change meant that the
companies' economic analyses, upon which they based their
bids, changed, and the oil blocks now look less profitable.



5. (SBU) PSC BACKGROUND CONT: Jointly including the NNPC in
the Stability of Law Clause is contradictory, according to
the oil companies. The companies point out that this clause
is meant to protect the investor (oil block operator) from
future changes in host government legislation. This is a
standard industry clause, which allows the operator to
renegotiate a contract if future legislation negatively
impacts the profitability of the investment. To include the
NNPC within this clause would in fact be protecting a
government parastatal from government action.



6. (SBU) PSC NEGOTIATIONS: Dr. Lukman's response was that the
important aspect of any agreement was the intention behind
it. He believes that both sides should have the right to
modify an agreement without the opposite party feeling
cheated. He stated that the GON would not make drastic
changes to any agreement, and claimed that in past
negotiations some changes had been to oil companies' benefit.
Other changes had been to the GON's advantage. Lukman
stated that when the 1993 PSC agreements were negotiated, no
one imagined the oil discoveries that would take place in
Nigeria's offshore. These major discoveries and the nature
of deep offshore exploration now required a new type of PSC
arrangement.



7. (SBU) PSC NEGOTIATIONS: Lukman went on to explain that
with the reintroduction of democracy came the oversight of
the National Assembly. He stated that National Assembly
members have traveled to other oil-producing countries to
learn more about the industry, and to ensure that the GON was
receiving its fair share of oil revenues. As a result, it
was the National Assembly that pushed for the 70/30 Profit
Oil Split between the oil companies and the NNPC
respectively, not his office or the NNPC. Lukman stated "we
can defend 70/30, but with 80/20, we are in trouble."
Lukman indicated that in his view this ratio (for the first
tranche of 350 million barrels of oil produced) was fair and
a compromise will soon be reached. On the Stability of Law
Clause Dr. Lukman stated, "Don't worry...we can take care of
that," implying the GON will drop its demand that the NNPC be
included. (Comment: Lukman's optimism on this issue contrasts
with the gloom of Chevron's MD Ray Wilcox, whom the
Ambassador saw briefly on June 27. Wilcox said he had "no
reason" to think there would be a quick resolution of these
issues. Moreover, he characterized the GON's attitude toward
the PSC negotiations as bordering on indifference, with
little show of flexibility in meeting the oil companies half
way. End Comment.)



8. (C) OPPORTUNITIES FOR U.S. FIRMS: Continuing the
discussion, Ambassador Jeter commented that Royal Dutch Shell
still remains a major player in Nigeria, but American firms
appeared to be taking the lead, especially on new offshore
exploration. Dr. Lukman agreed and stated that this was a
positive development. The GON believes that such a trend
provides balance, and Dr. Lukman suggested that in five or
six years we may see a new configuration of the Nigerian oil
sector with American firms as the leading producers. Lukman
pointed out that the GON was encouraging two significant
American investments in the gas sector, an ExxonMobil-led
Western Niger Delta Liquefied Natural Gas (LNG) Plant, and
the Chevron Gas-to-Liquids project. Lukman suggested that as
these projects develop it would only be natural for product
exports to be directed to the U.S. market. He explained that
the existing Shell-led Nigerian Liquefied Natural Gas Plant
supplied the European market, and hoped that a U.S. LNG plant
would supply the United States. Lukman went on to reiterate
a GON goal first stated by Lukman during President Obasanjo's
recent May visit to Washington: to capture 5% of the U.S. gas
market.



9. (SBU) MARGINAL FIELDS/YEAR 2001 OFFSHORE ROUND: The
upcoming "marginal field" round was also raised. Dr. Lukman
stated that this round will take place in the near future,
and that a separate deep off-shore round will take place in
September 2001. The "marginal field" round will not only
provide opportunities for indigenous operators, but also for
U.S. independents. Independent American companies may bid as
technical partners alongside Nigerian firms. This exercise
should broaden the Nigerian oil sector, and could potentially
bring a new type of American oil firm to Nigeria.



10. (C) OCEAN ENERGY: Following on the topic of independents,
Ambassador Jeter raised the case of Ocean Energy, and
explained that the USG had still not received an explanation
for the revocation of its oil block award. (Note: Ocean
Energy was awarded a share of OPL 250, this award was later
revoked for reasons still unknown. (Ref B). End Note.) Dr.
Lukman replied that he didn't know what had happened, and
that the question should be directed to President Obasanjo.
Lukman offered that "he hoped people did not mess things up
again, because the President has been clear to give them
(Ocean Energy) another chance." Lukman said he believed
Ocean Energy "to be a good company, but someone may have
given President Obasanjo inaccurate information." However,
Lukman encouraged Ocean Energy to bid again, but to do so
independently. Ambassador noted that this was previously the
advice we had given to Ocean Energy, and had urged them to
become better known in Nigeria prior to the net offshore
round. Lukman emphasized opportunities for U.S. independents
in general by pointing out that "we don't want all the big
boys."



11. (C) OPEC: In response to questions regarding Nigeria's
role in OPEC, Dr. Lukman stated that he remains the head of
the Nigerian delegation. He is also the Alternate Chairman
of the Conference of OPEC Ministers. Lukman believes that
the Iraqi action and the present crude shortfall will be made
up by OPEC members, but as a contingency OPEC members agreed
to meet in July. Lukman indicated the price band mechanism
in place would automatically trigger a 500,000 barrel a day
increase if necessary. When asked if the GON would be in
favor of increasing production beyond 500,000 barrels if the
price of crude continued to increase, Dr. Lukman replied that
"we would have to do something."



12. (SBU) DOUBLING NIGERIAN PRODUCTION: On the domestic
front, Dr. Lukman explained that the GON has embarked upon a
plan to nearly double current production capacity from 2.5
million barrels a day and reserves of 25 billion barrels to 4
million barrels a day and 40 billion barrels of reserves by

2010. The GON intends to gradually increase production and
reserve levels in tandem. Then as the demand for OPEC oil
grows, the GON will be in a position to increase crude
exports as OPEC quotas increase. (Presently, Nigeria has
some spare capacity on the order of several hundred thousand
barrels per day. In addition, Nigeria produces 120,000
barrels of condensate a day that is not included within the
OPEC quota.) Dr. Lukman indicated OPEC countries eventually
want to establish a reserve equivalent to 10 percent of their
production capacity as a "market cushion."



13. (C) COMMENT: The meeting with Dr. Lukman was very
positive and very productive; however, he is obviously a
skilled diplomat who was careful to emphasize the positive
future ahead for U.S. companies. If his statements are
correct, we could see an early end to the Year 2000 PSC
stalemate. This will clear the way for a "marginal field"
round and an additional deep offshore round. Investment
opportunities for U.S. companies are real. We hope that the
GON is sincere in its desire to reconfigure the oil sector so
that over time U.S. firms become the leading producers.
Ambassador Jeter stated that such a move would clearly
illustrate that the U.S. - Nigeria bilateral relationship is
indeed a "special" one.



14. (C) We still have no answer on Ocean Energy, but are told
that the U.S. independent should try again. Lukman agreed
that a regular dialogue with the Ambassador would be helpful,
and we intend to take him up on that offer.
Jeter