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