NIGERIA: U.S. OIL EXECUTIVES TELL SENATOR BINGAMAN

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 002665

SIPDIS


E.O. 12958: DECL: 09/12/2012
TAGS: OREP EPET SENV ECON PGOV NI
SUBJECT: NIGERIA: U.S. OIL EXECUTIVES TELL SENATOR BINGAMAN
FLARING REDUCTION DEPENDS ON GON FUNDING

REF: ABUJA 3201


Classified by Ambassador Howard F. Jeter; Reason 1.5 (d)



1. (C) Summary: On August 31, Senator Bingaman (D-New
Mexico) met representatives of the three largest
Nigerian-based U.S. oil companies (ChevronTexaco, Conoco, and
ExxonMobile) to discuss natural gas flaring in Nigeria. The
oil executives stated that efforts to halt gas flaring have
been hamstrung by the GON's lack of funding to the Nigerian
National Petroleum Corporation (NNPC). ExxonMobil, second
largest producer in Nigeria after Shell, with 520,000 barrels
per day (bpd),plans to end flaring by 2005; Chevron-Texaco,
with production around 450,000 bpd, hopes to stop gas flaring
by 2007, a year before the GON-mandated 2008 deadline.
Conoco, a relatively small producer at 15,500 bpd, will
deplete its current production field in 2004. The deep-water
blocks the companies are now developing will not flare gas.
The executives added that development of the natural gas
industry and of an internal market for natural gas has been
stifled by the GON's inability to formulate natural gas
policies that encourage private sector investment. End
summary.



2. (C) The U.S. oil executives who met with Senator Bingaman
were Steven L. Howard, ChevronTexaco Nigeria Limited General
Manager Finances and IT Department; Larry Salz, ExxonMobil
Producing Nigeria Unit Limited, Executive Director,
Production; John T. Capps, Conoco Energy Nigeria Limited
President and Managing Director.


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Senator Concerned by Gas Flaring
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3. (SBU) Senator Bingaman told the oil executives that his
interest in gas flaring had been piqued after meeting with
World Bank (WB) officials in Washington in early August.
Briefing the Senator on a proposed $3 to $4 million dollar
program to curtail gas flaring and venting, the WB officials
identified Russia and Nigeria as the two most prolific gas
flarers, with as much as 75 per cent of Nigeria's natural gas
being wasted. Pointing to the economic and environmental
losses caused by gas flaring, the Senator asked the oil
executives what steps they were taking to rectify this loss.


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Slow Progress on Gas Flaring
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4. (C) Salz said ExxonMobil, which mostly re-injects natural
gas into the wells in order to lift more crude, flares 25% to
30%, "probably the lowest in Nigeria." Salz stated that by
Nigerian law, all flaring should halt in 2008; ExxonMobil has
set 2005 to eliminate gas flaring at all of its facilities.
Salz said the major problem in halting gas flaring was the
NNPC, which holds 60% of the JV to ExxonMobil's 40%. The
NNPC's budget has been cut by the GON and will likely not be
able to provide its share of the $2.5 billion project to halt
gas flaring, he concluded.



5. (C) Comment: Through the NNPC, the GON owns the
controlling interests in all joint ventures or production
sharing contract production blocks with oil companies. The
NNPC, which relies on the GON for its annual budget, has been
unable to provide its share of the capital investments
required to fund gas flaring reduction facilities. End
Comment.


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Political Machinations Complicate Problem
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6. (C) Senator Bingaman remarked that, meeting earlier in
the day, Nigerian President Obasanjo told the CODEL that gas
flaring would end by 2004. Salz responded that the current
pace of GON investment would not sustain the President's
prediction. Salz added, "Nigeria has been slow to stop gas
flaring because it is easier to flare than to re-inject or
sell it." ChevronTexaco's Howard then said that though there
is a huge potential market for natural gas in Nigeria, it is
not profitable to produce and sell because, in part, the GON
keeps electric and natural gas prices low.



7. (C) Capps reported that Conoco would halt oil flaring as
soon as its only oil field runs dry, probably in 2004.
Concoco's future projects will not flare gas. Howard said
that ChevronTexaco has started projects to halt gas flaring
by the GON's mandated 2008 date, and hopes to complete them
by 2007. Bingaman asked the executives why the NNPC was not
acting to halt gas flaring sooner. ExxonMobile's Salz
believes the problem is money, for which there are many
demands in the GON. He explained that last year the GON gave
NNPC $3.1 billion of which ExxonMobile's budget was $1.3
billion. This year that budget was cut by $350 million to
$950 million. Simply spoken, the GON penalizes oil companies
for flaring, but does not provide NNPC the funding necessary
to end it. Nigeria is still not very environmentally
conscious and a reduction of flaring, the executives
speculated, may not be as politically attractive as other
potential uses of the limited government funds.


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Uncertainty in Natural Gas Regime Makes Investors Wary
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8. (C) The Senator asked about plans to build natural gas
power plants that would use the gas now being flared.
ChevronTexaco's Howard said the lack of an integrated policy
on natural gas hurts development of the gas and power
industries. For example, the GON tries to stimulate the gas
industry by taxing profits at 30 per cent (as compared to 70
per cent for oil). But another measure, entry of capital
goods duty free, was revoked recently as a way to gather
revenue. A USAID Officer also noted that the GON has not
decided how to administratively divide up the natural gas
portfolio. A lack of clear administrative guidelines and the
unclear pricing and regulatory policy in power generation and
natural gas have dampened interest by potential investors.


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75 per cent flared is probably too high
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9. (C) Bingaman asked whether the WB estimate that Nigeria
flares 75 per cent of its natural gas was accurate. The oil
executives replied in unison that they thought the figure too
high. Oil companies must provide monthly flaring reports to
the GON and the NNPC should be able to provide an accurate
number. The Senator stated that he was concerned about the
flaring issue and would try to build support in the Senate
for the WB's initiative to reduce gas flaring.



10. (C) Comment: Inadequate GON funding of the NNPC bodes
poorly for a reduction in Nigeria's gas flaring at the rate
the companies plan. This does not mean that the GON is
disinterested in gas flaring. A high GON energy sector
priority is to become a major player in the natural gas
market. To do so, Nigeria must start capturing the gas it
now burns. The hurdle is that the GON's current budgetary
squeeze makes it difficult to invest significant funds to end
gas flaring in the short-term. Because of the GON's
financial constraints, this is an issue we must continue to
push if we are to get more rapid GON movement to end the
environmentally damaging gas flaring.
JETER