NIGERIA PROPOSES NEW OPEC QUOTA SCHEME

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 000385

SIPDIS


STATE FOR AF/W AND EB
NSC FOR JFRAZER


E.O. 12958: DECL: 02/19/2013
TAGS: EPET ENRG PREL NI OPEC
SUBJECT: NIGERIA PROPOSES NEW OPEC QUOTA SCHEME

Classified by Ambassador Howard F. Jeter; Reasons 1.5 (b) and
(d).



1. (C) Summary: Special Assistant on Petroleum Issues
Kupolokun told the Ambassador on February 14 that Nigeria had
made a thinly-veiled threat to withdraw from OPEC while
proposing to other members a new quota allocation scheme
based on production capacity and socioeconomic indicators
rather than reserves. Kupolokun enlisted U.S. support for the
Nigerian position, but the Ambassador indicated we were
unlikely to put diplomatic pressure on Saudi Arabia or other
Gulf countries at this time. He did suggest, however, that
Kupolokun visit Washington soon to discuss energy issues.
Paragraph 9 is an Action Request. End Summary.



2. (C) In a February 14 meeting with the Ambassador at the
ChevronTexaco Managing Director's Abuja residence, Special
Assistant to the President on Petroleum Issues Funsho
Kupolokun said Nigeria had proposed to OPEC members the
preceding week in Vienna a new quota allocation scheme based
on production capacity and socioeconomic indicators rather
than reserves. Also present at the meeting with Kupolokun was
ChevronTexaco Managing Director Jay Pryor. Lagos CG
Hinson-Jones and Econoff (notetaker) were also there. The
Nigerian proposal argued that adherence to the current system
would cripple the Nigerian oil sector and, because that one
sector is so dominant, have a devastating impact on the
Nigerian economy at-large.



3. (C) Kupolokun predicted that Nigerian production capacity
will grow quickly over the next few years as deepwater fields
go into production. He said that in 2003 Nigerian production
capacity will be about 3.1 million barrels per day (mbd),
while the OPEC quota will be only 2 mbd. Kupolokun forecasted
that by 2006 Nigerian production capacity will rise to 4.7
mbd, with a quota of only 2.3 million if the current system
remains intact.



4. (C) Kupolokun said several factors contributed to the
increase in Nigerian production capacity, key among them the
recent infusion of capital into the sector by the government
to meet joint venture cash-call arrears that had gone unpaid
for much of the 1990's. Pryor added that most of that
investment has gone into deepwater fields that yield light
crude that is easier to refine into gasoline than onshore
Bonny crude. U.S. demand for this non-Arab source of crude
that can be cheaply refined into gasoline has also pushed
investment in Nigerian deepwater fields, according to Pryor.



5. (C) Kupolokun acknowledged that maintaining spare capacity
is key to OPEC's ability to keep world oil prices stable, but
said that Nigeria's burden in doing so is too high. He said
that by 2006 if the OPEC quota system is not changed,
Nigerian spare capacity as a percentage of total capacity
will be more than 100 percent, while spare capacity for Arab
OPEC members will be around 25 to 50 percent. Pryor added
that to be economically viable, deepwater fields must run at
close to full capacity, unlike the large onshore fields being
pumped by most other OPEC members.



6. (C) Kupolokun also made the case that from a socioeconomic
perspective, Nigeria would find it difficult to keep a lid on
production. He compared Nigeria to other OPEC countries on a
series of socioeconomic indicators, summing up the situation
as follows: "If it is good, like income, we are last, if it
is bad, like infant mortality, we are first." He said the GON
is finding it harder and harder to explain to its people why
it is forsaking additional oil revenues for the benefit of
rich Arab nations.



7. (C) Commenting that these two points comprised a
thinly-veiled threat to withdraw from OPEC, Kupolokun went on
to outline the Nigerian proposal that the OPEC quota
allocation system be modified to include production capacity
as well as account for economic development indicators such
as GDP per capita and external debt. To ensure that no member
would face a drop in quota, the Nigerian proposal would allow
some proportion of the new quota to be based on the old
system, with the balance based on production capacity and
those key indicators. Kupolokun reports that Nigeria's
proposal split OPEC members between Gulf and non-Gulf
countries, with Saudi Arabia, UAE, Kuwait, and Qatar
staunchly opposed and Algeria and Libya enthusiastically
supportive. Kupolokun indicated that a final decision on the
Nigerian proposal, as well as a similar proposal made by an
independent consultant, would be made at the mid-March OPEC
Council of Ministers Meeting.



8. (C) Kupolokun asked the Ambassador whether the United
States might be able to provide diplomatic support for
Nigeria's efforts to win over other OPEC members on their
quota allocation proposal. The Ambassador expressed sympathy
for the Nigerian position, but noted that given the current
state of the world, the United States was unlikely to press
Saudi Arabia or other Gulf states on an issue as contentious
as this. He did, however suggest that Kupolokun visit the
United States soon to have a full discussion on energy issues
with Washington-based officials interested and dealing with
energy security issues. Kupolokun indicated interest in the
idea but said he would consult with his colleagues before
making a commitment. In a recent chance meeting, Kupolokun
told the Ambassador the GON is very interested in the idea of
visiting Washington, but would not want to do so before the
April National Elections. Kupolokun promised to formalize the
request in writing.



9. (C) Action Request: Post requests Washington input on the
feasibility of a Washington visit by Kupolokun following the
April Nigerian National Elections. End Action Request.



10. (C) Comment: The proposal to increase Nigeria's quota is
strongly backed by ChevronTexaco here in Nigeria. It will
almost certainly be supported by other oil companies
operating in Nigeria, including Exxon-Mobil. Although the
humanitarian benefits to Nigerians of a quota increase were
stressed in the meeting, the other major factor is more money
for the oil companies and the GON. End Comment.
JETER