NIGERIA: ENERGY UPDATE, FEB 20

UNCLAS SECTION 01 OF 03 LAGOS 000384

SIPDIS


PARIS FOR OECD/IEA


E.O. 12958: N/A
TAGS: EPET ENRG EFIN ECON EINV PINS NI
SUBJECT: NIGERIA: ENERGY UPDATE, FEB 20



1. (U) This periodic update covering energy issues includes:
--Oil Strike Suspended, No Effect on Exports
--Wellhead Blows in Ogoniland
--Local Content Rule Gives U.S. Firms Opportunity and Risk
--Gas Developments, and
--Almost Never Ever Power Anywhere


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OIL STRIKE SUSPENDED, NO EFFECT ON EXPORTS
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2. (U) The strike by Department of Petroleum Resources (DPR)
employees has been suspended before reaching a full week.
Oil producers reprted no effect on production. DPR efforts
at placing managers in the field to conduct the inspection
and gatekeeper functions of DPR appear to have kept all
lifting and exporting processes on track. Meetings between
the various oil industry unions and government and
legislative officials apparently resolved the strike, at
least temporarily, which DPR called in response to
outstanding salary payments and its assertion that DPR must
be granted autonomy from GON influence. Reports indicate
that the GON agreed to immediately pay salary and allowance
arrears and to continue talks to develop a mechanism to give
DPR more autonomy.


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WELLHEAD BLOWS IN SOUTH SOUTH
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3. (U) On Monday, February 17, a Shell Oil Company wellhead
ruptured in the Ogoni region of Rivers State east of Port
Harcourt. Shell no longer extractsoil from Ogoniland, but
maintains old wells and pipeline in the area. A news
story the following Friday reported a major blowout with
significant spillage and potential environmental damage, but
a Shell representative had informed Post earlier in the week
that the situation was under control and spillage minimal.



4. (U) Shell reported that a young man tampered with the
device known as a Christmas tree attached to the wellhead
and broke open a valve. This caused a tremendous release of
gas pressure and noise, frightening the man who ran from the
site, but also alerting nearby townspeople who apprehended
him and turned him over to police. Shell reported that
because of the high gas content of crude in that region, the
resulting spill was not as serious as past incidents,
including a 2001 blowout in the same Yorla field, which
raised tension between Shell and the Ogoni people. Shell
reported that a joint investigative team from the company
and state and federal governments was on-site by Thursday
and considered the spill manageable. Other sources,
including the Movement for the Survival of the Ogoni People
(MOSOP),confirmed that the incident appeared contained and
that local residents had cooperated in Shell's efforts.



5. (U) COMMENT: In previous oilfield incidents in Ogoniland
and elsewhere, local residents sometimes had tried to
extract cash payments from oil companies in exchange for
access to a damaged facility or spill site. This practice
raised tensions in the Niger Delta region as oil companies
and workers were often unwilling to respond immediately to a
reported crisis, which, the companies claimed, were often
acts of sabotage to undermine production and extract a
ransom. This time, Shell and local residents cooperated, a
positive sign in the often-troubled region. END COMMENT.


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LOCAL CONTENT RULE GIVES U.S. FIRMS OPPORTUNITY AND RISK
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6. (U) Chevron Nigeria Ltd. recently brought representatives
from ten companies, most of which are U.S.-based, to Nigeria
to explore business opportunities in its supply chain.
Representatives from companies including G.E., Solar
Turbines, and Universal Compression were shown fabrication
facilities in Lagos, Warri, and Onne in order to provide
them a realistic understanding of what it would take to
establish operations in Nigeria. Chevron hosted its
preferred suppliers in Nigeria to instruct them on the needs
of the company in meeting its local content obligations, and
on the challenges they would face in establishing operations
here. For the most part each company would have to set up a
joint venture or locally-owned business to supply Chevron,
and would face the infrastructure and security challenges
Nigeria poses. Regardless of the companies' interest or
capacity to establish operations in Nigeria, Chevron is
committed to meeting its local content target. Chevron has a
joint venture agreement with the Nigerian National Petroleum
Corporation (NNPC) that obligates it to comply with a GON
target of having 40 percent local content in its projects by

2004.



7. (U) A manager in Chevron's supply chain division told
Econoff that while the visiting companies did not signal an
immediate interest in establishing Nigerian operations, they
did seem to take away what Chevron intended to demonstrate;
that is, while the oil producer is obligated to use local
content, it would prefer to continue using its known
suppliers, but the challenges of establishing business
operations in Nigeria are significant. The companies
invited to Nigeria were those suppliers with which Chevron
does the largest volume of business worldwide, and from
which Chevron can demand a price advantage. The manager
indicated this strategy will be used later in the year in
Angola since the company faces local content requirements
from developing countries around the globe and is dealing
with them in a similar fashion.



8. (U) COMMENT: GON local content requirements raise issues
with respect to Nigeria's compliance with the WTO Agreement
on Trade-Related Investment Measures, but the immediate goal
of providing opportunities to domestic companies likely is a
higher priority for the GON than is paying close attention
to its international trade obligations. The willingness of
companies like ChevronTexaco to not only acquiesce in local
content rules but also expend resources to convince their
international suppliers to work within those parameters may
make it harder for the USG to press for compliance with WTO
and other trade agreements that these major oil companies
believe provide no scaleable economic advantage. If the oil
majors can help establish workable Nigerian-based business
entities, it is possible that small American firms or firms
not having established business ties to the major oil
producers in Nigeria may not be able to compete fairly for
future contracts under GON rules or practices. Should that
come about, the direct economic power of the big oil
companies may overshadow USG advocacy efforts and undermine
trade negotiations. END COMMENT.


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GAS DEVELOPMENTS
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9. (U) The economic promise of Nigeria's natural gas
reserves continues to grow as several projects move into new
phases. ChevronTexaco recently announced the discovery of
new gas reserves in the OPL 218 field it controls jointly
with Norwegian oil producer Statoil offshore of Rivers.
ChevronTexaco and Shell Oil, owner of the nearby OPL 219
block, previously signed an MOU for a feasibility study for
a Floating Liquefied Natural Gas (FLNG) platform to develop
these fields, and the discovery of deepwater gas in OPL 218
increases the viability of an FLNG project.



10. (U) Several West African countries have signed an
agreement to bring the West African Gas Pipeline (WAGP)
closer to reality. Representatives from Nigeria, Benin,
Togo and Ghana signed a treaty at the West African Summit in
Dakar, Senegal, to establish a legal and fiscal framework
for the project. To that end, the West African Gas
Administration will be established to oversee the WAGP from
its headquarters in Accra, Ghana. Jay Pryor, Managing
Director of ChevronTexaco Nigeria, was quoted in press
accounts as lauding the agreement as an important step for
establishing conditions necessary for future direct foreign
investment in the region.


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ALMOST NEVER EVER POWER ANYWHERE
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11. (U) The National Electric Power Authority (NEPA)
continues to be plagued by power distribution problems.
Recent reports indicate that slow progress on repairs to gas
supply lines to NEPA generators is hampering power supply,
causing increasingly frequent power outages, particularly in
the Lagos zone. One NEPA manager was quoted in the Vanguard
Newspaper as disclosing that while daily demand for power
in the Lagos metropolitan area is 1200 megawatts (MW),NEPA
has been averaging 800MW of production during the last
month.



12. (U) COMMENT: Power outages and severe fluctuations in
current and voltage are becoming ever more frequent
throughout Nigeria. As the weather continues to grow
warmer, the rumble of backup generators will become nearly
constant in wealthy neighborhoods, while darkness will
settle over poorer areas. Until Nigeria can provide a
stable, affordable source of power, it will not attract the
kind of industrial investment it requires to diversify its
economy. Even corporate giants like ChevronTexaco might not
lure their suppliers to Nigeria if fabricating firms cannot
keep their machines running. END COMMENT.


HINSON-JONES