HALLIBURTON BAN LIKELY TO BE REVERSED; FIRM

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002384

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E.O. 12958: DECL: 11/24/2009
TAGS: EPET EINV NI
SUBJECT: HALLIBURTON BAN LIKELY TO BE REVERSED; FIRM
CRITIQUES BARITE IMPORT BAN AND JV UNDERFUNDING

REF: ABUJA 1663

Classified By: Classified By: Consul General Brian L. Browne for Reason
s 1.4 (D & E)

Summary
--------------


1. (C) Halliburton has indicated the GON is likely to
quietly lift the ban against the firm's activities in
Nigeria. The move was facilitated by the October 5 return to
Nigeria of radioactive sources stolen in 2002 but later
recovered by Halliburton. Halliburton also expressed concerns
regarding funding constraints for joint venture petroleum
operations with the Nigerian National Petroleum Corporation
(NNPC). The Halliburton Business Development Manager noted
the NNPC often curtails oil service company operations
mid-year, due to the GON's failure to meet budget
allocations for NNPC. Halliburton also expressed alarm at
the ban on the importation of barite, a mineral used in
drilling mud. Instead, oil service companies are being
directed to a Nigerian firm awarded an exclusive import
license, which charges three times the world price for
barite.

GON Likely to Lift Halliburton Ban
--------------


2. (C) Energy Off met Halliburton's Business Development
(BD) Manager Jim Mills and Halliburton (outside) legal
counsel Oghogo Akpata on 18 and 19 November. Both indicated
the ban against Halliburton entering into new oil service
contracts is likely to be lifted soon. They indicated
President Obasanjo was likely to approve a carefully brokered
agreement that would allow the company to enter new
contracts. Halliburton is currently waiting for the
President and Attorney General to meet to conclude the
agreement. Halliburton legal counsel indicated the return of
the radioactive sources to Nigeria on 5 October played a
central role in the GON's apparent about face. (Note: The
sources had been stolen from a Halliburton site in Nigeria,
and shipped as scrap in Germany. Halliburton's decision to
ship the sources to the U.S. for examination in the firm's
laboratories raised the ire of the GON; President Obasanjo
voiced intense displeasure that the sources were not returned
immediately from Germany to Nigeria. End Note.)

Quiet Reversal of Ban Likely
--------------


3. (C) Given the GON's public pronouncements against
Halliburton, the reversal in GON policy is likely to be
downplayed. In recent weeks, Halliburton has attempted to
get its side of the story out, to prepare public opinion for
an eventual reversal of the ban. Halliburton states that the
radioactive sources were imported with the knowledge and
consent of GON for use in normal petroleum production
activities, and that the firm immediately reported the
disappearance to the GON. However, in a reversal from an
earlier position, Halliburton legal counsel did admit that
the radioactive sources were licensed, but incorrectly so, as
the recent establishment of a Nigerian Nuclear Regulatory
Authority seems to have created temporary confusion regarding
which entity had the authority to license nuclear materials
in Nigeria.

Halliburton Suffers Severe Business Impact
--------------


4. (C) The BD Manager stated Halliburton suffered a severe
business impact from the ban, but overall oil production did
not suffer as Halliburton's competitors swiftly picked up
its business. He was frustrated that the GON, perhaps to
gain additional negotiating leverage, tried to link
resolution of the ban on new contracts for Halliburton Energy
Services Company with the TKSJ (an international consortium
involving Halliburton division Kellogg, Brown, and Root, or
KBR) bribery scandal on the construction of the NLNG plant.
Mills noted that Halliburton Energy Services Company is a
separate legal entity from KBR, the Halliburton entity
charged in the bribery scandal. He believes that all
Halliburton divisions have been unfairly smeared in the
scandal.

Serious Concerns with JV funding
--------------


5. (SBU) Echoing common industry concerns, the BD Manager
expressed frustration with the joint venture (JV) funding
situation in Nigeria. JV funding constraints are the largest
impediment to additional oil and gas exploration and
production in Nigeria. The BD Manager is concerned about the
downward trend in JV funding by the GON, noting that there
are fewer rigs running in Nigeria than two years ago due to
JV funding constraints. (Note: The parastatal Nigerian
National Petroleum Corporation, NNPC, is typically the
dominant equity partner in joint ventures with international
firms. Oil production in Nigeria is currently under the
joint venture model, although deepwater fields currently
under construction are under a production sharing contract
model. As the dominant equity partner, NNPC is required to
contribute the majority of the equity capital. NNPC does not
retain its own revenues from year to year, and hence funds
all equity shares with allocations from the GON budget.
Increased petroleum revenues from this year's high oil
prices do hold out hope of at least temporarily ameliorating
the JV funding issue during the next year.) The BD Manager
noted a yearly pattern, in which NNPC does not receive the
full amount of funds allocated to it. In September or
October of a given year, the GON announces the budget data,
including an allocation for NNPC. By about April of the
following year, the GON does not have sufficient funds, and
NNPC is forced to curtail the budget. In turn, U.S.
contractors are ordered to curtail their operations. Rig
operations are halted, and expensive equipment often has to
be re-located to projects outside of the country, causing
significant losses for affected firms, including American oil
service companies (OSCs). The BD Manager noted that, unlike
some other parastatals, NNPC is not willing to be "carried"
through alternate financing arrangements when it does not
have cash on hand to complete planned projects; rather, the
NNPC simply stops operations.

Sole Legal Barite Importer Charges 3 Times World Price
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6. (SBU) The BD Manager also expressed his concerns with
the Nigerian import bans in general, and the ban on barite
importation in particular. Barite is used as a weighting
agent in drilling mud for oil and gas exploration. It has
been banned by the GON, allegedly in the interest of
fostering a local barite industry. However, Nigeria does not
have the infrastructure to mine it in industrial quantities,
and the small-scale hand mining that does exist is inadequate
to meet the needs of petroleum operators in Nigeria. The BD
Manager noted that Nigeria does not have large quantities of
barite, and would run out of the mineral in a little more
than three years, if it were produced in-country in
industrial quantities. (Note: It appears to be an open
question whether the relatively small quantity of barite
found in Nigeria would economically justify capital intensive
mining investment for barite exploitation.) The BD Manager
stated that barite can be purchased on the world market for
approximately $120/ton, but the Ministry of Solid Minerals is
now pressuring firms to purchase it from a Nigerian company
awarded an exclusive import license for $350/ton. The import
ban has not resulted in any industrial quantity barite
production.

7. (C) According to the BD Manager, Halliburton and other
OSCs are in danger of failing to meet their contractual
obligations with multinational energy firms to carry out
drilling operations, due to the lack of barite in the market.

Comment
--------------

8. (C) Concerns about barite importation are not limited to
Halliburton, and have been voiced by a variety of companies
at industry conferences. Inflated pricing for barite and
other inputs for the petroleum sector also exacerbates the
problems caused by GON inadequate JV funding, as operators
and their contractors are forced to divert scarce project
funds to pay higher than market values for essential inputs.
The ban on barite may violate WTO policies, and may be
causing significant financial losses for American firms. The
ban on barite, like the other import bans, raises serious
concerns about the GON's commitment to liberalizing its
trade regime, and creating an enabling environment to support
credible local industry as well as attract needed foreign
investment. The award of sole rights to import barite to one
firm also raises issues of rent seeking through manipulation
of Nigeria's trade regulations.


9. This cable has been cleared by Embassy Abuja.
BROWNE