CONVERSATION WITH EXXON MOBIL MANAGING DIRECTOR

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002447

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E.O. 12958: DECL: 12/06/2014
TAGS: EPET EINV NI
SUBJECT: CONVERSATION WITH EXXON MOBIL MANAGING DIRECTOR


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

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


1. (C) Exxon Mobil Managing Director for Nigeria John
Chaplain said the challenges facing Nigeria's energy sector
are: 1) under-investment in JV funding; 2) civil unrest; 3)
specific pending legislation governing local content and gas
fiscal terms; and 4) a corrupt and overly bureaucratic
Nigerian business culture. End summary.

Chronic Under-investment for 30 Years; Next Year Better?
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2. (C) Pol/Econ Chief and Energy Off met Managing Director
(MD) of ExxonMobil Nigeria, John Chaplain, and External
Relations Director Udom Inoyo. Chaplain said one of the
largest problems confronting energy firms in Nigeria is the
significant under-investment by the GON's parastatal Nigerian
National Petroleum Corporation (NNPC) in petroleum
operations. Chaplain estimates the sector has suffered from
30 percent under-investment for 30 years. The MD noted that
the energy sector historically received 70 percent of the
budget recommended by the National Petroleum Investment
Management Services (NAPIMS),NNPC's investment unit. This
underfunding leads to significant delays in projects, he
said. However, the MD noted that the $4.3 billion the GON
has allocated for the sector for the coming year, if
actualized, would represent an upward shift in investment.


3. (U) Not everyone agrees JV funding should be a top
priority. There are compelling arguments for many sectors
that historically have also been underfunded. Senator Udoma
noted at a recent industry conference that the $4.3
billion/580 billion naira budget proposed for JV funding was
more than the GON's combined budgetary allocation of 540
billion naira for education, health, power, and
infrastructure. He urged that approximately 10 to 11 billion
naira be re-allocated for these needs. He argued the JV
funding only represents about 60 percent of the GON funding
for the energy sector, and that the GON will actually spend
950 to 980 billion naira next year in the sector. While
acknowledging that oil and gas are capital-intensive
industries, he called for additional jobs in the sector for
Nigerians.


4. (C) External Affairs Director Inoyo said the Nigerian
fiscal regime is highly favorable to the government, with
petroleum profit tax and royalty rates of 85 percent. He
stated that overall, about 95 percent of the energy returns
flowed to the GON. Yet, the Delta region remains
underdeveloped lacking in almost all basic infrastructure.
Both Chaplain and Inoyo said the Niger Delta Development
Commission (NDDC) was improving, but it had a long way to go
before it would be effective. Inoyo noted that majors give
the NDDC three percent of oil revenues; in Exxon Mobil's
case, the contribution amounted to $100 million in 2003. It
is unclear where that money and the other petroleum related
tax revenues eventually end up.

Unrest in the Delta Second Major Challenge
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5. (C) The MD pointed to unrest and instability in the
Delta region as the second major challenge. He noted,
however, that ExxonMobil is more insulated from these
pressures than the other majors because its operations are
off-shore; the closest operation to land is 11 miles from
shore.

New Legislation is Third Major Challenge
--------------


6. (C) Chaplain voiced concern with pending legislation,
including local content and downstream gas bills, and a
proposed model production sharing contract for the gas
sector. Chaplain said that in the quest to increase national
content, NNPC is asking that large contracts be broken into
smaller bits to be handled by Nigerian firms. This
reductionist strategy would discourage construction of
integrated capabilities among local firms, and lead to the
mushrooming of many small firms with only limited
capabilities. He also noted that operating with many small
contracts increases costs, and makes it complicated for the
majors to manage the larger pool of contracts.


7. (C) Chaplain raised significant concerns regarding
pending legislation on downstream gas and a new model
production sharing contract (PSC) for the gas sector. He
stated that the proposed gas PSC would ?totally kill the gas
sector.? He indicated that proposed policies on joint
venture projects and associated gas projects were also
troublesome. The proposed fiscal terms were
simply taking too much out, leaving nothing for the
investor, Chaplain argued. (Comment: The MD and External
Relation Director's comments regarding pending legislation
are reflective of general industry opinion. There is concern
regarding all pending legislation mentioned, but there is
particular concern that the proposed gas fiscal terms will
stifle the development of this industry. The major energy
firms, including Exxon Mobil, are discussing with the GON how
to resolve their differences over the pending legislation and
model contracts. End comment.)

The "Nigeria Factor," Fourth Major Challenge
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8. (C) The MD pointed to the Nigerian business climate, or
what he termed the "Nigeria factor" as the fourth major
challenge facing operators in country. Operations take about
twice as long to mount in Nigeria as in other countries where
EM operates, significantly increasing production costs. Due
to excessive bureaucracy and corruption, decisions and
approval processes in Nigeria may take 18 months instead of 6
to 9 months elsewhere. GON actions, such as import bans,
create doubt regarding its commitment to a positive
investment climate. These factors, coupled with security
concerns and infrastructure challenges, lead to production
costs higher in Nigeria than in other countries where EM
operates.

World Oil Prices Could Alter Challenges
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9. (C) Finally, the MD pointed to world oil prices as
the "wild card" which could alter the relative importance of
any of the challenges facing the industry. For example,if
world oil prices remain relatively high, the GON and NNPC are
likely to face fewer problems funding JV projects. However,
if a glut in world oil capacity were to drive down prices,
the GON would likely face intense pressures in balancing its
JV budget with funding for pressing social needs.

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


10. (C) Chaplain's cited challenges beg the question: why
work in Nigeria? For now, Nigeria's pros apparently
outweight her cons. Chaplain waxed optimistically as he
discussed Nigeria's untapped oil and gas reserves.
Nigeria, he said, is like the Gulf of Mexico in the 1970s.
The industry is pushing into new frontiers, particularly
deepwater exploration. In addition, the high quality of
Nigerian sweet crude commands a premium price, which allows
the majors to realize significant economic returns, despite
high production costs. ExxonMobil paid the NDDC more than
$100 million last year only because its revenues totaled more
than $3 billion. Nonetheless, the GON will need to make some
adjustments to allow the sector to approach its potential.
Immediate steps in that regard would be redressing the
proposed gas fiscal terms
and local content legislation.


11. (U) This cable has been cleared by Embassy Abuja.
BROWNE