NIGERIA: EXXON MOBIL CHIEF ON REFINING DEMANDS,

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 001677

SIPDIS

TREASURY FOR SEVERNS/RENENDER
USDOC FOR HUPER
ENERGY FOR DAS BRODMAN AND CGAY
STATE PASS TO USTR
STATE PASS TO OPIC
STATE PASS TO US EXIM BANK

E.O. 12958: DECL: 09/09/2015
TAGS: EPET EINV ETRD NI OIL
SUBJECT: NIGERIA: EXXON MOBIL CHIEF ON REFINING DEMANDS,
NEW MOU

REF: A: LAGOS 1341 B: LAGOS 1369

Classified By: AMBASSADOR JOHN CAMBELL FOR REASONS 1.4 A,B, and D


1. (C) Exxon Mobil Nigeria Chief John Chaplin told the
Ambassador on September 6 that oil majors were in the midst
of renegotiating their MOU with the Nigerian government
(GON),which would allow them to keep a part of the revenue
over $30 per barrel, all of which now goes to the GON. They
also are negotiating to reduce severe tax penalties on
increased production costs. Chaplin planned to inform the GON
that Exxon Mobil was selling its retail operations in 14 of
26 African countries, though not Nigeria, to Total. While
Chaplin said oil producers were very unhappy with proposed
government regulations to force large producers to refine
some crude in-country and invest in refining, he did not
request the Embassy to engage the GON on the issue. When
pressed, he said the Embassy should continue to make the case
for downstream deregulation and a good investment climate.
Exxon Mobil's CEO would be visiting Nigeria soon and hoped to
meet President Obasanjo, while the oil producers planned to
discuss refining and other issues at a high level at the
upcoming World Petroleum Congress in Johannesburg.


2. (C) It was clear that the oil majors' priority were the
MOU and tax negotiations, and at this point they did not want
to rock the boat by calling for USG pressure on the refining
issue. Instead they will first try to address it themselves
in upcoming high-level meetings. Though for the moment they
have backed off a request for the Ambassador to raise the
refining proposals directly, if the GOU were to issue the
proposed regulations, they might be knocking on our door
demanding immediate high-level action, both here and in
Washington. We will want to be prepared. End summary.

Getting a Better Deal
--------------


3. (C) Exxon Mobil, Nigeria chief John Chaplin called on
Ambassador on September 6 to discuss issues facing the oil
industry in Nigeria. He told the Ambassador the majors'
current focus was on an inter-ministerial group that was
looking at renegotiating the Memorandum of Understanding with
the oil producers to split the revenue above $30 per barrel.
Currently all revenue above that level goes to the Government
of Nigeria. The oil producers also are having meaningful
discussions about tax penalties on operating costs and
capital costs above a set threshold. To keep costs down and
profits high, the GON imposes a 50% tax penalty on operating
costs above $2.40 per barrel, and a similar tax on capital
costs that exceed a certain threshold. Costs are rising, in
some cases imposed by the government, and many companies
exceed the threshold. In total, with various new taxes and
levies, the Government of Nigeria gets 95% of the profit from
oil production. Nonetheless, Chaplin said production,
including new production, is still attractive in Nigeria as
long as oil prices exceed about $25 per barrel. Still, the
terms must be right, and Chaplin pointed out that majors did
not compete for new blocks in the recent bid round.

Pulling Out of Retail
--------------


5. (C) Chaplin said he was on his way to deliver the news to
the Nigerian National Petroleum Corp. (NNPC) that Exxon Mobil
was selling off its retail business in 14 of the 26 African
markets where they had a presence. The entire stakeholding
was being sold to the French firm Total. Exxon Mobil would
keep its retail operations in Nigeria, but the subtle message
would be that they would pull out of countries where the
investment did not pay off.

Oh Yes, and That Refining Issue
--------------


6. (C) A good forty minutes into the conversation, Chaplin
got around to what we had expected to be the main topic of
the meeting--GON proposals to require oil producers to refine
some crude in country. Chaplin said the GON had long been
pressuring the majors to engage in refining, preferably by
buying refineries being privatized, or by building new
refineries. Given the poor state of refineries and their
huge legacy of environmental, workforce, and community
issues, western firms were absolutely unwilling to touch
them. Now the GON wanted them put crude in and take off
product, which NNPC Managing Director Kupolokon believed
would force majors to invest in the refineries, since they
were nearly moribund. The industry saw this as creeping
expropriation, both by commandeering their crude, and by
trying to force investment in a money-losing sector. The
industry was talking to the GON about the issue, but did not
believe the discussion was going anywhere. The oil producers
believe Kupolokon was responding to pressure from the
President to get the majors involved in refining. He was
threatening legal action by the National Assembly if the
majors didn,t comply.


7. (C) The Ambassador asked how the majors intended to
address the issue. Chaplin said they were trying to maintain
a common front, and to assess the costs to them if the
regulations were issued, and what their bottom line was in
terms of what they could accept. The industry was lobbying
the government on various issues, but Chaplin acknowledged
that there were currently many separate discussions on
different issues, which were not integrated. Together all of
the potential problems could add up to significant new costs.
The refining issue, in particular would hurt the investment
climate. The oil companies had not engaged the President
recently, in the past he tended to pound tables and demand
the oil company step up to the table. Chaplin said Exxon
Mobil's new CEO would be coming to Nigeria soon and hoped to
meet with President Obasanjo. Further high-level meetings
would take place involving all the oil majors at the upcoming
World Petroleum Congress in Johannesburg. When the Ambassador
asked what Chaplin wanted the Embassy to do, he asked that
the U.S. continue doing what it already did -- encourage
deregulation and improving the investment climate.


8. (C) Comment: Earlier Chaplin had suggested to ConGen Lagos
that the Ambassador meet with Deputy Energy Minister Dakoru
on behalf of the industry to raise concerns about the
refining issue (ref A). We expected to Chaplin to reiterate
this request and possibly upgrade its urgency. Instead, he
appeared relaxed and hopeful that the MOU and tax discussions
would bear fruit. This was clearly the priority issue for the
oil majors. It was further clear that the oil companies did
not want to annoy the GON by getting the USG to raise the
refining issue while the MOU negotiations were ongoing, and
they hoped that upcoming high-level industry meetings with
the GON might defuse the refinery issue.


9. (C) It is not unusual for the U.S. oil companies to blow
hot and cold. They put a great deal of energy into nurturing
their relationship with the GON, and for the most part prefer
to try to address industry specific issues themselves. They
may turn to the Mission, only to back away from requests on
further consideration. If their efforts fail to achieve a
resolution or problems become more acute, they can quickly
return demanding action. At this point the government could
issue new regulations, possibly within a few weeks, and then
to begin imposing fines for non-compliance. In this case
major U.S. oil companies could demand immediate action here
and in Washington. The Mission will continue to follow the
issue closely and Mission personnel will meet with the NPPC
and the Ministry for Energy to learn the GON's positions and
express concerns about the consequences of this proposal. We
will continue to keep Washington agencies informed so that we
are prepared to take appropriate steps if requested by
industry.
CAMPBELL