NIGERIA TO CONCLUDE 2005 BID ROUND FOR 88 BLOCKS;

C O N F I D E N T I A L SECTION 01 OF 05 LAGOS 001340

SIPDIS

STATE FOR AF/W
STATE FOR CA/OCS/SDENYER
STATE FOR EB/ESC/IEC/ENR/BLEVINE
STATE FOR DS/IP/AF
STATE FOR INR/AA
STATE PASS DOE FOR DAS JBRODMAN AND CGAY
STATE PASS TREASURY FOR ASEVERENS AND SRENENDER
STATE PASS DOC FOR KBURRESS
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR BTERNET
STATE PASS EXIM FOR JRICHTER, ZHAN
STATE PASS USTR FOR ASST USTR SLISER
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ

E.O. 12958: DECL: 08/25/2015
TAGS: EPET PGOV NI
SUBJECT: NIGERIA TO CONCLUDE 2005 BID ROUND FOR 88 BLOCKS;
MAJORS CONCERNED WITH TIGHT FISCAL TERMS, BUT DEEPWATER
CONTINUES TO GENERATE SIGNIFICANT INTERNATIONAL INTEREST


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

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


1. (C) On August 26, Nigeria will hold a bid round for 88
oil blocks. Bidders will be judged on both commercial and
technical bids in a Brazilian style competitive process.
Changes to the Deep Offshore fiscal regime include the
introduction of a royalty as well as an 80 percent cost
recovery cap. GON has received 379 bids from about 278
companies for the blocks on offer. U.S. majors operating in
Nigeria will participate in the bid round, but their
enthusiasm is considerably diminished by tightened fiscal
terms. However, several U.S. independents seem pleased with
the blocks on offer, and are willing to consider the
diminished fiscal terms. Significant interest is also
expected from new entrants from China, India, and Korea.
Some of them will receive preferential access in exchange for
commitments to construct refineries or independent power
plants in Nigeria,s beleaguered downstream sector.

61 Blocks Up for Bid in 2005 Round; More may be Added Later
-------------- --------------


2. (U) A total of 88 exploration and production blocks, will
be offered during the 2005 bid round. These include the last
of the deepwater blocks in exclusively Nigerian waters. Some
of the blocks, with Ministry of Petroleum Resources estimates
of their prospectivity are listed below:

--12 Deep Offshore (High)
--6 On the Niger Delta Continental Shelf (High-Moderate)
--6 On-Shore in the Niger Delta (High-Moderate)
--9 In the Anambra Basin (Moderate-Low)
--16 In the Benue Trough (Low)
--12 In the Chad Basin (Low)


GON Pleased with Level of Interest in the Bid Round
-------------- --------------


3. (U) Department of Petroleum Resources (DPR) Director Tony
Chukwueke told us the GON is pleased with the level of
interest in the bid round. GON has received 379 bids from
about 278 companies. He noted keen interest in blocks 321
and 323, with blocks 257, 215, and 214 also generating
significant attention.


4. (U) The Bida and Sokoto basins are not included in the bid
round, because technical specification data is unavailable.
Up to 20 additional blocks in the Niger Delta may become
available, once pending legal issues are resolved. Full
details on all blocks currently on offer will be available at
the 2005 Bid Round website. Relevant technical data
including seismic, well, gravity, topographical, satellite
photo, maps, geological and geophysical studies will be
available to bidders according to MPR.

GON's Goals for the 2005 Bid Round
--------------


5. (U) MPR's goals for the round include:
-- Pursuing and realizing national production targets and the
oil reserve base to support them. (Note: The GON hopes to
double its production of approximately 2.4 million
barrels/day by 2010.);
--Expanding opportunities for gas development;
--Attracting new international players, while continuing to
encourage traditional players;
--Attempting to reverse the migration of oil and gas
exploration from the Delta towards the deepwater;
--Providing an opportunity for strategic downstream projects
to attract investors by giving such investors preferential
treatment of upstream projects;
--Implementing a viable and comprehensive Local Content
strategy; and
--Using the opportunity of the 2005 bid round to reinforce
Nigeria's commitment to transparency and the principles of
EITI.

Changes in Commercial Measures
Alter Fiscal Regime in Favor of GON
--------------


6. (SBU) The introduction of a royalty element and a ceiling
on oil cost recovery are designed to increase GON's revenues
in the early years of PSC projects; hitherto, the operator
took all the revenue for several years to recapture capital
investment expenditures. The MPR recognizes international
best practice for attaining maximum well like and optimal
production is for government to take its share of project
revenues after first oil and full cost recovery. Dr. Edmund
Daukoru, Minister of State for Petroleum Resources,
acknowledges the royalty payments violate these principles,
and can "kill wells" prematurely. However, the GON finds
itself constrained by the exigency of current budget demands
base; over 80 percent of GON revenues flow from the petroleum
sector and any appreciable dip in these revenues immediately
diminish the governments fiscal strength. As the first
generation of PSC projects (e.g., Bonga, Ehra, and Agbami)
come on-line, the GON will face low revenue flows on these
projects for several years while the operators recover costs.
The GON is determined not to find itself in the same fiscal
bind with the new blocks up for bid in 2005. Dr. Daukoru
also argues the Nigerian deepwater is no longer frontier
territory, and future projects do not merit the same investor
incentives as the high-risk early projects.

MPR Will Follow Brazilian Local content Model;
Using Pre-Qualification to Avoid Speculators
-------------- -


7. (U) The MPR has examined a number of national models for
development of local content, such as those used by the UK
and Norway to develop their petroleum sector. However, the
MPR Believes the Brazilian system most applicable to Nigeria.
Recently a MPR team including Dr. Daukoru, traveled to
Brazil to learn more about their local content efforts.
Through pre-qualification of national firms, the MPR sought
to avoid the "hawking of Nigerian assets overseas" by
Nigerian companies selling acreage to foreign concerns, it
believes occurred in past bid rounds. This is just one change
instituted as a result of their study of the Brazilian model.
In past years, the GON found that some indigenous firms had
received rights to develop acreage which they had neither the
skills nor intention to develop, but only the desire to sell
for a quick profit. The MPR designed the qualification
system to make sure indigenous firms had the requisite
technical, financial, and managerial competence, prior to
being admitted to participate in the bid round with a foreign
partner.


Local Content Vehicles
--------------


8. (U) In its quest to increase the level of national
content in the petroleum industry, the GON has mandated that
all bidders take on a minority technical partner. After an
evaluation of their competency and work histories, the DPR
pre-qualified a number of firms to participate as &local
content vehicles,8 (LCVs). LCVs can acquire up to a 10%
stake in a project. DPR Director Tony Chukwueke admits not
all firms will be able to obtain 10 percent of the equity for
their project, and he expects some firms will be &carried8
financially by their foreign partners. Conoil, a large
presence in the downstream sector, and well represented in
the Nigerian petrol station market, is the lone indigenous
firm which qualified to participate in the bid round as a
full bidder in its own right, and not as a LCV minority
partner.


9. (SBU) The screening and approval LCVs has been
problematic. Finally, with less than a month left before the
bid round, DPR released a list of pre-qualified LCVs to
prospective bidders. DPR and Ministry of Petroleum Resources
have been encouraging a number of the &one man shops8 to
merge, in order to meet the technical and financial needs of
their foreign partners. While majors continue to complain
about the low technical and financial capability of the LCVs,
most majors appear committed to working with the current
situation.

Majors, Large Independents Dubious about Bid Round;
ExxonMobil Expects its Bid may Disappoint GON
-------------- --------------


10. (C) Ian Fischer, General Manager Exploration for Esso,
ExxonMobil Nigeria,s deepwater subsidiary, speaking of the
deepwater blocks on offer, &There were enormous
expectations, but we don't see the prospectivity, and the
(fiscal) terms are worse.8 To underscore EM,s concerns
regarding fiscal terms, Fischer shared an EM document, which
showed the total government &take8 from the blocks
auctioned under 1993 fiscal terms was 43% of the revenue;
under 2003 62% of the revenue; and under the 2005 fiscal
terms, 70% of the revenue. He explained the proposed
&take8 in this round was too high, given that under the
terms of Nigeria,s production sharing contract, the majors
assume the sole risk for billions in exploration and
development costs for deepwater.


11. (C) Fischer elaborated on the poor prospectivity, noting
most deepwater blocks in Nigeria currently under exploration
were on the &inner shelf,8 along a contour in about 2000
meter of water. Some of the blocks in the current bid round
(and in last fall,s Joint Development Zone bid round) are in
the &outer shelf,8 in about 3000 meters of water. Fischer
stated that, &Most wells in the outer bank have so far been
a disappointment.8 While noting both EM and rival firms are
loath to advertise their failures, he believed about six
wells in the outer shelf had come up &dry.8


12. (C) Based on EM,s assessment the blocks on offer may
have poor prospectivity along with tough fiscal terms,
Fischer anticipates the GON may well be disappointed with
EM,s participation in the bid round, as "there is an
expectation ExxonMobil will be in full force for the bid
round.8 He added Government,s minimum bid of $50 million
per block was &a problem,8 noting firms might have been
willing to submit low, non-conforming bids for certain
blocks, but now appeared to be prevented from doing so.

Chevron Echoes Pessimism re: Bid Round
--------------


13. (C) Chevron Nigeria Planning Manager Kevin Lyon stated
that Chevron would likely only bid on 2 blocks, both of which
would leverage existing Chevron assets in neighboring blocks.
He too indicated tightened fiscal terms were a significant
deterrent to Chevron,s fuller participation. Lyon
continually stresses the stiff competition within Chevron for
investment capital; Nigerian projects compete with projects
from around the world for funding. With returns in Nigeria
ranking near the bottom for Chevron,s worldwide operations,
the firm is making the decision to allocate scarce investment
capital elsewhere. (Comment: Industry interlocutors
consistently indicate in this era of record-high oil prices,
the additional economic rent from these revenues completely
accrues to the GON, creating a disincentive to invest in
Nigeria at this time. For example, the industry can
currently earn much higher returns of U.S.-based projects in
the Gulf of Mexico, where returns are among the highest in
the world. End comment.)

Independents Weigh In with Negative Views on Round
-------------- --------------


14. (C) The larger independent firms appear to share similar
views about the bid round. Devon Energy Nigeria Managing
Director (MD) Raymond Marchand stated they were still
&running its numbers8 for the bid round during our last
conversation, but his analysis regarding the Devon,s
participation was decidedly pessimistic. MD of Canadian firm
Nexen, Richard Owens, shared a similarly negative assessment.


New Entrants Seem More Enthusiastic
--------------


15. (C) However, there are a number of new American firms
entering the Nigerian market for the first time in this bid
round. While cautious, they appear more optimistic about the
prospects for Nigerian deepwater than do the established
players. In recent months, the mission has hosted a series
of visitors from U.S. independents Occidental and Amerada
Hess. Amerada Hess, for example, is showing some caution by
entering Nigeria initially as a non-operating partner, but
both firms are upbeat about the commercial potential of the
blocks on offer. U.S. independent Pioneer is also apparently
planning to bid, but has not engaged the mission in its trips
to Nigeria.

Nigeria Moves onto the World Stage;
Chinese Firms, Other New Entrants Participate Vigorously
-------------- --------------


16. (C) The Ministry of Petroleum Resources seems to view
this bid round as Nigeria,s move onto the world stage.
Seeking to broaden the Nigerian market beyond the traditional
&Big 58 (Shell, Chevron, ExxonMobil, ENI/AGIP, and Total)
by which Nigeria has often felt itself dominated, the GON has
worked hard to attract interest from both new countries and
new entrants, including U.S. independents not yet represented
in Nigeria. The bid round road show traveled to London,
Houston, and Singapore to attract international
participation. The Ministry of Petroleum Resources believes
its efforts have been worth it: they expect 4-5 Chinese firms
to bid, as well as a firm from India. The Korean National
Oil Company will also bid. Several U.S. independents will
also participate. (Comment: Unfortunately for U.S. firms, it
appears from press reports the Chinese firms may well have
secured preferential access to certain blocks, based on their
parastatal firms, commitments to the GON to finance the
downstream sector projects (refineries and independent power
plants). China, concerned with its long-term energy
security, appears to be willing to underwrite potentially
unprofitable downstream investments to secure strategic
access to upstream blocks. U.S. firms, concerned with the
profitability of the still price-regulated Nigerian
downstream, are incapable of making such commitments. End
comment.)

BROWNE