NNPC ATTEMPTS TO FORCE MAJORS TO SELL, REFINE

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 001341

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E.O. 12958: DECL: 08/22/2015
TAGS: ECON EPET NI
SUBJECT: NNPC ATTEMPTS TO FORCE MAJORS TO SELL, REFINE
CRUDE IN-COUNTRY AT CONTROLLED PRICES

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

Summary
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1. (C) U.S. major oil firms are concerned about new
Nigerian National Petroleum Corporation (NNPC) proposals to
mandate in-country refining. In a series of meetings with
ExxonMobil, Chevron, and ConocoPhillips, as well as with
Shell, top executives raised alarm over a recently proposed
regulation mandating in-country refining. If passed as is,
executives report the actions could significantly reduce
investment in the Nigerian petroleum sector. NNPC held
hearings on the proposal on 24 August. Right now, we don't
know whether the GON is serious about enacting these
regulations or whether it is being used to leverage other,
less ambitious concessions from the majors. Mission will
report industry read-out on hearings septel. Additionally,
at the request of industry, Mission is attempting to arrange
a meeting between Ambassador Campbell and Minister of State
for Petroleum Daukoru to raise these important concerns.

Proposal for Mandatory Domestic
Refining Takes Industry by Surprise
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2. (C) In an August 5 letter to major oil companies
operating in Nigeria, NNPC Group Managing Director Funsho
Kupolokun forwarded a proposal for mandatory in-country
refining of oil for those companies producing over 50,000
barrels per day of crude. The proposal would require the
majors to meet 80 percent of the country,s domestic refining
capacity by 2006, and 90 percent of its capacity by 2007.
NNPC said it would hold hearings on the proposal on 24
August. While we do not know his position on the specific
regulation at hand, President Obasanjo previously has
expressed his belief, in principle, that oil majors should
contribute to Nigeria's refining capacity. We have seen
similar measures proposed in the National Assembly. However,
this proposal may be a more imminent threat because, as an
NNPC regulation, it does not need to go through the slow
moving legislative process. As a regulation, this proposal
could be enacted very quickly, simply by the Executive or
NNPC, with little right to public comment or review.

Majors Universally Opposed to Proposal;
Requests USG Assistance
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3. (C) In a series of separate discussions, ExxonMobil
Nigeria Managing Director (MD) John Chaplin, Chevron Nigeria
General Manager for Asset Management Chuck Taylor and Public
and Government Affairs General Manager Femi Odumabo,
ConocoPhillips Managing Director Todd Creeger, and Shell
Petroleum Development Corporation MD Basil Omiyi, universally
expressed alarm at the recent proposal. In an August 19
meeting, Chaplin indicated the industry was worried. He
stated &this is very serious,8 if the proposal were
approved, &we would stop investing in Nigeria.8 As the
Chairman of the Lagos Chamber of Commerce Oil Producers,
Trade Sections (OPTS),the industry's advocacy group, he
indicated the industry was drafting a common response to the
proposal. He also requested intervention from the USG to
assist, specifically noting a meeting between Ambassador
Campbell and Minister of State for Petroleum Daukoru would be
helpful.

OPTS Views Proposal as Expropriatory
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4. (C) Chaplin indicated OPTS opposed the proposal on
constitutional, statutory, and contractual grounds. OPTS
considers the proposed regulation as expropriatory. By
demanding in-country refining, the regulators would
effectively seize and control a portion of the crude oil to
which the majors are legally entitled under their Memorandums
of Understanding and Joint Venture Agreements. The majors
note NNPC, as the dominant equity partner in the joint
venture (JV) area, already owns 60 percent of the crude
produced under most JV arrangements with the majors entitled
to only 40 percent. They believe NNPC and the Nigerian
Government should first look to their own crude to meet the
government's in-country refining targets. Chaplin stated the
NNPC already possessed far more crude than domestic
refineries could handle. However, he noted President Obasanjo
(and Minister of Petroleum Resources) &sees this as a social
obligation8 on the part of the majors.

Proposal Appears to Force Crude Sales at Controlled Prices
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5. (C) The downstream sector in Nigeria remains
price-controlled, and Chaplin said NNPC had indicated majors
would not receive the world market price for domestically
refined product under this new proposal. (Note: In large
measure, due to price regulation, Nigeria,s refining sector
is moribund, with its four parastatal refineries operating
well below capacity.) Additionally, the proposal sets fees
for domestic refining, termed an &incentive8 fee. Majors
note that a set refining fee, with no competition, simply
forces them to subsidize an uneconomic and wasteful refining
industry, and would delay any meaningful reform in the
Nigerian refining sector.

Chilling Impact on Future Investment
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6. (C) Chaplin, Taylor, and Creeger all claim the proposal
would chill the investment climate in the petroleum sector.
By acting as an additional tax on the sector, it would stall
additional investment necessary to grow oil production in
Nigeria, undermining the GON,s goals of doubling oil
production by 2010. For firms such as Conoco Phillips, which
currently produces less than 50,000 bpd (and hence would not
be subject to the mandate as currently constructed),it would
put the brakes on additional production which would take them
over the threshold.

Industry Decries Investment Climate in Sector
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7. (C) Chevron,s Chuck Taylor noted the proposal was
typical of the type of proposals the sector has seen recently
from the GON, stating he was &horribly concerned with the
overall trend in the last 12-18 months.8 Echoing comments
from other industry figures, he pointed out &the industry
operates here with profit margins which are the smallest or
among the smallest in the world. There is not a lot of room
before investment will be impacted."

Comment
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8. (C) In addition to the potentially negative
consequences of the proposed regulation, NPPC's attempt to
make such an existential change via administrative regulation
and not through the legislative process is troubling. While
we have yet to determine if the GON is completely earnest
about this regulation or whether it is a cat's paw to induce
other less fundamental concessions from the companies, we are
concerned that such a proposal has even been put on the
table. This type of suprise is becoming frequent in Nigeria.
A bad strain of economic populism or nationalism seems to be
advising the GON's approach to the oil majors. The GON
appears to be giving contract sanctity and creation of a
favorable investment climate short shrift. Many in the
industry believe President Obsanjo is behind this latest
move. We are not sure of that assertion. However, President
Obasanjo is stuck between a moribund refining sector, demands
by the Nigerian citizens for affordable crude products, and
international crude prices which show no signs of falling.
We do know President Obsanjo expects the majors to play a
greater role in helping him resolve these conflicting
problems than they believe is within their ambit or their
margin of profit. Finding a sustainable balance will be
tough and will likely need the help of some will-timed
advocacy efforts on our part.


9. This cable was cleared by Embassy Abuja.
BROWNE