Identifier
Created
Classification
Origin
05LAGOS1369
2005-08-31 18:09:00
CONFIDENTIAL
Consulate Lagos
Cable title:  

NNPC HEAD TELLS OIL MAJORS - CONSTRUCT REFINERIES,

Tags:  EPET EINV ECON NI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.

311809Z Aug 05
C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 001369 

SIPDIS

DOE FOR DAS JBRODMAN AND CGAY
TREASURY FOR ASEVERENS AND SRENENDER
DOC FOR KBURRESS
USAID FOR GWEYNAND AND SLAWAETZ
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR NCABOT
STATE PASS EXIM FOR JRICHTER
STATE PASS USTR FOR ASST USTR SLISER

E.O. 12958: DECL: 08/31/2015
TAGS: EPET EINV ECON NI
SUBJECT: NNPC HEAD TELLS OIL MAJORS - CONSTRUCT REFINERIES,
OR FACE MILLIONS IN FINANCIAL PENALTIES

REF: LAGOS 1341

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

Summary
---------

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 001369

SIPDIS

DOE FOR DAS JBRODMAN AND CGAY
TREASURY FOR ASEVERENS AND SRENENDER
DOC FOR KBURRESS
USAID FOR GWEYNAND AND SLAWAETZ
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR NCABOT
STATE PASS EXIM FOR JRICHTER
STATE PASS USTR FOR ASST USTR SLISER

E.O. 12958: DECL: 08/31/2015
TAGS: EPET EINV ECON NI
SUBJECT: NNPC HEAD TELLS OIL MAJORS - CONSTRUCT REFINERIES,
OR FACE MILLIONS IN FINANCIAL PENALTIES

REF: LAGOS 1341

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

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


1. (C) ConocoPhillips Managing Director (MD) Todd Creeger
briefed us on an August 25 meeting between the Nigerian
National Petroleum Corporation Group Managing Director (GMD)
Kupolokun and the MDs of Nigeria's major energy companies.
Kupolokun told the MDs he was under intense pressure,
apparently from President Obasanjo, to conclude an agreement
on domestic refining by the majors. In an initial move that
seemed to hold some promise, Kupolokun signaled willingness
to pay the going international rate if the majors agreed to
domestic refining. However, the prospect of compromise
quickly faded when he revealed the GON's real objective - in
the name of corporate social responsibility, the majors
should construct new refineries, or face multi-million dollar
penalties.

Kupolokun Outlines Demand for Domestic
Refining Agreement within 30 Days
--------------


2. (C) During an August meeting with the Energy Officer,
ConocoPhillips Managing Director (MD) Creeger summarized an
August 25 meeting between the NNPC GMD Kupolokun and
Nigeria's major energy companies. Kupolokun hold the oil MDs,
"I'm under pressure; I've been given a month to conclude an
agreement," to ensure the majors refine some of their crude
domestically. He explained the GON was looking to link the
oil industry with the rest of the economy through additional
local content. Apparently under marching orders from
President Obasanjo, who has made a political decision on this
issue, he warned, "there is no legal argument that can wish
this away."

Kupolokun Fills in Technical Details on NNPC Proposal
-------------- --------------


3. (C) During the meeting, Kupolokun explained new
technical details concerning NNPC's proposed regulations

circulated in early August (reftel). NNPC wants the majors
to deliver 380,000 barrels/day to the national refineries, a
little over half of Nigeria's estimated 700,000 barrel/day
demand. While the nameplate (maximum) capacity of Nigeria's
four refineries (Port Harcourt I and II, Warri, and Kaduna)
is actually 445,000 barrels/day, Kupolokun acknowledged the
refineries were not working at capacity. (Note: In reality,
the refineries are working at about 50 percent capacity, and
would have to sweat and strain to reach production of even
380,000 barrels/day. Refinery capacity careens wildly from
month to month, depending on whether NNPC has provided funds
for maintenance. During the last year, reports indicate the
refineries have fluctuated between twenty to eighty percent
capacity. The refineries are unable to retain revenues they
generate to cover operational and routine maintenance
expenses. Instead, they depend on infrequent transfers from
NNPC headquarters. For example, the Managing Director of the
Port Harcourt refineries told us he waited 14 months for
funds to repair the Port Harcourt II refinery. End note.)

Kupolokun Offers Olive Branch -
Payment in Line with International Prices
--------------


4. (C) MD Creeger indicated during the first phase of
Kupolokun's meeting, there was significant positive movement.
Kupolokun for the first time agreed NNPC would pay the going
rate for the majors' crude. (Note: The majors' singular
objection to selling their crude to Nigerian refineries, or
to building greenfield refineries, has consistently centered
on their refusal to sell into a price-regulated market. End
note.) Kupolokun assured the MDs he "would make them whole,"
i.e., he would commit NNPC to paying the majors the going
international rate for their crude, minus relevant transport
costs. With this assurance, Creeger indicated most of MDs
(excepting AGIP's) began to warm to Kupolokun's proposal.

The Other Shoe Drops: Build Refineries,
Take over Downstream, or Face Millions in Penalties
-------------- --------------


5. (C) Just as the interlocutors seemed on the verge of
making progress, Kupolokun dropped a bomb, revealing the
GON's true demand. Within the next month, the GON wants the
majors to commit to construct refineries, as well as assume
responsibility for distribution and sales of petroleum
products. If they did not play ball, the majors would face
severe financial penalties in the tens of millions of
dollars. Kupolokun told the MD's Nigeria needed to balance
its domestic consumption and domestic refining capability,
and that all problems in the downstream sector needed to be
fixed, not just access to sufficient crude. He chastised the
MDs for thinking that access to upstream crude was the real
issue, pointing out, "I could divert my own (i.e., NNPC's)
production to fill the refineries." Instead, Kupolokun
explained refinery maintenance and downstream distribution
were also serious concerns the majors needed to help the GON
tackle.

"Corporate Social Responsibility doesn't Equal
Refineries"; Kupolokun Dismisses Protests with a Threat
-------------- --------------


6. (C) MD Creeger reported the Total MD then protested
corporate social responsibility did not require building
multi-billion refineries (with no hope of a profitable
return). Kupolokun replied, "I strongly encourage you to
take part in the privatization of the parastatal refineries
and to conclude agreements to build refineries - or you'll be
left exposed." The Total MD then argued the proposed
penalties would cost his firm a post-tax $50 million loss per
year. (Note: As Total is a relatively small operator,
potential losses to ExxonMobil and Chevron would be much
higher. End note.)

Kupolokun Threatens Harsher Action by the National Assembly
-------------- --------------


7. (C) Kupolokun also threatened action by the National
Assembly if the majors comply. He asserted the National
Assembly was prepared to pass a bill "within a week" to
mandate domestic refining. Kupolokun cautioned any bill
passed by the National Assembly would be harsher than the
proposed regulations from NNPC. (Note: Kupolokun could be
right. While the NNPC proposal is very bad, some of the
proposed legislation making the rounds in the Assembly is
worse. A current National Assembly proposed Petroleum Act
amendment would mandate the majors to refine half of
Nigeria's crude in country - more than a million barrels a
day, far in excess of the country's installed refining
capacity. Even Kupolokun considers this bill ill-advised,
and has helped in holding this bill in stasis for several
months. However, should Kupolokun and Petroleum Minister of
State Daukoru release the executive branch throttle, the
legislature may likely rush the measure towards passage. End
note.)

Moving Forward - Meeting to Re-Convene Soon
--------------


8. (C) Kupolokun indicated this week he would send out a
revised proposed regulations, reflecting the majors'
feedback. He told the MDs they would re-convene within two
weeks to reconsider the amended document.

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


9. (C) Call it what you will, Kupolokun is putting a tight
squeeze on the oil companies. This portends to be a high
stakes game of which side will back down first. The majors
were deeply concerned with NNPC's push for them to refine
some product domestically. This new demand for multi-billion
outlays for at best, marginal refineries, is even more
alarming. The proposal threatens investor rights, including
contract sanctity and effective ownership and control of
private property. The proposed regulations would further
damage Nigeria's investment climate in general, and the
investment climate in the petroleum sector more specifically.
There are indications the oil majors' patience with the GON
may be thinning. For now, an encounter between the unstable
forces of Nigerian domestic politics, and the immovable
object of the majors' financial logic, seems to be in the
offing. The sides will have to find a meaningful and
significant course adjustment to avoid a showdown over this
issue of the refineries.


10. (U) This cable was cleared by Embassy Abuja.
BROWNE