SHELL CONTEMPLATES LONG TERM HOSTAGE SCENARIOS AND

C O N F I D E N T I A L SECTION 01 OF 04 LAGOS 000430 SIPDIS SIPDIS STATE PASS DOE FOR GPERSON AND CGAY TREASURY FOR ASEVERENS AND SRENENDER COMMERCE FOR KBURRESS STATE PASS TRANSPORTATION FOR MARAD STATE PASS USTR FOR ASST USTR SLISER STATE PASS USAID FOR GWEYNAND AND SLAWAETZ E.O. 12958: DECL: 03/22/2016 TAGS: EPET ENERG ASEC EAID PTER NI SUBJECT: SHELL CONTEMPLATES LONG TERM HOSTAGE SCENARIOS AND DIMINISHED NIGERIAN PRODUCTION REF: A. 2005 LAGOS 1941 ¶B. LAGOS 39 ¶C. LAGOS 333 ¶D. LAGOS 405 ¶E. LAGOS 429 Classified By: Acting Pol/Econ Chief Shannon Ross for Reasons 1.4 (D & E) -------------- Summary -------------- ¶1. (C) A senior Shell executive assessed President Obasanjo is coming to the realization the hostage situation is symptomatic of larger Delta developmental problems; he has underscored the need to accelerate Delta development projects quickly. Shell management reiterated its view there is no military solution to the current crisis, only a long-term developmental solution. Shell is struggling to keep the spotlight on the hostages after thirty-plus days in captivity, and expressed concern we are reaching a tipping point where they could be held for the long-term as human shields. Shell explained three scenarios for their oil production over the next year: in the best (and most unlikely) case, Shell returns to full production within 70 days. In the middle scenario, Shell,s western operations remain out of operation for the year, or perhaps until after the 2007 elections. In a worst case scenario, the Movement for the Emancipation of the Niger Delta (MEND) attacks crude loading platforms (CLPs) at Shell,s Bonny Island, and takes out CLPs at other major export facilities, potentially reaching its target of shutting-in an additional million barrels in March. A Shell security official,s worst fear is MEND tapping a network of militias to carry out operations throughout the Delta. Meanwhile, Shell contractors are laying off staff and curtailing drilling for new wells, auguring ill for Nigeria,s aspirations to grow its oil production in coming years. -------------- President Obasanjo: Taking Delta Development More Seriously? -------------- ¶2. (C) Shell Executive Vice-President Ann Pickard recounted some highlights from her September 17 meeting with President Obasanjo, Minister of State for Petroleum Daukoru, and Nigerian National Petroleum Corporation (NNPC) Group Managing Director Kupolokun (Reftel D). She told us the group had a "relaxed attitude" towards the hostage crisis, and seemed confident it would end soon. Even while President Obasanjo continued to call the militants "criminals," she assessed he had experienced a significant attitude change in coming to realize the hostage situation is symptomatic of larger Delta developmental problems. He spoke seriously about a longer-term developmental response to the crisis, and told her Rivers State-style quick impact projects would have be rolled out simultaneously in Delta and Bayelsa States. (Note: The Rivers State project, still under development, will be funded by the state, with international oversight by USAID, DFID, and the World Bank. End note.) Reacting to militant demands for the withdrawal of the Nigerian military from the Niger Delta and its replacement by militia members in carrying out security functions, President Obasanjo told Pickard he refused to hand the Nigerian military over to the militants, but "they can join if they meet the qualifications." Pickard asked about revenue losses for the Nigerian state from current shut-in production, which she estimates at a minimum of $7 billion USD a year. She says the President appeared unconcerned, saying "the hostages are more important." Pickard indicated the President,s general attitude seemed to be that Nigeria,s oil wasn't going anywhere, so why worry? LAGOS 00000430 002 OF 004 -------------- -------------- Shell: No Military Solution to Crisis, only Long-Term Development Will Solve Delta,s Ills -------------- -------------- ¶3. (C) Pickard firmly stated Shell management,s view that there is no military response or military solution to the current crisis, only a long-term developmental response for the Delta. She asked if we had heard the contrary from Shell employees, and indicated if we had, this did not reflect Shell,s position. -------------- Thirty-Plus Days In: How Do We Avoid Tipping into a Long-Term Hostage Scenario? -------------- ¶4. (C) Pickard and her staff indicated they are desperately trying to keep the spotlight on the hostages after thirty-plus days. West African Security Manager Colgate voiced concern we are reaching a tipping point where the hostages could be held for the long-tem, potentially through next year,s elections, as human shields. Colgate warned, "the longer the hostages are held, the longer they will be held." Colgate stated Shell is struggling to avoid a scenario in which hostages in Nigeria, as in Columbia, are routinely held for lengthy periods, even years. -------------- -------------- Shell,s Production Scenarios: Staring into an Opaque Future -------------- -------------- ¶5. (C) Pickard laid out three possible scenarios for the general security situation and Shell,s production for the next 6-12 months. While she indicated Shell has not done a formal scenario planning exercise, these are the general scenarios she and her staff use when making their plans. --In the best case, Shell would find the security situation in Warri improving immediately, and could return the Forcados crude loading platform (CLP) and export terminal, and the SeaEagle to full production within 70 days. --In the middle scenario, Shell,s western operations will remain out of operation for the rest of the year, potentially until or beyond Nigeria,s 2007 elections. --In the worst case scenario, MEND would continue to attack production facilities, taking out vulnerable CLPs at Shell, s Bonny Island, and moving on to other major export facilities including Chevron,s Escravos and ExxonMobil,s Eket. Shell agreed with our assessment that MEND could not hit their March target of shutting in an additional 1 million bpd without targeting additional major oil companies (Reftel C). Pickard refused to put any possible numbers on the likelihood of one scenario over another, except to indicate both she and her staff assessed the rosy scenario as "unrealistic," and they would be "more than lucky" if the situation unfolded in that manner. -------------- -------------- Pickard: Bonga Security is the GON,s Responsibility Bonga not highly Vulnerable -------------- -------------- ¶6. (C) When asked about security for mega-project Floating, Production, Storage and Offloading vessel (FPSO) Bonga, she emphasized FPSO security "is the government's responsibility." She did not assess Bonga as vulnerable, stating FPSOs were built to be secure. (Note: Per reftel E, Pickard,s assessment differs significantly from that of her Bonga Operations Manager. End note.) She would not speculate as to Bonga,s greatest vulnerabilities, saying LAGOS 00000430 003 OF 004 Shell would not share this information. On the security front Pickard emphasized, "things need to happen away from us," underscoring that security arrangements should involve perimeter security located well away from vulnerable oil infrastructure. -------------- - Shell,s Fear: MEND to Tap Militia Alliances to Move Freely Around the Delta -------------- - ¶7. (C) Security Manager Colgate stated that his worst fear is MEND tapping a network of highly localized but mobilized militia groups outside of its own operational area, to move freely throughout the Delta. He stated MEND has figured out it does not need to stay long in an area to carry out an operation if it knows the infrastructure. He assessed MEND,s only remaining constraints were logistical "ensuring it had enough fuel to move around the Delta," and its ability to evade security forces, for which it has a proven track record. On the political front, Colgate opined President Obasanjo had learned a tough lesson last year when he flew militant leader Asari to Abuja for discussions, and inadvertently conferring increased legitimacy on him. Colgate does not believe Obasanjo is in a hurry to go down that road again. -------------- -------------- Struggles on the Contractor Front: Staff Laid Off, Rigs Abandoned, Plans to Grow Nigeria,s Oil Awry -------------- -------------- ¶8. (C) After Shell,s declaration and subsequent extension of force majeure on December 21 and January 13, (reftels A and B),Pickard told us Shell,s contractors are laying off staff. (Note: Under force majeure, payments to contractors are suspended. End note.) Contractors' equipment largely lies abandoned in the field, subject to vandalism and theft. Pickard noted contractors have curtailed drilling new wells, which will have a significant impact on Nigeria,s aspirations to increase production in the next couple of years. (Note: Industry sources tell us Shell,s contractors have ceased operating six out of seven drilling rigs it had under contract. End note.) Finally, Pickard indicated Shell is struggling with how to manage its message to its staff and staff morale when it cannot protect them adequately. -------------- Nigerian Crude: Still a Factor in International Crude Markets -------------- ¶9. (SBU) When asked whether Nigerian crude production had been "discounted" from international markets as suggested by some energy analysts, Pickard responded that she did not see how 2 million-plus barrels could be discounted from the world market. While not claiming to be an energy market expert, her reports indicate about $2 USD of current crude prices were attributable to instability in the Delta and Nigeria,s current shut-in production. -------------- Comment -------------- ¶10. (C) Pickard,s queries about Shell employees who might be failing to tow the corporate line on the desirability of a military solution to the current crisis, taken together with the Bonga Operation Manager's frustration at his inability to deploy assets to protect his staff (reftel E) point to an organization experiencing serious internal friction regarding its path forward. While senior Shell management clearly recognizes the legal peril for Shell in western courts were it to authorize the use of weapons by Shell personnel, and will doubtless prevent Shell funds from LAGOS 00000430 004 OF 004 being used to purchase such equipment, mid-level management appears in crisis, believing it can not provide minimal life and safety guarantees to its employees. Regardless, Shell appears united in refusing to return the Forcados export terminal and the SeaEagle to operation until the security situation improves significantly. We see no signs this will occur soon. ¶11. (U) This cable was cleared by Embassy Abuja. HOWE