SHELL'S BAD DAY: NIGERIAN GOVERNMENT PULLS OIL

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000060 SIPDIS SIPDIS DOE FOR GPERSON, CGAY TREASURY FOR ASEVERENS, SRENENDER, DFIELDS COMMERCE FOR KBURRESS STATE PASS USTR FOR ASST USTR FLISER STATE PASS TRANSPORTATION FOR MARAD STATE PASS OPIC FOR ZHAN AND MSTUCKART STATE PASS TDA FOR NCABOT STATE PASS EXIM FOR JRICHTER STATE PASS USAID FOR GWEYNAND AND SLAWAETZ E.O. 12958: DECL: 01/29/2016 TAGS: EPET ENERG ASEC PTER NI SUBJECT: SHELL'S BAD DAY: NIGERIAN GOVERNMENT PULLS OIL BLOCK, CHINESE CONTRACTORS KIDNAPPED, LAGOS 00000060 001.2 OF 002 Classified By: Consul General Brian Browne for Reasons 1.4 (B,D) ¶1. (C) Summary: Shell Managing Director Ann Pickard told visiting Deputy Director for West African Affairs Don Heflin the Government of Nigeria (GON) has notified the company that one of its oil blocks will be given to a Nigerian company. Unless the GON pays USD 1.2 billion in arrears Shell believes it is owed, the company has informed the GON it will shut down operations in Nigeria pursuant to a phased plan. Three Chinese employees of the China National Petroleum Company (CNPC),conducting seismic studies and drilling under contract to Shell, were kidnapped and several others missing following an incident at Sagama in Bayelsa State. Chinese and Indian oil companies, whose deals with the GON often include projects such as construction of refineries, make those projects contingent on success in striking oil or gas in one of the blocks awarded. End Summary. -------------- -- Shell Oil Block Reallocated to Nigerian Company -------------- -- ¶2. (C) Ann Pickard, Managing Director of Shell Nigeria, in a January 25 briefing for West African Affairs Deputy Director Donald Heflin, announced that Shell "had a bad day." Chief among the problems: notification from the Nigerian Government that it had just reallocated one of Shell's oil blocks to an indigenous company, Malabu owned by a close friend of president Obasanjo. Pickard noted Shell had already invested USD 1 billion into the block. The Government gave no reason for the reallocation, nor did it claim Shell had failed in any required undertaking, according to Pickard. Shell will attempt to resolve the dispute pursuant to the U.K.-Nigeria bilateral investment treaty, which the company has used before with some success. -------------- - Shell Owed USD 1.2 Billion; Threatens Shutdown -------------- - ¶3. (C) A problem which has been festering for some time is that the Nigerian Government owes Shell USD 1.2 billion from 2005 and 2006. All but USD 250 million of this sum is owed Shell from the Excess Crude Account. Shell has been told the excess crude amounts will be reflected in Nigerian National Petroleum Company (NNPC) accounts. Shell continues to vet the accounts, but the funds have not appeared. Shell has informed the Nigerian Government that unless the arrears are paid, Shell will begin shutting down operations in Nigeria. The company's plans are in four phases, Pickard said. -------------- -------------- Contractor Cancels Based on New U.S. Travel Warning -------------- -------------- ¶4. (C) At least one contractor has canceled its work with Shell because of the most recent U.S. Travel Warning, which made it practically impossible has had the effect of making it impossible for the company to obtain insurance. Although it is becoming more difficult to get oil service contractors to work in Nigeria, Shell has no problem attracting executives to work in Lagos because of the flexible work schedules and excellent schools the company makes available as part of the compensation package. -------------- Chinese Contractors Kidnapped LAGOS 00000060 002.2 OF 002 -------------- ¶5. (C) Early on the 25th, three Chinese employees of the China National Petroleum Company (CNPC),conducting seismic testing and drilling for Shell in Sagbama, Bayelsa State, were kidnapped; seven others are missing. (Note: Subsequent reports put the number of Chinese workers abducted at nine. End Note) Shell is increasingly using Chinese contractors on its projects. The South Korean Ambassador told her that, because of the increase in hostage takings in the Niger Delta, the Government of South Korea is very close to following the Philippine government in banning Filipino workers from traveling to Nigeria. -------------- Chinese Deals Contingent on Oil Success -------------- ¶6. (C) Commenting on the willingness of the Chinese to take on special projects such as the building of a refinery if they are awarded oil blocks, Pickard has seen the contracts used in these deals. The fine print indicates the parties agree that the Chinese will build the refinery or other special project only in the event of striking oil or gas in one of the blocks awarded. The Indians use a similar contract, which Pickard has also seen. Most Nigerians in the industry are extremely skeptical about these deals, Pickard noted. ¶7. (C) When the Government of Nigeria (GON) first told Shell it would lose its Ogoni concession as the result of its dispute with the Ogoni people, the Government also told Shell the concession would be reassigned to the Chinese. Subsequently, the reconciliation process between Shell and the Ogoni began to move forward under the aegis of a well respected Nigerian cleric, Father Kukah, Pickard said. She added the United Nations Environmental Program (UNEP) has been asked to assess environmental degradation and fashion a remediation plan for Shell to follow. Several oil wells within the concession have been set afire, and the Ogoni have refused Shell the access it needs to cap the wells to prevent further sabotage. Some at the company perceive factions developing in the Ogoni people, with elders, the Movement for the Survival of the Ogoni People (MOSOP),and discontented others taking different positions on the controversy. ¶8. (C) Comment: Shell has emphasized in the past that it is "in for the long haul", despite its myriad problems in the Niger Delta. Pickard made it clear that the company hopes that the government will resolve the dispute over arrears long before Shell has to take action pursuant to any of the phases of the threatened pull-out plan. BROWNE