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

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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.

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Shell Oil Block Reallocated to Nigerian Company
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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.

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Shell Owed USD 1.2 Billion; Threatens Shutdown
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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.

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Contractor Cancels Based on New U.S. Travel Warning
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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.

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Chinese Contractors Kidnapped

LAGOS 00000060 002.2 OF 002


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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.

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Chinese Deals Contingent on Oil Success
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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