RUMORS SURFACE ABOUT FUTURE OF NIGERIAN LNG PROJECT

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000644

SIPDIS

SIPDIS

DOE FOR GPERSON, CGAY

E.O. 12958: DECL: 09/24/2017
TAGS: EPET ENRG PGOV NI
SUBJECT: RUMORS SURFACE ABOUT FUTURE OF NIGERIAN LNG PROJECT

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Classified By: Acting Consul General Donald McConnell for reasons 1.4 (
B) and (D)


1. (C) Summary: The head of a major gas project in Nigeria
says there are indications that plans for the OK liquefied
natural gas (LNG) plant will not proceed. He also said new
gas tax legislation could cripple future gas exploration and
production in Nigeria. A Shell managing director reports
that announced reforms to Nigerian National Petroleum
Corporation (NNPC) have paralyzed the organization and no new
contracts are being signed. Local oil executives agree that
the situation in the Delta is at a turning point, but are
unsure of which direction it will take. End Summary.

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Is OK LNG Really Okay?
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2. (C) During a side bar meeting with Econoffs after a larger
gathering of local oil executives, Martin Hutchison (strictly
protect),the Managing Director of Brass LNG told Econoffs
that he had participated in an informal meeting between the
Deputy President of the Nigerian Senate, Ike Ekweremadu, the
Chairman of the Senate Gas Committee, Patrick Osakwe, and
other legislators after the Gas Committee's inaugural
session. The post-session meeting took place in the office
of the Deputy President and Mr. Hutchison was the only
non-Nigerian present. He said when talk turned to the OK LNG
plant planned for construction in Ondo State, the legislators
began to smirk and referred repeatedly to the project in the
past tense. The clear impression he received was that the
legislators viewed the OK LNG plant as a pet project of
former president Obasanjo and now that he was no longer in
power, construction on the facility may not proceed.
Hutchison believes Chevron would be in serious trouble
without OK LNG, having no other significant outlet for its
gas besides the troubled West African Gas Pipeline (WAGP).
(Note: The OK in OK LNG is short for Olokola, the location
of the facility in Ondo State. Hutchison said a joke amongst
industry insiders was that OK actually stood for Obasanjo and
Kupolukun, the former Group Managing Director of NNPC. End
Note.)


3. (C) When asked about the real future of gas production in
Nigeria, Hutchison, a 30-year industry veteran, said he
thought expectations were wildly optimistic. He noted that
most onshore gas was associated and would not really be
available until the oil reserves were depleted since that gas
would be needed for re-injection as the oil fields aged. The
big offshore gas fields he said were mainly in deep-water and
therefore too expensive to develop and produce at current
prices without significant recovery of condensate. According
to Hutchison, Nigerian government policies on domestic gas
prices are holding back real market incentives to develop gas
in Nigeria.

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Tax Legislation Could Threaten Nascent Gas Industry
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4. (C) Hutchison also voiced serious concern over the Natural
Gas Fiscal Reform Act (NAGFRA) moving through the Nigerian
National Assembly. According to him, the new legislation
will not allow oil companies to offset costs attributable to
gas projects against oil revenues as currently permitted
under the corporate income tax law. Given the exorbitant tax
rates on oil companies during high oil prices, this change in
the tax law would, in his words, kill future gas projects and
could impact efforts to reduce gas flaring. Brass LNG is
tracking the legislation closely and is working to get a
grandfather clause written for current gas projects. If that
fails, Hutchison claims ongoing projects could be in
jeopardy. As an aside he noted that Brass go/no go
investment decision point was around $500 million. Hutchison
was unsure of prospects for NAGFRA or whether efforts to
insert a grandfather clause enjoyed any support in the
National Assembly.

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NNPC Described as Paralyzed by Uncertainty
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5. (C) Chima Ibeneche, Managing Director of Offshore
Operations for Shell Nigeria Exploration and Production
Company and Jide Ayo-Vaughan, General Manager for Exxon
Mobil's Erha offshore facility discussed their views on the
proposed NNPC restructuring announced by President Yar'Adua.
While both welcomed reform of the NNPC and agreed it would
succeed in the long term, neither was optimistic the reforms
would start in the six month timeframe announced by the
President. Ayo-Vaughn was openly dismissive of that timeline
and thought any restructuring would take two years. Ibeneche
believed it could happen sooner, but both agreed legislation
to reorganize the NNPC faced a battle in the Nigerian
legislature, particularly the House, as competing groups
lined up to protect their interests. Ibeneche complained
that in the meantime, NNPC was not approving any new
contracts above $250,000 as NNPC managing directors and board
members needed to approve high value contracts were either
confused about their status or busy lobbying for a place in
the reorganized company. He described working with NNPC as
currently "impossible" and said this presents a serious
problem for ongoing operations.

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Community Relations Troublesome for Local Operators
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6. (C) Imo Itsueli, the chairman of Nigerian independent oil
company Dubri Oil Company Ltd (DOCL),described to a small
group of executives and Econoffs the problem of shut-in oil
for a Nigerian independent after one of the group commented
that Nigerian-owned oil firms must be free from the community
problems that plague the international companies. Itsueli
countered that DOCL's production from wells in Rivers state
was completely shut-in due to community problems. DOCL, like
many small operators, uses barges instead of pipelines to
transport its oil from the wellhead. Itsueli told the group
that while his employees still controlled the wellheads,
barge traffic was at a standstill. Barges would either be
hijacked by local groups along the creeks or forced to pay
such exorbitant "tolls" that it made the oil uneconomical.
When asked how he still controlled his wellheads, Itsueli
wryly noted that many of his employees were from the nearby
communities, the same communities presumably responsible for
holding up his barges. To Itsueli, small operators like
himself can only stay in business by finding concessions in
other locations and avoiding publicity by operating them
under different company names.


7. (C) The small group debated the ongoing problems in the
Delta region. While of differing opinions on details, all
agreed that the violence had reached a plateau, but it
remained to be seen where it would go from there. Ibeneche
of Shell believed that the fact that most Delta politicians
were "appointed" to their positions in the last elections by
PDP higher ups had broken the connection between those
politicians and local gangs historically employed to rig
elections and shore up support. He also thought violence
directed towards the families of local elites had awakened
many politicians to the real danger of the gangs. Itsueli
disagreed and said relationships were as tight as ever. All
were pessimistic about near term solutions to the problem,
but agreed that oil company community development efforts
were not the answer. Hutchison said Brass LNG was hoping to
head off problems with locals by negotiating before the
project rather than waiting until project completion when the
company could no longer bargain from a position of strength.
Both he and Ibeneche agreed that the question of development
could only be solved at the local and federal government
levels and was not fundamentally solvable by private actors.
As is often the case with Exxon Mobil contacts, Ayo-Vaughan
downplayed any significant problems his company had with
indigenous groups and he stayed largely out of the
conversation on the Niger Delta


8. (C) Comment: This is the first we have heard that OK LNG
may not go forward. If true, it could be a big blow to
Chevron's gas operations in Nigeria. With the WAGP slow to
come on-line, Chevron would be have no easy way to export its
natural gas and as pressure mounts to end gas flaring, the
company could be in a real bind. Legislation working its way
through the National Assembly could be vital to the future of
gas production in Nigeria. End Comment.

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MCCONNELL