Identifier
Created
Classification
Origin
07LAGOS740
2007-11-13 15:37:00
CONFIDENTIAL
Consulate Lagos
Cable title:  

RESOURCE NATIONALISM IN NIGERIA

Tags:  EPET ENRG PGOV NI 
pdf how-to read a cable
VZCZCXRO4905
PP RUEHPA
DE RUEHOS #0740/01 3171537
ZNY CCCCC ZZH
P 131537Z NOV 07
FM AMCONSUL LAGOS
TO RUEHZK/ECOWAS COLLECTIVE PRIORITY
RUEHUJA/AMEMBASSY ABUJA PRIORITY 9341
RUEHC/SECSTATE WASHDC PRIORITY 9584
INFO RUFOADA/JAC MOLESWORTH AFB UK
RUEKJCS/SECDEF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000740 

SIPDIS

SIPDIS

STATE FOR EEB/ESC BGGRIFFIN
DOE FOR GPERSON, CGAY

E.O. 12958: DECL: 11/07/2017
TAGS: EPET ENRG PGOV NI
SUBJECT: RESOURCE NATIONALISM IN NIGERIA

REF: A) STATE 150999 B) LAGOS 000717 C) LAGOS 000602
D) LAGOS 000697 E) LAGOS 000647 F) ABUJA
002155 G) ABUJA 002178

Classified By: Acting Consul General Vicki Hutchinson for reasons 1.4 (
B) and (D)

This is a joint Embassy Abuja and Consulate General Lagos
response to Reftel A.

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000740

SIPDIS

SIPDIS

STATE FOR EEB/ESC BGGRIFFIN
DOE FOR GPERSON, CGAY

E.O. 12958: DECL: 11/07/2017
TAGS: EPET ENRG PGOV NI
SUBJECT: RESOURCE NATIONALISM IN NIGERIA

REF: A) STATE 150999 B) LAGOS 000717 C) LAGOS 000602
D) LAGOS 000697 E) LAGOS 000647 F) ABUJA
002155 G) ABUJA 002178

Classified By: Acting Consul General Vicki Hutchinson for reasons 1.4 (
B) and (D)

This is a joint Embassy Abuja and Consulate General Lagos
response to Reftel A.


1. (C) Summary: Resource nationalism is not a significant
movement in Nigeria. GON officials publicly and privately
express a desire to attract more foreign investment in the
petroleum sector. However, tough new local content
requirements are in practice nationalistic and could hamper
petroleum sector development. Increasing regulatory capacity
building programs and strengthening bilateral trade and
investment arrangements could help Nigeria efficiently
develop its resources. End Summary.

--------------
Nationalism in Nigeria's Discourse
--------------


2. (C) The political and economic discourse in Nigeria is not
overtly nationalistic. Politics in Nigeria are a complicated
mix of ethnic, regional, and religious loyalties, fueled by
money funneled through a patronage system. Populist resource
nationalism is not a significant part of that equation.
While international oil companies (IOCs) are a frequent
target of criticism in the press and a convenient whipping
boy for politicians, there is no real move to follow the
example of Bolivia or Venezuela. (Note: Oil and natural gas
are the only significant extractive industries in Nigeria at
present, though mining has potential. End Note.)


3. (C) Even in poverty stricken oil states, attempts to
extract more money from IOCs take the form of demands for
increased use of locals to supply equipment, labor, or
"security" to oil installations or for various local
assistance projects. Nigeria's national oil company,
Nigerian National Petroleum Corporation (NNPC) and small
indigenous oil companies face the same demands, evidence that
these are opportunistic attempts by local leaders to cash in
on oil company operations. There is also legitimate
criticism that oil proceeds fall prey to corruption rather

than being used to create a better future for ordinary
Nigerians.


4. (C) What is often mistaken for resource nationalism in
Nigeria is usually poorly articulated public statements
combined with sensationalist press coverage. In a recent
example, presidential advisor on energy, Rilwanu Lukman told
the press that Nigeria would "reconsider its generous terms"
with the IOCs. This vague pronouncement made a splash in the
local and international media which reported his statements
without follow up or context.


5. (C) However, senior presidential advisor on petroleum Dr.

O. Emmanuel Egbogah met with Econoffs a week later and
clarified those remarks (Reftel B). As reported in Reftel C,
the GON announced a future reorganization of its petroleum
sector. As part of that reorganization, it plans to
restructure onshore oil production joint venture (JV)
agreements with the IOCs. These JVs require NNPC to make
periodic cash payments to the IOC JV operating partner. The
GON has had significant trouble making these payments, much
to the chagrin of the IOCs. (Note: GON cash call arrears are
routinely cited by IOC executives as one of the most serious
business problems they face. End Note.) The GON hopes to
bypass this problem by restructuring JVs to attract third
party investment and eliminate the need for cash call
payments. Lukman's comments were aimed at this, but his
failure to elaborate, plus shoddy media reporting, implied a
plan to abrogate all GON contracts.


7. (C) President Yar'Adua has said that he wants to see a
contract structure that will permit greater third party
investment in petroleum joint ventures, freeing the GON to
use its money on social spending or other infrastructure
projects. The head of Nigeria's oil regulator, Tony

LAGOS 00000740 002 OF 003


Chukwueke, has called for more foreign investment in Nigeria
and offered to lead a delegation to the United States to
convince small, independent oil companies that Nigeria is a
place to invest (Reftel D).


8. (C) Nigerian officials do publicly complain about costs
associated with production sharing contracts (PSCs),the form
of contracts used in Nigeria's deepwater offshore oilfields.
The contracts are structured to allow the operator to recover
exploration and production costs before sharing oil profits.
Nigerian politicians have accused the IOCs of cost padding,
such as cost overruns at Shell's Bonga and Exxon Mobil's Erha
offshore facilities. There have been threats to investigate
these projects and impose tougher PSC terms (Reftel E).


9. (C) While Nigeria may not be nationalizing its oil
industry in the traditional sense of the word, we expect it
to drive a hard bargain in future contract negotiations.
Future PSCs will likely include tighter terms on ring fencing
and cost recovery write-offs in attempts to reduce the impact
that rising project costs have on the timing of GON revenues.
We expect the GON will use the entrance of Asian oil
companies into West Africa, IOC fears of nationalization, and
higher oil prices to extract every advantage in new contracts
while not scaring away needed foreign investment.

-------------- ---
Local Content Motivated by Resource Nationalism?
-------------- ---


10. (C) GON has not proposed or implemented specific policies
directly motivated by resource nationalism. Nonetheless, new
legislation requiring local content in petroleum projects
could affect the ability of international firms, especially
oilfield service firms, to operate profitably in Nigeria.
The Local Content Bill will mandate specific and very high
levels of Nigerian value added content and employment in most
oil and natural gas projects. For example, the bill requires
55 percent of funds spent on well testing services be spent
with Nigerian-owned companies and 90 percent of front end
engineering and design and 100 percent of all 2D and 3D
seismic services (in man-hours) by performed by Nigerians.
The bill is vague in what would legally constitute "Nigerian"
content and leaves room for regulators to apply the law
capriciously.


11. (C) The status of the proposed legislation is murky. It
did not pass during the National Assembly's last term, but
its sponsor plans to reintroduce it this year. (Note: The
House Speaker's corruption scandal and resignation have
crippled the National Assembly calendar. End Note.) The
IOCs are engaging with legislators and regulators to reduce
the bill's most severe clauses, but passage of the
legislation itself seems to be a forgone conclusion.
Language that mandated criminal penalties and jail time for
failure to comply has been dropped.


12. (C) International oilfield services companies have also
expressed concerns about the bill. They see themselves
squeezed out of projects by less capable, but
politically-connected local firms. Executives also worry
that proprietary technology and techniques will be
expropriated by the new law. The oilfield services companies
are less organized as a group than the oil majors in Nigeria
and, given their relatively smaller size and revenue
contribution, wield less influence with Nigerian officials.
Nonetheless, they are organizing an industry trade group to
lobby the GON, with local content rules as a top priority.

--------------
Beneficiaries of Resource Nationalism
--------------


13. (C) In theory, the local content legislation is driven by
a desire to keep oil-related spending localized and increase
employment. Contacts point out that a typical foreign oil
firm already has a work force that is 85 to 95 percent
Nigerian, with expatriate workers limited to highly
experienced and senior engineers, technicians, and managers.
Use of local firms will likely drive up sector costs and may
actually reduce the total number of Nigerians employed.

LAGOS 00000740 003 OF 003


There are a limited number of Nigerian firms that are capable
of performing highly technical oilfield work. Those that are
capable are highly sought after. Consequently, oilfield
costs are rising and projects are delayed. (Note: On local
employment, a Chevron engineering contact reports that a
Nigerian firm doing project engineering work actually
outsources the project to engineers in India. End Note.)


14. (C) The real beneficiaries of the bill will be local
oilfield service companies, often owned by politicians, NNPC
officials, government regulators, and other Nigerian
insiders. Conflict of interest laws are porous, not
enforced, and easily evaded. For example, while he was the
head of NNPC, former Group Managing Director Funso Kupolokun
had financial connections to three petroleum engineering
firms that would benefit from increased local content
legislation drafted on his watch.

-------------- --------------
USG Actions to Address Growing Resource Nationalism
-------------- --------------


15. (C) Building on country team goals already in place, we
recommend a two-prong strategy for confronting potential
resource nationalism in Nigeria. First is to promote good
governance and regulatory best practices to encourage
efficient extraction of petroleum and wise revenue spending.
The second is to encourage the GON to diversify its export
economy beyond oil by increasing bilateral and multilateral
trade ties. A more diverse economy, particularly in the
oil-producing Niger Delta, could diminish the perceived need
to rely almost exclusively on the petroleum industry for
employment and revenues.


16. (C) Post already engages with Nigerian regulators and
other officials in both areas. We are spearheading a donor
group initiative to improve the planning and work of the
Nigerian Extractive Industries Transparency Initiative
(NEITI). NEITI audits the flow of money from oil producers
to the Nigerian government. The work NEITI does will
hopefully lead to better use by the GON of oil revenues. We
also work closely with electricity regulators at the Nigerian
Electricity Regulatory Commission (NERC). The Trade and
Development Agency recently launched a study of safety issues
for NERC that received much favorable press coverage (Reftel
F). USAID/West Africa has a contractor working with
officials of the West African Gas Pipeline project (WAGP) on
supply, administrative, and business issues.


17. (C) With the price of oil over 90 USD per barrel, funding
such projects in an OPEC nation may not appear to be a
necessary. Nigeria has significant petroleum reserves; it
also has an enormous and impoverished population. On a per
capita basis, Nigeria has the second lowest reserves in OPEC,
even lower than OPEC dropout Ecuador. Revenues from oil are
needed to serve the Nigerian population's real and pressing
demands. USG assistance on regulatory capacity building
programs would be greatly appreciated, widely recognized, and
could have a significant impact.


18. (C) Post is preparing for Trade and Investment Framework
Agreement (TIFA) talks scheduled for 10-11 December (Reftel
G). Strengthening TIFA and even moving beyond it towards a
Bilateral Investment Treaty would help the GON expand its
export economy beyond petroleum, which currently accounts for
99 percent of foreign exchange earnings. A more diversified
economy may reduce ill-advised attempts to squeeze more
short-term revenues from oil companies to fund social
programs.
HUTCHINSON