NIGERIA'S 2008 OIL PRODUCTION TO FALL SAYS TOP OIL

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000749

SIPDIS

NOFORN
SIPDIS

STATE FOR EEB/ESC BGGRIFFIN
DOE FOR GPERSON, CGAY

E.O. 12958: DECL: 11/18/2017
TAGS: ENRG EPET MARR MASS PGOV PREL NI
SUBJECT: NIGERIA'S 2008 OIL PRODUCTION TO FALL SAYS TOP OIL
EXECUTIVE

REF: LAGOS 000717

LAGOS 00000749 001.2 OF 003


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


1. (C/NF) Summary: Shell's senior Africa executive reported
that while no country in the world has the potential of
Nigeria in terms of new reserves available to international
oil companies, Shell would not develop new fields next year
because of ongoing funding and security problems. The
executive expects Nigeria's total oil production to fall in

2008. Shell plans to lay off 7,000 direct hire employees and
believes an additional 90,000 jobs may be lost among
contractors. Shell is using the Dutch Bilateral Investment
Treaty in a dispute with the GON over an oil block. Shell
has a myriad of difficulties in working with the GON and the
Nigerian National Petroleum Corporation (NNPC) but President
Yar'Adua is unwilling to meet with the international oil
companies (IOCs). The Shell executive recommended the USG
focus on improving the GON's coastal interception
capabilities to reduce violence and insecurity in the Niger
Delta region. End Summary.

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Shell VP: Nigeria's Oil Production To Decline
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2. (C/NF) In a frank exchange with Econcouns and Econoffs,
Shell's Vice President for Africa, Ann Pickard, said the
company has no plans to invest money next year other than
spending to maintain the integrity of installed oil
production equipment. No new onshore oil will come on-line
next year and she expects Nigeria's total oil production to
fall to 1.9 million barrels per day in 2008 as onshore
production deteriorates. The reasons given were familiar:
the GON's failure to fully fund its cash call obligations;
rising production costs; ongoing security problems in the
Niger Delta and NNPC's paralysis as a result of a possible
reorganization. Consequently, Shell will announce plans to
lay off 7,000 direct hire employees, mostly in the Niger
Delta region. Pickard expected those layoffs to result in
the loss of up to 90,000 jobs among employees of prime
contractors and subcontractors.


3. (C/NF) Pickard did not elaborate on Shell's publicly
announced plans to reorganize its operations in Nigeria. She
did remark that it was a cost savings move and that Shell's
current structure in Nigeria was unique worldwide and long
overdue for a reorganization. She claimed rumors that Basil
Omiyi, Shell's top Nigeria officer, would be forced out were
not true. However, he would be relieved of responsibilities
for day to day line operations and would assume more
strategic duties as Shell's Country Director. (Note: Omiyi
currently serves as Managing Director of Shell Petroleum
Development Company and as Shell's overall Nigeria Country
Director. He reports to Pickard who is responsible for all
Shell operations in Africa. End Note.) She noted that Omiyi
was past the normal mandatory retirement age, but had
received a waiver to continue working, evidence he is highly
valued by the company.


4. (C/NF) Despite these problems, Shell still views Nigeria
as one of the two most attractive places for accumulating
proven reserves (North America being the other). Pickard
described a Shell company chart that color codes countries as
red, yellow, or green depending on the amount of new oil
reserves available for IOC development. Of all those areas
with untapped reserves, only North America and Nigeria were
color-coded green. (Note: Qatar, which had been green,
recently turned yellow since it told Shell it cannot support
additional development at this time. End Note.)

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Restructuring JV Contracts a Good Idea. In Theory.
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5. (C/NF) Pickard was ambivalent when asked about the GON's
plans to incorporate the onshore joint venture (JV) contracts
(reftel). She told Emboffs that Shell had proposed that idea

LAGOS 00000749 002.2 OF 003


to the GON in 2004 and was not opposed to it in principal.
However, she noted that by Shell's own estimate it would take
four years to fully incorporate the JVs and during that time
Nigeria would still have to meet its cash call obligations
under the present JV structure. As for cash call arrears,
the GON would either have to make good on the money owed to
the IOCs or permit them to write off the losses against
future revenues.


6. (C/NF) On offshore deepwater production sharing contracts,
Pickard was less ambivalent. She described the 1993
production sharing contracts (PSCs) as generous, but
necessarily so given that offshore development in Nigeria was
an unknown at the time. However, those contracts are up for
renewal in 2008 and Shell expects the GON to take a very
hard-line during renegotiations, even though contracts
contain a stabilization clause. The 2000 PSC contracts were
less attractive, but she described them as workable.
However, she termed the 2005 PSC terms as "the worst in the
world" and said the major IOCs had refused to enter into
agreements with the GON because of them. The smaller size of
new offshore oilfield discoveries and the bad PSC terms had
made deepwater development uneconomical for most IOCs.
Shell, she said, needed an offshore oilfield size of around
400-450 million barrels in order to break even. Despite the
bad 2005 PSC terms, French producer Total broke ranks with
the other IOCs and entered into a 2005 PSC for Oil
Prospecting License (OPL) block 223, which lies to the east
of its producing Usan oilfield in OPL 222.


7. (C/NF) Pickard said that Shell has decided to seek redress
under the Dutch/Nigerian Bilateral Investment Treaty for its
long running dispute over OPL 245. Shell has been in a three
way battle over the disputed oil block with the GON and local
firm Malabu Oil since Shell won sole control of it during the
2003 bid round. Pickard said, however, that Shell has
offered to settle the case with the GON. She acknowledged
that the dispute could drag on for some time, and even if
Shell did win the case (of which she was confident),the GON
would take it out on Shell in other ways.

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Security in Delta a Mixed Bag
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8. (C/NF) On security in the Niger Delta, Pickard had mixed
opinions. She said the eastern Niger Delta has seen no lull
in militant/criminal activity, but described the situation in
the west as "improving." As a result, by December 15th,
Shell will permit the families of expatriate employees to
return to Warri and Bonny Island and partners (but not
children) to return to Port Harcourt. (Note: The day
following this meeting, armed groups attacked a pipeline in
Shell's Forcados oilfield near Warri. Shell has not said
whether it plans to rethink the decision on families. End
Note.) When asked about the recent attack in Shell's
west-located EA field, Pickard replied that Shell security
personnel thought insiders, specifically a junior naval
officer who mysteriously went missing shortly before the
attacks, may have helped the assailants.


9. (C/NF) Pickard said that based on differences in metered
volumes between the wellhead and export terminals, it appears
that 20,000 barrels per day are bunkered from Shell's
operational onshore oil facilities. However, Shell does not
have control of about 455 km of pipelines and Shell's daily
shut-in oil totals 500,000 barrels. She could not give an
estimate of how much of that oil might be bunkered. On a
recent overflight of the area she saw what appeared to be new
barges tied up to shut-in oil wells owned by Shell. She
described the barges as riding low in the water, presumably
full of oil. Pickard acknowledged that former employees of
Shell with technical experience in oil production may be
assisting in oil theft from shut-in wells.

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Natural Gas Industry Faces Confusion, Bad Planning
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LAGOS 00000749 003.2 OF 003



10. (C/NF) Pickard described numerous problems in the natural
gas industry. Notably, she told Econoffs that the Nigeria
Liquefied Natural Gas plant (NLNG) would complete work on
train six within the week; however, the train would not be
operational because it lacks a supply of gas. (Note: Shell is
a partner in the NLNG consortium and the major supplier of
gas to the plant. End Note.) She reiterated what other
contacts have said about the development of natural gas in
Nigeria, namely that the Nigerian government cannot settle on
a fiscal regime, has not determined its gas development
priorities, plans gas projects without consideration to gas
supply, and fails to meet its funding obligations for
gas-related projects. She described current natural gas
development as "jury-rigged." When asked about possible USG
assistance to the GON in developing a comprehensive natural
gas plan, Pickard recalled that Wood Mackenzie has provided
consultants and the IOCs had offered their advice on the
issue, none of which has had an impact. The current delay in
settling on a gas master plan may be the result of wrangling
over domestic versus international gas priorities.
Additionally, political pressure to generate more electricity
is leading to some irrational development of independent
power projects (IPPs). Pickard told how Shell is still owed
USD 550 million by the GON for a power plant it built in Port
Harcourt, a plant that ExxonMobil had refused to bid on. The
GON continues to pressure the IOCs to build IPPs despite
known problems in funding and gas supplies. Shell has
stopped construction on its plant due to GON arrearages and
it is not providing any new electric power supplies for
Nigerian consumers.

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IOC Access to President is Limited
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11. (C/NF) The IOCs have little to no direct access to
President Yar'Adua who, she said, keeps oil company
executives at arms length. Under the previous administration
she had regular access to then President Obasanjo, but
related that she has only met once with Yar'Adua and the
reception was notably "cool" and limited in substance.
Pickard described Yar'Adua and Finance Minister Shamsuddeen
Usman as not really understanding oil and gas related issues.
Shell is worried about the health of Yar'Adua. She told
Econoffs that the UK High Commission and Dutch Embassy have
shared with her their views of a possible succession should
Yar'Adua leave office early for health reasons; she declined
to elaborate on those views.


12. (C/NF) When asked about what the USG could do to improve
the situation in the oil and gas sector, Pickard said she
thought that it should focus on police and coast guard
capacity building in the Niger Delta. The Nigerian military,
she said, was not the right group to provide security in the
Niger Delta. She specifically cited, however, the need for
boats to intercept those bunkering oil and fomenting violence
in and around the Delta, commenting that there were only
about five ways in and out of the Delta and it doesn't take a
world-class navy to control the passageways.


13. (C/NF) Comment: There is often a bit of "woe is me" in
our discussions with oil company contacts. Nigeria is a
tough place to do business. However, Pickard's comments were
more downbeat than normal and she painted a grim picture of
the state of Nigeria's hydrocarbon industry. Shell and the
other IOCs still see Nigeria as a good place to book proven
reserves. However, given the aforementioned problems, little
additional onshore oil production will come on-line in the
short and medium term, nor will Nigeria meet its goal of
producing 4 million barrels per day by 2010. End Comment.


14. (U) This cable has been coordinated with Embassy Abuja.
HUTCHINSON