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. -------------- Shell VP: Nigeria's Oil Production To Decline -------------- ¶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.) -------------- -------------- Restructuring JV Contracts a Good Idea. In Theory. -------------- -------------- ¶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. -------------- Security in Delta a Mixed Bag -------------- ¶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. -------------- -------------- Natural Gas Industry Faces Confusion, Bad Planning -------------- -------------- 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. -------------- IOC Access to President is Limited -------------- ¶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