A POSSIBLE STRUCTURE FOR A NEW NIGERIAN OIL SECTOR

C O N F I D E N T I A L SECTION 01 OF 05 LAGOS 000750

SIPDIS

SIPDIS

STATE FOR AF/W, EEB/ESC, INR/AA,
TREASURY FOR ASEVERENS, SRENENDER, DFIELDS
COMMERCE FOR KBURRESS
DOE FOR GPERSON, CGAY
STATE PASS USTR FOR ASST USTR FLISER
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR NCABOT
STATE PASS EXIM FOR JRICHTER
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ

E.O. 12958: DECL: 10/31/2017
TAGS: EPET ENRG PGOV NI
SUBJECT: A POSSIBLE STRUCTURE FOR A NEW NIGERIAN OIL SECTOR

REF: A) LAGOS 000602 B) LAGOS 000697 C) LAGOS 000717

LAGOS 00000750 001.2 OF 005


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


1. (SBU) Summary: This cable provides an initial view of
plans by the government of Nigeria (GON) to reorganize its
petroleum sector and national oil company. No official plan
has been announced publicly. Clarification may come in
February 2008, but the actual implementation is expected to
take significantly longer. Nigeria faces serious challenges
in reforming the state oil company and its petroleum sector
in general. End Summary.

--------------
The New Nigerian Petroleum Sector?
--------------


2. (SBU) In August 2007, Nigeria's President Umaru Yar'Adua
announced that the Nigeria would reorganize its national oil
company within six months (Ref A). The details on the
organization outlined below come from information gleaned
from press reports, statements from contacts, and a draft,
untitled, reorganization plan obtained from an industry
executive. The document is being circulated among industry
executives for comment and is believed to be the basis for
current reform planning. The committee tasked with reform
planning has not made its work public.


3. (SBU) This is not an exhaustive or final description of
the reorganization. Details are sketchy and information is
occasionally contradictory. The roles of some of the new
entities appear to overlap and are often vague. As is often
the case in Nigeria, there may be a disconnect between the
organization as presented on paper and the organization as it
really functions. Of particular interest is the fate of
National Petroleum Investment Management Service (NAPIMS),
the NNPC unit that controls Nigeria's joint ventures with the
international oil companies (IOCs).

--------------
Minister of Petroleum Resources (MPR)
--------------


4. (SBU) MPR will perform ministerial level functions for the
government of Nigeria within the oil and gas sector.
Specific responsibilities include:
--Advising the President and Federal Executive Council on oil
and gas issues;
--Administering the sectors through strategies developed by
its policy division;
--Overseeing and coordinating the entities listed below and;
--Representing Nigeria at OPEC and other international
petroleum forums.

--------------
National Petroleum Directorate (NPD)
--------------


5. (SBU) The NPD will work directly for the Minister as a
policy formulation group. Its mandate is to maximize
Nigeria's economic return from its oil and gas resources. It
will not develop technical regulations or licensing
requirements.
Specific responsibilities include:
--Creating sector policies and strategies;
--Optimizing the government's interests in petroleum
agreements;
--Developing the oil and gas sectors in general, including
policies to increase reserves and;
--Acting as custodian of unassigned oil blocks and deciding
when those blocks should be allocated for production.


LAGOS 00000750 002.2 OF 005



6. (SBU) The bidding process for unassigned acreages released
by NPD will be managed by the Petroleum Inspectorate
Commission described in the following section.

--------------
Petroleum Inspectorate Commission (PIC)
--------------


7. (SBU) PIC will act as an upstream and downstream
regulator, a licensing body, and in some respects a tax
authority. It will combine the functions of the current
Department of Petroleum Resources (DPR) with certain NNPC
activities. Specific responsibilities in the exploration and
production sectors include:
--Processing applications for acreage allotments;
--Evaluating reserves and managing reservoirs;
--Administrating leases;
--Collection of royalties, rentals, and fees;
--Establishing and enforcing safety and performance standards;
--Ensuring compliance with all petroleum laws and regulations
and;
--Publishing sector reports and statistics.


8. (SBU) PIC responsibilities in the natural gas and
downstream oil sectors include:
--Licensing new companies to operate in the downstream
markets;
--Licensing new investment projects;
--Creating and enforcing regulations on wholesale and retail
sales, marketing, and transportation of petroleum products;
--Enforcing local content laws in downstream activities and;
--Conducting environmental impact assessments for new
investment projects.


9. (SBU) PIC responsibilities in health and safety will
include:
--Establishing standards for facility designs and operations;
--Establishing safety, health, and environmental standards
that comply with national and international norms and;
--Ensuring compliance with the above standards.


10. (SBU) PIC will be funded through a levy on all crude oil
and condensate produced in Nigeria. Additionally, it will
receive a portion of the funds accruing to the Petroleum
Technology Development Fund.

--------------
The National Oil Company (NOC)
--------------


11. (SBU) The NOC will be a fully integrated upstream and
downstream petroleum company. NNPC's current oil exploration
arm, the Nigerian Production and Development Company (NPDC),
the Nigerian Gas Company, and the Petroleum Products
Marketing Company will be combined with four oil refineries
to make up the new NOC. The NOC will operate in the
following areas:
--Exploration and production of oil and natural gas;
--Oil refining;
--Refined products marketing and sales;
--Natural gas and liquid propane gas production, marketing
and sales;
--Research and development and;
--Operation of other petrochemical plants.


12. (SBU) The NOC will have an independent board of
directors. However, the appointment and removal of the NOC's
chief executive officer will be subject to Senate approval.
In theory, it will be an economically viable company. The
NOC will bid for projects competitively with the IOCs, but
for reasons of "national interest" may be "assigned choice
acreages" by Nigerian authorities. Initial operating and
capital funds will be provided by the Government of Nigeria

LAGOS 00000750 003.2 OF 005


(GON). Additionally, the NOC will be granted a percentage of
the national reserves to provide it with assets to use as a
basis for obtaining private financing.

-------------- --------------
Petroleum Products and Distribution Authority (PPDA)
-------------- --------------


13. (SBU) The PPDA is the successor to the Petroleum Products
Pricing Regulatory Agency, a government regulator and pricing
authority. It is in theory responsible for setting retail
gasoline prices. In practice the establishment of those
prices has been a political decision made at highest levels
of the Nigerian government. Primary responsibilities of the
PPDA include:
--Co-coordinating and regulating all commercial activities in
the downstream oil and gas industry;
--Determining pricing policies for petroleum products;
--Setting benchmarks for downstream natural gas pricing;
--Regulating the supply and distribution of petroleum
products;
--Moderating volatility in product prices while ensuring a
reasonable return to operators;
--Establishing parameters and codes of conduct for all
operators in the downstream market;
--Regulating refineries and;
--Regulating common carrier oil and gas pipeline regimes.

--------------
National Petroleum Research Center (NPRC)
--------------


14. (SBU) NPRC will act at the Nigerian government's
petroleum and research institution. It will not have a
regulatory or standards setting function. Primary duties
include:
--Conducting research along the petroleum value chain;
--Conducting valuations of petroleum fields for the Nigerian
government;
--Collaborating with PIC to analyze and evaluate information
received from the IOCs;
--Developing, patenting, and marketing new technologies;
--Conducting environmental impact assessments and;
--Carrying out other industry research, investigations and
projects as required.

--------------
Who Gets (Stuck With) the Joint Ventures?
--------------


15. (SBU) The fate of the National Petroleum Investment
Management service, NAPIMS, and the joint ventures it
controls, is of particular concern. Questions about where it
ends up and the form it takes are probably driving much of
the current reorganization planning.


16. (SBU) Nigeria uses two different types of petroleum
contracts. More recent agreements for deep water exploration
and production use production sharing contracts (PSCs).
However, much of Nigeria's onshore and shallow offshore oil
production is done through older, unincorporated joint
venture agreements. The GON, through NNPC, participates in
these agreements as a majority, non-operating partner. Like
the other venture partners, it is subject to periodic cash
calls for funds to develop and continue production. However,
Nigeria is routinely late and short in providing its share of
these funds (Ref C). This has been a great source of
frustration for the IOCs and has hampered sector development,
particularly of associated natural gas gathering projects.
The GON would like to rid itself of these cash call
obligations. In addition to being a financial burden, the
GON believes this issue is used by the IOCs as an excuse not
to invest further in onshore oil and gas projects. It is an

LAGOS 00000750 004.2 OF 005


excuse the GON has a hard time countering.


17. (SBU) Several possible destinations for NAPIMS have
surfaced. The draft plan received by Post shows NAPIMS and
the joint ventures falling under the PIC, and hence remaining
the responsibility of the Nigerian government. Press
reporting and an NNPC source tell a similar story, but with
NAPIMS as an independent governmental agency called the
National Oil and Gas Asset Management Company. In contrast,
a senior level contact at DPR has said that NAPIMS and the
joint ventures will be turned over to the NOC and the
government would be relieved of all responsibility for them
(Ref B).


18. (C) Recent developments indicate that Nigeria is
rethinking the joint ventures entirely. One presidential
advisor caused a stir in the media when he said Nigeria was
going to rethink its agreements with the IOCs. Dr. O Emanuel
Egbogah, the President's top advisor on petroleum, clarified
that statement. He told Post that Nigeria plans to
restructure the joint ventures by incorporating them. This
is most likely an attempt to give the joint ventures a
structure that eliminates the need for cash call payments
(Ref C). In that case, NAPIMS and the joint ventures could
be given to the NOC as part of its initial capitalization
without the burden of negative cash flows to the joint
ventures.


19. (C) IOC reaction to the reorganization has been mixed.
While our oil company contacts agree that some reorganization
is needed, they are also skeptical that a new NOC will be a
viable company. Oil executives believe that a reorganization
will take significantly longer than Nigerian officials
expect, and they fear that in the short and medium term, NNPC
and its successor will be even more chaotic and difficult to
deal with than usual. IOC representatives also agree that
NNPC is currently paralyzed by the uncertainty surrounding
the reorganization. Executives from Shell, Chevron, Exxon
Mobil, Total, Schlumberger, Halliburton, and Conoco Phillips
all say the same thing; as it stands now, NNPC is a blackhole
of work. New contracts are being delayed and expenditures
are not being approved. It is thought that inside NNPC,
executives with the authority to make decisions are jockeying
for position in a reorganized entity and have lost focus on
current operations.

--------------
Comment
--------------


20. (C) Reports of paralysis at NNPC and prospects for
continued confusion are troubling. Nigeria faces many
critical investment decisions in the next 12 to 18 months,
including construction of two new liquefied natural gas
terminals and expansion of a third, commencement of gas flow
through the West African Gas Pipeline, repair of its four
refineries, and construction of numerous independent power
projects. These decisions come at a time of rising costs due
to increased worldwide demand for petroleum industry
services. Further indecision will prove costly, delaying
revenues and diverting needed money from social spending and
non-petroleum related infrastructure.


21. (C) Statements by Nigerian officials that the NOC will
resemble Brazil's Petrobras or Saudi Aramco are wildly
optimistic. While NNPC does not publish audited financial
statements that would allow for a detailed analysis, there
are well known deficiencies in its operations. Its
production unit, NPDC, lifts about 70,000 barrels per day.
The nation's four refineries suffer from a lack of
maintenance and an intermittent supply of feedstock. In
general, NNPC is poorly managed, extremely bureaucratic, and
corrupt. The hiring of outside Nigerian petroleum executives

LAGOS 00000750 005.2 OF 005


with IOC experience would be a sign that Nigeria is serious
about NNPC reforms.


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