NIGERIA: GAS PRICE AGREED TO BUT POLICY CONFUSION

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000157

SIPDIS

SIPDIS

STATE FOR AF/W, INR/AA, DS/IP/AF, DS/ICI/PII, DS/DSS/OSAC
DOE FOR GPERSON, CHAYLOCK

E.O. 12958: DECL: 04/28/2018
TAGS: EPET ENRG PGOV NI
SUBJECT: NIGERIA: GAS PRICE AGREED TO BUT POLICY CONFUSION
RAMPANT

REF: A. LAGOS 122

B. 07LAGOS 645

Classified By: Consul General Donna Blair for Reasons 1.4 (B,D)


1. (SBU) Summary: Negotiations between upstream gas
producers and the Government of Nigeria have established a
price for domestic natural gas of USD 0.50 per thousand
standard cubic feet. A USAID contractor said Nigeria's
Minister of State for Energy (Gas) Emmanuel Odusina had
balked at supplying more than a token amount of natural gas
to the West African Gas Pipeline citing domestic priorities,
but oil company contacts are confident the pipeline will
receive all the gas it is currently capable of transporting.
In a meeting with "stakeholders", the chairman of the Senate
Committee on Gas admitted he had not seen Nigeria's master
plan for developing its gas resources. Indigenous industry
representatives are growing increasing impatient with the
lack of certainty in the natural gas policy. There is plenty
of gas available, but Nigeria must come to grips with the
nature of natural gas investment. End Summary.

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Chevron: Government Agrees on Gas Price...
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2. (SBU) Chevron Nigeria's Gas Policy Manager told Econoff
and a visiting Department of Energy official that the GON and
upstream gas producers have agreed to a domestic gas price of
USD 0.50 per thousand standard cubic feet (mscf). The price
is the result of lengthy negotiations between the oil
companies and the GON, spurred on by Nigeria's recent
announcement of a new natural gas policy and regulation (Ref
A). The Chevron executive also shared a Nigerian National
Petroleum Corporation document that appears to be the outcome
of those negotiations. In it, USD 0.50 is defined as a price
to be used during the "emergency period." No details are
given on the definition of emergency period or how long it
will last. Following the emergency period, gas pricing is
expected to transition to "export pricing parity", a price
linked to the previous year's export price agreements through
a complex pricing formula. (Note: Ref A reports that oil
companies were seeking to secure a workable current natural
gas price while seeking assurances that the GON would
transition to market-based pricing in the future. The
document shows the companies were at least partially
successful, although the timeframe for implementation was
notably vague. End Note.)

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...But Issues Conflicting Demands for Gas Supply
-------------- ---


3. (SBU) On the subject of mandatory domestic gas supply
obligations, the Chevron manager said that shortly before
coming to terms with the GON, Chevron had received two
letters within two days, one from the Minister of State for
Energy (Gas) and one from the Department of Petroleum
Resources, detailing the amount of gas Chevron was expected
to supply to meet domestic Nigerian needs. The Minister's
letter required Chevron to supply 135 million standard cubic
feet per day, the amount Chevron already has under contract
for domestic consumers. The Department of Petroleum
Resources however, demanded Chevron supply 351 million
standard cubic feet per day or face fines of USD 3.50 per
mscf not supplied plus gas flare penalties of USD 3.50 per
mscf. Chevron will not have that amount of gas available
until next year, but even if it did, the pipeline connecting
Chevron's gas gathering facility at Escravos to the Nigerian
Gas Company hub in Warri is limited to 300 million standard
cubic feet per day. Additional throughput capacity is
planned, but not expected to be completed before 2012.
(Note: The Department of Petroleum Resources letter gave a
compliance date of April 1, 2008. Chevron has not met those
demands and has not heard anything further from the
Department of Petroleum Resources o the matter. Shell
received the same letter and decided to ignore it, assuming
it was a negotiating ploy. End Note.)


LAGOS 00000157 002 OF 003


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Export Gas for West African Gas Pipeline: Wait and See
-------------- --------------


4. (SBU) A USAID contractor working with the West African Gas
Pipeline Company (WAGPco) told Econoff that Nigeria is
balking at supplying more than 30 million British thermal
units (MMBTU) per day of natural gas to the pipeline.
According to the contractor, the pipeline, which has
completed pre-commissioning checks, is capable of
transmitting 60 MMBTU per day. Delays in installing
compressors have reduced the initial capability of the
pipeline (Ref B). Engineers had originally estimated the
pipeline's uncompressed, free flow capacity at 30 MMBTU per
day, but revised their estimate upwards after final tests of
the system. When all the compressors are installed, the
pipeline will be capable of handling 474 MMBTU per day.


5. (SBU) At a meeting with the Minister of State for Energy
(Gas),WAGPco officials requested that the Nigerian Gas
Company (NGC),the marketer responsible for supplying gas
from the upstream producers, inject 60 MMBTU per day into the
pipeline. WAGPco officials pointed out that under the terms
of an prior agreement, NGC was supposed to have initially
delivered 134 MMBTU. The Minister claimed that Nigerian
domestic needs prevented the country from supplying more than
30 MMBTU per day for the indeterminate future, though he
promised to review the issue.


6. (SBU) However, a Chevron manager in charge of commercial
gas sales told Econoff that Chevron, Shell, WAGPco and NGC
would soon sign an agreement to supply "as much uncompressed
gas as the pipeline is currently capable of handling". He
appeared genuinely surprised at allegations the Minister and
NGC were balking at supplying more that 30 MMBTU of natural
gas. In a side bar discussion at an industry workshop,
Shell's gas manager was similarly confident that such an
agreement would soon be reached.

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Gas Policy Expertise in National Assembly Weak
-------------- -


7. (SBU) On the legislative front, on April 7, the Chairman
of the Senate Gas Committee, Senator Osita Izunaso convened
an "Expert Meeting on a Commercial Framework For Effective
Gas Utilization". The initial meeting was attended by
Econoff, a USAID officer, a gas policy consultant (who in
looking for business prospects had agreed to give a
presentation on the future of worldwide natural gas demand),
the head of the oil industry trade group in Nigeria, a
representative from the office of the Vice President, several
NGO representatives, a representative from a company claiming
to be building small methanol plants, and a mid-level
employee of the Nigerian Gas Company. The actual purpose of
the meeting was never clear, and after the obligatory
accusations that oil companies were dragging their feet on
ending gas flaring (followed by equally obligatory denials by
the industry representative),the Chairman announced all the
attendees would be members of future sub-committees that
would be involved in "speed(ing) up the process to arriving
at a comprehensive legal framework for gas development and
utilization in the country." Interestingly, at the end of
the meeting, Senator Izunaso, the Senate Gas Committee
Chairman who has been Chair of this Senate Committee since
mid-2007, admitted he had not yet seen the Gas Master Plan,
Nigeria's all encompassing plan for developing its natural
gas industry. Although still a draft document, the plan has
been widely circulated inside and out of Nigeria and is not
considered a closely held item. (Note: The Gas Master Plan
was formally presented to the Senate on April 14. End Note.)
After the meeting, the person representing the Vice
President's office on gas issues told Econoff he had not seen
Nigeria's recently published natural gas policy and
regulation and he asked Econoff to provide him a copy.

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Industry Frustrated at Gas Policy Confusion
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LAGOS 00000157 003 OF 003




8. (SBU) Nigerians working in the gas industry expressed
their frustrations at the GON's failure to implement a clear
gas policy during a forum sponsored by the Nigerian Gas
Association. The association, composed mainly of Nigerian
engineers and businessman working for indigenous and
international gas companies, hosts a quarterly meeting to
discuss various industry issues. On April 17, the
association invited a representative from the Office of the
Special Advisor to the President on Petroleum Matters to give
a presentation on the state of the Gas Master Plan. After
the presentation, the assembled audience unloaded on the
speaker, with person after person, many of them senior
petroleum engineers and executives, rising to complain about
the lack of a stable gas policy.


9. (C) Comment: Nigeria, and Nigerian politicians and
bureaucrats specifically, simply must come to terms with the
fact that natural gas development demands policy and
regulatory consistency. The many talented and experienced
Nigerians working in the private sector already understand
what needs to be done. The Yar'Adua administration
reportedly wants legislative approval for its various gas
plans and policies; the National Assembly's demonstrably weak
knowledge of the issues does not bode well for effective and
needed review and subsequent oversight. Nigeria has an
estimated 185 trillion cubic feet of proven natural gas
reserves and most experts think additional trillions of cubic
feet still await discovery. Even assuming half of the proven
reserves is needed to sustain oil production, the country has
plenty of gas in the ground to meet domestic needs and
international obligations for the foreseeable future. Making
that gas available depends, however, on getting a policy in
place that encourages, rather than discourages, gas
production while assuring investors the ground rules won't
change on a whim. End Comment.
BLAIR