CHEVRON AND EXXON FACE CHALLENGES, CONTINUE

UNCLAS LAGOS 000041 SIPDIS SENSITIVE SIPDIS STATE FOR AF/W, INR/AA, DS/IP/AF, DS/ICI/PII, DS/DSS/OSAC DOE FOR GPERSON, CAROLYN GAY TREASURY FOR ASEVERENS, SRENENDER, DFIELDS COMMERCE FOR KBURRESS 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: N/A TAGS: EPET ENRG PGOV NI SUBJECT: CHEVRON AND EXXON FACE CHALLENGES, CONTINUE EXPANSION IN NIGERIA This cable contains business proprietary information. ¶1. (SBU) Summary. Based on their operating locations, Chevron and ExxonMobil (EM) face distinct challenges in operating in the Niger Delta. Deputy Assistant Secretary (DAS) Todd Moss, the Ambassador, and Econoff (note taker) visited Chevron's Escravos oil and gas complex in Delta State and EM's East Area Project 20 miles offshore of Akwa Ibom State on January 28. Chevron believes its community development model has contributed in part to its ability to operate successfully in Delta State. DAS Moss and the Ambassador saw active oil bunkering clearly visible near Chevron's location. Chevron noted it had contact on security matters with the militants via phone and text messages. Both Chevron and EM sites were flaring large amounts of natural gas, highlighting the difficulties both companies will have in meeting the GON's flareout deadline now "set" for December 31, 2008. Both companies explained about the need for the GON to either pay long overdue joint venture arrears or find another mechanism to resolve the financial differences and disputes. While there are numerous problems facing the hydrocarbon sector in Nigeria, the country will remain an key location for international oil company investment. Whether that investment can translate into better socio-economic conditions for residents of the impoverished Niger Delta remains to be seen. End Summary. -------------- Oil Bunkering: Easy to See, Hard to Stop -------------- ¶2. (SBU) Chevron's Managing Director Fred Nelson hosted the DAS, the Ambassador, and Econoff (note taker) at Chevron's Escravos facility, home to an oil export terminal, a natural gas processing facility, and the future site of a gas-to-liquids plant that will convert natural gas to diesel fuel. Plant managers and company executives described in detail their operations and the problems they face. According to the executives, Chevron currently produces 302,000 barrels of oil per day (bpd) from its Escravos area fields. On top of that, an average of 17,000 bpd is stolen or bunkered, with a record 32,000 barrels stolen the day before the visit. The briefers supplied photographs of oil bunkering barges the environmental damage they cause. The DAS and Ambassador saw actual bunkering and resulting oil spills and environmental degradation during a subsequent helicopter tour of the area, where at least ten barges involved in oil theft were clearly visible. Chevron executives complained that government security forces (GSF) make only half-hearted attempts to stop the thieves despite receiving detailed information from the company, noting their complicity in the lucrative business The company produced a slide showing the exact location of known, active oil theft points and an executive told the DAS that they know exactly when and how much is being stolen by observing drops in pipeline pressure. In addition, decrepit oil tankers waiting offshore to receive the stolen oil often present a hazard to company activities. On more than one occasion, Chevron has had to send boats to assist oil tankers that have lost power and gone adrift in the middle of Chevron offshore oil platforms. Chevron senior executives asked for USG assistance in tracking the oil tankers and determining their final destination. The Ambassador noted that some thought had gone into an oil tagging and identification process, and maybe something like a Kimberly process could be done to counter oil bunkering and ensure that only oil sold through export terminals was purchased on international markets. The Ambassador also said she would pass their oil bunkering information to relevant offices to see if they could determine the landing location of the tankers. -------------- -------------- Chevron's Community Development Paying Dividends? -------------- -------------- ¶3. (SBU) Chevron described for the DAS and Ambassador its local community development efforts. Chevron works through eight regional development councils (RDC) established near the company's major operations in the Niger Delta. Through grants and contracts these RDCs, composed of local community leaders and stakeholders, are supposed to take ownership of development in their region, with Chevron playing a supporting role by providing training and capacity building in addition to some funds. Additionally, Chevron directly funds several education and health initiatives in communities near it facilities. All told, in 2006, Chevron spent USD 43 million directly on community projects and contributed another USD 28 million to the government's Niger Delta Development Commission. The company estimates that its contribution to the oil revenues shared by the Federal Government with oil producing states totaled USD 233 million in 2006. ¶4. (SBU) Chevron believes that its community development efforts have paid off, at least in the short term. It says it enjoys a much better relationship with local communities and suffers less than neighboring Shell from militant activities in the region. Chevron admitted it maintains regular contact with members of Tom Polo's militant organization, going so far as to occasionally call militants before river-borne supply convoys pass by militant camps to make sure the situation is stable enough for the convoy to arrive at Escravos intact. (Note: Tom Polo's "Camp Five" lies 12 kilometers from Escravos along the river supply route from Warri. There are no roads leading to or from Escravos. End Note.) -------------- Tom Polo: Militant and Businessman -------------- ¶5. (SBU) Near the Escravos gas-to-liquids plant construction site along the river's edge sat dozens of large house boats used to house construction workers. The house boats are rented from local community contractors. As the DAS pointed out, clearly visible on one of the house boats was the name, "Tom Polo Limited", the same militant leader responsible for much of the unrest in the region. The Chevron teamed commented that they didn't have much choice; in addition to his militant activities Tom Polo was a local businessman and his houseboat went through the same vetting process as those from other companies. (Note: Chevron executives also remarked that several of the houseboats are leased from a company owned by former governor James Ibori, currently under indictment on more than 100 counts of corruption. The executives said that Chevron had been unaware that the leasing company belonged to Ibori at the time the boats were leased. The executives were concerned about this connection and said Chevron was investigating its options with regard to these leases. End Note.) ¶6. (SBU) The Escravos facility is the main gas hub for Chevron's western fields and is the starting point for Chevron's gas that flows through the pipeline serving Lagos and the West African Gas Pipeline. However, militants have vandalized the Nigerian Gas Company-owned pipeline in several locations and repairs are slow and repeatedly delayed. As a consequence, Chevron is flaring virtually all the gas that arrives at Escravos. The single flare stack launches a flame that reaches hundreds of feet into the air with a roar like a jet engine that can be heard all over the complex. Heat from the flare is noticeable from several hundred yards away, forcing some workers on the construction site to take 15 minute rest breaks every hour to avoid heat-related injuries. Ascot Ltd, the contractor hired to repair the pipeline, is in financial distress and Chevron is unsure if it is capable of completing the repairs. (Note: Nigerian company Ascot bought Willbros's troubled subsidiary in 2007 after that company decided to exit the Nigerian market. A Chevron executive described Ascot as minor machine shop before its purchase of Willbros Nigeria and he questioned its ability to operate a major pipeline repair contractor. End Note.) -------------- ExxonMobil: Offshore and Happy to Be There -------------- ¶7. (SBU) The DAS and Ambassador accompanied by EM's Managing Director John Chaplin then toured EM's East Area Project (EAP). This USD 4.2 billion facility, located 20 miles offshore of Akwa Ibom State, gathers natural gas currently being flared, removes the condensate, and then re-injects the dry gas into the oil fields. The facility is partially operational with the final portion, the natural gas liquids (NGL) extraction plant, scheduled to come on-line this year. Gas reinjected by EAP will allow EM to recover an additional 500 million barrels of oil from surrounding fields and add 275 million barrels of NGL reserves. Additionally, EAP is a major component in EM's plan to reduce its gas flaring by gathering gas currently stranded and expanding compression capability. However, flares resulting from equipment outages account for the vast majority of EM's flaring total and will be part of the issue into the future. ¶8. (SBU) While its offshore oil fields means EM has fewer community issue than Chevron, it is not entirely free from problems. Supply boats using Bonny River are repeatedly attacked by militants. EM now runs its boats in convoys to facilitate protection, but Chaplin complained that the JTF was still not up to the task of providing adequate security. When asked about moving its offshore support operations to a proposed Lagos deepwater base, Chaplin said the Lagos facility had run into trouble. Its competitor in Onne is better connected with the current administration while the Lagos developers have connections with the out of favor previous administration. Still, Chaplin asserted that for security purposes a base in Lagos is preferable and would be more cost effective in servicing its deep offshore fields located in the west. -------------- Funding, Policy, Security, and Rising Costs -------------- ¶9. (SBU) While they face different operational and management challenges, the two major oil companies have similar concerns about fiscal, policy, and security issues and are plagued by rising costs. Joint venture arrears were repeatedly mentioned as a major impediment to future hydrocarbon development. While generally supportive of the GON efforts to restructure the joint ventures to permit third party financing, neither was optimistic that a solution was imminent and Chevron in particular was pressing for repayment from Nigeria's excess crude account. Similar sentiments were expressed about the restructuring of the Nigerian National Petroleum Corporation (NNPC)- a good idea in theory, but not likely to be completed in the near future. ¶10. (SBU) Chaotic policy development and implementation by the GON was also cited as a concern. Chevron and EM both commented on the difficulties in long term planning in an environment of uncertain regulation. They cited unrealistic Nigerian content rules, equivocation on flare out deadlines and penalties, and a delayed national natural gas plan as examples of poor policy planning and implementation that have hampered hydrocarbon development. Additionally, poorly written tax rules are often subject to dubious interpretation by capricious regulators. On a positive note, Chaplin commented that Nigeria has a good reputation for honoring its contracts with the oil companies. As an example, he said the GON had recently rebuffed Chinese demands that Nigeria turn over one of EM's oil blocks to a Chinese firm in exchange for Chinese investment in railroads and other infrastructure. ¶11. (SBU) Comment. Despite the litany of complaints from the oil companies about how hard it is to work in Nigeria, it was evident that both Chevron and ExxonMobil view Nigeria as one of the most important countries in their portfolios and they continue to make significant investment in exploration and production. The positives of large potential oil and gas reserves and a government willing to let them explore for, produce, and book those reserves clearly outweigh the negatives, serious as they may be. ¶12. (SBU) However, the visit to Chevron's facility highlighted a disheartening aspect of hydrocarbon investment in the Niger Delta. A multi-billion dollar construction project in other places would usually mean new jobs, economic growth, and an increased local tax base as workers and their families moved to the area and businesses, schools, and community organizations sprang up to support them. In Nigeria that simply doesn't happen. Escravos is fenced off from surrounding communities and provides little direct economic benefit to the immediate area beyond oil company "investment" in community development projects. While those projects may be laudable in their intent, the sustainability of economic development that depends on commissions, grants, five year plans, and aid workers, rather than market forces is debatable. End Comment. ¶13. (U) This cable cleared by Embassy Abuja. BLAIR