NIGERIA: OIL COMPANIES TIGHTEN THEIR BELTS; DOUBT

C O N F I D E N T I A L LAGOS 000428

SIPDIS

DOE FOR GPERSON, CHAYLOCK

E.O. 12958: DECL: 10/30/2018
TAGS: EPET ENRG PGOV NI
SUBJECT: NIGERIA: OIL COMPANIES TIGHTEN THEIR BELTS; DOUBT
THE FUTURE OF NEW OFFSHORE OIL

REF: LAGOS 368

Classified By: Consul General Donna M. Blair for reasons 1.4 (B) and (D
)


1. (C) Summary: Executives at Chevron and Shell have
expressed doubts about the potential for new exploration and
production in deep water off the Nigerian coast.
Additionally, a manager for an American oilfield service
company said on October 22 that both Shell and Chevron are
cutting their 2009 budgets in Nigeria. His company however,
remained busy with work contracted by indigenous oil firms
working small oilfields. The budget cuts are a sign that oil
companies do not see conditions improving in 2009 and as a
result Nigerian oil production will remain below capacity.
End Summary.


2. (C) On several occasions during the past four months,
executives at Chevron and Shell have expressed their
skepticism about the future of deep offshore oil exploration
and production in Nigerian waters. Twice in the past four
months, during meetings on unrelated topics, a senior
executive at Chevron has commented that he believes days of
big discoveries in Nigeria's deep offshore environment are
over. Additionally, in a meeting on September 13 to discuss
rising violence in Rivers State, a top Shell official told
Econoffs concerning the deep offshore, "We're done for now.
There won't be a Bonga Southwest." (Ref A) (Note: The
executive was referring to an oilfield adjacent to Shell's
Bonga deep offshore oil production facility. When first
discovered this oilfield was thought to contain 1 billion
barrels of oil. End Note.)


3. (C) During a conversation on October 22, the country
manager for Hercules Offshore, an American oilfield service
company that supplies jack-up barges to oil companies, told
Energyoff that two of his biggest clients were cutting their
2009 budgets. According to the manager, top Chevron
officials in Nigeria have told all their department heads not
to submit budget requests above 2008 levels. The Hercules
manager said that Shell Nigeria plans to reduce its 2009
budget by USD 300 million from 2008 levels. When asked the
impact on his business, the executive said his company's
equipment was booked though 2009, with most of the new
contracts coming from Nigerian-owned oil companies working
small oilfields producing 7,000 to 10,000 barrels per day.
Hercules could easily deploy additional barges in Nigeria,
but the company's corporate headquarters has decided to focus
on business in the Gulf of Mexico, where the barges are in
demand to assist in repairing oilfield equipment damaged by
recent hurricanes and where operating margins are higher.


4. (C) Comment: The pessimism Chevron and Shell expressed on
the future of deep offshore oil in Nigeria could be a
combination of rising costs, falling oil prices, a government
increasingly difficult to work with, and the honest belief
that the big oil fields have already been found. On 2009
budgets, the cutbacks in Chevron and Shell reflect more than
just falling oil prices. Given how Nigerian oil contracts
are structured, Chevron and Shell weren't capturing much of
the windfall from USD 140 per barrel oil anyway. Regulatory,
policy, security, and political uncertainty in Nigeria are
also playing a role. Regardless of what precisely is driving
budget cuts, practically speaking it means that Chevron and
Shell do not expect conditions to improve in 2009 and as a
result Nigeria's oil production will remain well below its
capacity. End Comment.
BLAIR