NIGERIA: OIL EXEC SAYS GON NOT READY FOR JOINT

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000505

SIPDIS

DOE FOR GPERSON, CHAYLOCK

E.O. 12958: DECL: 12/19/2018
TAGS: EPET ENRG PGOV NI
SUBJECT: NIGERIA: OIL EXEC SAYS GON NOT READY FOR JOINT
VENTURE RESTRUCTURING

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


1. (C) Summary: The chairman and managing director of Pan
Ocean Oil Company, Dr. Festus Fadeyi (strictly protect),said
on December 16 that the GON and the Nigerian National
Petroleum Corporation (NNPC) do not fully understand the
implications of plans to turn the country's oil company joint
ventures into incorporated joint ventures. The joint venture
operating partners will demand greater control of joint
venture operations reducing the ability of NNPC and GON
officials to dictate contract terms, delay projects and steal
oil and cash. He expects the fight over oil industry reform
to take several years. Fadeyi said a leaking Shell oil
pipeline in Delta state exploded on November 6 killing seven
Shell workers and 17 contractors sent to repair the line.
The explosion has shut in all of Pan Ocean Oil's 41,000
barrel per day production. Fadeyi did not believe that
moving Rilwanu Lukman from his current special advisor role
to energy minister would necessarily indicate he has the
ability or desire to implement planned oil sector reforms.
He acknowledged rumors that Shell plans to exit Nigeria, but
dismissed them as routine industry chatter unlikely to
materialize; the exit would be costly and time consuming and
there are few viable candidates to take over Shell's vast
Nigerian operations. End Summary.

Proposed JV Structure Would Radically Alter Sector
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2. (C) In a conversation with EnergyOff on December 16, the
chairman and managing director of Pan Ocean Oil Company
(POOC),Dr. Festus Fadeyi, said he does not believe officials
in the GON and parts of NNPC fully realize the implication of
plans to turn Nigeria's unincorporated joint ventures into
incorporated joint ventures. (Note: POOC is the smallest of
the joint venture companies and the only Nigerian company to
operate a joint venture with NNPC. It produces 41,000
barrels per day from oil fields along the border of Delta and
Edo states. End note.) According to Fadeyi, the
international oil companies and POOC operating the joint
ventures will demand (through their trade lobbying group the
Oil Producers Trade Section) a majority stake in the
incorporated venture and that the managing director of the
venture be one of their executives. Additionally, the oil
companies will demand that the incorporated joint venture
director have final say on all spending plans, hiring
decisions, and contract awards. All the oil from the
incorporated joint ventures will be sold by the joint venture
itself and the resulting proceeds from the sale of oil will
be distributed to the shareholders. In return the
incorporated joint ventures will finance operations and
expansion through current revenues or seek additional debt
funding as a stand alone corporate entity. (Note: This is
the model for the successful Nigerian Liquefied Natural Gas
facility. End Note.)


3. (C) Under the current unincorporated structure, NNPC owns
a 60 percent share (55 percent in Shell's case) of the joint
venture. All spending plans and contracts must be approved
by National Petroleum Investment Management Service (NAPIMS),
a division of NNPC. Joint venture partners are responsible
for annual payments of the joint venture's operating and
capital expenses, known as the "cash call." The partners in
the current joint venture structure are allocated oil based
on their percentage of ownership; they are responsible for
selling the oil themselves. NNPC's crude oil marketing
division sells NNPC's share of the oil and the decision about
who gets to lift that oil, normally lucrative contracts rife
with kickbacks, is often made at the Presidential level.

GON Doesn't Understand New Joint Venture Structure
-------------- --------------


4. (C) The new, incorporated structure is being championed by
Dr. Emmanuel Egbogah, Special Advisor to the President on
Petroleum Matters, based on his experience working in
Malaysia. It has gained support from President Yar'Adua and
other senior GON politicians who see it as a way of ending

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the annual cash call requirement on the GON. However, Fadeyi
does not believe that either GON officials, including the
current Minister of State for Energy (Petroleum) Odein
Ajumogobia, President Yar'Adua, or the heads of NNPC's crude
oil marketing division and NAPIMS understand the broader
implications of this plan. NAPIMS controls almost every
contract that comes out of the joint ventures. The crude oil
marketing division sells Nigeria's share of the crude oil
produced by the joint ventures. They are the main areas in
NNPC for large scale corruption. Under the joint venture
restructuring plan, NAPIMS would be out of a job, unable to
control the joint venture contracts. The crude oil marketing
division would also be out of business as the joint ventures
would sell all the oil produced and distribute the resulting
proceeds to shareholders. In essence, said Fadeyi the GON
would be privatizing its onshore oil operations and limiting
the federal government's ability to interfere in ongoing
production decisions.


5. (C) In addition, Fadeyi thought the share of proceeds
going to the GON would be slightly less than under the new
joint ventures compared to the current form, but overall
revenues would improve as production increased. Fadeyi
expects that once politicians and NNPC insiders wake up to
the plan, a battle will ensue over the restructuring. Joint
venture restructuring, if it happens, could start as early as
next spring. However, Fadeyi believes overall sector reform,
as detailed in a petroleum sector reform bill currently with
the National Assembly, will take several years.

Rilwanu As Energy Minister Unlikely to Make Changes
-------------- --------------


6. (C) Fadeyi did not think the appointment of Rilwanu Lukman
as energy minister would significantly improve the current
dismal state of affairs in Nigeria's oil sector. While
acknowledging Lukman's expertise, he didn't think Lukman had
the drive or desire to shake-up the industry. In his
opinion, Lukman was appointed simply because he was a
northerner and a trusted face. Fadeyi pointed out that if
Lukman had wanted to shake things up, he could have done so
in his current role as honorary special advisor on energy to
President Yar'Adua, while Yar'Adua held the energy portfolio.
The fact that the industry has been adrift and the senior
GON leadership has been seemingly uninterested in the
petroleum sector while Lukman has acted as energy advisor is
either an indication that Lukman only wants to make cosmetic
changes or he does not have access to or influence with
President Yar'Adua.

Shell Pipeline Explosion Kills 24
--------------


7. (C) All oil production from POOC's fields is shut-in.
Fadeyi said that a Shell-owned pipeline in Delta State that
POOC uses to transport its oil to the Forcados export
terminal blew up on November 6. The explosion killed seven
Shell employees, including pipeline engineers, and 17
contractors who where in the area to fix a leak in the line.
According to Fadeyi, because of the explosion POOC and Shell
are unable to determine whether the original leak was caused
by sabotage or pipeline corrosion. (Note: This is the first
we have heard of the explosion which was not reported in the
media. Fadeyi said Shell had done a good job of keeping it
quiet. End Note.) He expects the line to be repaired and
POOC production to resume within the next two weeks.

Rumors about Shell's Exit Unfounded
--------------


6. (C) When asked about persistent industry rumors that an
oil company may exit Nigeria, Fadeyi said Shell was
perennially the target of such talk, but its exit was
unlikely. He pointed out the Shell is too deeply intertwined
in Nigeria to make an easy withdrawal from the country. No
other international oil company would want Shell's troubled
onshore oil fields and there are not enough competent
Nigerian private oil companies to absorb Shell's vast
operations. NNPC is a not capable of taking over from Shell

LAGOS 00000505 003 OF 003


and Fadeyi didn't think Russian, Chinese, or Indian companies
have much interest in getting that deeply involved in the
Niger Delta that quickly. Fadeyi speculated that Shell
itself may be encouraging such rumors as a way of keeping
pressure on the GON.

POOC to End Flaring, Begin Gas Processing in 2009
-------------- --------------


7. (SBU) POOC is building a gas gathering facility, in
conjunction with U.S.-based Lemna International, that will
send natural gas produced during oil production to the
Ihovbor power plant in Edo State and produce liquefied
propane gas for bottling. Fadeyi didn't have a timeline for
completion of the power plant, but he expects the gas
gathering facility to be operational in early 2009. When
asked how this fit into Nigeria's gas master plan, Fadeyi
said it did not. In his view, the GON should get out of the
business of controlling domestic gas and let the operators
find customers themselves. Completion of the gas gathering
facility will end routine gas flaring from POOC oil fields,
making the company the first joint venture operator in
Nigeria to do so.


8. (C) Comment: Fadeyi is a thirty year veteran of Nigeria's
oil and gas industry and has a close relationship with Dr.
Emmanuel Egbogah. While his comments on Lukman may be
colored by his connection to Egbogah (who apparently thought
he would be the new energy minister),his assessment of
Lukman's potential is reasonable. Without the strong backing
of the President or his own political power base, reforming
NNPC and restructuring the oil sector will be a difficult
chore for Lukman, regardless of whether he holds the title of
"honorary special advisor" or "minister." End Comment.


9. (U) This cable cleared by Embassy Abuja.
BLAIR