NIGERIA: CHIEF OF MISSION DELEGATION MEETS OIL & GAS CHIEF

UNCLAS SECTION 01 OF 03 ABUJA 001400

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E.O. 12958: N/A
TAGS: EPET EINV ENRG EAGR EAID ELTN NI
SUBJECT: NIGERIA: CHIEF OF MISSION DELEGATION MEETS OIL & GAS CHIEF
BARKINDO ON PETROLEUM INDUSTRY BILL

ABUJA 00001400 001.4 OF 003

REF:

A. ABUJA 1328

B. ABUJA 1209

C. ABUJA 1050

D. ABUJA 549

E. ABUJA 262

SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPRIETARY INFORMATION; NOT
FOR DISSEMINATION OUTSIDE USG


1. (SBU) Summary: The Ambassador was part of a diplomatic delegation
(French, UK, and Dutch) to meet with Nigerian National Petroleum
Corporation (NNPC) Chief Dr. Mohammed Barkindo to encourage more
transparency in the oil and gas sector reform process, raise
concerns with problematic provisions of the draft reform legislation
or Petroleum Industry Bill (PIB),and offer possible technical
assistance in certain areas. The Government of Nigeria (GON) asked
for USG assistance in establishing three independent regulatory
bodies and one policy agency to ensure conformity with global
industry standards and practices. On concerns with the legislation,
Barkindo agreed that some areas might need work and welcomed input,
but emphasized that the PIB provides for transparency and good
governance and is designed to reduce corruption, noting that there
will be a 12-18 month transition period after the PIB is passed for
oil companies to negotiate their specific aspects on current and
future investments. End Summary.


2. (SBU) On July 23, Ambassador was part of a Chief of Mission
delegation to meet with Dr. Mohammed Barkindo, General Managing
Director of the NNPC. The delegation included the British and Dutch
Charges' d'Affaires and the French ambassador. EconOff attended as
notetaker. The purpose of the meeting was to discuss the landmark
oil and gas industry reform legislation, PIB) before the National
Assembly. The reform was crafted by a public private committee
known as the Oil and Gas Sector Reform Implementation Committee
(OGIC) commissioned by President Yar'Adua in September 2007. The
OGIC mission was to take the oil and gas policy, developed by a
former committee's report from 2000-2004, and craft it into a single
omnibus legislation to reform and reshape the industry.


3. (SBU) The PIB's aim is to replace the existing 16 oil sector
laws into one legal framework through ominibus legislation with
clear rules, procedures, and institutions for the Nigerian oil and
gas industry. The core objective is to transform the NNPC into a
commercially viable oil company to compete with Shell, ExxonMobil,
Total, Chevron/Texaco and other multi-national oil companies in oil
block bidding, exploration, and development and production, both
locally and internationally. The new NNPC, according to the bill,
would be called the Nigerian National Petroleum Company Limited and
would operate like other government-owned but commercially viable
national oil companies without relying on government funding.

Private Meeting to Share Concerns
--------------


4. (SBU) The delegation met privately with Barkindo prior to a
formal boardroom meeting. The Ambassador led a substantive dialog
on the issues and concerns of the international oil companies in
regard to the PIB. Barkindo said that that Nigeria sees the bill as
a reform legislation and a framework for good governance in the
petroleum industry that will lead to increased petroleum revenues
for Nigeria and new opportunities for Nigerians to participate at
every level of the sector as well as to take the secrecy out of the
industry by allowing for full transparency on contracts, production,
and income.


5. (SBU) Barkindo said that the GON continues to look to the USG for
technical assistance in setting up one policy body and three
independent regulatory bodies separate from the commercial "for
profit" organization. The PIB provides for these organizations, but
there is no current structure, experience, or human capacity for
this type of regulation and policy. Barkindo supported Minister
Lukman's idea to establish a mentoring effort between Nigeria and
related U.S. entities to address organizational structure,
procedure, processes, and regulatory mechanisms in general (reftel B
& E). In the PIB, the policy arm would be the Nigerian Petroleum

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Directorate (NPD) which will function as the secretariat of the
minister, and formulate and develop strategies to implement industry
policies. The three regulatory agencies are:
--National Petroleum Inspectorate (NPI),an autonomous stand-alone
technical regulator to replace the Department of Petroleum Resources
(DPR);
--National Midstream Regulatory Agency (NAMIRA),responsible for all
matters related to the midstream, covering pipeline transportation,
storage, refining and liquefied natural gas; and
--Petroleum Products Regulatory Authority (PPRA),to regulate the
commercial aspects of the downstream sector, including petroleum
products and natural gas distribution to the end-users.


6. (SBU) Ambassador stated that the USG supports oil and gas reform,
a point other members of the delegation endorsed. She added that
the USG wants to better understand how it can work with the NNPC,
the Ministry of Petroleum Resources, the National Assembly and other
stakeholders to ensure concerns are addressed as smoothly as
possible. The Ambassador underscored the following points:

-- Key industry players, including international oil companies with
long experience in Nigeria, believe that the proposed fiscal terms
in the bill would have a negative impact on future investment in the
oil and gas sector. A report commissioned to McKinsey & Company on
behalf of the Oil Producers Trade Section (OPTS),an industry
organization, concluded that under the reform law joint ventures may
be expected to invest up to $165 billion between 2009-2020, of which
$74 billion and its associated production growth is deemed at risk;


-- The new IJVs may fail to become self-funding, which is an
important objective of the reform. The industry believes that
contrary to expectation, the proposed fiscal changes would severely
undermine the ability of the IJVs to achieve self-funding. There is
a lack of clarity on how the transition from current legal and
fiscal rules to the new ones would occur, such as the transfer of
assets of the UJVs into IJVs which could create administrative risks
for the transferring of licenses and property rights. Also the lack
of "grandfathering" of fiscal incentives creates a high degree of
uncertainty for investment for both investors and shareholder
alike.

-- According to the industry, the combination of high development
costs and PIB fiscal changes would have a negative impact on the
development of the gas sector. The proposed increase in taxation,
the non-competitive government pricing for domestic gas, and the
reduced investment incentives create significant problems. The
international oil companies report that under the PIB an estimated
890 percent of new gas projects would become economically unviable.
(Note: OPTS states that Nigeria has the third highest production
cost in the world per unit of gas produced, after Brazil and Norway.
Current Nigeria JV terms already generate one of the highest
government takes in the world 88% at $60/barrel (bbl),with an
expected rise to 94% post PIB. End Note).

-- Uncertainties about independent arbitration and property rights
in production sharing contracts and increased taxation would
significantly reduce deepwater investments and future production. A
proposed new requirement that production sharing contracts (PSCs)
should be renegotiated when commerciality is attained amounts to a
unilateral change in the agreed terms and tenure of existing PSCs.
This is of serious concern since the right to independent
arbitration seems unattainable as written.


7. (SBU) Barkindo agreed that some areas of the PIB might need
attention and welcomed assistance. He added that the bill would
have 12-18 months to transition once it became law, which the GON
feels is adequate to make any necessary changes. Barkindo opined
that the new legislation would unlock conflicts in policy and
regulation for the first time in 50 years, and said that the PSCs
will be designed to meet the challenges of the current times and not
those from the past. The world, he said, has moved on and this
legislation allows Nigeria to keep pace with the oil and gas
industry globally and align economic rents to current world
realities in a non-punitive manner.


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8. (SBU) Barkindo noted that each unincorporated joint venture (UJV)
will be individually renegotiated as it moves to IJV. The
difference is that all contract terms would be public knowledge, and
he underscored that good governance will eliminate secrecy, which
aids corruption. The PIB requires that all texts of all licenses,
leases, and contracts, and any of the modifications or changes to
such documents will no longer be confidential. He added that
payments to the GON would be public information. All petroleum
geological, geophysical, technical and well data would be accessible
for all interested persons in a national data base.

Boardroom Meeting Attracts Wide Attendance
--------------


9. (SBU) NNPC executives made a thorough presentation of the PIB and
offered supporting materials, including the most recent version of
the bill. The Ambassador thanked the NNPC and the Ministry of
Petroleum Resources employees for their dedicated work on the PIB.
She reiterated the key points she had made in the private meeting,
stressing that there is room to tighten language in the PIB to
reduce the risks to the GON's reform goals, to direct investment and
revenues. She added that the U.S. is a friend and partner to
Nigeria and offered assistance to support the reform process. The
British Charge offered assistance with policy support and staffing.
While the Dutch Charge stated that the Netherlands has been working
closely with the NNPC on reform and underscored that the PIB needs
more balance.


10. (SBU) Comment: The PIB is a major reform accomplishment if it
becomes law. The GON is sensitive that this legislation be a
visibly Nigerian product, but the international oil companies fear
that delays in securing support for key amendments, especially to
the fiscal aspects, would severely damage their interests and the
growth of the Nigerian oil and gas industry. End Comment.


11. (U) This cable was coordinated with ConGen Lagos.

SANDERS