IMF TEAM PROVIDES BRIEFING ON ITS REVIEW OF THE

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 001961 SIPDIS DEPT PASS USTR FOR AGAMA TREASURY FOR TONY IERONIMO, ADAM BARCAN, SOLOMAN AND RITTERHOFF E.O. 12958: DECL: 10/22/2019 TAGS: ECON EPET EINV EFIN NI SUBJECT: IMF TEAM PROVIDES BRIEFING ON ITS REVIEW OF THE PETROLEUM INDUSTRY BILL REF: A. A) ABUJA 1907 ¶B. B) ABUJA 1836 Classified By: Economic Counselor Perry Ball for Reasons in Sections 1.4 (b) and (d). -------------- SUMMARY -------------- ¶1. (C) An IMF team provided a briefing to the diplomatic and development community on its recent review of the Petroleum Industry Bill (PIB). The team was sympathetic with the PIB's intent but had a number of reservations. The team concluded that the proposed fiscal terms are too aggressive, that the Nigerian National Petroleum Company (NNPC) will have to be restructured before moving ahead with the proposed integrated joint ventures, and that the proposed multiplicity of new agencies will create new openings for corruption. The next step will be to deliver the team's aide memoir to the Minister of Finance on October 23. The IMF team expects the PIB to be passed before the end of the year. END SUMMARY. -------------- THE NATURE OF THE IMF REVIEW -------------- ¶2. (C) An IMF team headed by U.S. citizen Charles McPherson provided a briefing on its ten-day review of the GON's proposed Petroleum Industry Bill (PIB) to the diplomatic and development community on October 21. The review was attended by the U.K. High Commissioner, the French and Italian ambassadors, the Dutch DCM, Economic Counselor, and representatives from DFID, the World Bank, UNDP and the African Development Bank. McPherson was accompanied by Central Bank of Nigeria Senior Economist F. K. Ohuche, who had been seconded to the IMF Resident Representative's office in Abuja just prior to the review. ¶3. (C) McPherson explained that the IMF review had been requested by Minister of Finance Dr. Mansur Muhtar after the conclusion of the IMF Article IV Consultations with the Government of Nigeria in July 2009. The purpose of the review was to provide input into the PIB given the revenue implications of the petroleum industry reform process. McPherson said he was glad the request came from the Ministry of Finance because "it might not have come from the Ministry of Petroleum Resources," but now that the review was underway, the ministry was fully on board. McPherson also disavowed an October 14 "ThisDay" front page headline that claimed that the IMF had endorsed the PIB. ¶4. (C) McPherson said the review had concentrated on three areas: the proposed fiscal regime for oil and gas; the proposed establishment of an independent Nigerian National Petroleum Company (NNPC) and integrated joint ventures (IJVs); and the proposed restructuring of the sector. He explained that the team was sympathetic with the PIB's intent to achieve a flexible fiscal system, a simplified administration, the financial independence of the IJVs, and the reorganization of the sector. However, the team had a number of reservations about the PIB and will present options for inclusion in the bill. -------------- THE PROPOSED FISCAL REGIME FOR OIL AND GAS -------------- ¶5. (C) McPherson said the team looked at the fiscal regime's expected impact on revenue and investment at both the macro and sectoral levels. The team did its own modeling, using data obtained from the GON. The team concluded that the fiscal "terms are too aggressive" and saw problems in some areas for the production sharing contracts. Consequently, there is a need for further discussion. McPherson added that the structure of the fiscal regime is "quite deterministic." Qthe structure of the fiscal regime is "quite deterministic." It implies that, "I know what is going on, so I can design a fiscal regime," but the regime will break down in practice. ¶6. (C) McPherson said the biggest bone of contention on the fiscal side is the assumption about what the GON should remit as costs. The GON wants to allow the recovery of average costs from around the world, but the industry wants to recover costs that are unique to Nigeria and are at a premium in the Niger Delta. These costs include the unavailability of local contractors, bureaucratic delays, and security issues. There is a general impression that "gold-plating" is ABUJA 00001961 002 OF 003 going on, but the industry insists that these are real costs. The question is whether to find a model that is based on average costs and ignores the Nigeria-specific costs as this could have a negative impact on investment. ¶7. (C) Another challenge is to sort out the cost assumptions, fiscal regime, low wholesale price, and regulatory system for natural gas. There are also infrastructural problems which are being addressed through the Gas Master Plan. ¶8. (C) The French ambassador expressed concern about the imputation of overall costs. He noted that the international oil companies (OICs) will only be allowed to recover 80 percent of their costs and that these costs will be determined by civil servants, which will open the entire process to corruption. McPherson responded that the team would be discussing both the level of take and the structure of the tax system, but that he was not at liberty to go into any further detail until the team had delivered its report to the Minister of Finance. The French Economic Counselor asked if it was the GON's intention to link taxation with oil prices. McPherson replied that royalties would be linked with oil prices, production volume, location (onshore or offshore),and size of reserves. ¶9. (C) The U.K High Commissioner said the U.K. endorsed the need for reform principles and objectives. However, it is important to have a legislative framework going forward that is in conformity with international law and has the confidence of investors. He continued that the GON "needs to get it right" and that the IMF needs to get its finding to the GON quickly, especially since there could be a bill before the end of the year. -------------- -------------- THE PROPOSED ESTABLISHMENT OF AN INDEPENDENT NNPC AND IJVS -------------- -------------- ¶10. (C) McPherson said the Nigerian National Petroleum Company (NNPC) will have to be restructured before moving ahead with the integrated joint ventures. At the same time, the GON's decision to have the NNPC participate in the IJVs will give the GON much greater control over the industry and the establishment of IJVs will be a means to get round the existing joint ventures' inability to obtain direct finance. The IMF team made a number of recommendations for restructuring the NNPC. McPherson recognized that there is a need to move quickly in this area, just as there is a need to move quickly in the fiscal regime area. ¶11. (C) The French ambassador said the IJV's ability to obtain direct financing from commercial banks would be a welcome solution to the current system of cash calls on IOCs which are never paid. He also asked about the status of the recently announced 10 percent of the IJV shares which would go to local communities in the Niger Delta. McPherson responded that the 10 percent would come out of the NNPC's ownership of the IJVs. However, it is not clear whether the 10 percent is just a flow of cash that comes from the sale of the government's shares or whether the local communities will be given a 10 percent ownership that will complicate the governance of the IJVs. He added that the proceeds from the NNPC's sales would go to the local communities, not the states. (NOTE: Presidential Advisor on Petroleum Matters Dr. Emmanuel Egbogah told Reuters on October 20 that the GON's plan to allocate 10 percent of its ownership in joint venture Qplan to allocate 10 percent of its ownership in joint venture business to oil producing communities in the Niger Delta would not dilute the interest of the IOCs in the joint ventures. The NNPC currently holds a 57 percent ownership in the joint venture operations with Shell, Chevron, ExxonMobil, Total and Agip. Minister of Petroleum Resources Dr. Rilwanu Lukman also confirmed in a London Conference on October 20 that the details are still being worked out. END NOTE) -------------- THE PROPOSED RESTRUCTURING OF THE SECTOR -------------- ¶12. (C) McPherson said the multiplicity of new agencies will create new openings for corruption. The regulatory function needs to be taken out of the NNPC, but it is not clear where that should be put. It is also not clear how the new regulatory entity will be funded and to whom it should report. Obtaining funding through an earmark or through the national budget also will be an issue. ABUJA 00001961 003 OF 003 ¶13. (C) The Dutch DCM asked if it was too ambitious for the GON to try to accomplish all of the PIB-related reforms at once. McPherson replied that some people thought the GON should take more time. One option would be to go ahead and pass the PIB, but allow some time to sort out the details. Stopping the bill or pushing it through without more discussion would both be wrong. ¶14. (C) The DFID head expressed concern about the evolution of the NNPC's current labyrinthine regulatory system to a system dominated by a multiplicity of new petroleum related entities. McPherson replied that it would be good to take the regulatory activity away from the NNPC so that it would be left with only commercial activity. However, he was also concerned about the potential for abuse in the new entities. He said there were "lots of people waiting to be appointed to boards" and there was an "overlap between boards." A DFID economic advisor asked if there was a role for the Nigerian Extractive Industry Transparency Initiative (NEITI) in the bill. McPherson answered that the bill endorses NEITI and its principles. -------------- THE NEXT STEPS AND THE WAY FORWARD -------------- ¶15. (C) McPherson said the next step would be to deliver the team's aide memoir to the Minister of Finance on October 23. This would be followed by a 21-day comment period after which a confidential report will be delivered to the Minister of Finance at the end of a combined 45-day period (i.e., sometime in early December). McPherson said he hoped the report would be widely distributed with the GON, as this would support the PIB professed objective of achieving greater transparency. McPherson said he also hoped to provide a more detailed briefing to the diplomatic and development community once the aide memoir/report had been presented to the Minister of Finance. The U.K. High Commissioner said it would be good for the GON to receive good technical support to work through the issues. McPherson responded that the IMF was not set up for long-term aid. Consequently, there was a "huge potential" for the World Bank to establish a three-to-four-year program in the fiscal and governance area. He added that Minister of Petroleum Resources Lukman and NNPC General Managing Director Barkindo would be traveling to Washington, D.C. to meet with the IMF and World Bank in the near future. ¶16. (C) Economic Counselor asked about the likelihood that the PIB would be passed before the end of the year. McPherson answered that there were "lots of serious players that want the bill by the end of the year who know how to move legislation." The IMF team had heard that if the PIB is not passed by early next year, it will not happen because of the run-up to the 2011 national elections. Not doing anything will be too costly for the GON in terms of investment and revenue, and the GON needs more money, so it is likely to pass before the end of the year. ¶17. (C) The French ambassador summarized the discussion by concluding that it is better that there is "a regulated way of collecting the money, even if the burden is high." It is everyone's interest in not derailing the process. In short, there must be a win-win for everyone and a balance between all of the actors. ¶18. (C) The U.K. High Commissioner followed that the "political driver" is to synchronize the PIB with the GON's amnesty program to direct money to the local communities. He Qamnesty program to direct money to the local communities. He then asked why there had been an evolution from talk about the distribution of royalties to the local communities to the distribution of equity in recent months. The World Bank Senior Energy Specialist responded that the distribution of royalties was a constitutional matter, which is why the GON has been forced to think about the sale of equity. SANDERS