(C) NIGERIA: NEW PETROLEUM MINISTER LUKMAN PLANS TO REVAMP

C O N F I D E N T I A L SECTION 01 OF 04 ABUJA 000262 NOFORN SIPDIS STATE PASS USTR FOR AGAMA USAID/AFR FOR ATWOOD USDOE FOR GEORGE PERSON AND CHAYLOCK TREASURY FOR PETERS AND HALL E.O. 12958: DECL: 02/04/2029 TAGS: EPET ENRG ELAB ECON ETRD SENV PGOV NI SUBJECT: (C) NIGERIA: NEW PETROLEUM MINISTER LUKMAN PLANS TO REVAMP TROUBLED ENERGY SECTOR Classified By: Ambassador Robin R. Sanders for reasons 1.4. (b & d). ¶1. (C/NF) SUMMARY: In the Ambassador's February 3, 2009 meeting with the new Minister for Petroleum Resources Dr. Rilwanu Lukman, the Minister highlighted his intention to revamp the country's energy sector with both short-term and long-term plans. As an example, he said that the current Master Gas Plan was a solid document, but would not help Nigeria with its immediate needs or problems. He noted that he plans to recommend to President Yar'Adua a new direction in the sector particularly with local fuel prices. He had concerns about the current local content bill before the National Assembly, saying that it was unproductive. Lukman also frankly mentioned problems with corruption, particularly within the Nigerian National Petroleum Company (NNPC),which he hopes his reorganization plan and the recent appointment of a new NNPC chief will address. Ambassador took the opportunity to discuss sanctity of international oil company (IOC) contracts and security issues as well as ensure that Lukman continues to support USG efforts on natural gas and electricity policy, which he agreed to do. Clearly Lukman, fiery and pragmatic, has the ear of President Yar'Adua and will try to have his no-nonsense style reign in an on an out of control sector. He plans to have "straight talks" with Yar'Adua on issues and push his recommendations. Given the entrenched internal corruption environment in the oil sector, he is also aware that he will be fighting these changes both alone and uphill within the GON. He provided the Ambassador with a copy of the graphic of his new plans, which he asked to keep close hold until they are released publicly and he fully briefed President Yar'Adua. Lukman also requested help from U.S. Trade and Development Agency (USTDA) to come out to provide technical assistance in the sector. END SUMMARY. ¶2. (C) On February 3, 2009 the Ambassador, USAID Economic Growth Director and EconOff (notetaker) met alone with Dr. Rilwanu Lukman, who candidly shared his vision for the energy sector, which included forward looking statements not necessarily in line with previous Nigeria National Petroleum Company's (NNPC) stated policies. The Ambassador said that the U.S. Mission has been working diligently in the energy sector and sought Lukman's agreement to: -- Restore Nigeria's petroleum production capacity; -- Continue the U.S. Mission's policy work with his Ministry on energy with increased efforts on natural gas, especially for electricity generation; -- Increase Government of Nigeria's (GON) efforts to ensure the security of U.S. companies working in the oil sector in the Niger Delta; -- Support ongoing working groups we have the Ministry; and -- Put forward other areas the Minister would like to explore with the U.S. Mission. ¶3. (U) By way of background, the recent devolution of the Ministry of Energy into separate Ministries of Petroleum (oil and gas) and Power (electricity),Minister of Energy (covering oil and gas plus electric power) was a post President Yar'Adua had kept for himself, as did his predecessor Olusegun Obansanjo. When the Ministry of Energy was headed by the President there were three state ministers for petroleum, gas, and power. Now there is the Minister of Petroleum Resources, Dr. Rilwanu Lukman; Minister of State of Petroleum Resources Odein Ajumogobia; Minister of Power Dr. Lanre Babaloa; and Minister of State for Power Architect Nuhu Wya. - - - - - - - - - - - - - - - LUKMAN SETS POSITIVE NEW TONE - - - - - - - - - - - - - - - ¶4. (C) Lukman said that he tried to restructure NNPC during his first tour as Minister of Petroleum and Chairman of NNPC during 1985/86-89; he made a few adjustments, but feels that he failed in his earlier efforts to reform the sector. He said this time the planned sector restructuring will create stability, transparency and consistency, and end bottlenecks and corruption. The Minister showed the Ambassador a graphic on how his new structure would operate and noted that his new NNPC Chief Barkindo would head the implementation of the reform. He further noted that he headed the previous Oil and Gas Sectors Reform Implementation Committee (OGIC) which submitted its report in 2008. He also led the group which submitted the report to Yar'Adua's Presidential Committee on Power Sector Reform. The OGIC report itself was a synthesis of several other Presidential Committees on the reform of the oil and gas sectors, which were commissioned during the immediate past administration of President Obasanjo. He said the plan has flaws and requires help. He said ABUJA 00000262 002 OF 004 there are only a handful of world class consultants that could verify whether the planned changes can be implemented with success and transparency, and he sought the assistance of friends like the U.S. to help provide technical assistance. ¶5. (C) He said NNPC, in its present form, has conflicting roles and he intended to approach the reform with short-term and long-term objectives. His plan is for NNPC to become an internationally integrated company on its own like Petronas and StatoilHydro. This change will happen through an executive reform bill also authored by Lukman via the OGIC. The bill was approved by the Federal Executive Council in September 2008. The legislation seeks to establish the Nigerian Petroleum Directorate (NPD),which will essentially function as the secretariat providing much of the work the Minister is currently tasked. Lukman said that implementing this huge change will be in addition to running the Ministry and he said it will be very difficult. The planned deconstruct of NNPC will create 11 industry institutions and six incorporated joint ventures. He also said he believes this formula will also reduce corruption in the sector. Lukman described the new oil and gas industry landscape as follows: -- Nigerian Petroleum Directorate (NPD),policy -- National Petroleum Assets Management Agency (NAPAMA),cost regulator upstream -- National Petroleum Inspectorate (NPI),technical regulator -- Petroleum Products Pricing Authority (PPRA),commercial regulator -- Nigerian Petroleum Refinery Company (NRPC),research -- Petroleum Training Institute (NPI) -- Inland Basins National Frontier Services Agency/Co. -- Utility National Petroleum Logistics Co. -- Commercial Operations NNPC Ltd. -- PTDI, fund (SIC) -- PEF (SIC) Incorporated Joint Ventures (IJV) -- NNPC/Shell -- NNPC/Chevron -- NNPC/AGIP -- NNPC/ExxonMobile -- NNPC/Pan Ocean -- Production Sharing Contracts (PSCs)-upstream Also the Minister plans to maintain the existing small businesses within NNPC's portfolio. -- Nigerian Petroleum Development Company (NPDC) -- Integrated Data Services Limited (IDSL) -- Kaduna Refining & Petrochemical Company (KRPC) -- Port Harcourt Refining Company Limited (PHRC) -- Warri Refining & Petrochemical Company Limited (WRPC) -- Pipelines and Products Marketing Company Limited (PPMC) -- Hyson/Calson - JV for NNPC International -- National Engineering & Technical Company Limited (Netco) -- Eleme Petrochemicals Company Limited (EPCL) - - - - - - - - - - - - - - REQUESTED U.S. PARTNERSHIP - - - - - - - - - - - - - - ¶6. (C) The Minister further emphasized that bureaucracy, mismanagement, and corruption have delayed development of major projects and negatively impacted NNPC's growth and caused financial strain for the IOCs. Lukman further underscored that pricing and cost analysis would be separated from NNPC. Lukman showed concern over local fuel prices as he is not in favor of subsidies and has told President Yar'Adua so. He said that he wants to review the technical assistance study funded for Nigeria by the U.S. Trade and Development Agency (USTDA) to support policy and regulatory framework restructuring for the liquefied petroleum (LP) sector in Nigeria. He again emphasized the importance of U.S. assistance from entities like USTDA to advise on the restructuring so that quality and efficiency would not be compromised. The Ambassador said she would go back to USTDA to see if this is something they would consider coming out to discuss. Lukman said he understood, but invited the Ambassador to be a partner in making this new oil and gas structure work. - - - - - - - - USG ENGAGEMENT - - - - - - - - ¶7. (C) The Ambassador reported that she had met with former Minister ABUJA 00000262 003 OF 004 of State for Gas Odusina in late September 2008 to brief him on the donor agency approach (USAID, World Bank, DFID) plan of action to help the Ministry with its natural gas policy. Due to the reorganization of ministries in November and December 2008, the project stalled during its initial phase. The joint project began with the USAID team reviewing, analyzing, and assessing a short list of GON plans, policies, and tariffs. The World Bank experts identified the main gas sector development issues, such as payment guarantees. USAID officer noted that the World Bank seeks a meeting with Lukman for clarification on moving forward with the study, including the partial loan guarantee program for both gas payments to the IOCs and electricity producers. Lukman said he welcomes a meeting with the World Bank and that he is in favor of continuing the project because a sufficient supply of natural gas is key to increasing power generation. He supports fair market pricing for gas and asserted that no one should be forced to sell below market prices. The Ambassador asked if he was going to scrap the Gas Master Plan and he said no and highlighted his long-term intention to revamp the country's oil and gas sector; but recognizes that there also needs to be immediate stop gap measures to address the country's needs now. Lukman commented that his priority is increasing natural gas supply for power generation first then focusing on the Gas Master Plan. - - - - - - - - - - - - - - - - PLAIN TALK ON THE REAL PROBLEMS - - - - - - - - - - - - - - - - ¶8. (C/NF) Lukman explained that the international oil companies (IOCs) are often blamed for a myriad of problems in the energy sector, but the bottom line is that the GON has not invested enough in developing the necessary oil and gas infrastructure. He underscored that "it is all just simple arithmetic in maintaining a good balance among the three stages: explore, develop, and produce." Lukman insisted that if the GON cannot afford to invest, then it must cut back on production - "What you take from the ground must balance with proven reserves." He contended that the failure to properly invest in the sector had led to the current problems and he has strongly advocated to the President the absolute necessity to invest and spend now on infrastructure in order to increase production. He said there are ways to get the investment money. He added that the discussions on the local content targets for the oil and gas industry of 45% by 2006 and 70% by 2010 are likely not achievable. The sector must be efficient; pushing to 70% would likely cause disruption in any meaningful momentum. This, he said, is troublesome and he would welcome input. - - - - - - - - DELTA PROBLEMS - - - - - - - - ¶9. (C) The Ambassador shared concerns about the deteriorating security situation in the operating areas of ExxonMobil due to increased attacks in the oil fields off the shore of Akwa Ibom and threats against their living compounds. These attacks threaten U.S oil companies and their foreign national and Nigerian employees. The Ambassador suggested closer coordination between the Ministry, NNPC, IOCs and the security agencies is necessary to find a solution. Lukman said he does not advocate war, but "if people are shooting, you should shoot back." He said using the military was not the best answer, but "if the lawbreakers set the pace; then the answer should be the best protection force possible." He encouraged the Ambassador to provide information directly to him on what the USG has offered to-date to help the GON in the Niger Delta. The Ambassador offered to send a copy of the Mission's Framework for Partnership, which shows much of the work the Mission is doing in the Delta, especially for civil society. ¶10. (C) The Minister also noted that the solution in the Niger Delta will need to go beyond just security measures and stressed that nothing could be achieved unless the Niger Delta issue was successfully resolved, claiming that he underscored this to the President and to the cabinet. Diversification, he continued, is needed away from the largely oil-based enclave economy to other sectors such as agriculture, tourism, manufacturing, information and communication technology, etc. He added that Nigeria also urgently needs diversity within the extractive sector itself; by focusing equally on the development of gas and other alternative renewable energy resources. For example, for over 50 years, Nigeria concentrated only in the exploration and development of oil and ignored the other hydrocarbons and non-hydrocarbon energy natural ABUJA 00000262 004 OF 004 resources such as natural gas, coal, wind, solar, uranium, and biofuels. He concluded his thoughts by adding that the issues of lack of domestic self sufficiency and local content benefits have become the classical examples of Nigeria's paradox of plenty and resource curse syndromes respectively. ¶11. (C) The Ambassador noted another problem was the sanctity of contracts in the petroleum sector. She recognized the right of the GON to review and renegotiate contract terms when permitted in the contract itself; however, she stressed that the sanctity of contracts is vital in an industry where significant capital expenditures and years of planning are required to bring a project on-stream. U.S. energy companies have made enormous investments in difficult operating environments in Nigeria based on the existing contracts, and the GON has received billions of dollars in revenue. Lukman replied that long term partners should be recognized. - - - - - - - - - - OPPORTUNITY FOR USG - - - - - - - - - - ¶12. (C/NF) COMMENT: It is clear that Minister Lukman is in charge, considering the role he has played over the years in the sector. Lukman was the pioneer chairman in 2000 of the Oil and Gas Implementation Committee (OGIC),which was reconstituted in 2007. The planned reform encompasses the industry in its upstream and downstream sectors. His recommendations on reform to President Yar'Adua's special committee addresses the required legislation, funding and privatization, gas linkage with power supply, and roles of the three tiers of government. The plan is to transform NNPC from its present status as a guardian of government oil and gas into an international, integrated commercial oil and gas corporation driven by revenue generation and profit objectives. Lukman knows he needs good technical assistance and experts to be successful in this quest. He understands change will be hard, but this is a great opportunity for the USG to build a close, positive and successful partnership with the most important government ministry. We will follow up with USTDA for his offer for them to come out to look at the possibility of feasibility studies in the sector. END COMMENT ¶13. (U) This cable was coordinated with Consulate Lagos. SANDERS