NIGERIAN GOVERNMENT PULLS KOREAN COMPANY OIL BLOCKS

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000070 SIPDIS DOE FOR GPERSON, CHAYLOCK TREASURY FOR PETERS, IERONIMO, HALL E.O. 12958: DECL: 02/12/2019 TAGS: EPET ENRG ECON EINV PREL KS NI SUBJECT: NIGERIAN GOVERNMENT PULLS KOREAN COMPANY OIL BLOCKS Classified By: Consul General Brian Browne for Reasons 1.4 (B,D) ¶1. (C) Summary: The GON announced on January 20 that it will revoke exploration rights to two deep water oil blocks awarded to a South Korean consortium led by the Korean National Oil Company (KNOC). The Korean group has threatened legal and diplomatic action. The blocks were awarded in 2005 as part of a deal in which the South Koreans agreed to build various infrastructure projects in return for access to Nigeria's offshore oil fields. KNOC had been moving forward with the offshore project, but this announcement coupled with lower oil prices, puts those plans in doubt. A dispute over licenses and exploration rights is not unusual in the often murky world of Nigerian oil blocks, but it highlights the growing interest by non-traditional actors in Nigerian exploration areas traditionally the domain of established western oil companies. End Summary. ¶2. (SBU) The GON announced on January 20 that it was canceling the Korean National Oil Company's (KNOC) rights to explore for oil in offshore oil blocks OPL 321 and OPL 323 and giving those rights to the Indian company, Oil and Natural Gas Corporation (ONGC). KNOC led a South Korean consortium that secured a 60 percent stake in the deep water oil blocks during the controversial 2005 Nigeria oil license bid round. ONGC had actually submitted the winning bid for the blocks in 2005, but the South Koreans secured a right of first refusal, and eventually the two blocks themselves, as part of an broader government to government agreement to build infrastructure in exchange of access to oil. In the deal, finalized during a visit to Nigeria by South Korea's president in 2006, the South Korea consortium agreed to build a 1000 kilometer natural gas pipeline from the Niger Delta to Kaduna, an electrical power plant, and railroad lines. ¶3. (SBU) The GON canceled the contract with the South Koreans because the consortium reportedly failed to pay a USD 231 million signature bonus on the oil blocks. A spokesman for the South Korean group is quoted in a newswire story as saying that it had "met (its) obligations through official negotiations with the Nigerian government and can't understand the decision." The group is reportedly threatening legal and diplomatic action. A KNOC government relations manager told Energyoff on February 3 that the cancellation violated a bilateral agreement between GON and South Korea, but he said he anticipated a "quick resolution" of the issue. ¶4. (SBU) Prior to the announcement, KNOC had been actively moving forward with its exploration plans. The company occupied the former South Korean Embassy in Lagos and had secured a deep water oil rig. Original plans called for it to start drilling exploratory wells in early 2009. KNOC's exploration planning was occurring during the extraordinary run-up in oil prices in early 2008, and the company was forced to pay USD 600,000 per day to lease the specialized drill ship. The company's manager would not comment on how those plans have changed in light of the dispute with the GON and lower oil prices. ¶5. (C) Petrobras Nigeria Managing Director, Rudy Ferreira, told Energyoff on February 9 that in his view the GON had given clear indications before the announcement that it was unhappy with KNOC's development of the two oil blocks and the slow pace of promised infrastructure investment. According to Ferreira, in August 2008 the Nigerian National Petroleum Corporation (NNPC) rejected KNOC's plans to lease the drill ship. When asked if this could be attributed to NNPC's overall slowdown in approving contracts, Ferreira said he thought it was specific to the project. A five year veteran of Nigeria and related deep water offshore projects, Ferreira placed much of the blame for the dispute on the Koreans, saying they were inexperienced in Nigerian politics, insensitive to the local business culture, failed to find local partners and employees who could effectively negotiate with the GON, and were working in deep waters that were beyond their current technical capacity. Ferreira doubted that KNOC had the deep offshore experience needed to complete LAGOS 00000070 002 OF 002 the project. In contrast, he believed the Indian company ONGC has gained sufficient experience from its operations in the Indian Ocean to execute such a project. (Note: Petrobras competed for these two oil blocks in the 2005 bid round. Ferreira said Petrobras was second highest bidder for the blocks, behind ONGC. End Note.) ¶6. (C) Comment: The final years of the Obasanjo administration saw many strange business deals, with oil blocks assigned to newcomers to Nigerian oil sector outside of the normal bidding process in return for promises to build infrastructure and, presumably, generous bribes. The 2005 bid round was considered blatantly "irregular" even by Nigerian standards. The inter-governmental side deals arranged by Obasanjo, sometimes concurrent with the actual bid process, made the usually murky process of assigning oil blocks in Nigeria even more opaque. Regardless, the real story is that two non-Western oil companies are fighting to develop Nigerian deep water oil blocks once thought to be the exclusive territory of more experienced and technologically advanced western oil companies. Success will mean the GON has more bidders to choose from in future bid rounds. End Comment. ¶7. (U) This cable cleared by Embassy Abuja. BLAIR