This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 LAGOS 001917 
 
SIPDIS 
 
SENSITIVE 
 
DOE FOR DAS JBRODMAN AND CGAYE 
TREASURY FOR ASEVERENS AND SRENANDER 
USDOC FOR 3317/ITA/OA/KBURRESS 
 
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ 
STATE PASS EX-IM FOR JRICHTER AND KVRANICH 
STATE PASS OPIC FOR ZHAN AND JEDWARDS 
STATE PASS TDA FOR NCABOT AND BTERNET 
 
E.O. 12958: N/A 
TAGS: EPET EINV NI ENERG
SUBJECT: NIGERIA ENTERS DEEPWATER ERA AS BONGA GOES ONSTREAM 
 
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Summary 
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¶1.  (U)  Nigeria entered the era of major league deepwater 
oil and gas production on November 28, as Shell Nigeria 
Exploration and Production Company (SNEPCO), announced its 
Bonga oil field began production.  Bonga will initially 
produce 225,000 barrels per day (bpd) of crude oil, for a 
total of 1 billion barrels of oil over 10 years.  It will 
raise Nigeria's daily oil output 10 percent from its current 
2.4 million bpd.  Bonga gas will be exported as liquefied 
natural gas (LNG) via the Nigerian LNG (NLNG) facility. 
However, reaching this point has not been problem free.  The 
project has been plagued with cost overruns and scheduling 
difficulties that made project completion fall two years 
behind schedule.  The National Assembly has launched an 
inquiry into the cost overruns. 
 
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Bonga Begins Production, Ushers in Deepwater in Nigeria 
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¶2. (U) On November 28, SNEPCO (Shell Nigeria's deepwater 
exploration and production company), announced Bonga oil 
field began production. SNEPCO management expects Bonga, the 
first major Nigerian deepwater field to go into production, 
to commence exports in January 2006.  Bonga will initially 
produce 225,000bpd of crude oil, peaking at 350,000bpd, and 
producing about 1 billion barrels of oil over 10 years. 
Bonga will also produce 150 million standard cubic feet 
(mscf) of associated gas, and 280,000 bpd of fluids daily. 
Associated gas will be piped to Nigeria Liquefied Natural 
Gas (NLNG) for export to U.S. and European markets via a 268- 
kilometer Offshore Gas Gathering System.  Bonga is located 
in oil mining lease block (OML) 118, about 150 kilometers 
from shore southwest of Warri, Delta State, at a depth of 
approximately 1000 meters. 
 
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Bonga Key to GON Goals of Increased Oil Production 
--------------------------------------------- ------ 
 
¶3.  (U)  Cementing Shell's status as Nigeria's largest oil 
producer, Bonga will increase Shell's production in Nigeria 
by over 22% from its current 1 million-plus bpd output.  At 
full production, Bonga will raise Nigeria's daily oil output 
10 percent from its current 2.4 million bpd (barrels per 
day).  The GON has targeted oil production of 4 million bpd 
of oil by 2010. 
 
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Bonga Pioneers Super-FPSO Oil Production in Nigeria 
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¶4.  (U)  The Bonga field produces via the Bonga Floating, 
Storage, Production and Offloading (FPSO) vessel, which taps 
into a network of 30 seabed wells.  FPSOs are enormous 
tankers converted for deepwater oil and gas production, used 
in place of traditional fixed production platforms.  With 
Bonga, Shell pioneers the use of "super-FPSOs" in Nigeria. 
Shell claims the Bonga FPSO, at 300,000 metric tons, is the 
world's largest such vessel. 
 
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Bonga Field a Joint Industry Effort 
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¶5.  (U)  The GON awarded the Bonga project to Shell during 
Nigeria's first deepwater bid round in 1993.  It is operated 
by SNEPCO, on behalf of the national oil company, the 
Nigeria National Petroleum Corporation (NNPC).  Under the 
Production Sharing Contract (PSC) model, SNEPCO has a 55 
percent stake in the venture, while with Esso (20 percent), 
Nigerian Agip Exploration (12.5 percent) and Elf Petroleum 
Nigeria (12.5 percent) have minority stakes under a Joint 
Operating Agreement. 
 
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Bonga Plagued with Cost Overruns, Scheduling Difficulties; 
National Assembly Launches Inquiry 
--------------------------------------------- ------------- 
 
¶6.  (SBU)  Bonga has been plagued with cost overruns, and 
the project was completed two years behind schedule. 
Bonga's original budget was USD 2.7 billion, but SNEPCO 
officials say the final price tag is USD3.6 billion. 
However, other sources report cost overruns nearly double 
the original budget.  Last week, the National Assembly 
launched an inquiry into the project.  Assembly members are 
concerned the project's cost overruns will significantly 
delay GON's receipt of proceeds from the project; under the 
PSC model, Shell fully recoups its development costs before 
it has to pay taxes or split profits with the GON.  Shell 
counters that the construction cost overruns will be 
balanced out by current high oil prices.  Shell forecasts 
that oil recovery will be faster than anticipated, and thus 
the GON will not suffer economically because it will begin 
to realize profits within the expected time frame. 
 
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Comment 
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¶7.  (SBU)  Although a success, Bonga is alloyed with some 
difficulties.  Industry watches tell us the cost overruns 
and late delivery have raised questions about deepwater 
projects in Nigeria.  The GON and NNPC appear convinced that 
full cost-recovery provisions in PSC contracts provide 
industry with no incentive to control costs for deepwater 
projects.  They argue industry "gold plates" its deepwater 
projects, since development costs are written off of the 
company's tax bill once oil production begins.  Industry has 
a very different view.  They argue the GON's local content 
provisions forced Shell to bring the Bonga FPSO into Nigeria 
for work more efficiently done elsewhere.  With little 
infrastructure in place to do this work, costs ballooned 
while and schedules collapsed.  While the project is finally 
finished and publicly everyone is smiling, the arduous 
process of bringing Bonga on-line has left the GON and 
industry alike with mud on their faces and with suspicions 
about the credibility of the other.  Indications are that 
Bonga will be a production success.  However, both sides 
will have to try harder to understand the position of the 
other if Nigeria hopes to approach its potential in 
deepwater production.