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PP RUEHMA RUEHPA
DE RUEHOS #0097/01 0400947
ZNR UUUUU ZZH
P 090947Z FEB 07
FM AMCONSUL LAGOS
TO RUEHZK/ECOWAS COLLECTIVE PRIORITY
RUEHUJA/AMEMBASSY ABUJA PRIORITY 8323
RUEHC/SECSTATE WASHDC PRIORITY 8492
INFO RUEHWR/AMEMBASSY WARSAW 0133
RUEHCD/AMCONSUL CIUDAD JUAREZ 0113
RUEHIT/AMCONSUL ISTANBUL 0116
RUEHSO/AMCONSUL SAO PAULO 0131
RUFOADA/JAC MOLESWORTH AFB UK
RUEKJCS/SECDEF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 05 LAGOS 000097 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY 
SIPDIS 
 
DOE FOR GPERSON, CGAY 
TREASURY FOR ASEVERENS, SRENENDER, DFIELDS 
COMMERCE FOR KBURRESS 
STATE PASS USTR FOR ASST USTR FLISER 
STATE PASS TRANSPORTATION FOR MARAD 
STATE PASS OPIC FOR ZHAN AND MSTUCKART 
STATE PASS TDA FOR NCABOT 
STATE PASS EXIM FOR JRICHTER 
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ 
 
E.O. 12958: N/A 
TAGS: EPET NI PGOV ENERG
SUBJECT: NIGERIA NATIONAL ASSEMBLY PREPARES DOWNSTREAM GAS 
ACT 
 
LAGOS 00000097  001.2 OF 005 
 
 
¶1.  (U)  Summary:  Final investment decisions (FIDs) will be 
taken on the OK Liquefied Natural Gas (LNG), Brass LNG, 
Nigeria Liquefied Natural Gas (NLNG) and Equatorial Guinea 
LNG projects early in 2007.  As a result, the Nigerian 
National Petroleum Corporation (NNPC) is pushing Nigeria's 
National Assembly (NA) to pass the Downstream Natural Gas 
Act.  At hearings in the House of Assembly and Senate, 
witnesses from the public and private sector urged amendments 
to the bill, to assure the independence of the Gas Regulatory 
Commission (GRC). Members of both Houses also expressed 
support for an independent Gas Regulatory Commission (GRC). 
The Oil Producers Trade Section (OPTS) of the Lagos State 
Chamber of Commerce, which includes the international oil 
companies (IOCs), promised to submit proposed amendments for 
the House committee's consideration.  As the country nears 
the FIDS, demand for gas is increasing. Nigeria hopes gas 
revenues will equal oil revenues by 2010. End Summary. 
 
 
¶2.  (U)  The Nigeria's National Assembly held hearings on the 
Downstream Natural Gas Act in the House of Assembly Committee 
on Gas, chaired by Chief Mercy Almonei Isei, on January 
18-19.  The Senate Committee on Gas, chaired by Senator Rufus 
Initimi Spiff, held hearings on February 1-2. 
Powers of Gas Regulatory Commission, Minister 
--------------------------------------------- 
 
¶3.  (U)  The bill establishes a Gas Regulatory Commission 
(GRC), which will provide commercial regulation for the 
downstream sector.  In that capacity, the Commission will 
issue licenses relating to the supply, transportation, 
distribution and operation of the transportation network for 
natural gas.  This includes licenses for the sale and 
delivery of gas to end users; for the construction and 
maintenance of pipelines and infrastructure for conveyance of 
gas under high pressure from processing facilities, for 
construction and operation of distribution networks in local 
delivery zones; and for the management and operation of the 
transportation network.  The GCR must ensure that a licensed 
Transportation Network Operator (TNO) provides third party 
access to the network, and may not purchase, own, or sell gas 
or participate in natural gas marketing or transportation. 
The Department of Petroleum Resources will continue to do 
downstream technical regulation as well as upstream 
regulation. 
 
¶4.  (U)  The bill provides that the Minister of Energy and 
Petroleum Resources has the duty to formulate, determine and 
monitor downstream gas sector policy, determine when 
conditions are right for the initiation of a competitive 
market, issue regulations and ensure the independence of the 
Gas Regulatory Commission.  The bill also provides that the 
GRC may amend, suspend or remove license conditions only upon 
consultation with the Minister of Energy. 
 
Downstream Act Unbundles NGC 
---------------------------- 
 
¶5.  (U)  The bill also provides that NNPC subsidiary the 
Nigerian Gas Corporation (NGC), will be bifurcated into the 
Nigerian Gas Transmission Company (NGTC), a gas 
transportation company, and the Nigerian Gas Marketing 
Company (NGMC), a marketing and distribution company.  The 
NGTC will operate as an independent company; 51 percent of 
the company's equity will be sold to strategic investors with 
experience and financing capacity, while 49 percent will be 
retained by the Government of Nigeria (GON).  All physical 
assets of the NGC will be transferred to the NGTC.  Gas Sale 
 
LAGOS 00000097  002.2 OF 005 
 
 
and Purchase Agreements and Gas Transfer Agreements between 
NGC and any third party will be transferred to the NGMC. 
 
Pricing Provisions 
------------------ 
 
¶6.  (U)  The bill gives the GRC power to regulate prices for 
monopoly services and services not sufficiently competitive 
to protect the interests of consumers.  Prices for using the 
transportation and distribution networks will be regulated. 
End-user prices for captive consumers will also be regulated 
until competition is introduced and consumers have a choice 
of supplier.  The GRC is charged with monitoring the 
downstream gas sector to determine its readiness for 
competition.  The GRC is also empowered to prevent and/or 
curtail anti-competitive practices by its licensees. 
 
¶7.  (U)  The GRC is charged with setting up a transitional 
pricing regime that will ensure full cost recovery for 
participants in the gas chain while avoiding a price shock 
when the subsidies inherent in the current pricing 
arrangements are removed.  The regime will also eliminate 
cross subsidies prevailing in the sector and between gas and 
other sectors such as power and steel. 
 
Fast Action on Bill Required for New Projects 
--------------------------------------------- 
 
¶8.  (U)  Group Managing Director of Nigerian National 
Petroleum Company (NNPC) Funsho Kupolokun testified at both 
hearings, explaining the purpose and content of the 
legislation.  Drafting of the bill was begun when Kupolokun 
was Special Advisor to the President for Energy.  NNPC took 
three years to prepare the bill, holding three stakeholders 
forums to get input from industry and interested others. 
Consultants from to the World Bank, McKenzie and Wood and 
Nigerian companies all worked on the draft. 
 
¶9.  (U)  The legislation is necessary because the existing 
legal and administrative framework was created primarily for 
oil. There are insufficient legislative and regulatory 
provisions for activities in the gas sector.  Existing 
contractual arrangements are opaque.  For example, there are 
currently no commercial terms for gas discovered in 
Production Sharing Contract concession areas, Kupolokun 
explained. 
 
¶10.  (U)  Nigeria's gas reserves have risen steadily to 
approximately 184 trillion cubic feet (TCF), despite the fact 
that there has been no direct exploration for gas, Kupolokun 
commented.  Based on these numbers, Nigeria has the 7th 
largest gas reserves in the world.  As with Nigeria's Bonny 
light crude oil, Nigeria's natural gas is high quality. 
 
¶11.  (U)  Since the bill was introduced in 2003, there has 
been an explosion of demand for Nigeria's natural gas, 
Kupolokun said.  Demand is expected to reach 15 bcf/d by 
2010, with domestic demand accounting for about 30 percent of 
this volume.  There are four projects, for which final 
investment decisions (FIDs) are scheduled in 2007, which will 
use Nigeria's natural gas: 
 
--  Olakola (OK) Liquefied Natural Gas (LNG):  This project 
will have a total of 4 LNG trains producing 5.5 million 
tons/year.  The final investment decision (FID) will be taken 
in 2007.  This project will boost Nigeria's LNG capacity by 
22 million tons per year from 2011.  25 TCF of Nigeria's 
natural gas reserves have been allocated to this project. 
 
LAGOS 00000097  003.2 OF 005 
 
 
 
--  Brass LNG:  This project will have two LNG trains each 
with 5 million tons per year capacity.  Final investment 
decision is targeted for 2007.  Brass LNG will add 10 million 
tons per year to global LNG supplies.  10 TCF of Nigeria's 
natural gas reserves have been allocated to this project. 
 
--  NLNG Train 7:  10 TCF of Nigeria's natural gas reserves 
have been allocated to this project. 
 
--  Equatorial Guinea LNG:  5 TCF of Nigeria's natural gas 
reserves have been allocated to this project 
 
¶12.  (U)  Kupolokun urged the committee to pass the bill as 
quickly as possible because these FIDs will result in the 
allocation of 50 trillion cubic feet out of the total 184 
trillion cubic feet of reserves available, and the 
legislation is needed to properly capture the economic value 
of the gas for the country.  Nigeria intends to collect as 
much revenue from natural gas as from oil by 2010.  The bill 
will help Nigeria reach other goals, including ending flaring 
and addressing related environmental issues, extending gas 
penetration to the domestic market so as to facilitate the 
growth of the power sector and other industries, creating a 
level playing field between oil producers and other parties 
involved in the domestic gas business and increasing private 
sector participation, Kupolokun said. 
 
¶13.  (U)  According to Kupolokun, historical and current 
prices for natural gas in Nigeria are extremely low. 
Domestic gas prices are below the cost of supply, which has 
resulted to an annual subsidy to the power sector of USD 
50-80 million, created a disincentive to investment in gas 
gathering infrastructure; and distorted fiscal arrangements 
for the power sector.  According to Kupolokun, price setting 
is opaque and discretionary; there is no basis for setting 
tariffs and wholesale prices. 
 
House Hearings Focus on Independence of Commission 
--------------------------------------------- ----- 
 
¶14.  (U)  Private attorneys and the Bureau of Public 
Enterprise testified that the bill does not make the GRC 
sufficiently independent of the Minister of Energy and 
Petroleum.  The Minister has the power to publish 
regulations, to be consulted with respect to the issuance or 
revocation of licenses, and to "ensure the independence of 
the Commission."  The Department of Petroleum Resources 
expressed concern that the bill does not sufficiently 
distinguish its powers to regulate the technical aspects of 
downstream gas from the powers of the GRC to regulate the 
commercial aspects of downstream gas.  Companies with 
existing contracts to transport and market gas expressed 
concern about whether their existing 20 year contracts with 
Nigerian Gas Corporation, a subsidiary of NNPC, would be 
honored.  The Bureau of Public Enterprises, the arm of the 
Office of the President that is leading the privatization of 
state-owned companies, pointed out that entities named in the 
legislation, such as the National Gas Marketing Company and 
the National Gas Transport Company, would be privatized and 
thus should not be owned by NNPC as provided in the bill. 
BPE also noted that other entities named in the bill, such as 
the Petroleum Inspection Commission, have not yet come into 
existence.  Others questioned the need for the Nigerian Gas 
Marketing Commission because gas can be marketed by the 
companies that produce it. 
 
¶15.  (U)  The Oil Producers Trade Section (OPTS) of the Lagos 
 
LAGOS 00000097  004.2 OF 005 
 
 
State Chamber of Commerce, which has as members many of the 
international oil companies (IOCs), urged the committee to 
minimize bureaucracy, avoid overlap with upstream sector 
regulation, ensure clarity of definitions, provide for the 
right to a hearing, ensure respect for contracts, set prices 
so investors can recoup their investment, assure a level 
playing field for new projects, respect existing commitments, 
and assure participation by private companies in the 
unbundling of NGC.  The OPTS representative indicated that he 
would submit proposed amendments to the bill for the 
committee's consideration. 
 
¶16.  (SBU)  The Special Advisor to the House Committee on 
Gas, told Pol-Econ Chief that following the hearing, the 
Committee adopted amendments assuring the independence of the 
GRC.  Regulations, as recommended by the GRC, will be 
promulgated by the Minister.  Fines and other penalties will 
be retained by the Commission so as to assure its greater 
independence.  The number of members on the GRC was increased 
to nine to guarantee membership from all six geo-political 
zones.  Tax benefits granted a project will not automatically 
be extended to an expansion of the project. 
 
Senate Hears Plea for 50 Percent Derivation 
------------------------------------------- 
 
¶17.  (U)  According to press reports, communities in the 
Niger Delta asked the Senate Committee to use the bill as a 
vehicle to increase to 50 percent the revenue from gas 
production shared with the communities.  In addition, the 
communities asked that five of the GRC Commissioners come 
from the gas producing states, and that the headquarters of 
the GCR be sited in one of the nine gas producing states. 
BPE testified that the GCR should be independent of the 
Ministry of Petroleum Resources.  According to press reports, 
Senators indicated that the failure of Minister of Petroleum 
Resources Edmund Daukoru's failure to appear to defend the 
provisions of the bill vesting power in his Ministry would 
result in the adoption of the BPE's recommendations. 
 
Changes to Fiscal Regime, PSC Gas Contract Planned 
--------------------------------------------- ----- 
 
¶18.  (U)  In his testimony, Kupolokun also discussed planned 
changes to the current fiscal regime for natural gas. 
Reforms are needed to ensure that Nigeria receives a share of 
the economic rents generated from natural gas.  The GON's 
upstream government take is negative at the price of USD0.50 
per metric cubic foot of gas, while other countries that 
charge USD1.00 per mcf have positive government take.  The 
new fiscal regime, which will apply to both joint 
venture/sole risk (JV/SR) concessions and to production 
sharing contract (PSC) concessions alike.  The new fiscal 
regime is intended to have a neutral impact; it will neither 
stimulate development of uneconomic gas projects nor deter 
profitable projects. 
 
¶19.  (U)  The new regime is based on a sliding scale 
principle that allows the GON and the investor to share in 
the upside and downside of the project, Kupolokun claimed. 
The least profitable gas projects will be liable only to the 
minimum gas profits tax while the most profitable projects 
will be liable to gas profits tax at an effective 75 percent 
rate (a 20 percent minimum rate plus 55 percent maximum 
incremental rate.) 
 
¶20.  (U)  The new fiscal regime is intended to be 
automatically responsive to varying project costs and price 
 
LAGOS 00000097  005.2 OF 005 
 
 
conditions; progressive so that the government take increases 
proportionately with project profitability; and simple, so as 
to avoid multiple taxes and complex allowances that either 
create loopholes or provide too much incentive.  The regime 
is focused on profit, not revenue or costs. 
 
¶21.  (U)  Kupolokun also said that a gas development 
agreement for Production Sharing Contracts will be drafted. 
Because the PSCs are for oil exploration and development, gas 
discoveries are incidental to oil operations.  A separate 
agreement is being developed to establish terms for the 
commercial development of the gas, taking into account that 
exploration costs are recovered from oil revenue, and 
unsuccessful oil exploration is considered a sunk cost.  The 
NNPC retains ownership of PSC gas. 
BROWNE