VZCZCXRO8191
PP RUEHMA RUEHPA
DE RUEHOS #0667/01 2781549
ZNR UUUUU ZZH
P 051549Z OCT 07
FM AMCONSUL LAGOS
TO RUEHZK/ECOWAS COLLECTIVE PRIORITY
RUEHUJA/AMEMBASSY ABUJA PRIORITY 9245
RUEHC/SECSTATE WASHDC PRIORITY 9477
INFO 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 02 LAGOS 000667 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DOE FOR GPERSON, CGAY 
 
E.O. 12958: N/A 
TAGS: ENRG EPET SENV NI
SUBJECT: NIGERIA THREATENS FINES ON GAS FLARING; PROPOSES 
INCREASED PRICES 
 
¶1. (SBU) Summary: A World Bank workshop on gas flaring in 
Nigeria turned into a discussion on possible increases in 
prices for export natural gas.  The Nigerian government 
accused oil companies of dragging their feet on eliminating 
gas flaring and said stiff fines would be imposed at the 
start of the year.  Oil company representatives countered 
that the government had failed to fund gas related projects 
and said eliminating flaring by 2008 would increase the 
amount of shut-in oil.  End Summary. 
 
--------------------------------------------- ------- 
Top Nigerian Oil Leaders Show Resolve in Gas Flaring 
--------------------------------------------- ------- 
 
¶2. (SBU) The World Bank (WB) sponsored a one day workshop on 
eliminating gas flaring as part of its Global Gas Flaring 
Reduction Initiative.  Among the twenty Nigerian government 
participants at the meeting were key petroleum officials 
including Olatunde Odusina, State Minister for Energy (Gas), 
¶H. Odein Ajumogobia, Minister of State for Energy 
(Petroleum), and Tony Chukwueke, Director of the Department 
of Petroleum Resources (DPR).  No heads of major 
international oil companies (IOCs) attended. 
 
¶3. (SBU) With the goal of stopping gas flaring in Nigeria in 
2008 just around the corner, the government of Nigeria (GON) 
took a hard-line, as articulated by Odusina.  The Minister 
refused to consider any further delays in the deadline and 
said by January 1, 2008 gas flaring must be eliminated, "or 
else."   The "or else" was articulated by a DPR 
representative as an increase in fines for gas flaring to USD 
100 per mscf flared and USD 500 per mscf for companies caught 
misrepresenting the amount of gas flared.  Additionally, 
willful or repeated violations could result in the loss of 
concessions and the imposition of criminal penalties on 
company executives. 
 
--------------------------------------------- ------ 
IOCs:  2008 Deadline Would Cause Halt in Production 
--------------------------------------------- ------ 
 
¶4. (SBU) Charles Adeniji, Chevron's General Manager for Gas 
Commercialization, acted as the lead spokesman for the IOCs. 
In his presentation, Adeniji said eliminating gas flaring by 
2008 would require the oil companies to stop production from 
117 wells until sufficient associated gas (AG) gathering 
projects came on line in 2012.  According to IOC numbers, 
that would result the loss of 480 million barrels of oil over 
the four years. 
 
¶5. (SBU) The IOCs proposed moving the target back to 2012 to 
allow time for completion of new AG gathering projects. 
Adeniji cited three reasons for failure to reach the 2008 
goal.  First, and most important, was the failure of the 
Nigerian National Petroleum Corporation (NNPC) to fully 
provide its share of the joint venture funds for AG projects. 
 Also hindering the goal were ongoing security problems in 
the Delta and a tough domestic content law that resulted in 
inadequate numbers of qualified Nigerian subcontractors.  A 
DPR representative questioned the IOCs' shut-in numbers on 
specific details, but claimed the GON was willing to accept 
shut-in wells.  The DPR representative said stopping 
production on those wells would simply defer income and that 
would be an "investment in our future." 
 
¶6. (SBU) In a side bar with Econoff, one high level industry 
participant said he anticipates the terms of the fines will 
be reduced, but he also expects the GON to make good on its 
threat to impose them.  As they stand now, the proposed fines 
would make AG flaring wells uneconomical and force the IOCs 
to cease production from them.  During the meeting the IOCs 
expressed serious concern about proposed criminal penalties. 
Both sides agreed that the IOCs would have a chance to voice 
their concerns and provide input as implementing legislation 
wound its way through the National Assembly. 
 
--------------------------------------------- 
Nigeria: Export Gas Prices Increases Possible 
--------------------------------------------- 
 
 
LAGOS 00000667  002 OF 002 
 
 
¶7. (SBU) Talk turned to funding and both sides readily agreed 
that natural gas pricing was the crux of the problem. 
Chukwueke of the DPR floated the idea of an increase in the 
transfer price of export gas to USD 2.50 per mmbtu, up from 
approximately USD 0.50 per mmbtu.  With higher returns to the 
upstream, the GON hoped to attract more third party investors 
in gas gathering projects.  IOC representatives were 
enthusiastic, but non-committal.  They said higher prices 
would help in the longer term, but delays obtaining 
government approval for projects, the difficult work 
environment, and the complexity of such projects would mean 
that gas flaring would continue into 2008 unless the IOCs 
stopped some production. 
 
¶8. (SBU) As part of the future Gas Master Plan, the GONs all 
encompassing plan for developing a natural gas industry, a 
NNPC representative described a three tier gas pricing 
system.  Gas prices for domestic industries and the 
electricity sector would be set well below prices established 
for gas sales to the international market.  DPR and NNPC 
representatives were adamant that domestic gas prices were 
not likely to rise in the short term, particularly for gas 
supplied to the politically sensitive domestic electricity 
generation market.  In the long term however, NNPC predicted 
more price parity between domestic and export prices as the 
Nigerian non-oil economy grew. 
 
¶9. (SBU) Both sides debated the current fiscal terms for gas 
projects in Nigeria.  Chukwueke accused the IOCs of taking 
advantage of terms that permitted offsetting gas project 
expenses against current oil revenues.  Those terms, he 
claimed, had been intended to promote AG projects, but 
instead IOCs had used them to build non-associated gas (NAG) 
projects.  New fiscal terms may eliminate that tax advantage. 
 The IOCs countered that long term gas contracts demanded a 
reliable supply and NAG projects, which tend to be offshore, 
were developed to augment often unreliable onshore AG 
sources. 
 
------------------- 
A Committee is Born 
------------------- 
 
¶10. (SBU) Almost as an afterthought, the participants 
returned to the immediate issue of gas flaring.  WB 
facilitators proposed the idea of establishing yet another 
committee.  This Flare Reduction Committee, to be hosted by 
the Minister of State for Energy (Gas), would consist of IOC 
and GON representatives and would coordinate gas flaring 
initiatives from both sides.  Participants acknowledged 
however that the committee could do little to stop flaring by 
the 2008 deadline.  The WB Country Director Hafez Ganhem 
wondered if failure to eliminate flaring in 2008 would bring 
a credibility problem to the IOCs and GON.  Participants 
agreed to include communications strategy as a part of the 
new committee. (Note:  Although the workshop was billed as a 
meeting of stakeholders, no local community representatives 
were in attendance.  According to one Western NGO 
representative, none were invited.  End Note.) 
 
¶11. (SBU) Comment:  Some accommodation on the fines will be 
reached since neither side wants to see additional wells 
shut-in.  Where this accommodation will take place is another 
issue.  Industry representatives expressed confusion over 
whether the legislature or the DPR would have the lead on 
setting penalties.  The GON was notably vague in answering. 
 
¶12. (SBU) The security situation in the Delta is just one 
part of the problem in eliminating gas flaring, and if the 
workshop is any indicator, not necessarily the most serious. 
Financing problems, a Byzantine policy making apparatus, and 
complex and inflexible price controls all contribute to the 
failure to end gas flaring and retard the development of the 
natural gas industry in general.  Gas related legislation and 
implementation of the Gas Master Plan will hopefully clear up 
some of the regulatory and policy uncertainty.  End Comment. 
HUTCHINSON