VZCZCXYZ0006
PP RUEHWEB

DE RUEHOS #0041/01 0391506
ZNR UUUUU ZZH
P 081506Z FEB 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 9714
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHHH/OPEC COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9447
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 LAGOS 000041 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/W, INR/AA, DS/IP/AF, DS/ICI/PII, DS/DSS/OSAC 
DOE FOR GPERSON, CAROLYN GAY 
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 ENRG PGOV NI
SUBJECT: CHEVRON AND EXXON FACE CHALLENGES, CONTINUE 
EXPANSION IN NIGERIA 
 
This cable contains business proprietary information. 
 
¶1. (SBU) Summary.  Based on their operating locations, 
Chevron and ExxonMobil (EM) face distinct challenges in 
operating in the Niger Delta.  Deputy Assistant Secretary 
(DAS) Todd Moss, the Ambassador, and Econoff (note taker) 
visited Chevron's Escravos oil and gas complex in Delta State 
and EM's East Area Project 20 miles offshore of Akwa Ibom 
State on January 28.  Chevron believes its community 
development model has contributed in part to its ability to 
operate successfully in Delta State.  DAS Moss and the 
Ambassador saw active oil bunkering clearly visible near 
Chevron's location.  Chevron noted it had contact on security 
matters with the militants via phone and text messages.  Both 
Chevron and EM sites were flaring large amounts of natural 
gas, highlighting the difficulties both companies will have 
in meeting the GON's flareout deadline now "set" for December 
31, 2008.  Both companies explained about the need for the 
GON to either pay long overdue joint venture arrears or find 
another mechanism to resolve the financial differences and 
disputes.  While there are numerous problems facing the 
hydrocarbon sector in Nigeria, the country will remain an key 
location for international oil company investment.  Whether 
that investment can translate into better socio-economic 
conditions for residents of the impoverished Niger Delta 
remains to be seen. End Summary. 
 
---------------------------------------- 
Oil Bunkering: Easy to See, Hard to Stop 
---------------------------------------- 
 
¶2. (SBU) Chevron's Managing Director Fred Nelson hosted the 
DAS, the Ambassador, and Econoff (note taker) at Chevron's 
Escravos facility, home to an oil export terminal, a natural 
gas processing facility, and the future site of a 
gas-to-liquids plant that will convert natural gas to diesel 
fuel.  Plant managers and company executives described in 
detail their operations and the problems they face. 
According to the executives, Chevron currently produces 
302,000 barrels of oil per day (bpd) from its Escravos area 
fields.  On top of that, an average of 17,000 bpd is stolen 
or bunkered, with a record 32,000 barrels stolen the day 
before the visit.  The briefers supplied photographs of oil 
bunkering barges the environmental damage they cause.  The 
DAS and Ambassador saw actual bunkering and resulting oil 
spills and environmental degradation during a subsequent 
helicopter tour of the area, where at least ten barges 
involved in oil theft were clearly visible.  Chevron 
executives complained that government security forces (GSF) 
make only half-hearted attempts to stop the thieves despite 
receiving detailed information from the company, noting their 
complicity in the lucrative business  The company produced a 
slide showing the exact location of known, active oil theft 
points and an executive told the DAS that they know exactly 
when and how much is being stolen by observing drops in 
pipeline pressure.  In addition, decrepit oil tankers waiting 
offshore to receive the stolen oil often present a hazard to 
company activities.  On more than one occasion, Chevron has 
had to send boats to assist oil tankers that have lost power 
and gone adrift in the middle of Chevron offshore oil 
platforms.  Chevron senior executives asked for USG 
assistance in tracking the oil tankers and determining their 
final destination.  The Ambassador noted that some thought 
had gone into an oil tagging and identification process, and 
maybe something like a Kimberly process could be done to 
counter oil bunkering and ensure that only oil sold through 
export terminals was purchased on international markets.  The 
Ambassador also said she would pass their oil bunkering 
information to relevant offices to see if they could 
determine the landing location of the tankers. 
 
 
--------------------------------------------- ----- 
Chevron's Community Development Paying Dividends? 
--------------------------------------------- ----- 
 
¶3. (SBU) Chevron described for the DAS and Ambassador its 
local community development efforts.  Chevron works through 
eight regional development councils (RDC) established near 
the company's major operations in the Niger Delta.  Through 
grants and contracts these RDCs, composed of local community 
leaders and stakeholders, are supposed to take ownership of 
development in their region, with Chevron playing a 
supporting role by providing training and capacity building 
in addition to some funds.  Additionally, Chevron directly 
funds several education and health initiatives in communities 
near it facilities.  All told, in 2006, Chevron spent USD 43 
million directly on community projects and contributed 
another USD 28 million to the government's Niger Delta 
Development Commission.  The company estimates that its 
contribution to the oil revenues shared by the Federal 
Government with oil producing states totaled USD 233 million 
in 2006. 
 
¶4.  (SBU) Chevron believes that its community development 
efforts have paid off, at least in the short term.  It says 
it enjoys a much better relationship with local communities 
and suffers less than neighboring Shell from militant 
activities in the region.  Chevron admitted it maintains 
regular contact with members of Tom Polo's militant 
organization, going so far as to occasionally call militants 
before river-borne supply convoys pass by militant camps to 
make sure the situation is stable enough for the convoy to 
arrive at Escravos intact.  (Note: Tom Polo's "Camp Five" 
lies 12 kilometers from Escravos along the river supply route 
from Warri.  There are no roads leading to or from Escravos. 
End Note.) 
 
----------------------------------- 
Tom Polo:  Militant and Businessman 
----------------------------------- 
 
¶5.  (SBU) Near the Escravos gas-to-liquids plant construction 
site along the river's edge sat dozens of large house boats 
used to house construction workers.  The house boats are 
rented from local community contractors.  As the DAS pointed 
out, clearly visible on one of the house boats was the name, 
"Tom Polo Limited", the same militant leader responsible for 
much of the unrest in the region.  The Chevron teamed 
commented that they didn't have much choice; in addition to 
his militant activities Tom Polo was a local businessman and 
his houseboat went through the same vetting process as those 
from other companies.  (Note:  Chevron executives also 
remarked that several of the houseboats are leased from a 
company owned by former governor James Ibori, currently under 
indictment on more than 100 counts of corruption.  The 
executives said that Chevron had been unaware that the 
leasing company belonged to Ibori at the time the boats were 
leased.  The executives were concerned about this connection 
and said Chevron was investigating its options with regard to 
these leases.  End Note.) 
 
¶6. (SBU) The Escravos facility is the main gas hub for 
Chevron's western fields and is the starting point for 
Chevron's gas that flows through the pipeline serving Lagos 
and the West African Gas Pipeline.  However, militants have 
vandalized the Nigerian Gas Company-owned pipeline in several 
locations and repairs are slow and repeatedly delayed.  As a 
consequence, Chevron is flaring virtually all the gas that 
arrives at Escravos.  The single flare stack launches a flame 
that reaches hundreds of feet into the air with a roar like a 
 
jet engine that can be heard all over the complex.  Heat from 
the flare is noticeable from several hundred yards away, 
forcing some workers on the construction site to take 15 
minute rest breaks every hour to avoid heat-related 
injuries.  Ascot Ltd, the contractor hired to repair the 
pipeline, is in financial distress and Chevron is unsure if 
it is capable of completing the repairs.  (Note:  Nigerian 
company Ascot bought Willbros's troubled subsidiary in 2007 
after that company decided to exit the Nigerian market.  A 
Chevron executive described Ascot as minor machine shop 
before its purchase of Willbros Nigeria and he questioned its 
ability to operate a major pipeline repair contractor.  End 
Note.) 
 
------------------------------------------ 
ExxonMobil: Offshore and Happy to Be There 
------------------------------------------ 
 
¶7. (SBU) The DAS and Ambassador accompanied by EM's Managing 
Director John Chaplin then toured EM's East Area Project 
(EAP).  This USD 4.2 billion facility, located 20 miles 
offshore of Akwa Ibom State, gathers natural gas currently 
being flared, removes the condensate, and then re-injects the 
dry gas into the oil fields.  The facility is partially 
operational with the final portion, the natural gas liquids 
(NGL) extraction plant, scheduled to come on-line this year. 
Gas reinjected by EAP will allow EM to recover an additional 
500 million barrels of oil from surrounding fields and add 
275 million barrels of NGL reserves.  Additionally, EAP is a 
major component in EM's plan to reduce its gas flaring by 
gathering gas currently stranded and expanding compression 
capability.  However, flares resulting from equipment outages 
account for the vast majority of EM's flaring total and will 
be part of the issue into the future. 
 
¶8. (SBU) While its offshore oil fields means EM has fewer 
community issue than Chevron, it is not entirely free from 
problems.  Supply boats using Bonny River are repeatedly 
attacked by militants.  EM now runs its boats in convoys to 
facilitate protection, but Chaplin complained that the JTF 
was still not up to the task of providing adequate security. 
When asked about moving its offshore support operations to a 
proposed Lagos deepwater base, Chaplin said the Lagos 
facility had run into trouble.  Its competitor in Onne is 
better connected with the current administration while the 
Lagos developers have connections with the out of favor 
previous administration.  Still, Chaplin asserted that for 
security purposes a base in Lagos is preferable and would be 
more cost effective in servicing its deep offshore fields 
located in the west. 
 
-------------------------------------------- 
Funding, Policy, Security, and Rising Costs 
-------------------------------------------- 
 
¶9. (SBU) While they face different operational and management 
challenges, the two major oil companies have similar concerns 
about fiscal, policy, and security issues and are plagued by 
rising costs.  Joint venture arrears were repeatedly 
mentioned as a major impediment to future hydrocarbon 
development.  While generally supportive of the GON efforts 
to restructure the joint ventures to permit third party 
financing, neither was optimistic that a solution was 
imminent and Chevron in particular was pressing for repayment 
from Nigeria's excess crude account.  Similar sentiments were 
expressed about the restructuring of the Nigerian National 
Petroleum Corporation (NNPC)- a good idea in theory, but not 
likely to be completed in the near future. 
 
¶10. (SBU) Chaotic policy development and implementation by 
 
the GON was also cited as a concern.  Chevron and EM both 
commented on the difficulties in long term planning in an 
environment of uncertain regulation.  They cited unrealistic 
Nigerian content rules, equivocation on flare out deadlines 
and penalties, and a delayed national natural gas plan as 
examples of poor policy planning and implementation that have 
hampered hydrocarbon development.  Additionally, poorly 
written tax rules are often subject to dubious interpretation 
by capricious regulators.  On a positive note, Chaplin 
commented that Nigeria has a good reputation for honoring its 
contracts with the oil companies.  As an example, he said the 
GON had recently rebuffed Chinese demands that Nigeria turn 
over one of EM's oil blocks to a Chinese firm in exchange for 
Chinese investment in railroads and other infrastructure. 
 
¶11. (SBU) Comment.  Despite the litany of complaints from the 
oil companies about how hard it is to work in Nigeria, it was 
evident that both Chevron and ExxonMobil view Nigeria as one 
of the most important countries in their portfolios and they 
continue to make significant investment in exploration and 
production.  The positives of large potential oil and gas 
reserves and a government willing to let them explore for, 
produce, and book those reserves clearly outweigh the 
negatives, serious as they may be. 
 
¶12. (SBU) However, the visit to Chevron's facility 
highlighted a disheartening aspect of hydrocarbon investment 
in the Niger Delta.  A multi-billion dollar construction 
project in other places would usually mean new jobs, economic 
growth, and an increased local tax base as workers and their 
families moved to the area and businesses, schools, and 
community organizations sprang up to support them.  In 
Nigeria that simply doesn't happen.  Escravos is fenced off 
from surrounding communities and provides little direct 
economic benefit to the immediate area beyond oil company 
"investment" in community development projects.  While those 
projects may be laudable in their intent, the sustainability 
of economic development that depends on commissions, grants, 
five year plans, and aid workers, rather than market forces 
is debatable.  End Comment. 
 
¶13. (U) This cable cleared by Embassy Abuja. 
BLAIR