VZCZCXRO6887
PP RUEHMA RUEHPA
DE RUEHUJA #2009/01 3070707
ZNR UUUUU ZZH
P 030707Z NOV 09
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 7400
INFO RUEHOS/AMCONSUL LAGOS 2223
RUEHJO/AMCONSUL JOHANNESBURG 0116
RUEHZK/ECOWAS COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 04 ABUJA 002009 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS USAID AFR/SD FOR CURTIS, ATWOOD AND SCHLAGENHAUF 
DEPT PASS TO USTDA-PAUL MARIN, EXIM-JRICHTER 
DEPT PASS TO USTR-LAURIE-ANN AGAMA 
DEPT PASS TO OPIC-BARBARA GIBIAN AND STEVE SMITH 
JOHANNESBURG FOR JASON NAGY 
USDOE FOR GEORGE PERSON 
TREASURY FOR IERONIMO, BARCAN, SOLOMON AND RITTERHOFF 
DOC FOR 3317/ITA/OA/BURRESS AND 3130/USFC/OIO/ANESA/REED 
 
E.O. 12958:  N/A 
TAGS: ENRG EPET EINV ELTN NI
 
SUBJECT:  ENERGY SCENESETTER FOR THE VISIT OF COORDINATOR FOR 
INTERNATIONAL ENERGY AFFAIRS DAVID GOLDWYN, NOVEMBER 9-11, 2009 
 
ABUJA 00002009  001.2 OF 004 
 
 
-------- 
OVERVIEW 
-------- 
 
¶1.  (SBU) The oil and gas industry in Nigeria accounts for 92 
percent of export earnings and 85 percent of GON revenues, according 
to the World Bank.  Nigeria is the 12th largest producer of crude in 
the world, the 8th largest exporter, and is the world's 10th largest 
crude oil reserves at 36.2 billion barrels.  Its production 
currently averages 1.8 million barrels per day, but this could 
increase after the GON's amnesty program in the Delta and as 
"shut-in" fields are brought back into production.  The GON wants to 
produce three million barrels per day by 2015.  Nigeria has 184 
trillion cubic feet of proven natural gas reserves, and is the 
second largest flarer of natural gas in the world and the largest in 
Africa. 
 
--------------------------- 
UPSTREAM PETROLEUM INDUSTRY 
--------------------------- 
 
¶2.  (SBU) Nigeria's oil is produced from five sedimentary basins: 
the Niger Delta, Anambra, Benue Trough, Chad, and Benin.  The Niger 
Delta, both the onshore and shallow offshore basins, are reported to 
be well-explored.  Ventures here are low-risk, and the basins 
contain about 80 percent of the country's producing wells.  The 
emergence of offshore oil and gas operations and the granting of 
deep water acreages to the international oil companies (IOCs) are 
producing a shift from Joint Operating Agreements (JOA) to 
Production Sharing Contracts (PSCs) due to the complexity of 
offshore operations. 
 
¶3.  (SBU) The Nigerian National Petroleum Corporation (NNPC) 
represents GON interests in the joint ventures (JV) with the IOCs. 
The JOA governs the partnership, including budget approval and 
supervision, crude oil lifting and sale in proportion to equity, and 
funding.  A Memorandum of Understanding (MOU) governs the way 
proceeds are allocated between the partners, including payment of 
taxes, royalties, and industry margin.  Operational income is shared 
in proportion to the parties' equity interests in the venture, with 
each party bearing the cost of its royalty and tax obligations in 
the same proportion.  Allocations are also made from the revenue to 
cover operating and technical costs.  There are six JVs with Shell, 
Chevron, Mobil, Agip, Elf, and Texaco/Chevron. 
 
¶4.  (SBU) The PSC governs the relationship between the parties in 
the offshore blocks.  The contractor, usually an IOC, bears the 
entire cost and risk of the exploration activities, and only reaps 
the rewards after a commercial discovery.  In the event of a 
commercial discovery, the contractor recovers its costs fully from 
the allocation of oil, referred to as "cost oil."  Allowance is also 
made from production for royalties, after which the remainder of the 
production, called "profit oil," is shared in previously-agreed-upon 
proportions between the company and the GON.  The contractor company 
thereafter pays income tax on its profits from the venture.  The oil 
and all the installations remain the property of the GON throughout 
the contract.  There are ten PSC operators: Statoil, Snepco, Elf, 
Qthe contract.  There are ten PSC operators: Statoil, Snepco, Elf, 
Agip, Addax (now Sinopec), Conoco, Petrobas, Star Deep Water 
(Texaco), Chevron, and Oranto Phillips, according to the NNPC's 
website.  (NOTE: China National Offshore Oil Corporation (CNOOC) 
acquired a 45 percent working interest in offshore oil mining 
license oil mining license 130.  The purchase was reported in the 
local press at $2.3 billion from South Atlantic Petroleum Limited 
(SAPETRO) and was described as a PSC operation.  END NOTE). 
 
¶5.  (SBU) Efforts to reduce flaring have not been successful due to 
security issues, insufficient funding, low domestic gas prices, and 
slow development of a commercially-viable gas market.  The GON's 
policy is to attain zero gas flaring by 2011, but the GON is not 
expected to achieve this goal.  The GON is encouraging anti-flaring 
investment through the use of the incentives within the Clean 
Development Mechanism (CDM). 
 
----------------------------- 
DOWNSTREAM PETROLEUM INDUSTRY 
 
ABUJA 00002009  002.2 OF 004 
 
 
----------------------------- 
 
¶6.  (SBU) Nigeria's downstream petroleum industry operations are 
state-owned and include gas distribution/sale, petroleum product 
distribution and storage, and petroleum product retail.  There are 
three petrochemical plants in Warri and Kaduna.  The downstream 
operation has 5,000 kilometers of pipeline network, 21 storage 
depots, and nine liquid petroleum gas (LPG) depots.  Efforts have 
been made to increase the nation's refining capacity, petroleum 
product distribution, natural and petroleum gas utilization, and 
petrochemical development projects.  Nigeria's four state-owned 
refineries have an installed capacity of 445,000 barrels per day. 
They have a history of fire, sabotage, poor management, lack of 
turn-around maintenance, and corruption.  These elements have 
limited refinery output to 40 percent of capacity or less.  Minister 
of Petroleum Resources Dr. Rilwanu Lukman has swayed in the past 
year between upgrading the refineries and selling them outright, 
which has resulted in shortages of refined product and the need to 
increase imports to meet domestic demand.  As a result, Nigeria is 
the only OPEC member that imports the majority of its refined 
product needs. 
 
¶7.  (SBU) Corruption is found in the distribution and marketing 
chain with frequent allegations of cross-border smuggling.  NNPC is 
the oil and gas sector regulator and sets wholesale and retail 
prices.  The GON is in the process of full deregulation of the 
downstream sector as outlined in the Petroleum Industry Bill (PIB). 
Diesel and jet fuel were fully deregulated in early 2009.  Labor 
unions, importers, and some civil society groups oppose the 
deregulation of gasoline and domestic kerosene, which is planned for 
early 2010.  The GON finds the fuel subsidy of $4.3 billion in 2009 
to be unsustainable, and is alleged to benefit less than five 
percent of the population, i.e., those who are affluent enough to 
afford vehicles.  Nigeria exports 22 million tons of liquefied 
natural gas (LNG) and 2.2 million metric tons of LPG.  In 2010, it 
is scheduled to complete the 420-mile West African Gas Pipeline, 
which will carry natural gas from Nigeria to Ghana via Togo and 
Benin.  Discussion to construct a $12 billion, 2,500-mile 
Trans-Saharan Gas Pipeline to Algeria's Beni Saf export terminal on 
the Mediterranean is a "hot" topic in Nigeria.  Total and Gazprom 
have expressed interest in the pipeline. 
 
-------------------- 
PROPOSED LEGISLATION 
-------------------- 
 
¶8.  (SBU) The Nigerian Content Development Bill was passed in the 
Senate on April 17, 2008, and by the House of Representatives on 
October 22, 2009.  The Senate and House versions are being 
reconciled and completion is expected by November 15, 2009.  The 
Bill is designed to enhance local participation in Nigeria's oil and 
gas sector, and has important implications for operators, 
contractors, subcontractors, and financial and legal service 
providers.  It is a companion piece to the Petroleum Industry Bill 
Qproviders.  It is a companion piece to the Petroleum Industry Bill 
(PIB).  Stakeholders in the oil and gas industry doubt the nation's 
ability to attain the required percentage of local content by 2010. 
The international oil and service companies have been preparing for 
the 2010 deadline but admit that it will take its toll on costs, 
productivity, and efficiency.  There are 13 significant items for 
reconciliation, the most important being the requirement for 
operators to maintain bank accounts in Nigeria with at least ten 
percent of their total revenue and to contribute up to one percent 
of their project costs to the Nigerian Content Development Fund. 
 
¶9.  (SBU) The PIB is an omnibus legislation that will replace the 
existing 16 oil sector laws with one legal framework with clear 
rules, procedures, and institutions.  The stated objective of the 
new law is to bring about transparency, good governance, and reduce 
corruption.  The Mission has supported the oil and gas reform and 
has worked with both the GON and the IOCs on issues of concern 
within the PIB.  The PIB has had two readings in the National 
Assembly and public hearings were held July 27-31.  The Senate and 
House joint PIB committees have completed a draft report and will 
take a retreat in mid-November to come to final agreement.  Today, 
the gap between the GON and the IOCs on a variety of issues has 
 
ABUJA 00002009  003.2 OF 004 
 
 
narrowed.  These issues include greater support for the southern oil 
communities, positive movement on taxation, and deregulation of 
downstream production.  Major differences still exist over the total 
rate of taxation, the sanctity of contracts, and international 
arbitration. 
 
¶10.  (SBU) The Nigerian Content Development Bill, the PIB, and the 
Nigeria Gas Master Plan (NGMP) are all part of the National Oil and 
Gas Policy that would reform the oil and gas industry and introduces 
a formal mid-stream sector.  The planning and implementation of the 
policy is the responsibility of the President's Oil and Gas Sector 
Reform Implementation Committee (OGIC).  The NGMP is expected to 
cost approximately $30 billion for infrastructure development which 
includes: a gas pricing policy; a gas supply obligation regulation; 
and a gas infrastructure blueprint.  The NGMP calls for three 
sectors of pricing: domestic sector cost (grid power); industrial 
sector - netback; and commercial sector - alternative fuels pricing. 
 The GON recently implemented the Domestic Gas Supply Obligation 
Regulation that mandates the JVs to provide gas for industries such 
as methanol, fertilizer, and power.  (NOTE: The NGMP calls for 
gradual migration of the gas-to-power price from $0.1 per thousand 
cubic feet to $1.0 per thousand cubic feet by January 2012.  An 
additional $0.3 per thousand cubic feet is provided for gas 
transmission to power plants.  The IOCs lament that the 2008 price 
of $0.1 per thousand cubic feet is too low.  END NOTE)  At the core 
of the proposed infrastructure blueprint are three gas-gathering and 
processing systems, each of which will gather gas across a 
delineated area, process the gas into a national specification, and 
export the dry gas into the network of gas transmission systems. 
Nigeria needs private sector participation for the delivery of these 
infrastructure elements.  (NOTE: GAZPROM has shown interest in 
participating in the midstream gas gathering sector.  END NOTE). 
 
--------------------------------------------- ------- 
EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (EITI) 
--------------------------------------------- ------- 
 
¶11.  (SBU) Nigeria was among the first countries to "domesticate" 
EITI by passing a Nigeria EITI law in 2007.  The USG provided 
legislative strengthening and advocacy support to the National 
Assembly and civil society that facilitated the passage of the NEITI 
law.  The NEITI legislation codifies the EITI principles and 
processes, providing a statutory basis for promoting transparency, 
accountability, and due diligence in the management of revenues from 
extractive industries in Nigeria.  The law also allows for 
significant civil society oversight.  Technical assistance to civil 
society organizations (CSO) and relevant National Assembly 
committees are ongoing to improve their understanding of extractive 
industry revenue transparency issues to adequately carry out their 
oversight responsibilities in the implementation of the law.  The 
Qoversight responsibilities in the implementation of the law.  The 
2005 EITI audit has been completed and accepted by the President's 
Executive Council.  The 2006, 2007, and 2008 audits will be 
completed when the contract is awarded. 
 
¶12.  (U) Nigeria also agreed to publish and disseminate the EITI 
report and to have an independent validator verify fulfilment of 
agreed-upon EITI indicators.  USAID has received approximately $1.5 
million in Anti-Corruption Initiative (ACI) funds to address EITI 
issues, and is building the capacity of civil society to engage in 
the EITI process while the World Bank and DFID are providing support 
to the NEITI Secretariat.  The USG is conducting an assessment to 
identify states in the Niger Delta that can work with donors and the 
GON as EITI lead states.  Bayelsa State, for example, has adopted 
EITI at the state level. 
 
------------ 
POWER SECTOR 
------------ 
 
¶13.  (SBU) Nigeria's power generation problems are: inadequate 
maintenance of aged generating plants; poor gas supply; 
vandalization of gas pipelines; and a shortfall in water systems for 
hydro plants.  The country's transmission and distribution networks 
are characterized by single circuit radial lines (which exacerbate 
the grid's fragility and increase the likelihood that a disruption 
 
ABUJA 00002009  004.2 OF 004 
 
 
in any part of the system will result in major power outages to a 
large section of the country, rather than just the immediately 
affected area), overloaded transformers, obsolete substation 
equipment, and high incidences of line tapping for electricity 
theft.  The capacity of the transmission grid is 4,000 megawatts 
with an average of 2,400 megawatts of generation, which is well 
below national needs.  The grid reaches about 40 percent of the 
population and 10 percent of rural households. 
 
¶14.  (SBU) The Ministry of Power has developed and implemented the 
first phase of a strategic plan to provide an average of 6,000 
megawatts of power by December 2009 through the rehabilitation of 
existing power plants, strengthening of the distribution and 
transmission grids, and expansion of the transmission system.  The 
second phase of the plan is to deliver an average generation of 
10,000 megawatts by December 2011 through an expansion of the 
transmission grid to 16,000 megawatts, the completion of eight 
National Integrated Power Project (NIPP) plants, and independent 
power plants (IPP) from the JVs.  Power beyond this level, planned 
at 20,000 megawatts, will come from future IPPs and the completion 
of the Mambilla and Zungeru hydro-plants totalling 3,550 megawatts. 
The budget for the 6,000 megawatts and 10,000 megawatts was provided 
through the 2008 and 2009 Ministry of Power operating and capital 
allocations as well as a $5.3 billion disbursement from the CBN 
Excess Crude Account.  The lack of gas and gas infrastructure 
threaten the 6,000 megawatts goal.  Some plants are almost ready; 
other units are on schedule, but sit idle without a gas supply.  An 
additional 450 million standard cubic feet of gas is needed to power 
existing functional turbines.  NNPC is looking at providing LPG or 
Synthetic Natural Gas (SNG) for feedstock, and Minister of Power Dr. 
Lanre Babalola is considering coal and solar power to diversify away 
from gas.  There are also problems with adequate transmission 
capacity where two or more generating plants are trying to dispatch 
power through the same line, exceeding the line's capacity. 
 
¶15.  (SBU) The Nigerian Electricity Regulatory Commission (NERC) was 
established by the Electric Power Sector Reform Act of 2005 to: 
 
-- promote competition and facilitate a more rapid provision of 
service throughout the country; 
-- create a new legal and regulatory environment for the sector that 
establishes a level playing field; 
-- restructure and privatize the National Electric Power Authority 
(NEPA) - now Power Holding Company of Nigeria - PHCN); and 
-- encourage the successors to NEPA to undertake investment programs 
(11 distribution companies, six generation companies, and one 
nationalized transmission company). 
 
¶16.  (SBU) NERC has performed well.  It has developed and 
implemented a multi-year tariff order (MYTO) that calculated for the 
first time the "real" cost of power and applied it to the power 
rates.  The rates establish a wholesale rate for power and wheeling 
Qrates.  The rates establish a wholesale rate for power and wheeling 
charges necessary to attract IPPs.  The IPP industry has challenged 
the wholesale rate and asked to have it reviewed as the price of gas 
for power was taken from the Gas Master Plan.  The Ministry of Power 
and NERC held a meeting of the electricity sector to disseminate the 
Nigerian Electricity Health and Safety Standards Manual and to 
declare that the industry is now accountable to the standards and 
that infractions will be punishable by law.  This manual and an 
accompanying train-the-trainer program were funded by USTDA.  U.S. 
United States Agency for International Development (USAID) provides 
support to NERC by funding selected travel and training costs for a 
mentoring/capacity-building program between NERC and the Michigan 
Public Service Commission (MIPSC).  The program sponsor is the 
National Association of Regulatory Utility Commissioners (NARUC) 
Energy Regulatory Partnership Program. 
 
SANDERS