A former Managing Director of Exxon Mobil for Nigeria, who is now the Vice-President of Exxon Mobil Corporation, John Chaplain, has described Nigeria’s energy sector as corrupt.
Chaplain said that corruption is one of the four challenges the energy sector in Nigeria is facing.
The other challenges Chaplain identified were under-investment in Joint Venture funding, civil unrest and specific pending legislation governing local content and gas fiscal terms.
Chaplain, in one of the cables in which he was quoted by the United States of America Embassy in Nigeria, as released by Wikileaks, said the business environment in Nigeria is plagued by “a corrupt and overly bureaucratic Nigerian business culture.”
Described as the “Nigerian factor,” the former MD of one of the largest oil majors in Nigeria, said that the oil industry is a money spinning one in Nigeria with huge interest from actual operations and taxes.
He said in 2003, Exxon Mobil, as part of its three per cent obligation to the Niger Delta Development Commission (NDDC), paid the commission about $100 million.
But in his opinion and that of the External Director of Exxon Mobil, simply identified as Inoyo in the cable, “it is unclear where that money and the other petroleum related tax revenues eventually end up.”
The cable, in Section 4 said: “External Affairs Director Inoyo said the Nigerian fiscal regime is highly favorable to the government, with petroleum profit tax and royalty rates of 85 percent. He stated that overall, about 95 percent of the energy returns flowed to the GON (Government of Nigeria). Yet, the Delta region remains underdeveloped lacking in almost all basic infrastructure. Both Chaplain and Inoyo said the Niger Delta Development Commission (NDDC) was improving, but it had a long way to go before it would be effective. Inoyo noted that majors give the NDDC three percent of oil revenues; in Exxon Mobil’s case, the contribution amounted to $100 million in 2003. It is unclear where that money and the other petroleum related tax revenues eventually end up.”
In the last five days, Nigeria has been on the edge owing to a face-off between the government and the people over the withdrawal of subsidy on petrol, a development that the government said was as a result of fraudulent activities in the oil sector.
Chaplain’s comment goes a long way in confirming this position.
But rather than tackling the fraud, the government opted to put the burden on Nigerians by removing subsidy on petrol, a subsidy most believe does not exist in the first place but as a result of fraudulent practices in the oil industry.
In a story published on this site on Tuesday, the Chairman of Zenon Petroleum and Gas, Mr. Femi Otedola, exposed the atrocities those operating in the oil industry perpetrate to the detriment of Nigerians.
For instance, Otedola said that rather than buying petroleum products, which ordinarily should have been produced in the country, directly from refineries outside Nigeria, the Nigerian National Petroleum Corporation uses third parties for such transactions.
He also said that instead of about 40 days that vessels spend on sea before delivering products to the depots in Lagos, those in the industry claim to spend 90 days.
And all these costs are ultimately passed on to the end users.
Chaplain was further quoted in Section 8 of the cable: “The MD pointed to the Nigerian business climate, or what he termed the “Nigeria factor” as the fourth major challenge facing operators in country. Operations take about twice as long to mount in Nigeria as in other countries where EM operates, significantly increasing production costs. Due to excessive bureaucracy and corruption, decisions and approval processes in Nigeria may take 18 months instead of 6 to 9 months elsewhere. GON actions, such as import bans, create doubt regarding its commitment to a positive investment climate. These factors, coupled with security concerns and infrastructure challenges, lead to production costs higher in Nigeria than in other countries where EM operates.”
Reproduced below is the full content of the cable as leaked by Wikileaks:
(04LAGOS2447) CONVERSATION WITH EXXON MOBIL MANAGING DIRECTOR
Original Content
This record is a partial extract of the original cable. The full text of the original cable is not available.
070721Z Dec 04
C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002447
SIPDIS
STATE FOR AF/W
STATE FOR EB/ESC/IEC/ENR/BLEVINE
STATE FOR DS/IP/AF
STATE FOR INR/AA
STATE PASS DOE FOR DAS JBRODMAN AND CGAY
STATE PASS TREASURY FOR ASEVERENS AND SRENENDER
STATE PASS DOC PHUPER
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS TO EXIM, OPIC, AND TDA
E.O. 12958: DECL: 12/06/2014
TAGS: EPET EINV NI
SUBJECT: CONVERSATION WITH EXXON MOBIL MANAGING DIRECTOR
Classified By: Consul General Brian L. Browne for Reasons 1.4 (D & E)
Summary
¶1. (C) Exxon Mobil Managing Director for Nigeria John Chaplain said the challenges facing Nigeria’s energy sector are: 1) under-investment in JV funding; 2) civil unrest; 3) specific pending legislation governing local content and gas fiscal terms; and 4) a corrupt and overly bureaucratic Nigerian business culture. End summary.
Chronic Under-investment for 30 Years; Next Year Better?
¶2. (C) Pol/Econ Chief and Energy Off met Managing Director (MD) of ExxonMobil Nigeria, John Chaplain, and External Relations Director Udom Inoyo. Chaplain said one of the largest problems confronting energy firms in Nigeria is the significant under-investment by the GON’s parastatal Nigerian National Petroleum Corporation (NNPC) in petroleum operations. Chaplain estimates the sector has suffered from 30 percent under-investment for 30 years. The MD noted that the energy sector historically received 70 percent of the budget recommended by the National Petroleum Investment Management Services (NAPIMS), NNPC’s investment unit. This underfunding leads to significant delays in projects, he said. However, the MD noted that the $4.3 billion the GON has allocated for the sector for the coming year, if actualized, would represent an upward shift in investment.
¶3. (U) Not everyone agrees JV funding should be a top priority. There are compelling arguments for many sectors that historically have also been underfunded. Senator Udoma noted at a recent industry conference that the $4.3 billion/580 billion naira budget proposed for JV funding was more than the GON’s combined budgetary allocation of 540 billion naira for education, health, power, and infrastructure. He urged that approximately 10 to 11 billion naira be re-allocated for these needs. He argued the JV funding only represents about 60 percent of the GON funding for the energy sector, and that the GON will actually spend 950 to 980 billion naira next year in the sector. While acknowledging that oil and gas are capital-intensive industries, he called for additional jobs in the sector for Nigerians.
¶4. (C) External Affairs Director Inoyo said the Nigerian fiscal regime is highly favorable to the government, with petroleum profit tax and royalty rates of 85 percent. He stated that overall, about 95 percent of the energy returns flowed to the GON. Yet, the Delta region remains underdeveloped lacking in almost all basic infrastructure. Both Chaplain and Inoyo said the Niger Delta Development Commission (NDDC) was improving, but it had a long way to go before it would be effective. Inoyo noted that majors give the NDDC three percent of oil revenues; in Exxon Mobil’s case, the contribution amounted to $100 million in 2003. It is unclear where that money and the other petroleum related tax revenues eventually end up.
Unrest in the Delta Second Major Challenge
¶5. (C) The MD pointed to unrest and instability in the Delta region as the second major challenge. He noted, however, that ExxonMobil is more insulated from these pressures than the other majors because its operations are off-shore; the closest operation to land is 11 miles from shore.
New Legislation is Third Major Challenge
¶6. (C) Chaplain voiced concern with pending legislation, including local content and downstream gas bills, and a proposed model production sharing contract for the gas sector. Chaplain said that in the quest to increase national content, NNPC is asking that large contracts be broken into smaller bits to be handled by Nigerian firms. This reductionist strategy would discourage construction of integrated capabilities among local firms, and lead to the mushrooming of many small firms with only limited capabilities. He also noted that operating with many small contracts increases costs, and makes it complicated for the majors to manage the larger pool of contracts.
¶7. (C) Chaplain raised significant concerns regarding pending legislation on downstream gas and a new model production sharing contract (PSC) for the gas sector. He stated that the proposed gas PSC would totally kill the gas sector? He indicated that proposed policies on joint venture projects and associated gas projects were also troublesome. The proposed fiscal terms were simply taking too much out, leaving nothing for the investor, Chaplain argued. (Comment: The MD and External Relation Director’s comments regarding pending legislation are reflective of general industry opinion. There is concern regarding all pending legislation mentioned, but there is particular concern that the proposed gas fiscal terms will stifle the development of this industry. The major energy firms, including Exxon Mobil, are discussing with the GON how to resolve their differences over the pending legislation and model contracts. End comment.)
The “Nigeria Factor,” Fourth Major Challenge
¶8. (C) The MD pointed to the Nigerian business climate, or what he termed the “Nigeria factor” as the fourth major challenge facing operators in country. Operations take about twice as long to mount in Nigeria as in other countries where EM operates, significantly increasing production costs. Due to excessive bureaucracy and corruption, decisions and approval processes in Nigeria may take 18 months instead of 6 to 9 months elsewhere. GON actions, such as import bans, create doubt regarding its commitment to a positive investment climate. These factors, coupled with security concerns and infrastructure challenges, lead to production costs higher in Nigeria than in other countries where EM operates.
World Oil Prices Could Alter Challenges
¶9. (C) Finally, the MD pointed to world oil prices as the “wild card” which could alter the relative importance of any of the challenges facing the industry. For example, if world oil prices remain relatively high, the GON and NNPC are likely to face fewer problems funding JV projects. However, if a glut in world oil capacity were to drive down prices, the GON would likely face intense pressures in balancing its JV budget with funding for pressing social needs.
Comment
¶10. (C) Chaplain’s cited challenges beg the question: why work in Nigeria? For now, Nigeria’s pros apparently outweight her cons. Chaplain waxed optimistically as he discussed Nigeria’s untapped oil and gas reserves. Nigeria, he said, is like the Gulf of Mexico in the 1970s. The industry is pushing into new frontiers, particularly deepwater exploration. In addition, the high quality of Nigerian sweet crude commands a premium price, which allows the majors to realize significant economic returns, despite high production costs. ExxonMobil paid the NDDC more than $100 million last year only because its revenues totaled more than $3 billion. Nonetheless, the GON will need to make some adjustments to allow the sector to approach its potential. Immediate steps in that regard would be redressing the proposed gas fiscal terms and local content legislation.
¶11. (U) This cable has been cleared by Embassy Abuja.
BROWNE.