Cablegate: Nigeria Enters Deepwater Era As Bonga Goes Onstream

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 LAGOS 001917

SIPDIS

SENSITIVE

DOE FOR DAS JBRODMAN AND CGAYE
TREASURY FOR ASEVERENS AND SRENANDER
USDOC FOR 3317/ITA/OA/KBURRESS

STATE PASS USAID FOR GWEYNAND AND SLAWAETZ
STATE PASS EX-IM FOR JRICHTER AND KVRANICH
STATE PASS OPIC FOR ZHAN AND JEDWARDS
STATE PASS TDA FOR NCABOT AND BTERNET

E.O. 12958: N/A
TAGS: EPET EINV NI ENERG
SUBJECT: NIGERIA ENTERS DEEPWATER ERA AS BONGA GOES ONSTREAM

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Summary
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1. (U) Nigeria entered the era of major league deepwater
oil and gas production on November 28, as Shell Nigeria
Exploration and Production Company (SNEPCO), announced its
Bonga oil field began production. Bonga will initially
produce 225,000 barrels per day (bpd) of crude oil, for a
total of 1 billion barrels of oil over 10 years. It will
raise Nigeria's daily oil output 10 percent from its current
2.4 million bpd. Bonga gas will be exported as liquefied
natural gas (LNG) via the Nigerian LNG (NLNG) facility.
However, reaching this point has not been problem free. The
project has been plagued with cost overruns and scheduling
difficulties that made project completion fall two years
behind schedule. The National Assembly has launched an
inquiry into the cost overruns.

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Bonga Begins Production, Ushers in Deepwater in Nigeria
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2. (U) On November 28, SNEPCO (Shell Nigeria's deepwater
exploration and production company), announced Bonga oil
field began production. SNEPCO management expects Bonga, the
first major Nigerian deepwater field to go into production,
to commence exports in January 2006. Bonga will initially
produce 225,000bpd of crude oil, peaking at 350,000bpd, and
producing about 1 billion barrels of oil over 10 years.
Bonga will also produce 150 million standard cubic feet
(mscf) of associated gas, and 280,000 bpd of fluids daily.
Associated gas will be piped to Nigeria Liquefied Natural
Gas (NLNG) for export to U.S. and European markets via a 268-
kilometer Offshore Gas Gathering System. Bonga is located
in oil mining lease block (OML) 118, about 150 kilometers
from shore southwest of Warri, Delta State, at a depth of
approximately 1000 meters.

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Bonga Key to GON Goals of Increased Oil Production
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3. (U) Cementing Shell's status as Nigeria's largest oil
producer, Bonga will increase Shell's production in Nigeria
by over 22% from its current 1 million-plus bpd output. At
full production, Bonga will raise Nigeria's daily oil output
10 percent from its current 2.4 million bpd (barrels per
day). The GON has targeted oil production of 4 million bpd
of oil by 2010.

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Bonga Pioneers Super-FPSO Oil Production in Nigeria
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4. (U) The Bonga field produces via the Bonga Floating,
Storage, Production and Offloading (FPSO) vessel, which taps
into a network of 30 seabed wells. FPSOs are enormous
tankers converted for deepwater oil and gas production, used
in place of traditional fixed production platforms. With
Bonga, Shell pioneers the use of "super-FPSOs" in Nigeria.
Shell claims the Bonga FPSO, at 300,000 metric tons, is the
world's largest such vessel.

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Bonga Field a Joint Industry Effort
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5. (U) The GON awarded the Bonga project to Shell during
Nigeria's first deepwater bid round in 1993. It is operated
by SNEPCO, on behalf of the national oil company, the
Nigeria National Petroleum Corporation (NNPC). Under the
Production Sharing Contract (PSC) model, SNEPCO has a 55
percent stake in the venture, while with Esso (20 percent),
Nigerian Agip Exploration (12.5 percent) and Elf Petroleum
Nigeria (12.5 percent) have minority stakes under a Joint
Operating Agreement.

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Bonga Plagued with Cost Overruns, Scheduling Difficulties;
National Assembly Launches Inquiry
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6. (SBU) Bonga has been plagued with cost overruns, and
the project was completed two years behind schedule.
Bonga's original budget was USD 2.7 billion, but SNEPCO
officials say the final price tag is USD3.6 billion.
However, other sources report cost overruns nearly double
the original budget. Last week, the National Assembly
launched an inquiry into the project. Assembly members are
concerned the project's cost overruns will significantly
delay GON's receipt of proceeds from the project; under the
PSC model, Shell fully recoups its development costs before
it has to pay taxes or split profits with the GON. Shell
counters that the construction cost overruns will be
balanced out by current high oil prices. Shell forecasts
that oil recovery will be faster than anticipated, and thus
the GON will not suffer economically because it will begin
to realize profits within the expected time frame.

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Comment
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7. (SBU) Although a success, Bonga is alloyed with some
difficulties. Industry watches tell us the cost overruns
and late delivery have raised questions about deepwater
projects in Nigeria. The GON and NNPC appear convinced that
full cost-recovery provisions in PSC contracts provide
industry with no incentive to control costs for deepwater
projects. They argue industry "gold plates" its deepwater
projects, since development costs are written off of the
company's tax bill once oil production begins. Industry has
a very different view. They argue the GON's local content
provisions forced Shell to bring the Bonga FPSO into Nigeria
for work more efficiently done elsewhere. With little
infrastructure in place to do this work, costs ballooned
while and schedules collapsed. While the project is finally
finished and publicly everyone is smiling, the arduous
process of bringing Bonga on-line has left the GON and
industry alike with mud on their faces and with suspicions
about the credibility of the other. Indications are that
Bonga will be a production success. However, both sides
will have to try harder to understand the position of the
other if Nigeria hopes to approach its potential in
deepwater production.

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