Cablegate: Local Content Bill Could Be Signed Into Law By

VZCZCXRO5417
PP RUEHMA RUEHPA
DE RUEHUJA #1997/01 3041115
ZNR UUUUU ZZH
P 311115Z OCT 09
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 7377
INFO RUEHOS/AMCONSUL LAGOS 2205
RUEHJO/AMCONSUL JOHANNESBURG 0106
RUEHZK/ECOWAS COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 03 ABUJA 001997

SENSITIVE
SIPDIS

DEPT PASS AID AFR/SD FOR CURTIS, ATWOOD AND SCHLAGENHAUF
DEPT PASS TO USTDA-PAUL MARIN, EXIM-JRICHTER
DEPT PASS TO USTR-AGAMA
JOHANNESBURG FOR 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: EPET EINV ENRG EAGR EAID ELTN NI

SUBJECT: LOCAL CONTENT BILL COULD BE SIGNED INTO LAW BY
MID-NOVEMBER

ABUJA 00001997 001.2 OF 003

1. (SBU) SUMMARY. The Senate and the House have passed competing
versions of the Nigerian Content Development Bill, with the main
difference being a 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. Nevertheless, the texts are
expected to be reconciled and a bill signed into law year's end.
END SUMMARY.

2. (SBU) The Nigerian Content Development Bill (NCDB) 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.

3. (U) The Nigerian Content Development Bill would require a
minimum Nigerian content for front-end engineering (FEED) and
detailed engineering and other engineering services (onshore
facilities), offshore facilities, shallow water (90 percent); FEED
and detailed engineering on Liquefied Natural Gas (LNG) facilities
(50 percent); FEED and detailed engineering on gas gathering (90
percent); FEED and detailed engineering on deep offshore
facilities-hull and topside modules (80 percent); and floating
concrete structures (80 percent). For under well and drilling
facilities, the bill would require the following: reservoir services
(75 percent), well completion services (80 percent), logging while
drilling services (45 percent), well watch services (70 percent),
fluid/bottom hole sampling services (80 percent) and OCT services
(cleaning, hardbanding, recutting, re-threading, and storage)(95
percent).

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PREVIOUS EFFORTS TO INCREASE LOCAL CONTENT
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4. (SBU) GON support for local content can be traced back to the
Petroleum Act of 1969, which is the principal statute regulating the
oil and gas sector. Under the act, holders of oil mining leases are
required to ensure that 75 percent of the total number of persons
employed in managerial, professional and supervisory grades, or any
corresponding grades designated in a manner approved by the Minister
of Petroleum Resources, are Nigerian within 10 years of the grant of
the lease. Further, no less than 60 percent of employees in any one
of these grades must be Nigerian, and all skilled, semi-skilled and
unskilled workers must be Nigerian. Other steps in this direction
include the Petroleum Regulations of 1969; incorporated language in
joint ventures and production sharing contracts to encourage
Nigerian content; establishment of the Petroleum Training Institute
in 1972 and the Petroleum Technology Fund in 1973; issuance of
Guidelines with Respect to Release of Nigerian Workers from
employment in the Petroleum Industry and Utilization Quota in 1997;
Qemployment in the Petroleum Industry and Utilization Quota in 1997;
and development of the Marginal Field Program in 2001.

---------------------------------
SIGNIFICANT ISSUES TO BE RESOLVED
---------------------------------

5. (SBU) There are 13 significant items for reconciliation between
the Senate and House versions, according to the Oil Producers Trade
Section (OPTS) of the Lagos Chamber of Commerce and Industry. The
most important are that all operators shall maintain bank accounts
in Nigeria of a minimum of 10 percent of total revenue and pay
0.5-1.0 percent of project costs as contributions to the Nigerian
Content Development Fund. A summary of the significant items
follows with the Senate language presented first and the House
language second.

--Nigerian independent operators shall be given first consideration.
Senate: or preferential consideration. House: in the award of oil
blocks and oil field licenses, oil lifting licenses, and in all
projects for which contract is to be awarded in Nigeria.

ABUJA 00001997 002.2 OF 003

--Penalty. Senate: an operator, who carries out any project
contrary to the provisions of this Act, commits an offence and is
liable upon conviction to a fine of 5 percent of the project sum or
cancellation of the project where applicable. House: removed where
there is an applicable clause on project cancellation.

--Nigerian Content Development Fund. Senate: 1 percent of project
costs shall be contributed to the fund. House: 0.5 percent of
project costs shall be contributed to the fund. (NOTE: This is
another example of taxation that the international companies are
citing as a problem with the PIB. END NOTE.)

--Definition of a Nigerian Company. Senate: a company fully owned
by Nigerians. House: a company owned 51 percent by Nigerians.

--Nigerian Content Development Bill (NCDB) Minimum Content Schedule
A. Senate: NCDB shall set the minimum content for the project or
project item pending a revision of Schedule A by the National
Assembly. House: NCDB shall set the minimum content for the project
or project item pending a revision of Schedule A by the Minister.

--Consideration of Nigerian Content in Commercial Bid Evaluation.
House: Included additional clauses stipulating that when bids are
within 1 percent of each other, the company with the highest
Nigerian Content value should be considered.

--Maintenance of bank account in Nigeria. Senate: All operators
shall maintain bank account(s) in Nigeria in which they shall retain
a minimum of 10 percent of their total revenue accruing from their
Nigerian operations. House: Delete this clause. (NOTE: money in
U.S. or other selected countries provides easier access to loans,
which is not available from Nigerian banks. END NOTE.)

--Project value limit. Senate: Projects greater that $1 million
should be reviewed and approved by NCDB. House: Projects greater
than naira 154 million today (naira equivalent of $1 million).

--Establishment of a project office. Senate: Office to be in Local
Government Area. House: Office to be in Catchment Area.

--Allowance for expatriates in management position.
Senate: Operators may retain 5 percent of management positions to
take care of investor interest. House: Operators may retain 5
percent of management positions, as may be approved by NCDB, to take
care of investor interest.

--Regulations for further growth of Nigerian Content. Senate:
Minister shall make regulations setting out targets to ensure full
utilization of Nigerian companies for oil and gas services. House:
Minister shall make regulations setting out targets to ensure full
utilization of Nigerian companies for oil and gas services.
International / multinational companies working through their
Nigerian subsidiaries must insure that 50 percent of the equipment
to be deployed is owned by Nigerian partners.

--Insurance and reinsurance business. Senate: All insurable risks
are placed through an insurance broker or brokerage firm or an
insurer registered in Nigeria under the provisions of the Insurance
Act of 2003. House: All insurable risks are placed through an
QAct of 2003. House: All insurable risks are placed through an
insurance company or an insurance broker registered in Nigeria under
provision of the Insurance Act of 2003 as amended: each operator
submits its insurance program every 6 months to NCDB including a
comprehensive list of all insurance companies and brokers utilized
in the last 6 months.

--Prohibition of welded materials. House: Removed text which grants
the Nigerian Institute of Welders (NIW) control of all welding,
non-destructive testing (NDT), mechanical tests, etc. activities in
Nigeria.

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COMMENT
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ABUJA 00001997 003.2 OF 003

6. (SBU) Stakeholders in the oil and gas industry have doubts about
the nation's ability to attain 70 percent 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. Minister of Petroleum Resources
Rilwanu Lukman says he agrees that Nigeria needs a sustainable plan
to build oil and gas sector capacity and has asked the USG for
assistance.

SANDERS

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