39. Memorandum of Conversation1
- Meeting Between Secretary Schlesinger and Nigerian Commissioner for Petroleum, Muhammed Buhari, 3:00 p.m., June 30, 1978
- See Attachment
Commissioner Buhari described Nigeria’s planned LNG project. It will produce 1.6 to 1.7 billion cubic feet (about 0.6 tcf per year) from six trains, all of which the Nigerians hope to dedicate to the US. This 20 year project will require 13 tcf of Nigeria’s 45 tcf of reserves. The Federal Government will own 85 percent of the gas gathering facilities and 50 percent of the transportation facilities; the companies involved in the project—Shell, BP, Phillips, ELF and AGIP—will own the remainder.
Buhari said the LNG project could come on-stream 36 months after all regulatory approvals had been obtained. He expressed concern about regulatory delays.
Secretary Schlesinger said we expect to have an LNG policy statement by September. Once the policy has been established, he hoped evaluation of individual projects would not take more than three or [Page 119] four months (following submission of a complete application). Nigeria could hopefully get an answer in that time frame, though he could not say what the answer would be. The Secretary advised the Nigerians not to equate the timing of reviews on new applications with that required for earlier projects. The applications for the El Paso II and the Tenneco projects were filed before the FPC; its stringent ex parte procedures will hopefully not apply to applications with DOE.
(FYI—Final procedures for processing LNG import applications are still being negotiated between the Economic Regulatory Administration (ERA) and the Federal Energy Regulatory Commission (FERC). At this juncture, it appears that most major policy aspects of specific LNG projects will be reviewed by ERA with FERC conducting a separate review on siting and domestic marketing arrangements. While ERA is generally subject to DOE policy guidance, FERC is not bound by such guidance. End FYI)
Secretary Schlesinger said price will be an extremely important consideration in the final decision on LNG contracts. He noted that the average price of US natural gas is about $1.25 mcf; new gas is now selling for about $2.00 mcf; Canadian gas for $2.16 mcf; and Mexico has offered the US gas at $2.60 mcf. Consequently LNG is a relatively high cost gas, and we are uncertain about future demand for it. We believe the natural gas legislation will stimulate development of new domestic gas.
The Secretary suggested that Nigeria had two key factors in its favor. First, a large portion of LNG cost is the transportation charge and Nigeria is closer to the East coast market than some other potential LNG exporters. Second, the US wanted to diversify sources of supply, and most LNG applications, either approved or pending, involve Algerian LNG (1.6 tcf/yr)—which causes supply security concerns.
In response to Mr. Marinho’s questions on incremental vs. rolled-in pricing and price indexing, the Secretary said that:
—The natural gas legislation requires limited incremental pricing for new natural gas. We do not yet know how much of the burden of incremental pricing would fall on LNG, but would tend to look askance at fully rolled-in pricing for LNG.
—We have already allowed some price indexing but only if the delivered price is acceptable. We would likely not permit landed price of LNG to reflect solely the OPEC price but we might find it acceptable if the landed cost of LNG was tied to the total cost of energy. The underlying objective of our energy policy is to bring the full cost of energy to the consumers.
The Nigerians asked whether plans to use existing landing sites on the East coast and the Gulf coast would adversely affect the decision [Page 120] on the Nigerian LNG proposal. The Secretary assured them that this factor would not be decisive.
Buhari told the Secretary that his discussion the day before at Treasury had been useful. He explained Phillips’ concern that its 7.5 percent equity in the LNG project would not permit it to qualify for tax credits under IRS guidelines. Buhari thought an acceptable solution would be to let Phillips have 10 percent of voting control but receive only 7½ percent of the profits. He also noted that Phillips is discussing buying additional equity from other companies in the project.2
Competitiveness of US Equipment Manufacturers
Buhari and Marinho said that the cost of the LNG project to the FMG would be about $4 billion, 60 percent for equipment and 40 percent for construction. While preferring US equipment and contractors, they said European and Japanese offers were more competitive. For instance, they said US Steel refused to bid on the pipelines for the project after learning of Japanese competition. One US firm—Williams International—got a small portion of the $4 billion contract and had exceeded Nigerian expectations. Since this firm had used sub-contractors, the Nigerians wondered why it had not been willing to take on a large share of the total project. Marinho asked what might be done to make US companies more competitive. He speculated that they entered a larger risk element in their calculation than was justified. He also raised the question of EXIM financing.
Secretary Schlesinger said the US Government does not dictate commercial policy to US companies and noted that the US market itself is invaded by imported steel. He said unfortunately US firms tend not to be export-oriented, but they must reassess earlier attitudes in view of the US’s $30 billion trade deficit in 1977. The Secretary said we would look into how companies calculate risks in dealing with Nigeria.
Regarding EXIM, the Secretary said the Bank’s objective was to encourage US exports; its loans were normally tied to the purchase of US equipment. He noted that the Nigerians might want to approach the World Bank, whose loans were not tied to purchases of equipment from any particular country.
Commissioner Buhari explained the importance of US companies to the Nigerian energy situation. The companies produced 700,000 b/d of oil. With a total investment of $1.3 billion, they had invested $200 million in Nigerian oil production in 1977. He expressed concern [Page 121] that the companies would reduce their investments if they were subject to the IRS ruling that taxes based on posted prices cannot be counted as tax credits. Noting that Treasury would have to decide that matter, Secretary Schlesinger speculated that the companies would probably figure out some way to meet the IRS concerns and still protect their interests in Nigeria.
Buhari said the Nigerians needed help to accelerate the development of new reserves. The cost of equipment, particularly for deep offshore drilling, is escalating. Marinho interjected that US and other industrialized countries’ firms appear to charge a surtax on equipment sold to OPEC countries. He said Nigeria had documented that equipment sold to Ghana was priced lower than the same equipment sold to Nigeria.
Secretary Schlesinger emphasized that there was no government policy to charge OPEC countries more than other countries. He said we would investigate these charges if the Nigerians would furnish us the data. It was agreed that the Nigerian Ambassador would provide the information to Assistant Secretary Bergold.
US Energy Legislation
In response to Commissioner Buhari’s query, Secretary Schlesinger said new US energy legislation would not affect Nigerian exports disproportionately. The effect of the new legislation on imports will be slow. He expected US demand for imports to grow after the Alaskan oil had been fully absorbed into the economy.
Marinho suggested that non-commercial factors were responsible for the current slack in Nigerian oil sales. He claimed that even though Nigeria had taken the necessary action to make its prices competitive on a net-back basis with comparable crudes from other countries, its sales were not recovering as rapidly as they should. Nigerian crude exports to the US had declined from 58% to 50% of total exports. He said that Iran seemed to be benefiting most from the Saudi decision to reduce exports of light crudes.
Secretary Schlesinger stated that the US Government did not try to influence companies as to their sources of supply. We have no allocation system. However, he indicated that we would investigate if non-commercial factors were causing aberrations in the market.
US Strategic Reserves
In response to Marinho’s query, the Secretary made the following points:
—We have ambitious plans for the creation of a 1 billion barrel strategic storage reserve, which we will reach by 1983–84.[Page 122]
—We had hoped to have 250 million barrels a day in storage by the end of the year. But the figure will be more like 125 million barrels. The larger figure will not be achieved until June 1979.
—We are experiencing some difficulties (e.g., in citing permits from states, disposing of obstacles from salt caverns), but we think all can be overcome.
—By the end of October, we will have pipelines to the storage facilities, permitting accelerated filling. Currently oil is moved to storage by barges.
Future Direct Contacts
The Nigerians expressed a desire for direct line of contact with DOE. Secretary Schlesinger assigned that responsibility to Assistant Secretary Bergold. The Embassy in Washington will be the Nigerian point of contact.
List of Participants
- Muhammed Buhari, Commissioner for Petroleum
- Ambassador Olujimi Jolaoso
- F.R.A. Marinho, Managing Director, Nigerian National Petroleum Company (NNPC)
- S.M. Akpe, Head of Gas and Petrochemical Division of NNPC
- D.A. Okanla, Manager of the Petroleum Inspectorate of NNPC
- E.O. Idown, Manager of the Legal Division of NNPC
- J.J. Akpieyi, Head of the Product Marketing Division of NNPC
- Secretary James Schlesinger
- Harry E. Bergold, Jr., Assistant Secretary for International Affairs
- Marion Creekmore, Director, Special Regions Policy
- Peter Chaveas, Desk Officer, Dept. of State