Identifier
Created
Classification
Origin
03LAGOS2078
2003-10-08 15:41:00
CONFIDENTIAL
Consulate Lagos
Cable title:  

CHEVRON'S VIEW ON THE DYNAMICS BEHIND THE FUEL

Tags:  EPET ELAB ECON NI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 002078 

SIPDIS


PARIS PASS OECD, IEA


E.O. 12958: DECL: 10/06/2013
TAGS: EPET ELAB ECON NI
SUBJECT: CHEVRON'S VIEW ON THE DYNAMICS BEHIND THE FUEL
PRICE SHOWDOWN

Classified By: ECON:FHDAY for reasons 1.5 (b) and (d)


C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 002078

SIPDIS


PARIS PASS OECD, IEA


E.O. 12958: DECL: 10/06/2013
TAGS: EPET ELAB ECON NI
SUBJECT: CHEVRON'S VIEW ON THE DYNAMICS BEHIND THE FUEL
PRICE SHOWDOWN

Classified By: ECON:FHDAY for reasons 1.5 (b) and (d)



1. (SBU) Summary: According to Chevron management some two
weeks ago President Obasanjo ordered the Nigerian National
Petroleum Corporation (NNPC) to cancel all outstanding orders
for refined petroleum products, thus committing the country
to an abrupt course of petroleum market reform and
liberalization. Union and NGO reaction was to call for a
general strike. Oil companies met among themselves October 6
and will meet with their unions and the NNPC October 7 to
plot a course and to decide whether jointly to order a tanker
load of refined product to put fuel in the Nigerian pipeline.
The downstream traders must assess the likelihood of being
allowed to sell the fuel here at a market price. They have
assurances from the GON that they can, but the issue is
highly political, and they will be prepared to divert the
tanker until the last moment. The outcome of the decision is
not yet known. Chevron believes the petroleum unions may
have lost control of their own policy in the current crisis,
and are being swept along towards a strike that is not in
their best interests. End Summary


What's broken, and why
--------------

2. (C) CG Lagos and Consulate officers met with senior
management at Chevron/Texaco October 6 for an extensive
discussion of upstream and downstream petroleum issues
(upstream, septel). Under the current system, we were told,
the NNPC imports all refined product and apportions it in a
strikingly non-transparent manner among the 1000 or so
independent distributors and the 6 major oil companies in the
downstream market. The supply is sharply limited by several
logistical bottlenecks at Lagos port, so distribution is
strictly a zero-sum game -- a situation guaranteed to give
rise to the extensive bribery said to plague the NNPC. Many
of these independents don't actually sell in Nigeria at all;
a sign and a canopy over some pumps are all that is required
to get a distribution license from the NNPC. These
distributors, license in hand, fill their tankers at the NNPC
and deliver the gas across the border. Independents who do

sell in Nigeria buy from the NNPC at the subsidized price and
sell not at the N34 they are supposed to charge but at the
highest price their locality can support.



3. (SBU) Having done very nicely on the initial sale the
independents improve matters by paying taxes on their volume
as if they had sold the petrol for N34; an underpayment that
Chevron believes costs the GON $1 billion a year. The status
quo is a high performance cash cow for the independent
operators and the NNPC bureaucracy, two powerful opponents of
reform. The irony, of course, is that these people get rich
by operating a defacto free market system, while consumers
are gouged by shortages and exhorbitant prices.



4. (C) The government is also getting fleeced. The NNPC
pays $2 billion a year to buy refined product abroad at
market prices and pass it on to distributors at a subsidized
price. Added to the $1 billion in under-collected taxes,
that is almost seven percent of Nigeria's GDP, but there is
more: crude that could have been exported at $29 a barrel is
provided to country's refineries at $22 a barrel. In
Chevron's view, President Obasanjo is personally persuaded
that the system must be fundamentally altered, but does not
trust anyone below the top leadership of the NNPC. During
the summer he personally "took over the (petroleum) file" and
began working with a small alternative body, the Petroleum
Products Pricing Regulatory Agency, to help him transform the
downstream petroleum economy. 10 to 14 days ago, Chevron
says, Obasanjo personally directed the NNPC to cancel all its
contracts for supply of refined product (the NNPC had already
contracted deliveries for the fourth quarter of '03 and the
first quarter of next year). He then informed the oil
companies that they would be able to import what they wanted
and sell it at market price, with the request that they not
exceed N40 per liter in the first month. This draconian
step, just before his October 1 announcement of petroleum
market liberalization, seems intended to demonstrate that the
bridges back to the old system have been burned; if so, it is
a bold gesture.


Fixing it, and cutting the unions' power
--------------

5. (SBU) At present Nigeria has seven to ten days of
refined product on hand. Nothing is in the pipeline. The
pricing baton has been handed abruptly to the oil companies,
and they are deliberating what to do with it. They met with
their unions, amongst themselves, and with the petroleum
unions and the NNPC; the outcome is not yet known. They are
consulting among themselves to decide whether to pool
resources and order a tanker load of fuel as a test case.
The ship would lift in South Africa, and during its three to
four days enroute the companies will monitor the fluid and
intensely political situation here to gauge whether it will
be possible to sell the cargo at market rates. If it appears
questionable they will divert the ship to a different market
in the region.



6. (C) Comment: This is real brinksmanship on Obasanjo's
part. As the ship nears Lagos the country will be down to a
few days reserve. If the unions prevent it from discharging,
he will take the country's empty fuel tanks and beat the
unions over the head with them. Obasanjo has already handed
the unions the opportunity to disrupt the All Africa Games;
an object of great national pride. Now the unions must
grapple with the awkward dilemma of what to do about the
temptation; despite a rather puny call for Nigerians to stay
away, so far the unions (and the population) have avoided
using the Games to show their displeasure. Chevron thinks
Obasanjo's subtext in setting this crisis in motion at this
time is to lure the unions into a series of untenable
positions with the intent of curbing their power. Obasanjo
is not presenting an easy target and is making it harder for
the opposition to agree on what the target (the government or
the companies) actually is. End Comment



7. (C) Chevron thinks (and we agree) there isn't much
solidarity between the two petroleum unions (NUPENG and
PENGASSAN) and the rest of the opposition. Chevron has been
talking to its unions and is sure they understand that
deregulation is good for them in the long run. It means a
larger, more efficient downstream sector and more gas going
into gas tanks at a better price. The unions know (they have
told us as much) that the price of a liter of gas isn't the
real issue here; it's the overall structure of the sector --
how much is imported, how much is refined here, and where and
how it's refined -- that matters. The unions, according to
Chevron, have 25,000 well paid members sitting (mostly) idle
in Nigeria's four refineries (which, again according to
Chevron, really need 6000 workers),and they know well that
those refineries cannot compete in price with imports sold at
market prices.


Making a deal
--------------



8. (C) Chevron believes the GON thinks its delapidated
refineries at Kaduna and Part Harcourt II are salvageable.
Our late-night conversations October 6 with the presidents of
the petroleum unions suggest different mixes of salvagable
capacity, but the common element is there: a triage
assessment, followed by a commitment to make competitive (at
a market price in a deregulated sector) some subset of
Nigeria's current capacity. This is, however, not what the
other unions and NGOs are looking for; they (and the public)
are angry about a lot of things and don't care much about the
subtleties that matter to the petroleum unions. There will
be intense pressure on those unions to reject a separate
peace, and they may not be able to resist it; Chevron
certainly believes they may be swept away in the current of
popular anger over higher fuel prices.
HINSON-JONES