Identifier
Created
Classification
Origin
03LAGOS2387
2003-11-20 14:54:00
CONFIDENTIAL
Consulate Lagos
Cable title:  

FOUR WORN AND UNDER-UTILIZED REFINERIES FOR SALE

Tags:  EPET EINV ELAB PHUM PGOV PINR SOCI 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 03 LAGOS 002387 

SIPDIS


PASS GURNEY, LONDON AND NEARY, PARIS


E.O. 12958: DECL: 11/20/2013
TAGS: EPET EINV ELAB PHUM PGOV PINR SOCI NI
SUBJECT: FOUR WORN AND UNDER-UTILIZED REFINERIES FOR SALE

Classified By: J GREGOIRE FOR REASONS 1.5 (B) AND (D).


C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002387

SIPDIS


PASS GURNEY, LONDON AND NEARY, PARIS


E.O. 12958: DECL: 11/20/2013
TAGS: EPET EINV ELAB PHUM PGOV PINR SOCI NI
SUBJECT: FOUR WORN AND UNDER-UTILIZED REFINERIES FOR SALE

Classified By: J GREGOIRE FOR REASONS 1.5 (B) AND (D).



1. (C) SUMMARY. Nigeria's Bureau of Public Enterprises (BPE)
has set November 14 as the deadline for investors to submit
expressions of interest to be core investors (51 percent) in
the country's four refineries. Major U.S. oil companies tell
us they are not interested. Labor is taking a cautionary
position. END SUMMARY


--------------
For Sale
--------------



2. (U) Signaling a continuation of President Obasanjo's
promises to reform the Nigerian economy, particularly the
petroleum sector, on October 28 the Bureau of Public
Enterprises (BPE) issued an announcement that the federal
government intends to divest 51 percent of its interest in
the nation's four refineries. The GON later announced that
prospctive "Core Investors" were to submit expressions f
interest by November 14. A similar advertisemnt was placed
in the Economist magazine.


3.(C) At a monthly lunch meeting of major U.S. based
companies doing business in Nigeria on November 6 the
managing directors of ExxonMobil (upstream) Mobil Producing
Nigeria (downstream),Texaco Nieria (downstream) and
ConocoPhillips (upstream) xpressed their surprise at the
announcement, and their reservations about the proposed
refineries sale. While reticent about sharing data, the
downstream executives said their companies would not buy
stakes in the refineries, although John Pototsky of Mobil
said his company would consider a management contract.



4. (SBU) Nigeria's refineries -- two at Port Harcourt and one
at Warri and Kaduna respectively -- are notorious for
breakdowns, turnaround and maintenance contracts that never
end, and a lack of crude feedstock due to vandalism and
disrepair of feeder pipelines. Technically capable of
processing 445,000 barrels of crude per day, the refineries
rarely work above 40 percent capacity, and frequently Nigeria

imports almost all of the fuel it consumes. The management
of the Kaduna refinery told visiting Embassy Abuja PolCouns
and ECONOFF in September that nearly half of the Kaduna
refinery was designed to use high-sulfur crude from Venezuela
rather than Nigeria's Bonny Light, so as to be able to
extract feed stock for fertilizer and bitumen for road repair
and other civil engineering purposes. NNPC has also imported
high-sulfur Saudi crude to use that refining capacity at
Kaduna, but until March of this year, Kaduna was operating at
less than 50 percent capacity, about 750,000 liters a day,
largely because no high-sulfur crude had been imported since
the middle 1990s.


--------------
Any Takers?
--------------



5. (C) The American oil and gas company executives said they
knew of no major oil company interested in buying a majority
share of the existing refineries. In a meeting with
Consulate staff in October, executives at ChevronTexaco
(upstream) and Texaco Nigeria (downstream) also doubted if
any credible international company would invest in the
refineries, and added that of thefour, only the newest
refinery at Port Harcourt had any potential for commercial
viability. A Chevron executive said GON officials admitted
to him that the older plant in Port Harcourt and the refinery
in Warri may need to close, and that the GON would be
hard-pressed politically to make the same statement about the
Kaduna plant, although closing it may be the best course of
action. At the November 6 lunch, Pototsky of Mobil averred
that his company is not interested in the refineries not only
because of their disrepair, but also because of environmental
concerns. He said the impact they have on the environment
could make investment in them a "dead-end issue for any U.S.
company." Jules Harvey of Texaco tacitly agreed with that
assessment. The two downstream captains of industry
suggested Chinese or European bidders may be interested, but
may not have the capital available to bring the refineries up
to capacity.



6. (SBU) Chief Uzodimma of Niger-Global told POLOFF and
Econoff that his company has submitted an expression of
interest in the refineries along with a U.S. partner.
However, Uzodimma expressed concern that the process will
become politicized, the result being refineries being sold to
GON cronies with no real capacity to rebuild the ailing
refining industry.



7. (C) Austin Oniwon, a high-ranking NNPC official, told an
Embassy Abuja Econoff in Abuja last week that former NNPC
Group Managing Director Jackson Gaius-Obaseki and former
Energy Advisor Rilwanu Lukman had advised President Obasanjo
in mid-October that no company would buy the refineries in
their present condition. They then told him it was imprudent
and foolish to attempt to sell the refineries before the
end of the year. According to Oniwon, Lukman explained to
Obasanjo that no reputable company would buy the Kaduna or
Warri refineries knowing that even under GON-ownership, the
refineries, could not operate owing to sabotage and constant
pipeline breaks. Oniwon added that Vice President Atiku
stated to Obasanjo during the same meeting that Lukman and
Gaius-Obaseki were wrong and that the refineries could easily
be sold by the end of the year. Obasanjo, according to
Oniwon, then said he too thought the refineries could be
easily sold. Oniwon went on that he and Gaius-Obaseki
subsequently concluded that the Vice President and President
did not want the refineries to work in the short-term because
they wanted to pay off their cronies and supporters who are
making millions of dollars by importing fuel into the
country.


--------------
Labor has a Refined Approach
--------------



8. (C) Recent newspaper accounts have alleged that the
Petroleum & Natural Gas Senior Staff Association of Nigeria
(PENGASSAN),a white-collar union, will strike if Nigeria's
refineries are privatized. Ogbeifun Brown, National
President of PENGASSAN, told POLOFF on November 7 that the
newspapers are "getting us wrong." Brown stated that
PENGASSAN supports the privatization of refineries if sold as
the GON advertises, where NNPC will maintain 49% ownership
and a private corporation have 51% ownership. Brown stated
that PENGASSAN would strike if the transaction were to be
done without transparency and sold wholly to a private
individual with no capital or experience in the oil industry.
"We have an open mind; it is the Government's decision and we
can only suggest," said Brown. He also asserted that there
are many multinationals that can properly finance the project
and have the expertise "to do it right."



9. (C) POLOFF quizzed Brown on the state of the nation's
refineries. Brown said that he has heard reports that the
Warri refinery is having "turn-around maintenance" and should
be operational by the first week of December. He explained
that the Kaduna refinery is not operational only because it
has no crude to refine. He bemoaned the state of the
pipelines due to neglect and vandalism and identified their
dilapidated condition as the source of Kaduna's problems.
When asked if privatization would mean downsizing of the
labor force, Brown said this would be a necessary step. His
concern is that the GON will not properly provide for
displaced workers. PENGASSAN will thus demand that workers be
provided with severance pay and guaranteed protection of
their workers' benefits and pensions, "as it is done in
civilized society." Should these considerations be met,
Brown believes downsizing will not be a contentious issue ,
and pointed to the successful mergers of AGIP/Unipetrol and
Chevron/Texaco as models.



10. (C) Brown expressed sober enthusiasm for Kupolokun as the
new head of NNPC and stressed that he is "not a new hand,
but a group executive and engineer in the system who rose
through the ranks." Brown stated that he is ready to work
with Kupolokun. "He should be able to turn us around," he
said, and foresees problems only if Kupolokun "formulates
policy independently and forces it down our throats. But if
he his ready to consult, he can bring us along." In
principle, PENGASSAN supports Kupolokun's policy to break up
the NNPC's Pipelines and Products Marketing Company and sell
parts of it individually. However, Brown reiterated that "we
will not take dictation for one person" and stressed the need
for consultation. Brown demurred when asked if he believes
Kupolokun will change NNPC's reputation of extreme
corruption, saying that PENGASSAN has no position on the
subject since it has no proof and will not make judgments
based on supposition and rumors.



11. (C) COMMENT. The downstream petroleum sector in Nigeria
is undergoing a dramatic transformation with deregulation of
retail marketing, even if privatization of the refineries
exists only in policy and dialogue. Assessing the viability
of the companies that BPE announces as potential core
investors will be the first test of credibility of this
exercise. The next will be how BPE and the Presidency handle
the process. (Note. Both the President's Assistant on
Privatization Matters and the new chief of NNPC have pledged
stakeholder participation in the privatization process and a
greater GON effort at public awareness.) Finding capable
willing investors remains the GON's greatest challenge to
refinery privatization. END COMMENT.
HINSON-JONES