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2003-11-26 10:22:00
Consulate Lagos
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						C O N F I D E N T I A L SECTION 01 OF 04 LAGOS 002422 


E.O. 12958: DECL: 11/25/2013

REF: A. LAGOS 2330

B. LAGOS 2078

C. ABUJA 1700

D. ABUJA 1737

E. LAGOS 2090

F. LAGOS 2100

G. LAGOS 2322

H. LAGOS 2287

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

1. (C) SUMMARY. At the monthly Businessman's Lunch held at
the American Guest Quarters pub in Lagos on November 6,
executives of two major fuel marketing companies confirmed
that the sector is essentially deregulated, and that there is
no significant threat of mass action by organized labor (ref
A). They noted that the industry must have regular access to
dollars to pay for their fuel imports, and suggested that
changes are needed to the Nigerian Dutch Auction System (DAS)
for currency exchange in order to handle the volume of
exchange the marketers require monthly. END SUMMARY.




2. (SBU) Until October 2003, Nigeria's downstream petroleum
sector had been closely regulated and controlled by the GON
(ref B). Retail sellers faced both price ceilings on all
refined products as well as profit margin caps and "bridging"
fees collected ostensibly to help move fuel to the north from
southern refineries and from the port of Lagos. Nigeria's
four refineries have never worked at full capacity, and their
production has never met domestic demand. Thus, even as
Nigeria became the world's seventh largest exporter of crude
oil, it found itself importing much, if not most, of its
refined fuel needs through private marketers and the Nigerian
National Petroleum Corporation (NNPC).

3. (SBU) As world market prices for fuels increased in recent
years, private marketers eventually stopped importing fuel
because they could not sell it profitably given GON price
ceilings. By 2002, NNPC was essentially the sole importer of
fuels to Nigeria. (Note: Depending on the state of the
country's refineries, imports generally account for 60 to 100
percent of domestic fuel supply. NNPC benefited from GON
subsidies as it imported fuel at market prices but sold it to
private marketers wholesale and to consumers through several
retail outlets at the artificially low price caps. When its
refineries worked, the Nigerian National Petroleum
Corporation (NNPC) was also allowed to buy oil from Nigeria's
crude production at prices far below market. This
two-pronged NNPC subsidy was said to cost the GON some two
billion dollars annually. In late June 2003, the GON raised
the price ceiling (effectively raising the price) of gasoline
to 40 naira per liter from 26. A nationwide protest strike
that resulted in scattered violence and several deaths
effectively shut down the country for eight days. A
compromise was reached setting the price for gasoline at 34
naira per liter.




4. (SBU) This system changed dramatically when President
Obasanjo deregulated the downstream sector by pronouncement
on October 1, 2003 (ref C). Although private marketers
believed Obasanjo had promised them that all price caps would
be lifted and prices would be market driven from that day
forward, the NNPC maintained its selling price at the
previously imposed ceiling. Consumers became confused
overnight, as private fuel stations began charging 40 naira
per liter or more for gasoline, while NNPC stations kept
their price at 34. Panic buying soon escalated tension and
black market prices, and fuel queues began snaking from
stations once again. When confronted by angry accusations
from an array of fronts that he had unilaterally raised fuel
prices for the second time in six months, Obasanjo replied
that any increase in fuel prices was not his doing. He
insisted that he had merely deregulated the downstream
sector; retailers were now setting prices. This left private
marketers politically exposed, and gave the Nigerian Labor
Congress (NLC) a vehicle from which to rally. The NLC
denounced both Obasanjo for failing to consult civil society
before making such a significant change to government policy
and operations, and the fuel marketers for taking advantage
of the common man for the sake of profits.

5. (SBU) The country was headed for another nationwide work
stoppage when an agreement to avert the strike was reached
late on October 8 (refs D, E). But the agreement unraveled
almost as soon as it was reported (ref F). The unions
insisted that marketers agreed to keep prices at 34 naira per
liter for at least one month while a Stakeholders Committee
was formed and would meet to discuss and manage deregulation.
Marketers maintain they did not agree to continue selling at
the previous price cap. They say they tacitly agreed that
prices would likely remain at 34 naira until the first
shipment of fuel imported by marketers hit the Lagos port.
(Marketers maintain that the lowest viable price for
gasoline is currently 40 naira per liter.) The marketers
claim union officials misjudged how long it would take the
first industry shipment of gasoline to arrive; while unions
believed it would be at least four weeks, Unipetrol had
already placed an order for two shipments relying on the
President's pledge to deregulate, and those shipments were
underway as the strike deal was reached. Subsequently, just
days after the supposed "agreement," prices again jumped
overnight. NLC leaders claimed they had been duped, and some
union elements began targeting private dealers for pickets,
protests and even violence. In the confusion some dealers
closed, inciting passions even further as consumers had even
less fuel available to them and opportunists and
black-marketers took advantage of the supply crunch.

6. (SBU) Most marketers rolled back their prices quietly to
avoid confrontation, but as the stalemate dragged on and the
federal government appeared intransigent, the NLC's pressure
and sway on the issue began to weaken and fade. By the end
of October, most union leaders admitted they retained too
little momentum to call the strike back on. The Stakeholders
Committee met but accomplished little, and Obasanjo took
other shots at the NLC via legislation to curtail it's power
(ref G). Meanwhile, marketers continued to import fuel, and
NNPC itself shifted to market prices. By the third week of
October, fuel queues in Lagos all but vanished, and the
average cost of gasoline now hovers around 39 to 42 naira per
liter. As had been the case even when the GON imposed a
price cap, fuel prices in regions outside of urban centers
vary, as supply to bush regions and to the north is spotty.
(Note: domestic disturbances also affect fuel availability.
For example, Econoff noted on November 13 and 14 that long
and testy fuel queues stretched throughout the southern city
of Port Harcourt. Earlier in the week, demonstrations and
violent clashes sparked by the murder of a traditional ruling
chief blocked the road between the city and the nearest fuel
depot, causing a supply crunch by Thursday, and a run on
re-opened stations on Friday.)




7. (C) At the Businessman's Lunch on November 6, John
Pototsky, Managing Director of Mobil Nigeria, and Jules
Harvey, Vice President for West Africa of Texaco
International, said the marketers have been told by GON
officials at the NNPC, the Department of Petroleum Resources
(DPR) and the Petroleum Products Pricing Regulatory Authority
(PPPRA) that while the downstream sector is operating in a
deregulated environment, the agencies do not want to see
widely varying prices around the country and between
retailers. Pototsky said the industry has been warned,
"don't cause chaos with prices." He said there seems to be a
regional split forming within the ranks of decision makers
and regulators, with northern government officials winning
dominating policy decisions these days. Some have called for
price fixing and the continuation of the Petroleum
Equilisation Fund (PEF), which is essentially a tax on sales
to pay marketers for costs associated with transporting fuel
from the Lagos port to the north (known as "bridging").

8. (C) Pototsky also noted that the GON seems focused only on
gasoline prices; officials ignore what the retailers charge
for diesel or kerosene, which are the fuels primarily used by
industry and businesses. The same can be said for organized
labor. From the outset of the deregulation effort, all
attention has been on the price of gasoline. Even the
agreement reached on October 8 accepted that kerosene and
diesel prices would immediately rise to market rates. (Note:
Because of Nigeria's inadequate power grid, almost all
businesses use generators to supply backup or primary power,
adding a significant cost to doing business here. Nigeria's
stagnant textile industry has linked deregulation to an
effect on production by publicly claiming some 50,000 jobs
may be lost due to the increased cost of running textile
mills after a rise in NNPC's "black oil" price and an alleged
diversion of industry fuel allotments.)

9. (U) Meanwhile, the DPR has issued new guidelines and
directives for marketers on issues including import
licensing, quality control and safe transportation of




10. (C) Mobil's Pototsky and Texaco's Harvey indicated that
the industry is fully engaged in fuel importation. Pototsky
was quoted in the press as saying his company anticipated
importing 13.4 million liters of gasoline in three shipments
by mid-November. (Note: Pototsky and Harvey noted that most
gasoline imported to Nigeria is unleaded -- now the most
common gasoline available on world markets -- even though
vehicles here are generally equipped for leaded fuel. There
has been discussion in recent months among African leaders
that countries should convert to unleaded gasoline in the
near future, but Pototsky said retailers here cannot market
their gasoline as "unleaded" because it often becomes blended
with NNPC fuel of varying grades when stored in tanks.)

11. (C) In a separate conversation with Econoff, an
ExxonMobil official stated that the downstream industry is
now trying to import as much fuel as possible, in effect
"flooding the market." He said the marketers are doing so
primarily to ensure a steady supply of fuel nationwide. He
said that in this time of tense transition to a market-based
fuel sector, they do not want to give the unions or any other
detractor the opportunity to claim that in spite of
deregulation -- or perhaps because of it -- not only has the
price of gasoline risen, but the country still faces
shortages. Thus, according to the ExxonMobil official, the
goal of the marketers for the near term is to flood the
market with fuel, and get it distributed nationwide. Along
with trying to ensure stable supply and prices, the industry
has turned to public outreach to win consumers to the side of
deregulation; new radio jingles paid for by the marketers
extol the benefits of deregulation.




12. (C) The marketer's new problem, according to Pototsky, is
getting enough foreign currency to pay for the fuel
shipments. Businesses in Nigeria can acquire dollars twice
weekly through Nigeria's Dutch Auction System (DAS). Each
Monday and Wednesday, the Central Bank of Nigeria (CBN)
announces the amount of dollars it will be auctioning.
Companies seeking dollars then post a bid via an authorized
bank. They specify what amount they seek, at what rate they
will exchange naira for that amount, and for what purpose
they seek the dollars. An amount of naira equivalent to
their bid must be available in their bank at the time the bid
is made. On Tuesdays and Thursdays the CBN announces the
winning bids, and immediately deducts the equivalent naira
from the current accounts of the banks representing the
winning bidders. The CBN then transfers dollars into the
correspondent bank accounts of the winning bidders. Any
dollars not used must be returned to the CBN within five days
to be exchanged for naira at the rate the dollars were

13. (C) According to Pototsky, when the President deregulated
the downstream sector in a relatively sudden manner last
month, his administration did not anticipate the need of the
marketers to obtain dollars to pay for fuel imports.
Pototsky said that when NNPC pays for an imported shipment,
it uses dollars it obtained from crude oil sales kept in
accounts outside of the DAS. He told Econoff that marketers
now need approximately $120 - $150 million per month to pay
for their fuel shipments, and are obliged to obtain dollars
only through the DAS. He said they found themselves outbid
at several DAS auctions in October, and realized further that
their bids could equal up to 35 percent of the dollars sold
at any given auction. On November 12 Pototsky told Econoff
that while the CBN sold enough dollars to Mobil in the
November 5th auction to cover its outstanding invoices, he is
not certain how Unipetrol fared. (Unipetrol was the first
marketer to import fuel after deregulation took effect.)

14. (U) (Note: The CBN uses the DAS to control the exchange
rate, so the amount of dollars it supplies at each auction
varies, and the supply relative to the demand can vary
widely. For example, the CBN managed to keep the DAS
marginal exchange rate at 135.55 naira to the dollar on both
November 3 and November 5. However, the amount of dollars
sold ($103 million and 331 million respectively) accounted
for 82 percent of the demand on November 5 (bids totaled $403
million), and only 30 percent on November 3 (bids totaled
$351 million). On November 10, bidders requested $217
million, and the CBN sold $183 million, or roughly 85 percent
of demand, maintaining the exchange rate at 135.52 naira to
the dollar.)

15. (C) Pototsky told Econoff that marketers want the GON to
create a separate allocation of dollars available for fuel
purchases, or allow for advance funding of fuel purchases.
Pototsky also said that he and other marketers are worried
that under the current system, they will either not obtain
dollars in time to pay their fuel invoices, or the large
volume of their bids at any given auction will "decimate" the
DAS. The marketers' bids for dollars might create spikes in
demand and, if successful, edge out other industries for
access to the limited amount of foreign currency allowed by
the CBN at each auction. The new managing director of
Citibank Nigeria told Econoff that another option the
marketers may pursue is to press the GON to allow the
companies to buy dollars as an industry block through a
"syndicated import letter of credit," rather than
individually through the DAS as they do now. That option may
become more important in the future if companies choose to
order shipments jointly; currently, each company orders its
own fuel shipments and sells some of it (in naira) to the
others when a shipment arrives in port. (As Mobil's Pototsky
told Econoff, "We're tough competitors when it comes to
selling product and services throughout Nigeria, but we
shouldn't compete bitterly just to get the product here.
That could really blow out the market.")




16. (C) At the Businessman's Luncheon, Pototsky and Harvey
praised the new group managing director of NNPC, Funso
Kupolokun, for his decision to attend a marketers' meeting
the day after his appointment was announced (ref H) to
reassure the industry of the President's resolve to
deregulate and reform the downstream sector. Both men agreed
that Kupolokun has been accessible in the past and
understands the industry well. However, Bob Smith, MD of
ConocoPhillips (upstream), cautioned that Kupolokun may be
too "hands on" and not delegate enough decision-making,
making the organization more bureaucratic and lethargic.
Most oilmen at the table agreed that there is a risk of
stagnation within NNPC for the short-term; managers and
supervisors may be afraid to act on requests and applications
until they get a clear impression of the new GMD's
intentions, goals, likes and dislikes. For his part,
Kupolokun has publicly stated that he plans a comprehensive
review of the organization, and will eliminate unnecessary
positions and ineffective workers.

17. (C) COMMENT: While it seems deregulation of the
downstream sector has taken root, critical issues remain
outstanding that might cause significant strain on the
system. We will watch for continued complaints from unions
and northerners regarding prices, and for attempts by
government officials from the north to institutionalize
temporary or holdover pricing schemes used to bridge the
supply chain as in the past. NNPC's Kupolokun will continue
to press for reform, but a backlash is possible from those
who benefited financially from the inefficiencies of the old
system, and from managers within NNPC ranks he may try to
sack along the way. The link between currency exchange rates
and the availability of dollars for the marketers to pay for
their imports may have an impact on marketers' ordering
decisions, and possibly on the valuation of the naira. And
implementation of the GON's announced intention to finally
repair and privatize the country's refineries could affect
both the volume and price of products and the relative
strength of the players involved in the entire downstream
sector. END COMMENT.