Identifier
Created
Classification
Origin
04ABUJA1070
2004-06-16 13:32:00
CONFIDENTIAL
Embassy Abuja
Cable title:  

STRIKE WAS MINOR SETBACK FOR GASOLINE

Tags:  PGOV EPET ECON EFIN 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 ABUJA 001070 

SIPDIS

E.O. 12958: DECL: 05/09/2014
TAGS: PGOV EPET ECON EFIN NI
SUBJECT: STRIKE WAS MINOR SETBACK FOR GASOLINE
DEREGULATION, LITTLE OTHER IMPACT ON ECONOMIC REFORM

REF: ABUJA 1054 AND PREVIOUS

CLASSIFIED BY AMBASSADOR JOHN CAMPBELL FOR REASONS 1.5 (b&d).

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 001070

SIPDIS

E.O. 12958: DECL: 05/09/2014
TAGS: PGOV EPET ECON EFIN NI
SUBJECT: STRIKE WAS MINOR SETBACK FOR GASOLINE
DEREGULATION, LITTLE OTHER IMPACT ON ECONOMIC REFORM

REF: ABUJA 1054 AND PREVIOUS

CLASSIFIED BY AMBASSADOR JOHN CAMPBELL FOR REASONS 1.5 (b&d).


1. (C) Summary: The strike and rollback of prices are a
temporary setback for gasoline deregulation, similar to the
other rollbacks on price and the fuel tax over the past year.
The GON likely will regroup and raise the basic pump price
again in a few months, as it has done over the past year from
N34 per liter last June to the N50-52 range before the latest
strike and the N40-42 after it. The GON appears intent on
continuing in this herky-jerky fashion toward ending the
gasoline subsidy, and if the subsidy diminishes over time it
will have only a marginal effect on the rest of the economic
reform policy. End Summary.

--------------
NNPC'S GASOLINE SUBSIDY
--------------


2. (C) The Nigerian National Petroleum Corporation (NNPC) has
been complaining loudly about the deleterious effect of fuel
subsidization. NNPC Group General Manager Barkindo called
for a (Naira) N70/liter price, telling Econoff June 14 that
the price rollback was unsustainable. Barkindo said GON has
wanted to make NNPC "fend for itself," operating in a
competitive manner, generating its own revenue, and paying
taxes as well as shareholder dividends to the GON. Two
Central Bank (CBN) Deputy Governors echoed that sentiment to
Econoff, noting that fuel deregulation is one plank of the
NEEDS development program, and that deregulation was also
necessary to free resources for building infrastructure and
widening the productive base of the economy.


3. (C) Their case appears a bit overstated, given the
mechanics of how NNPC subsidizes gasoline imports. The GON
allocates 445,000 bpd to NNPC for domestic use, only a paper
transaction of the NNPC's own oil. NNPC Senior Assistant
Akani told Abuja Econ Specialist that 200,000 bpd (around 45
percent) of that domestic allocation goes to Nigerian
refineries and becomes gasoline sold at less than the cost.
The other 245,000 bpd is sold in the international market,
and the revenue from the sales is used to import refined

products for local consumption. The domestic allocation
crude is accounted by the GON as being bought from, and then
sold to, NNPC at a price a reliable source recently told
Lagos Econoff was USD 28/bbl. Whatever of the domestic
allocation crude NNPC then sells on the international market
at USD 38/bbl, for example, yields some USD 4.45 million for
buying gasoline.


4. (SBU) NNPC tells us domestic gasoline consumption is about
30 million liters/d. The 45 percent produced by GON
refineries means 16.5 million liters/d must be imported.
NNPC claims the landed cost per liter is about N50 (approx.
USD 0.37),but it sells to marketers at N38.5, a loss of
about N 11.50/liter. Multiplying that loss of N11.50 by
imports of 16.5 million liters means the subsidy is some N190
million per day (about USD 1.4 million). Subtracting this
from the revenue NNPC makes off selling that 55 percent of
its domestic allocation abroad (USD 4.45 million),and not
taking into account Akani's assertion that domestically
refined fuel is sold at less than cost, we arrive at around
USD 3 million per day in profits for NNPC.


5. (C) If NNPC is not losing money, the GON is losing that
USD 4.45 million as an opportunity cost in the sense that it
could otherwise go into the budget as revenue. Certainly the
GON is not telling anyone how the NNPC subsidy, necessary for
importing gasoline at a higher price than NNPC sells it to
retailers, works. (Comment: If all of Nigeria's refineries
were fully operational, all of the NNPC domestic crude
allocation would be refined domestically and NNPC's
opportunity for arbitrage by selling most of the domestic
crude allocation abroad would no longer exist. This
arbitrage may be one reason why there has been no serious
effort to put Nigeria's refineries in working order. End
Comment.)

--------------
ECONOMICALLY SUSTAINABLE?
--------------


6. (SBU) Whether or not the gasoline subsidy is financially
sustainable depends on several factors, including the time at
which the subsidies are paid, the international price for
gasoline, the quantity of gasoline imported (an inverse
function of domestic refinery output),and the volume and
price of the crude oil on international markets. The subsidy
may well be sustainable, even when retailers are selling
gasoline as low as the N38 base pump price, since
international gasoline prices are likely to decline in late
summer as vacations end and Iraqi exports and refining come
on line. Of course, reduced crude oil prices would reduce
the amount available to pay the subsidy on gasoline, unless
the arbitrary GON-internal pricing of the crude was lowered
too.

--------------
SUSTAINABLE AS POLICY?
--------------


7. (C) Most Nigerians are amazingly and willfully ignorant
about the economics of gasoline deregulation. Gasoline
should be cheap because Nigeria is an oil producer, in their
view, and cheap prices has meant in practice keeping the
price wherever it was last time they went to the pump.
Nigerians in general are also skeptical of gasoline price
reforms pursued by the GON, particularly since past raises
were supposed to be used for infrastructure investments that
have never materialized. Most Nigerians believe fuel price
deregulation favors a small group of people, namely who
possess easy access to foreign exchange and illicit funds.
In the obvious sense that deregulation has not been finished,
that part of the GON's economic reform policy has not been
accomplished and faces a popular challenge.


8. (C) It would be a mistake, in our view, however, to
interpret the continuation of fuel subsidies as proof that
the GON is not committed to economic reform. This would be
taking a small part of the picture and extrapolating it to
the whole. Nigeria's reform blueprint, the National Economic
Empowerment and Development Strategy (NEEDS),encompasses
many reform measures, and the removal of the subsidy on
gasoline is but one of them. Backpedaling on gasoline price
levels has been common in Nigeria's recent history, and those
prices are likely to go up stealthily again once the strike
is a few months past.


9. (C) Although it is certainly not intended, continuing the
subsidies on fuel actually has some short-term marginal
benefits for the economy which redound to the benefit of
reform efforts. Nigeria has no viable rail system or viable
electrical grid. Everything in Nigeria moves by motor
vehicle and much electricity is generated by private
diesel-fueled generators, so lower fuel prices act as a
buffer on already problematic inflation. Agricultural
development benefits from lower transport costs. As the NNPC
subsidy occurs outside the budget, before NNPC revenues are
the GON's budget revenues, there is no direct addition to the
budget deficit. Obviously, however, the main short-term
negative effect is that the NNPC profits could be channeled
into GON budget revenue if they were not used to subsidize
gasoline imports.


10. (C) There is another issue on transparency. The NNPC
subsidy for gasoline is totally opaque to the general public,
both amounts and process, although under EITI and the new G8
Compact the GON is committed to publishing NNPC revenues and
costs. Many Nigerians assume the GON is subsidizing gasoline
imports somehow, and should be subsidizing them, with the
"excess crude revenues" that are the difference between the
GON's budget target price of N25/bbl and the rather higher
prices it is actually receiving. All of that is currently
required by law to go into an escrow account the Finance
Ministry must report to the National Assembly on a quarterly
basis, and thus could not go toward the present gasoline
subsidy which is outside the budget. National Assembly
leaders have recently proposed, however, setting up a
supplementary budget to fund gasoline subsidies.

--------------
POLITICALLY SUSTAINABLE?
--------------


11. (C) The long-term political effects from this course of
slow and gradual deregulation by stealth may be a more
serious threat to the government than to the particular
policy. The complete lack of transparency in the subsidy
system only adds to Nigerians' angst, as expressed in the
continuing cycle of raising price, crises from opposition to
raising prices, the GON appearing to retreat from raising
prices, and then raising prices a few months later to begin
the cycle again. Political alienation is very high, across
Nigeria, and this "one step back, two steps forward" strategy
adds considerably to that alienation even if is ultimately
successful in ending the gasoline subsidy.


12. (C) This cycle also plays havoc with the proper phasing
and sequencing of other economic reforms. And it has
virtually precluded foreign investment to bring Nigeria's
refineries back to being capable of producing Nigeria's
gasoline needs, absent the GON divesting itself of all public
equity in the refineries by auctioning them off to the
highest bidder without insisting on a floor price. As CBN
Deputy Governor Lemo noted, "We need to enlighten the public
to understand that subsidizing fuel is not in their long-term
interests,"
CAMPBELL