BAD WITH THE GOOD - FUEL PRICES RISE AS OIL

UNCLAS SECTION 01 OF 03 LAGOS 001188

SIPDIS

STATE PASS TO EXIM, OPIC AND TDA
LONDON AND PARIS PASS TO AFRICA WATCHERS
KABUL PASS TO SROSS
DIA/J2 PASS TO GHAYES

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: EPET EINV PGOV ECON NI
SUBJECT: BAD WITH THE GOOD - FUEL PRICES RISE AS OIL
PRICES SOAR

REF: A: 2004 LAGOS 30

B: 2003 Lagos 2422


1. (SBU) SUMMARY. As Nigerians wonder if a
nationwide strike will be called yet again over fuel
prices, private fuel marketers have decided to scale
back their import level of the last 60 days as they
launch a public awareness campaign of their own to
explain the rise in gasoline prices. Official consumer
fuel prices have risen nearly 20 percent in the last
month with the rising tide of world petroleum prices,
and the government will be hard pressed to meet demands
of labor unions threatening to strike unless prices are
reversed to December 2003 levels. While the GON has
not been collecting the controversial fuel tax that
sparked strike threats in January and led to a court
order maintaining a fragile peace between the federal
government and the unions, NNPC is still in the fuel
business and keeping prices from rising even faster by
marketing at least half of Nigeria's fuel consumption
at subsidized rates. END SUMMARY.


2. (U) As world petroleum prices reached record highs
in recent weeks, the price of fuel in Nigeria has also
been rising. Pump prices for gasoline in Lagos on June
7 were generally 49.90 naira per liter, 20 percent
higher than a month ago, and news reports indicate
prices are even higher in distant regions of the
country. The Nigeria Labour Congress (NLC) has
threatened a nationwide strike on Wednesday, June 9, in
protest of the high prices, and is demanding that the
federal government reduce fuel prices to the December
2003 level of 36 naira per liter. The NLC is backing
away from a claim that the GON violated a court order
of January 2004 that prohibited it from imposing a fuel
tax of 1.5 naira per liter. Industry sources tell us
the fuel tax has not been collected by the government
nor charged by marketers since the court order was
issued, however.

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Root Cause: Supply and Demand
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3. (U) Marketers insist that the rise in fuel prices in
Nigeria is directly linked to rising world petroleum
costs and other market forces. Nigeria's refineries
are operating well below capacity, which forces Nigeria
to continue to import most of the fuel it consumes
including gasoline (petrol),diesel, kerosene and jet
fuel. The government, for the most part, seems to
accept the marketers' explanation. While some
officials at the Department of Petroleum Resources
(DPR) and the Petroleum Products Pricing Regulatory
Authority (PPPRA) have publicly stated displeasure over
"unauthorized" fuel price increases, it seems
regulators are allowing fuel prices to rise without
taking action against retailers.


4. (U) Marketers have also felt a cash flow pinch in
recent weeks, after the Nigerian National Petroleum
Corporation (NNPC) shortened its credit window on fuel
purchases from 30 to 15 days for major marketers. Some
marketers responded by revising their per-liter
consumer price in order to more quickly cover the cost
of NNPC-sourced fuel and to cover the high cost of
borrowing money when required for international or NNPC
fuel purchases.

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Just When It Thought It Was Out
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5. (SBU) O.T. "Jimmy" Adelekan, Executive Director of
Texaco Nigeria, told Econoff on June 7 that during much
of March, April and May, private marketers imported
roughly half of the fuel consumed in Nigeria, leaving
NNPC responsible for the other half through refinery
production and imports. Adelekan said that during
April and through May 20, marketers imported 100
percent of the fuel offloaded at the Apapa fuel jetty
in Lagos, which accounts for half of the nation's total
fuel consumption. Adelekan said that the Port Harcourt
refinery may be producing up to 40 percent of its
capacity, but NNPC must still import a large volume of
fuel to meet market demand. He said NNPC imports fuel
through the recently upgraded Atlas Cove transfer
facility in Lagos, as well as through other ports such
as Port Harcourt.


6. (SBU) Adelekan said the landed price of petrol in
Nigeria is about 50 naira per liter. He said NNPC is
selling fuel to retailers for 38.50 naira per liter,
indicating that NNPC continues to subsidize fuel
prices. Retailers, including the major marketers such
as Texaco and Mobil, mix their own fuel stocks with
purchases from NNPC, which lowers the average cost to
around 44.5 naira per liter. The retailers then add in
distribution and profit margins, reflected in an
average retail price of 49.5 naira per liter in Lagos.
(NOTE: On June 7 most stations in Lagos sold gasoline
at 49.9, while Mobil stations uniformly sold at 49.8.
Diesel was selling at 50 naira per liter at all
stations observed. END NOTE.) Transport costs to move
fuel to other parts of Nigeria result in regional price
differences throughout the country.


7. (SBU) Texaco's Adelekan noted that the rising flap
over fuel prices has spooked the major marketers, who
import fuel jointly through an import tendering
committee (ref A). According to Adelekan, the
marketers informed NNPC that they are reducing their
imports for June, and will continue to do so if they
are given cause to question their ability to recoup
import costs, such as government attempts to impose
price caps below profitability.

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Supply Steady So Far
--------------


8. (U) We have not seen queues stretching for miles
outside of fuel stations as is the usual occurrence in
advance of strike-talk and amidst fuel price increases.
The reason may be that Nigerians have become accustomed
to NLC strike threats not materializing. Also, prices
have been creeping upward based on market pressures,
rather than radically rising overnight as in the past
in reaction to government edict. Recent heavy rains
have also restricted movement around cities such as
Lagos, and perhaps have dampened motivation to wait in
line. Moreover, supplies have been steady, giving no
indication of shortage, which usually sparks panic
buying, hoarding, and roadside black market sales.


9. (U) NOTE: Tankers for NNPC can be seen docking at
Atlas Cove's new jetty at the mouth of the Lagos harbor
channel, but the facility appears capable of handling
only one ship at a time. Atlas Cove also operates a
single point mooring (SPM) buoy approximately six miles
offshore Lagos. Even with the new state-of-the-art
jetty, offloading at Atlas Cove can be hampered by
facility problems elsewhere. Atlas Cove is an
offloading point only, and problems with pipelines or
distribution equipment at its nearest depot some 60
kilometers away sometimes slow the offloading process.
END NOTE.


10. (SBU) COMMENT: Because of marketers' skittishness
regarding market prices and potential domestic price
caps, the outcome of strike negotiations this week will
have a direct effect on major marketers' participation
in fuel importation in the short-term, and possibly on
fuel supplies if NNPC cannot make up the difference.
NNPC is clearly still in the business of fuel importing
and marketing, and still in the business of subsidizing
fuel prices in Nigeria. Officials at NNPC, PPPRA and
DPR seem of two minds over just how far the GON will go
to deregulate the downstream sector. For example,
NNPC's Group Managing Director Funshi Kupolokun
recently reiterated his support for total
liberalization of the sector, but he did so while
warning marketers that hoarding and price gouging will
be met by harsh government penalty, and while
commissioning a new NNPC "Mega Station" in Enugu, one
of several new government-owned retail fuel outlets
planned around the country. Given world petroleum
prices and market pressures in Nigeria, the GON will be
hard-pressed to meet NLC demands of a fuel price
rollback without deepening the government subsidy, and
potentially eating up any windfall from high crude oil
prices; the GON has not budgeted for NNPC fuel
subsidies. In the meantime, fuel marketers have
launched a public awareness campaign with
advertisements in major papers explaining what they say
is the real reason for price increases.


11. (SBU) But as usual (ref B),most eyes are on petrol
prices, possibly leaving room for a compromise allowing
for diesel, kerosene, and jet fuel prices to continue
rising. Such a move might allow the NLC and GON to
save face while avoiding another round of strike
brinkmanship, but it would worsen the hardship of
Nigerians who would experience higher long-haul
transport charges and thus higher commodity prices,
higher airline ticket prices, and the higher cost of
using generators passed on to final consumers. Since
retail petrol sales are the key to the industry, any
overt or de facto price cap now would put up yet
another obstacle in the way toward fuel deregulation in
Nigeria. END COMMENT.

HINSON-JONES