NIGERIA'S FUEL CRUNCH WORSENS AMIDST STRIKE

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000155

SIPDIS

E.O. 12958: DECL: 01/23/2014
TAGS: EPET EINV PGOV PINR ENRG NI
SUBJECT: NIGERIA'S FUEL CRUNCH WORSENS AMIDST STRIKE
CONFUSION

REF: A. 2004 LAGOS 146

B. 2004 LAGOS 127

C. 2004 ABUJA 99

D. 2004 LAGOS 30

E. 2003 LAGOS 499

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


1. (C) SUMMARY: While Nigerians try to determine if a
national strike is on or off and whether or not there is a
tax on gasoline (refs A, B),the country's fuel supply
problems are not only clear, they are, in fact, worsening.
Private marketers have scaled-back fuel imports in the face
of business uncertainty, and a shortage of storage capacity
has left much of the East of Nigeria without fuel.
Meanwhile, international traders have reneged on GON orders,
diverting cargo to more lucrative sales elsewhere. Even
while the GON insists deregulation is in effect, it continues
to take actions that undermine the viability of a
market-driven downstream sector, and may re-introduce a
subsidized market scheme. Nigerians can expect fuel queues
again by the end of January. END SUMMARY.

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TAX? WHAT TAX?
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2. (SBU) In late-December, President Obasanjo announced
during the presentation of his budget request that the GON
would assess a 1.50 naira per liter fuel levy. According to
the President, the income from this levy would be used to
finance desperately needed road repairs, and accordingly, the
system of poorly (and corruptly) managed tollbooths along
Nigerian interstate highways would be dismantled. As of
January 1, fuel retailers charged the extra naira-fifty at
the pump, and tollbooths were closed.


3. (C) Labor, other civil society groups, and some
legislators immediately assailed the measure and questioned
the legality of what they dubbed a new "fuel tax." (The
National Assembly's House of Representatives Finance
Committee Chairman, Alhaji Farouk Lawan, told EconCounselor
January 21 that the President's 2004 budget submission
specified that the Executive expected to raise 45 billion
naira by the new "fuel tax" in 2004.) In reality, the
assessment was not a tax on fuel consumption, but rather a
levy on fuel imports. According to a Mobil executive,
beginning on January 1, 1.5 naira was assessed on each liter
of fuel marketers offloaded at the port of Lagos, and that
amount was then passed on to consumers through the pump
price. (Nigeria continues to import most of the fuel it
uses.) GON representatives, including Funso Kupolokun, the
Group Managing Director of the Nigerian National Petroleum
Corporation (NNPC),publicly defended the propriety of the
measure as an existing levy that merely lapsed in
enforcement, and not a new tax requiring legislative approval.


4. (SBU) With a Nigeria Labor Congress (NLC) strike threat
looming larger, the GON began backing away from its
commitment to the levy by the second week of January. The
President went so far as to state in a letter to the National
Assembly that the implementation of the "tax" was unintended;
he merely meant to highlight a policy option. On January 20
a federal court "advised" that the fuel tax be rescinded (ref
C),and the GON soon insisted it no longer assessed the levy.
As proof, the GON said the pump prices at the two fuel
stations operated by NNPC, one in Abuja and one in Lagos, had
reverted to pre-levy prices. In fact, by Wednesday, January
21, the pump price at NNPC's station in Lagos had decreased
by 1.50 naira.


5. (C) Jules Harvey, Texaco International's Vice President
for West Africa, told Econoff on January 20 that the
Petroleum Products Pricing Regulatory Agency (PPPRA) sent a
notice to marketers in late December explaining the levy and
how it would be assessed by the Department of Petroleum
Resources (DPR). Harvey said that his company would consider
the levy in effect until informed otherwise by PPPRA. A
union official told Labatt that GON representatives
specifically told union representatives a letter signed by
President Obasanjo rescinding the levy was sent to marketers
in recent days. As of January 21, private marketers' pump
prices in Lagos were one naira-fifty or more higher than the
NNPC price, suggesting such letters had not been received, or
that marketers were still trying to recoup the cost of the
levy already paid on existing fuel stock.

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SUPPLY TIGHT, AND ONLY GETTING WORSE
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6. (C) We previously reported that Nigeria's fuel supply was
tight due to infrastructure problems, poor business
practices, and government regulation (ref D). According to
Texaco's Harvey, private fuel marketers are importing only
about 20 percent of the fuel now on the market, with NNPC
importing the remaining 80 percent. (Harvey said that private
marketers have been importing an average of 10 cargoes per
month since October.) Harvey previously estimated that this
combined volume represents only about 55 percent of Nigeria's
current market demand. Harvey says his Texaco stations in
the East and Northeast of Nigeria are almost always closed
for lack of supply. Texaco and other private marketers have
little or no storage capacity in those regions, and the
volume of imports is insufficient to maintain a supply chain
via tanker trucks from Lagos (the poor state of roads in the
South and East also contribute to transport difficulties).
Harvey said he has discussed this matter with GON officials,
who have suggested that private marketers may be able to
lease storage tanks from NNPC at some point in the future.

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INTERNATIONAL PRESSURES
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7. (C) Harvey noted that NNPC will likely run short of fuel
by the end of January. He said international traders of fuel
have reneged on contracts with NNPC to bring fuel to Nigeria.
Harvey said traders who agreed to NNPC purchase offers in
2003 are now facing losses as high as one million dollars per
cargo on those contracts due to higher-than-expected crude
prices and high winter demand for petroleum products in the
U.S. The traders are diverting cargoes slated for Nigeria to
more lucrative ports. Such international market forces,
combined with ongoing refinery problems, leave Nigeria with
an almost identical fuel shortage situation it faced during
the first two months of 2003, when fuel queues returned to
the country after a three year hiatus (ref E).


8. (C) Harvey said NNPC's Kupolokun has decried the practice
of diverting cargoes, and threatened to blacklist traders who
breach contracts with NNPC, insisting the GON will never do
business with such companies in the future. When asked if
the international traders simply don't care if they are
blacklisted by Nigeria or face penalties for breach of
contract, Harvey said it is not that they don't care, but
when assessing their options, they choose not to lose a
known, large quantity of money in the short-term. Harvey
noted that such a choice is made easier given the GON's
history of blacklisting companies only to reinstate their
privileges after intercessions from a Nigerian state governor
or other interested party.

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THE STRUGGLE CONTINUES
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9. (C) Harvey also told Econoff that Kuplokun and Obasanjo
himself have met with marketers in recent weeks to continue
ironing out downstream deregulation; Kupolokun actually came
to Harvey's office in Lagos in mid-January. Harvey says that
Kupolokun has tried to win concessions from the private
marketers over pricing, and even tried to persuade them to
absorb the fuel levy without passing the cost on to consumers
at the pump. Nonetheless, Harvey said both men generally
agree with the marketers' assertion that the companies
should not be expected to operate in Nigeria at a loss.
Harvey said Obasanjo, while appearing sympathetic to the
business realities of the marketers, also expressed his
frustration over the pressures he faces to scale-back
deregulation. Harvey said Kupolokun is clearly still in line
with Obasanjo's thinking on this issue, but is forced by
political realities to try to negotiate concessions regarding
price caps and profit margins. Harvey described Kupolokun as
"very good and straight forward" as NNPC's chief executive,
still capable of pressing forward with deregulation.


10. (C) Harvey noted one option floated by the GON that
smacks of pre-October government encumbrance of the
downstream sector. He said some GON officials have suggested
that to maintain the semblance of deregulation during this
period of tumultuous world prices and domestic unions
challenges, private marketers would be encouraged to continue
importing fuel by having NNPC purchase their cargoes at
market rates. Under this plan, NNPC would then sell the fuel
back to the marketers at a reduced price, which would be
passed on to consumers. In effect, the GON would return to
subsidized fuel sales, artificial pricing, and a closely
regulated downstream sector. Harvey did not say how
seriously this option is being considered by either the GON,
or the industry.
HINSON-JONES