NIGERIA'S LINGERING FUEL SCARCITY

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000030

SIPDIS

E.O. 12958: DECL: 01/07/2014
TAGS: EPET EINV PGOV ENRG NI
SUBJECT: NIGERIA'S LINGERING FUEL SCARCITY

REF: A. 2003 ABUJA 1700


B. 2003 LAGOS 2078

C. 2003 LAGOS 2422

D. 2003 LAGOS 2574

E. 2003 LAGOS 499

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


1. (C) SUMMARY: Nigeria continues to face periodic fuel
shortages as the GON, fuel marketers and the public adjust to
a quasi-deregulated environment. Inadequate port facilities
in Lagos create bottlenecks for delivery of imported fuel,
and changing government policies create business uncertainty
for sellers of fuel. Short- and long-term relief may come as
private marketers look to other Nigerian ports to ease
shipping congestion and negotiate with the NNPC to assume
management of key offloading facilities. END SUMMARY.


2. (SBU) During the 2003 holiday season, Nigerian motorists
again found themselves waiting in lines for gasoline and
paying more for public transport as fuel stations ran short
of supply. Ongoing supply chain problems continue to plague
the country's fuel markets, as do the GON's re-regulation
policies for the downstream petroleum sector. An executive
with a major fuel retailer in Nigeria told Econoff that since
deregulation took effect October 1 (ref A),Nigeria's
domestic and imported fuel supply has been meeting only about
55 percent of market demand, so retailers routinely close
their stations on an ad-hoc basis. An air freight company
executive also reported that shortages of jet fuel at the
Lagos international airport has forced airlines to adjust
routes and fueling patterns.

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SHIP TO SHORE: BOTTLENECKS AT THE LAGOS PORT
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3. (C) In conversations with Econoff, Jules Harvey, Texaco
International's Vice President for West Africa, listed port
congestion as a major contributor to Nigeria's ongoing fuel
crunch. Because Nigeria's refineries remain largely offline,
most fuel sold in the country is imported. After retail price
caps were eliminated in October, private marketers entered
the import business cautiously. Harvey told Econoff that the
six major private fuel marketers in Nigeria formed a
purchasing committee to which each company submits bids
indicating how much fuel it is willing to bring to Nigeria
during a given time frame and at what cost. Winning bidders
then purchase fuel on international markets and arrange for
its delivery to Lagos ia tanker ships. Upon arrival,
cargoes are divided among the companies roughly according to
existing marketshare, the original purchaser being reimbursed
at the time of delivery by each recipient company for its
share of the cargo.


4. (SBU) Problems arise as soon as fuel tankers arrive in the
waters off the coast of Nigeria. The water level at the
berthing docks for the main fuel jetty at the Apapa port in
Lagos is too shallow to handle large tankers coming from
overseas (35,000 tons plus). Consequently, fuel cargoes must
be transferred to smaller vessels (15,000 tons) at sea before
being brought into port.


5. (SBU) The main fuel offloading jetty at Apapa belongs to
the Nigerian National Petroleum Corporation (NNPC). Once
cleared by Customs and port managers, fuel ships berth at the
jetty, and cargo is pumped through a manifold that sends fuel
either to NNPC's storage tanks or to those belonging to one
of the private marketers. (Besides the six major "private
marketers," Nigeria licenses over 1,000 "independent
marketers" (ref B). The independent marketers may own as few
as one gas station, and generally purchase fuel from NNPC.)
Delays occur because the jetty has insufficient capacity to
handle the number of ships needed to relay fuel cargoes.
Moreover, according to one fuel importer, regardless of when
a private marketer's ship is cleared for offloading, NNPC
vessels always take precedence at the jetty, forcing the
marketers' ships to wait. These delays in offloading result
in significant demurrage fees for the marketers that drive up
their business costs. A backup of fuel deliveries is evident
simply by scanning the horizon south of Lagos where ships
wait to be offloaded or to bring fuel to port. On a boat
tour December 26, Econoff counted some 55 tanker ships
anchored off the coast near the entrance to Lagos' harbor
channel. Most were small vessels registered in Lagos, but
large tankers were also anchored at sea, including some
transferring fuel to smaller ships.

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COMPANIES AND THE CBN ENTER UNCHARTED WATERS
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6. (C) Texaco's Harvey noted another element to the fuel
supply challenge in Nigeria: designated importers sometimes
fail to deliver their scheduled fuel cargoes. He noted that
some of the companies' managers grew accustomed to the old
system whereby NNPC imported fuel, sold it to the marketers
at a fixed rate, and mandated a retail price cap which
effectively became the universal sales price. For these
managers, this early phase of deregulation is a new business
model with which they are neither familiar nor comfortable.
On several instances since October, companies chosen by the
private marketers' ad-hoc import committee to purchase
cargoes of fuel failed to deliver product on time (or at
all),causing a supply problem for all of the private
marketers. Harvey attributed such delivery failures to a
combination of the inexperience and poor business decisions.


7. (C) Marketers sometimes also have difficulty obtaining
dollars from the Central Bank of Nigeria's (CBN) Dutch
Auction System (DAS) to purchase fuel abroad (ref C). Under
the current arrangement, the company purchasing fuel on the
international market pays for that cargo in dollars, and the
other marketers pay the purchaser for their respective share
of the cargo in naira at the time of delivery. Harvey told
Econoff that at a stakeholders' meeting on January 5,
President Obasanjo promised marketers that the CBN would make
$200 million per month available to the industry for fuel
stocks.

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POSSIBLE SHORT-TERM FIX: PORT HARCOURT
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8. (C) Texaco's Harvey told Econoff that marketers are
analyzing import options to ease the strain on the fuel jetty
in Lagos, including delivering fuel to Port Harcourt in the
far south of Nigeria and to Calabar in the southeast near the
Cameroon border. Such a move could help the companies move
fuel more easily throughout Nigeria's southern,
south-central, and eastern regions where supplies often run
dry and black-market prices were reported to have been as
high as 200 naira per liter in recent weeks. (Since
deregulation, the going rate for gasoline in Lagos has been
between 39 and 42 naira per liter, but the Department of
Petroleum Resources (DPR) recently told marketers not to
charge above 41 naira per liter in Lagos, and between 42 and
48 naira per liter elsewhere (ref D).)

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THE POTENTIAL OF ATLAS COVE
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9. (SBU) The Atlas Cove fuel jetty, now being completely
rebuilt, may help alleviate port congestion for fuel
shipments when it returns to operation. Atlas Cove lies near
the entrance to Lagos' harbor channel, and is deep enough to
handle large tankers. That would allow for faster, more
efficient, and less expensive offloading of fuel. Viewing it
from a boat in the channel, the new jetty nearing completion
does appear large and modern. However, the Atlas Cove jetty
is connected to NNPC storage tanks only, so under current
arrangements, private marketers would not use Atlas Cove for
their imports.

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MANAGEMENT OF THE JETTIES
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10. (C) Texaco's Harvey told Econoff that the marketers are
negotiating with the NNPC to turn over management of both the
main jetty at Apapa and the new jetty at Atlas Cove to
private industry. Harvey said his company is interested in
forming a consortium to operate the jetty, but other
proposals include hiring an international port management
company, or offering a management contract to one of the
marketers. Marketers believe that many of the actual
delivery delays could be eliminated with proper (private)
management of jetty operations. Harvey said President
Obasanjo is pressing NNPC Group Managing Director Funso
Kupolokun to turn over management of the Apapa jetty to the
industry, but Harvey believes that the NNPC will not turn
over Atlas Cove anytime soon. Harvey said that if NNPC
someday agrees to turn over management of Atlas Cove, the
marketers will build an underwater pipeline network to move
fuel directly from the jetty to the companies' storage tanks,
which lie near each other about four miles from Atlas Cove.

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OPPORTUNISM KNOCKS
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11. (SBU) The Nigerian press and government regulators also
point to greed as a cause of recent fuel queues. In
mid-December, President Obasanjo announced that as of January
1, 2004, a fuel tax of one and one-half naira per liter would
be imposed nationwide in an effort to raise revenue for road
repair and maintenance. Observers allege that after the
President's tax announcement, some retailers began hoarding
their fuel supplies in hopes that after the first of the year
they could charge consumers the amount of the tax but
under-report their sales to the government and pocket the
difference. That may not be a universal or even common
practice, but motorists reacted to Obasajo's announcement by
trying to fill their tanks before the end of the year,
causing a run on already tight fuel supplies. The usual
exodus of Nigerians from urban centers to villages for the
holidays also contributed to a spike in demand, and
subsequent gas station queues. Since January 1, occasional
fuel queues may be found at retail gas stations, but the
situation is not out of the ordinary, at least when compared
to conditions seen throughout 2003 when supply problems again
became
noticeable (ref E).

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SAME OLD SAME OLD?
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1. C) Fue maketers may have also reduced fuel imports in
Decmber after the Department of Petroleum Resources (PR)
reinstated a price-cap. Higher than expecte crude prices
and a decline in the value of the aira made the DPR price
caps particularly unwelcoe to the arkeers astheir narrow
profit margin degraded further. Moreover, a flurry of other
poposals covering matters such as how prices must b posted
at stations to how sales will be monitored and taxed have
been bandied about publicly by government officials,
legislators, unions and other activists at both the federal
and state levels, gave retailers an increasing feeling of
business uncertainty going into the new year. Nonetheless,
Jules Harvey of Texaco told Econoff on January 6 that his
company has increased its retail gasoline price to 42.5 naira
per liter in Lagos to absorb the new fuel tax, and that this
move, so far allowed by DPR, provides Texaco a sufficient
margin to continue importing fuel in the near-term. But
Harvey noted that the new year was rung-in under the same
dark clouds of poor government planning and coordination,
poor transportation infrastructure, and union strike threats
seen throughout 2003. He said President Obasanjo is trying
hard to keep deregulation and reform of the petroleum sector
on track, but he is "quite lonely at the top."
HINSON-JONES