LAGOS BUSINESS EXECS GRIM ON NIGERIAN BUSINESS

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000061

SIPDIS

STATE FOR AF/W
STATE FOR CA/OCS/FROBINSON
STATE FOR EB/ESC/IEC/ENR/BLEVINE
STATE FOR DS/IP/AF
STAT FOR INR/AA
STATE PASS DOE FOR DAS JBRODMAN AND CGAY
STATE PASS TREASURY FOR ASEVERENS AND SRENENDER
STATE PASS DOC FOR PHUPER
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR CDUFFY
STATE PASS TDA FOR BTERNET
STATE PASS EXIM FOR JRICHTER
STATE PASS USTR FOR ASST USTR SLISER
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ

E.O. 12958: DECL: 12/27/2014
TAGS: ECON EINV EPET PGOV NI
SUBJECT: LAGOS BUSINESS EXECS GRIM ON NIGERIAN BUSINESS
CLIMATE

REF: A. ABUJA 001946


B. ABUJA 02040

C. LAGOS 02447

Classified By: Classified By: Acting Consul General Ronald Kramer for R
easons 1.4 (D & E)


1. (C) Commercial and Energy Officers recently met with
group of senior business executives from American firms based
in Lagos, who expressed substantial concern with the Nigerian
business environment and import bans. They believe the GON
is failing to develop the institutions and policies needed to
promote growth in the private sector. The Exxon Mobil
Managing Director noted the GON is not even funding oil
projects at a sufficient level to maintain current production
capacity of approximately 2.4 million barrels/day. The
Texaco MD predicted the labor dispute over fuel prices would
become an issue again in January, when authority for the fuel
price reduction expires. The Citibank MD expressed concern,
given that politicians are already jockeying to position
themselves for the 2007 election, with how the GON will spend
the $16 billion in reserves accumulated due to record high
oil prices. End Summary.

Serious Concern about Trade and Business Environment
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2. (C) Commercial and Energy Officers recently met with
group of senior business executives from American firms based
in Lagos. They groused about the Nigerian business
environment and import bans. There was general agreement
that the GON's economic 'dream team' is a well-educated but
relatively powerless group. (Reftel B) There was a consensus
that President Obasanjo instead seems susceptible to a small
coterie of political insiders and businessmen who use
nationalist economic rhetoric to justify import bans and
trade restrictive practices that promoted the group's narrow
self-interest. Discussants noted that there is a plan to
phase out the import bans by 2007, but also remarked on a
failed promise to do so two years ago.

Personal Connections Needed where Institutions Fail
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3. (C) The Commercial Officer reported on the recent TIFA
negotiation in Abuja, noting the prepared statements by USTR,
DOS and USDA were quite critical of the GON. The business
executives were disappointed but not surprised that GON
interlocutors did not view the import bans and other trade
restrictions as negative. There was general alarm at the
situation suffered by Proctor and Gamble, which had to
temporarily shut down its new Lagos diaper factory in
September due to an import ban that blocked raw material
essential to diaper-marking from coming into Nigeria.
Despite successful operations in difficult markets around the
world, Proctor and Gamble apparently has not able to break
even after thirteen years of operation in Nigeria. (Reftel A)
Discussants noted that while Finance Minster Okonjo-Iweala
appears to have intervened to resolve Proctor and Gamble's
specific issue, the GON is failing to develop the
institutions and policies to promote a functioning private
sector. Instead, problems continue to be addressed through
informal methods and personal relationships.

EM Foresees Production Decline at Current Funding Levels
-------------- --------------


4. (C) Exxon Mobil Managing Director John Chaplain stated
that joint venture (JV) projects with the parastatal Nigerian
National Petroleum Corporation had been funded at $4.23
billion for the year, with Exxon Mobil's funding requests cut
by one-third (Reftel C). Chaplain assessed that gas projects
had been funded sufficiently, but not oil projects. (Note:
This shift likely reflects the GON's strategic move towards
exploitation of Nigeria's ample gas reserves, estimated to be
the 7th largest in the world. End note.) Chaplain expressed
serious concern the GON is not funding oil projects at a
level sufficient to maintain current production capacity of
approximately 2.4 million barrels/day. If oil production
declines, Chaplain noted that government revenues will also
decline, as currently about 70 percent of GON revenues are
derived from oil production. Discussants noted a decline in
oil revenues would have serious fiscal implications for
Nigeria. Chaplain observed that the GON appears to be
deliberately starving oil projects of revenue; he believes
the GON is attempting to force energy firms to accept
alternative funding arrangements, where the firms are paid in
oil or through other financial arrangements, rather than
through their share of the revenue stream generated by JV
projects.

Authority for Fuel Subsidy Runs Out in January
-------------- --


5. (C) Jules Harvey, Vice President and Managing Director
of Texaco Nigeria (Chevron Texaco's downstream subsidiary)
predicted the dispute over fuel prices would remain mute
until January, when temporary authorization for subsidies
allowing for lower consumer fuel prices runs out.

Refinery Privatization Pace May Accelerate
--------------


6. (SBU) On the issue of refinery privatization, Harvey
noted that Credit Suisse First Boston had been commissioned
to manage the refinery privatizations, but the Bureau of
Public Enterprises had apparently never paid the firm. After
the temporary departure of the consultants carrying out the
work, NNPC has now agreed to pay the CSFB bill. He
anticipates new developments in refinery privatizations as
soon as the consultants return to Nigeria. (Comment: Mission
anticipates that absent full deregulation of the downstream
fuel sector, the GON will continue to experience serious
difficulties in attracting credible foreign investors to
rehabilitate existing refineries or to build new ones.)

Concern over Bill Mandating Local Refining
--------------


7. (C) Harvey explained that energy firms remain concerned
about legislation which may force them to refine a set
percentage of their crude oil locally. (Note: The four
domestic refineries currently run at about 20 percent of
capacity. As Nigeria currently lacks sufficient domestic
refining capacity to implement this bill, many in the
industry view this measure as a backdoor attempt to force the
majors to construct a domestic refining industry in Nigeria.
The majors have strenuously resisted prior attempts to force
them to carry out refining in Nigeria. In various past
showdowns with the majors, the GON has threatened them with
loss of production rights; the majors have countered that
they would halt production if forced to refine domestically.
The GON has then backed off. If successful deregulation of
the downstream market is carried out, Mission believes the
majors would entertain refining some products locally.
Industry members are also concerned such a bill would force
them to sell a percentage of their products domestically,
when the Nigerian fuel market remains regulated and prices
below actual international values.

$13 Billion in Reserves;Where will the Money be Spent?
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8. (C) Harvey remarked that due to high international oil
prices in excess of budget assumptions, Nigeria increased its
foreign reserves from around $2 billion 16 months ago, to
over $13 billion today. Harvey noted the GON budget was
based on benchmark assumptions of monthly oil production of
2.7 million barrels/day at $27/barrel. While there has been
no final decision on the allocation of these excess funds
above the benchmark price, the GON plans to use them for an
unspecified combination of building a 'rainy day' fund,
paying off international debt, and financing infrastructure
improvements. A low benchmark also allows the GON to avoid
boom and bust budgetary cycles that have plagued past
Nigerian governments. The 2.7 million barrels/day production
benchmark, while well above Nigeria's current 2.4 million
barrels/day capacity, appears to take into account production
anticipated to come on-line in 2005 at Shell's Bonga and
Exxon Mobil's Yoho fields. Khaled Qurashi, Managing Director
of Citibank, noted that while the GON says it plans to spend
excess oil revenues on infrastructure and debt reduction,
there has not yet been any meaningful drawdown of these
reserves, despite the GON's many overdue bills with its
contractors. Qurashi expressed concern that, in the run-up
to the 2007 elections, this money might be spent on poorly
conceived projects or diverted for election spending. He
also noted that the perception of Nigeria having a large
surplus fund might also argue against some countries
considering debt relief for Nigeria.

Need for an American Business Association?
--------------


9. (C) There was a consensus among the discussants that the
Nigerian-American Chamber of Commerce is not performing its
proper role of a bi-national chamber, in terms of business
and free trade advocacy. Discussants noted several current
Chamber members had spoken out in favor of import bans, as
their personal businesses benefited from these trade
barriers. With the growing complexity of U.S. and Nigerian
business and trade relations, discussants agreed there is a
need a vehicle to genuinely fulfill the role of a bi-national
Chamber of Commerce. While not wanting to alienate the
current Chamber, discussants agreed that the establishment of
a new organization is worth exploring.
KRAMER