NIGERIAN PARADOX - PETROL SHORTAGES

UNCLAS SECTION 01 OF 04 ABUJA 000164

SIPDIS

SENSITIVE
SIPDIS

E.O. 12598: N/A
TAGS: ECON EPET ENRG EINV PGOV NI PETROL
SUBJECT: NIGERIAN PARADOX - PETROL SHORTAGES

REF: LAGOS 39

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1. (SBU) SUMMARY: Long gasoline queues have become endemic in the
past two months. The Nigerian National Petroleum Corporation (NNPC)
insists that the product stock available is enough to serve the
entire country and that pipeline vandalisms is causing the supply
hiccups. Pipeline sabotage has increased and is having a
debilitating effect on fuel supply and the economy. It is not clear
the GON has a plan to deal with continuing problems. END SUMMARY.

Petrol Queues
--------------


2. (U) Fuel queues started across the country beginning in December.
The media reported that the problem was due to an artificial
scarcity caused by the hoarding of petroleum products by retailers.
In the past, retailers hoarded petrol in anticipation of a price
hike and historically price hikes have come in January. As reported
in reftel, petrol scarcity has led to astronomical increases in
prices and a black market. In some parts of the country petrol
sells for as much as 300 naira in the black market and at the pumps
it sells for well above the official price of 65 naira.

Agricultural Production Affected
--------------


3. (U) Due to the petrol shortage in Jos, a farm that supplies
produce to the Embassy community reported farmers cannot run
irrigation pumps or transport produce creating shortages of and
higher prices for carrots, cabbages and potatoes. The high cost of
petrol has led to an increase in transportation costs and
commodities prices in general. A journey from Lagos to Ibadan
before cost 500 Naira, but now costs as much as 1,500 Naira. In
addition, the long lines at petrol stations have resulted in lost
employee work hours as people wait in queues six hours or more to
buy fuel when it is available.

MAJOR OIL PRODUCER = SHORTAGES??
--------------


4. (U) According to the Energy Information Administration of the
U.S. Department of Energy, Nigeria is the tenth largest producer of
crude oil in the world and the largest in Africa. At the same time,
life in Nigeria is characterized by erratic supply of petroleum
products. Shortages are not new. Nigeria experienced occasional
acute petroleum products shortages, especially in 1974 and 1975. In
the past, the GON set up a judicial commission of enquiry to unravel
the causes and suggest solutions. Previous commissions found that
the lack of effective distribution channels and facilities was a
fundamental factor. The commissions recommended the urgent
provision of a pipeline system and storage depots, engendering the
present oil pipelines and depots in Nigeria. This alleviated the
problem until 1986, when domestic production could not meet demand,
requiring petroleum products import.

Sources of Petroleum Products
--------------


5. (U) There are two sources of petroleum supply in Nigeria - local
refineries and imports. There are four refineries in the country:
Port Harcourt I, Port Harcourt II, Warri and Kaduna. The four
refineries have a combined capacity of 445,000 barrels per day
(bpd),and a refining capacity of 18 million liters of gasoline per
day (lpd) when working at full capacity. Currently, national demand
is 30 million lpd. The remaining 12 million liters is supplied by
imports. Due to mismanagement and poor maintenance, the refineries
routinely operate below capacity, sometimes requiring importing the
total volume of national demand. The NNPC has reported that the
refineries operate at near 70% capacity, but experts told us that
these claims are much too high.

Storage of Petroleum Products
--------------


6. (U) The NNPC, major marketers, and independent marketers are the
three major owners of storage and dispensing facilities. The NNPC
owns 22 facilities/depots while the major and independent marketers
each own one major facility. The combined holding capacity in cubic
meters for petroleum product depots in Nigeria are: 1,284,290 for
gasoline; 708,900 for kerosene; 1,084,900 for diesel; and 85,500 for
aviation fuel. Functioning at optimum levels, the depots can hold a
stock of refined products equal to 30-90 days of national supply.
Presently, the Atlas Cove Terminal, an offshore terminal and the

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country's main petroleum products import receiving facility, is in a
state of disrepair and not functioning. Additional constraints
include inadequate tugboats or pilot cutters for berthing and
un-berthing vessels; shallow and winding approach channels; and the
draught and overall vessel length allowed in most berths. These
constraints have resulted in delayed ships and increased demurrage,
exacerbating shortages.

Petroleum Product Distribution
--------------


7. (U) The NNPC controls the distribution of petroleum products
through its subsidiary, the Pipelines and Products Marketing Company
(PPMC). Petroleum products are distributed via pipelines, road,
rail, and sea. The pipeline network is made up of multipurpose
lines and dedicated lines. PPMC uses the 5,001 kilometer
multipurpose network to move products from the refineries and
imported products from receiving jetties to 21 storage depots
nationwide. Pipelines transport 70% of gasoline and 68% of
kerosene. Other means are used to transport low pour fuel oil
(LPFO),high pour fuel oil (HPFO),base oil, asphalt, wax, sulphur,
and petroleum chemicals (PC). Based on the latest figures, 36% of
the products from Port Harcourt refinery were moved via the
pipelines system, and the percentages for Warri and Kaduna were 47%
and 49% respectively. Seventy percent of the products were
transported from the refineries to the depots by pipelines and the
remainder was shared between road and rail.

Road, Rail and Marine Transportation
--------------


8. (U) Due to the decrepit state of roads and the poor condition of
trucks in Nigeria, transporting petroleum products by road is slow,
unsafe, unreliable and expensive over long distances. As a result,
petroleum products have been transported by road for short haulage
distances. Increased pipeline vandalism has increased the volume
transported by road and some experts estimate it is now up to 78-82%
of domestic consumption, exacerbating shortages. Rail
transportation is the least expensive means of transporting
petroleum products, but the near collapse of the Nigerian railway
system has not made it a viable alternative. Its very slow speed
and unreliability limit rail transport even in periods of serious
pipeline outages. The PPMC also supplies products to some locations
by sea using spot-charter vessels. However, jetties at Okrika,
Calabar, Warri, Atlas Cove and Apapa, crucial for successful
maritime operations are old and in poor condition, hampering the
movement of products by marine vessels and from the coastal
refineries of Port Harcourt and Warri.

Additional Distribution Factors
--------------


9. (U) An important factor affecting the efficient distribution of
petroleum products is the concentration of oil resources in the
Niger Delta region. Although Kaduna refinery is in the north and
depots are located across the country, depots and pipeline locations
are not optimal, and the connectivity and accessibility of the
country's pipeline network is poor. The PPMC has the sole
responsibility for marketing and distributing petroleum products, as
well as managing a 5,001 kilometer pipeline network and associated
depots. This leaves no room for healthy competition. The reliance
on imports to meet local demand puts excessive stress on the limited
import facilities and infrastructure.

NNPC Blames Sabotage
--------------


10. (SBU) Funso Kupolokun, Group Managing Director of NNPC discussed
the shortages with us. Kupolokun claimed the shortages were caused
by the recurrent destruction of pipelines by vandals, predominantly
in three areas crucial to petroleum product distribution - Port
Harcourt, Warri and Mosimi. In Port Harcourt from January to
September 2006 more than 1,650 line breaks occurred compared to 600
in 2003. In the Warri area 600 breaks were recorded in 2006
compared to 100 in 2003. The Mosimi area, in the south-west,
recorded 50 breaks in 2003 but reported 375 between January and
September 2006. In the past pipeline breaks in the north were rare
but now Kaduna and Gombe have been affected by frequent pipeline
breaks. He said even if the refineries were working at full
capacity, it would not help since criminals can easily break into
pipelines.


11. (SBU) The Kaduna and Warri refineries had been shut down since

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February 2006 as a result of the sabotage of the Escravos Warri
pipeline that transported crude oil to both refineries. Prior to
the destruction of the pipeline, both refineries operated at about
75% capacity producing about 8 million liters of gasoline per day,
according to Kupolokun.
The NNPC had to rely on imports to meet the shortfall arising from
production loss. There was a limit to the volume of imported
products the country's import facilities could handle when the two
refineries were down. Within days the disruptions were noticed on
the streets. Normally in the event of small supply disruption,
strategic reserves were triggered from the various depots, however,
since vandalized pipelines have not been restored strategic reserves
had fallen.


12. (SBU) Austen Oniwon, Head of Research and Development of the
NNPC said that he believed the vandals were part of an organized
crime network that knew when petrol was passing through the lines
and had sophisticated equipment to cut the pipelines and discharge
the product into trucks of 33,000 liters capacity. Oniwon said "it
is impossible to rule out the connivance of NNPC staff in the act of
sabotage because the staffers are the only ones that know the type
of product passing through the lines at any point in time."
Regarding public charges that there was a shortfall in gasoline
imports, because the NNPC anticipated a lower than actual demand
during the Christmas holidays, Oniwon commented that technically
there was a shortfall but it should not have been noticeable because
the NNPC kept an 11-day reserve stock. At the moment there were
vessels on the high seas waiting to discharge petroleum products,
but the damaged pipelines at the Atlas Cove terminal made it
impossible to pump product to storage depots.


13. (SBU) The Atlas Cove terminal was the only facility that could
handle 30,000-ton vessels, but it was not in use because of damage.
It was recently repaired but then damaged by vandals. Apapa port in
Lagos, which was the alternative to Atlas Cove, could only handle
vessels not exceeding 9,000 tons thereby requiring the discharge of
products into smaller vessels before it could be unloaded at the
Apapa port. This cumbersome process takes extra time. Whenever a
pipeline was sabotaged, the NNPC must stop pumping petroleum
products from the storage depot that feeds the pipeline, resulting
in local shortages that must then be supplied by truck.

Are GON Price Hikes Imminent?
--------------


14. (SBU) Oniwon said he was unaware of a plan to increase prices.
Since the international price of crude oil hovered below $55 per
barrel, an increase in the domestic price of petroleum products
could not be justified. If the international price had remained
around $75 per barrel an increase would be justified. Despite
Oniwon's assertion, the GON made a commitment to the IMF to increase
fuel prices in early 2007 and reduce the fuel subsidy to 1.25% of
non-oil GDP during the recently concluded second review of Nigeria's
Policy Support Instrument (PSI).


15. (SBU) The GON had planned to increase prices over the Christmas
holiday season, but was foiled by the Nigeria Labor Congress (NLC),
according to Adams Oshiomhole, outgoing President of the NLC. He
claimed retailers hoarded petroleum products in anticipation of an
increase to earn larger profits. Oshiomhole's assertions were
seconded by Benson Upah of the NLC, who told us the ruling party
wanted to use the proceeds of the fuel price hike to fund its
election campaign.

NNPC Fails to Compensate Importers
--------------


16. As reported in reftel, licensed importers Total, Texaco, Oando,
and MRS Oil and Gas stopped importing petroleum products in late
2006 because GON subsidy arrears had accumulated into the billions
of naira. Dr. Oluwole Oluleye, Executive Secretary Petroleum
Products Pricing Regulatory Agency (PPPRA),told the media that the
PPPRA had commissioned auditors to investigate the claims of the
importers and that once the investigation was complete importers
will be paid their claims. The media reported that approximately
19.5 billion naira was owed to importers and that 17.8 billion naira
in arrears was paid the week of January 15.


17. The NNPC recently met with major oil marketers to seek a
temporary solution to the lingering shortages. The NNPC and major
oil marketers agreed to deploy seven private import reception
jetties for three months to receive petroleum products. The major
marketers have agreed to designate some gas stations as special

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outlets to the public, which will work beyond normal hours to clear
the backlog demand. These will include Obat Petroleum, Folawiyo
Petroleum, Wabeco and Total, all in Lagos; and the Oando facility in
Onne.

Comment
--------------


18. Nigeria, a major oil producer, cannot guarantee a steady supply
of refined petroleum products for domestic use. The four
state-owned refineries have not worked at full capacity since 1999
and some experts claim close associates of top government officials
are benefiting from imports. The deregulation of the downstream
petroleum sector is only complete, perhaps due to these vested
interests in imports. Eighteen private refinery projects were
licensed in Obasanjo's first term, however, none have been built.
Most Nigerians still expect a price hike. Our contacts point the
finger at the failure to address pipeline sabotage. So far the
NNPC's strategy has sought to appease those in pipeline areas by
paying local village hunters and enlisting Nigeria's corrupt and
inefficient police to protect the pipelines. The main culprit is
presumably import bottlenecks both physical and financial due to
lack of cash at importers due to arrears in subsidy payments.

CAMPBELL