NIGERIA'S SHORTAGES AID BENIN'S EFFORT TO CRACK DOWN ON

UNCLAS SECTION 01 OF 02 COTONOU 000135

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR AF/W (DBANKS),AF/EPS
PARIS FOR D'ELIA
LONDON FOR HAHN
KAMPALA FOR FLINTROP

E.O. 12958: N/A
TAGS: EPET ETRD ECON EINV KCOR PGOV BN
SUBJECT: NIGERIA'S SHORTAGES AID BENIN'S EFFORT TO CRACK DOWN ON
SMUGGLED GASOLINE
REF: A) LAGOS 92, B) ABUJA 164, C) LAGOS 54, D) 06 COTONOU 543

COTONOU 00000135 001.2 OF 002



1. (SBU) SUMMARY: Recent gas shortages in Nigeria are helping to
shift gasoline consumption patterns in Benin from the black market
to the legitimate, and taxed, retail sector. Street vendors of
"kpayo" were compelled to shut down in late January due to the
sky-high price of gas smuggled in from Nigeria. Responding to price
and availability concerns, consumers, who previously bought 70-80
percent of their fuel on the black market, switched in massive
numbers to legitimate retail outlets. At first, massive lines
resulted, despite GoB efforts to weaken the kpayo market through
measures to keep prices affordable and to encourage retailers to
expand their distribution networks, retail stations were not up to
the task, and hours-long lines formed. After a few days, however,
the crisis abated, as kpayo shortages eased, and as retail networks
more efficiently met demand. It appears the crisis has shifted a
considerable percentage of Benin's fuel consumption into the
legitimate retail market. This shift will likely endure as long as
the price differential between smuggled and legal gasoline remains
moderate. The government will continue its efforts to curb gas
smuggling and improve the petroleum products distribution system.
In a related development, Chevron and state-managed petrol
distributor Sonacop have found a solution to their long-running
business dispute. END SUMMARY.

RUNNING ON EMPTY: THE FIGHT AGAINST SMUGGLED GAS
--------------


2. (U) Normally, unofficial gasoline distribution networks involving
street-side vendors who sell smuggled gas ("kpayo") from Nigeria in
glass bottles, meet 75 percent of Benin's demand. In a market where
price-sensitivity is virtually the sole criteria for most buyers,
the low prices vendors charge trump concerns over the questionable
quality of "kpayo". This price differential is a consequence of the
easy availability of gasoline smuggled from Nigeria, where the
subsidized pump price is around 50 cents a liter. Even with the
costs involved in smuggling operations, in late 2006, kpayo prices
hovered around 70 cents a liter (350 fCFA) while the price for legal
gas was 83 cents a liter (415 fCFA)


3. (U) When the Yayi government attempted, in June 2006, to crack
down on "kpayo" (REF D),two problems immediately became apparent.
One was the economic impact of forcing consumers to switch to more
expensive legitimate gas supplies. The other was the total
inadequacy of Benin's retail gasoline distribution network.
According to Mr. Gerard Dogbe, Chevron Country Manager for Benin and
Togo, there are currently 35 gas stations in Cotonou and its suburbs
serving a population of over one million, versus about 135 in Lome,
Togo (a smaller city). Many of these stations, particularly those
run by state-managed distributor SONACOP, rarely had adequate
supplies for sale.

REFORM EFFORTS MAKE SOME HEADWAY
--------------


4. (U) Since then, the GoB has undertaken a number of measures to
improve gasoline distribution. It extended state-management of
previously-privatized SONACOP, which was originally imposed in March
2006, in large part to ensure that adequate distribution of gasoline
across the nation can be maintained. It has also exonerated gas
station equipment from import duties and simplified the permitting
process to encourage the construction of new gas stations. Several
distributors, particularly Oryx, a Swiss company that has its own
fuel depot at the Port of Cotonou, have taken advantage of these
measures, and opened small "sidewalk" gas stations (each with a
maximum capacity of 5000 liters) at various roadside locations in
Cotonou. These mini-stations have helped relieve the pressure on
major stations to some extent, but have also created a traffic
hazard when they are located on heavily used roads. The GoB also
took steps to reduce the pump price differential between pumped gas
and "kpayo", by reducing the taxes imposed. This led, in January
2007, to the government-regulated price, set monthly, to drop to 80
cents (400 fCFA) per liter.


5. (SBU) Dogbe said Chevron would not build small roadside gas
stations as they do not meet Chevron's corporate standards, but said
Chevron would like to extend its retail network if it could purchase
land at a reasonable price. According to Dogbe, the cost of
building new full-size stations remains prohibitive, with a 2,000
meter plot of land in Benin costing $400,000 - $600,000 (200 - 300
million fCFA) compared to $36,000 (fCFA 18 million) for a recent
purchase in Togo.


COTONOU 00000135 002.2 OF 002


NIGERIA'S GAS CRISIS TIPS THE BALANCE
--------------


6. (SBU) Then, in late January, Nigeria's gasoline supply crisis
(REFS A-C) meant that supplies of "kpayo" in Benin were sharply
reduced. "Kpayo" became very hard to find, and the price for
available stocks soared to 1000 fCFA ($2) per liter, more than
double Benin's pump price. While caught off guard by the rapidity
at which events unfolded, the GoB was as ready as it would ever be,
with the price reduction just coming into effect, and several of the
sidewalk gas stations having just opened the same week.
Nonetheless, retailers struggled to deal with an unprecedented run
on their supplies (made worse since Benin, unlike Togo, has no
national strategic reserves of gasoline),and hours-long lines
snaked out of every gas station in the country.


7. (U) In recent weeks, the situation has stabilized somewhat.
"Kpayo" is once again widely available, but at a higher price (390
fCFA) than before the recent crisis. Combined with the reduction of
the pump price to just 400 fCFA, "kpayo" now enjoys a much-reduced
competitive advantage. To judge by the steady trade at the
newly-established service stations, a significant shift in
consumption has occurred toward the legitimate market. Making such
a shift permanent, however, will depend on continued reliability of
supplies at service stations. During a trip in northern Benin Feb.
13-15, the DCM discovered that supplies outside of coastal urban
areas are still spotty, with several stations reporting that they
had run out of gas to sell.

PROGRESS ON RESOLVING CHEVRON DISPUTE WITH SONACOP
--------------


8. (SBU) Mr. Dogbe also provided an update on the status of the
Chevron-Texaco dispute with SONACOP, Benin's former parastatal and
largest distributor of petroleum products. SONACOP, under
provisional state management since March 2006, has agreed to
compensate Chevron for the 22 million liters of Chevron's gas (worth
$6.7 million) that it stole in early 2005, when it was being run as
a privatized company. The compensation is given by waiving
throughput charges for gasoline Chevron stores in SONACOP
facilities, and this fee waiver will be continued until the amount
is repaid. To date, SONACOP has waived approximately $1.2 million in
throughput fees. The former owner-operator of the company, Mr. Sefou
Fagbohoun, remains in prison awaiting trial on charges that include
the Chevron affair.

BROWN