SHOUTING IN THE EAR OF A DEAF GOVERNMENT:

C O N F I D E N T I A L SECTION 01 OF 04 LAGOS 000054

SIPDIS

SIPDIS

DOE FOR GPERSON, CGAY
TREASURY FOR ASEVERENS, SRENENDER, DFIELDS
COMMERCE FOR KBURRESS
STATE PASS USTR FOR ASST USTR FLISER
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR NCABOT
STATE PASS EXIM FOR JRICHTER
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ

E.O. 12958: DECL: 01/25/2016
TAGS: EPET ENERG ASEC PTER NI
SUBJECT: SHOUTING IN THE EAR OF A DEAF GOVERNMENT:
NIGERIA'S FUEL "CRISIS"


LAGOS 00000054 001.4 OF 004


Classified By: Consul General Brian Browne for Reasons 1.4 (B,D)


1. (C) Summary: Bunkerers tapping into crude oil pipelines,
vandalized refineries too costly and dangerous to repair or
maintain, organized looting of downstream pipelines,
complicated import procedures that encourage corruption and
force importers to bear the costs of the fuel price subsidy,
coupled with the government's persistent refusal to
deregulate fuel prices all contribute to the current fuel
crisis in Nigeria. A Total executive predicts that the
Government will take steps to ease the crisis in February, to
avoid friction before the election. Deregulation is the
long-term solution to the problem. However, deregulation
remains politically unpopular. End Summary.

Scarcities Problem Begins Upstream
--------------


2. (C) Levi Ajuonuma, General Manager for Public Affairs,
Nigerian National Petroleum Corporation (NNPC),told Pol-Econ
Chief on January 22 that multiple factors contribute to the
current fuel shortage. Ruptures and leakage in upstream
pipelines carrying crude to the refineries are more numerous
even than those in the downstream lines. It is just that with
tragedies like the deadly fire in Lagos' Abule Egbe district,
downstream mishaps attract greater public attention, Ajuonuma
claimed. Ajuonuma verified NNPC's inability to repair the
pipelines that take crude to the Kaduna and Warri refineries
that have been vandalized in February 2006 by the Ijaw
militants in Delta State.

Vandalized Refineries Too Costly to Repair, Maintain
-------------- --------------


3. (C) Not only is NNPC unable to pump crude to two out of
four of Nigeria's refineries, the refineries cannot produce
sufficient fuel to meet domestic demand. The Warri and
Kaduna refineries have long been the favorites of vandals; in
February 2006, vandals used dynamite to damage both
facilities. According to Ajuonuma, the vandals will not give
NNPC access to the Warri refinery to conduct repairs unless
certain demands are met. Even if NNPC could gain access,
Ajuonuma said, the cost of repair would be exorbitant because
few companies are willing to risk the kidnapping of their
employees in order to do the repairs. The two Port Harcourt
refineries suffer from technical problems, he said.
Privatizing the refineries has proven difficult as no prudent
investor would buy at anything more than rock bottom prices,
and the Government is unwilling to sell at a low price,
partially because it would be detrimental politically to be
seen as selling off the national wealth on the cheap. The
Chinese and South Koreans may be willing to buy the
refineries, provided they are assigned additional oil blocks
as part of the deal, he said.

Organized Crime Behind Downstream Breaks
--------------


4. (SBU) Ajuonuma confirmed newspaper reports detailing
increasing vandalism in the pipelines carrying refined fuel.
There has been a significant rise in the number of breaks in
the Atlas Cove-Mosimi, Abuja-Suleja and Port
Harcourt-Aba-Enugu-Makurdi legs of the downstream system. In
Port Harcourt, the number of breaks has risen from 600 in
2003 to 1650 for the first three quarters of 2006; in Warri,
the number has risen from 100 to 600; and in the Mosimi area,
from 50 to 375 breaks during the same time periods. Line
breaks in Kaduna and Gombe, which in the past had been
relatively trouble-free, are now occurring with frequency.

LAGOS 00000054 002.2 OF 004


In December, Ajuonuma said, Mosimi was only able to pump for
three uninterupted days; most nights, the lines were broken
and the flow disrupted.


5. (C) This increase in breaks is the result of organized
crime activity believed financed and conducted by individuals
and groups with sufficient wealth to purchase tank trucks
costing naira 9-10 million (USD 70-80,000) each, Ajuonoma
believed. He recently visited the site of a fire in which
three large tank trucks were destroyed, he said. Fuel
marketers, who already own such trucks, are heavily involved,
he alleged.

Government's Non-Solutions
--------------


6. (C) Nigeria officially is not meeting its OPEC export
quotas; the country should be producing from 2.4 to 2.5
million barrels per day. However, the country has been
producing between 1.5 to 1.8 million barrels per day. The
loss is anywhere between 600,000-8000,000 barrels per day, he
said.


7. (C) As a result of militant activity in the Delta,
Ajuonuma said, the Navy has been given secret orders to go
after MEND and other militant groups. The militants have
become a government of their own in the Delta, he said.
Restraint has not worked. "If you ask me, they need a strong
hand; if action had been taken earlier, the problem would not
have festered," he said. Now, however, the militants have
more firepower than the Navy; arms are being imported from
everywhere, Ajuonuma exclaimed. As a result, he believes,
the situation is no longer susceptible to a peaceful
solution. "This will end as it ended for Jonas Savimba,
Ajuonuma predicted; every overture for peace was refused
until finally he was killed."


8. (C) It is technologically possible to protect the
upstream and downstream pipelines, Ajuonuma said. Ever since
the fire that took place in Lagos's Abula-Egba district in
January, Ajuonuma has been taking calls from pipeline
security firms in Europe, Australia and other countries
hoping to sell Nigeria equipment to protect the pipelines.
The technology, including sensors and drones, is available in
the United States and Israel that would make it possible for
NNPC to control the lines. In light of the billions of naira
the Government is losing as a result of the breaks, it would
be a good investment to install security systems, Ajuonuma
said. However, the Government is not ready to make the
expeditions, he lamented.

Marketer: Pipeline Breaks Perpetrated by Transporters
-------------- --------------


9. (C) O.B. Haffner, Corporate Affairs Manager, Total
Nigeria Ltd., the major marketer of diesel fuel, denied
flatly the claim that marketers are involved in the pipeline
breaks. Marketers don't own trucks, he told Pol-Econ Chief
in a conversation on January 23. The companies that
transport the fuel are involved in breaking the pipelines and
stealing fuel, he alleged. These companies, many of which
are owned by NNPC officials, already have the trucks and
needed knowledge of the system.

Complicated Import Process Contributes to Scarcities
-------------- --------------


10. (C) According to Haffner, the NNPC through the
Petroleum Products Marketing Commission (PPMC) authorizes

LAGOS 00000054 003.2 OF 004


each quarter all importers to import a specific amount of
fuel in the following quarter. The importers then establish
contracts with foreign suppliers. The Petroleum Products
Fund (PPF),a subsidiary of NNPC, pays the importer the
difference between the landed price and the regulated price.
The PPF's payments are typically six months in arrears, for
the simple reason, Haffner said, that the Government cannot
afford to pay the subsidy. Because of the arrearages, many
importers have to bear additional bank charges and interest
on the contracts for imported fuel for which they have not
yet received payment from the Government. Many importers
find themselves unable to buy the third quarter's imports
when they have not been paid first and second quarters'
subsidies. As a result, the importers have had to delay
additional orders until they are paid, he said.


11. (C) If the NNPC decides that it will allow importers to
import in one quarter amounts of fuel that more than meet
demand, then the scarcity from any delays in imports in the
following quarter may not be felt immediately. However, if
NNPC decides that it will allow importers to import an amount
that will only meet demand, or allows importers to import an
amount that falls short of demand, delays in imports will
immediately translate into scarcity of fuel.


12. (C) NNPC functionaries who control payment of funds
often demand a percentage just to release them to the
cash-hungry importer, Haffner said. The problem of
corruption at NNPC will only be solved, he said, when the
functions of the NNPC's subsidiaries are either abolished or
taken over by the private sector. Things are unlikely to
improve after the election, Haffner said. Yar A'dua's
campaign committee includes the president of Zenon Oil, Femi
Adetola. That company already has preferential lifting
rights for imported fuel; Zenon has product when Total does
not, he said. The money Adetola contributes to the campaign
he can surely be earning back through lucrative NNPC
connections within a short time.

Marketers Are the Scapegoat
--------------


13. (C) The scarcities will end by the second week in
February, Haffner predicted. The Government has decided to
import enough fuel to appease public opinion and to forestall
any unrest before the election. Government wants to make the
importers and marketers the scapegoat, and to use them
against the unions. The unions are quiet now, he said,
because the Government has not prompted them by raising
prices. People are willing to pay black market prices
because this is a crisis.


14. (C) If, however, the Government tried to raise fuel
prices of fuel to 75 naira per liter (Note: The regulated
prices is currently naira 65 per liter. End Note),the unions
would surely call for a strike, Haffner said. If so, an
actual strike would not last more than a week because people
want and need to work, he said. And, the Government would
probably be able to compromise with the unions on a price
increase to naira 70 per liter, Haffner reasoned.

Shouting in the Ear of A Deaf Government
--------------


15. (C) The only way out of this chronic dysfunction is for
the Government to marketize the downstream sector, Haffner
said. This would be to the benefit of the common man. It
would also help businesses; Total Nigeria's President will
be in Paris February 10 because the company's bottom line has

LAGOS 00000054 004.2 OF 004


been hurt by the performance of the Nigeria company. If thecompany does not rejuvenate, it will lay off Nigerian
workers, not expatriate workers, Haffner said. The unions
are sensible; they see the pipeline problems, the jetties
collapsing, and they want Government to improve the system
and its infrastructure, thus preserving their jobs. However,
there is a limit to what the unions can do, he said. "They
are shouting in the ear of a deaf government."


16. (C) Comment: Both the NNPC and the private sector
executive paint a picture of an oil system bordering on
disorder. However, at least one of Haffner's proposed
solutions, to wrest control of the downstream sector from the
NNPC and eliminate entities such as the PPMC and PPF, may be
in the offing if the Downstream Natural Gas Act is passed in
a form which establishes an independent regulatory commission
for the sector. (See septel.) Haffner also may be right
about the willingness of organized labor to consider the
prospects of an increase in the price of fuel in order to
save their jobs. End comment.

BROWNE