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