GON FORGES AHEAD WITH DEREGULATION OF THE DOWNSTEAM SECTOR

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 001905

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E.O. 12958: DECL: 02/04/2029
TAGS: EPET ENRG EINV ECON ETRD PGOV NI
SUBJECT: GON FORGES AHEAD WITH DEREGULATION OF THE DOWNSTEAM SECTOR

Refs: A) LAGOS 0103, B) ABUJA 0262

Classified By: Deputy Chief of Mission Dundas C. McCullough for
reasons 1.4. (b
& d).


1. (C) SUMMARY: Full deregulation of Nigeria's downstream petroleum
sector would occur with the passage of the Petroleum Industry Bill
(PIB),which the Petroleum Resources Upstream Committee Chairman
predicts will happen by December 2009. The elimination of the
existing petroleum subsidy was scheduled for November 1 but may be
delayed to coincide with the passage of the PIB. The GON spends
about $4.3 billion dollars on the petroleum subsidy per year.
Opposition to deregulation by organized labor was strong but appears
to be abating. In response to the GON's request for USG assistance,
USTDA has initiated a Definition Mission to Nigeria's oil and gas
sector. The GON wants to convert gasoline-powered vehicles to liquid
petroleum gas to offset the expected rise in unregulated gasoline
prices, gain carbon credits, and reduce refined petroleum product
imports. END SUMMARY.

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Existing Downstream Operations
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2. (SBU) Nigeria's downstream petroleum sector operations include
gas distribution/sale, petroleum product distribution and storage,
and petroleum product retail. Efforts have been made to increase the
nation's refining capacity, petroleum product distribution, natural
and petroleum gas utilization, and petrochemical development
projects. Nigeria's four state-owned refineries have a history of
inefficient operations, poor maintenance, and sabotage. Refined
petroleum products, whether domestic or imported, are distributed via
a nationwide network of about 20 depots and some 5,000 kilometers
pipelines. Other products include the production of liquefied
petroleum gas (LPG) from natural gas, fuels and lubricating oils from
crude, petrochemicals such as plastic resins like polyethylene and
polyvinyl, carbon black and linear alkyl benzene that are produced at
two plants in Delta State.

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Deregulation Announcement Startles Industry
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3. (SBU) Minister of State for Petroleum Resources Odein Ajumogobia
announced the planned deregulation of the downstream petroleum sector
by at the Nigeria Oil and Gas 2009 conference on February 26. He
startled the audience by declaring that the GON would fully
deregulate the downstream sector and eliminate the fuel subsidy
regime that fixes the retail price of gasoline and kerosene.
Ajumogobia estimated that the fuel subsidy would reach about $4.3
billion in 2009 and said that the current downstream structure as
"unsustainable". He also announced plans to sell Nigeria's four
refineries and establish regulations to permit third-party access to
terminals, storage depots, and pipelines. On October 14, Petroleum
Resources Upstream Committee Chairman and Petroleum Industry Bill
Committee Chairman Senator Lee Maeba told Energy Officer that both of
his committees support deregulation, which will be included in the
PIB, and that the deregulated downstream industry would take care of
QPIB, and that the deregulated downstream industry would take care of
itself without further planning or intervention. However, Petroleum
Resources Minister Lukman and NNPC General Managing Director Barkindo
state that the downstream industry is inefficient and corrupt, and
needs help to move forward.


4. (C) Oil and Gas Sector Reform Implementation Committee (OGIC)
Chairman Dr. Mohammed M. Ibrahim recently told Energy Officer that
USG advocacy in 2008 for LPG use had led to the GON's decision to use
LPG to offset the impact of the elimination of the gasoline subsidy.
Nigeria exports about 2.2 million metric tons of LPG per year and
could easily redirect supplies for cooking and motor vehicles. The
GON's objective is to provide financial incentives to encourage
consumers to convert their gasoline-powered vehicles to LPG-powered
or dual-powered vehicles. Ibrahim noted that Senate President David
Mark had announced at the LPG Summit on October 12 that less than
five percent of Nigerians benefit from the billions of subsidy
dollars paid by the government on petroleum products and that the
corruption associated with the distribution of these subsidies was
high. He added that the GON will also apply for carbon credits and
use the money to finance vehicle conversion kits, gas cooking

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appliances, and LPG public awareness programs.

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Union Reaction Swift and Negative
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5. (C) Total Downstream Corporate Affairs Manager O.B. Haffner
attributed the strong opposition of the two major oil unions to
deregulation to their control by powerful politicians and NNPC
insiders who profit from corruption in the downstream sector (reftel
A). Petroleum and Natural Gas Senior Staff Association of Nigeria
(PENGASSAN) is a white-collar union, while the National Union of
Petroleum and Natural Gas Workers (NUPENG) is blue collar. The GON
told the unions that there was no money to continue petroleum
subsidy, but the unions remained concerned about implementation


6. (C) PENGASSAN President Babatunde Ogun told Labor Officer on
October 16 that his union had given "conditional approval" for
deregulation. He explained that PENGASSAN supports free market
forces, but only in an environment that supports local production and
capacity. Ogun asserted that "under the current system, there is no
local production and, as a result, there is widespread fear and anger
that the elimination of the fuel subsidy will make fuel unaffordable
for the majority of Nigerians as prices will instead be determined by
imports." Ogun explained that "reliance on imports also contributes
to widespread leakage and corruption and does nothing for the local
economy."


7. (C) Peter Esele, president of NUPENG's umbrella labor group, the
TUC, explained to Labor Officer on October 15 that "deregulation per
se is not bad, but the GON's implementation strategy is problematic
because there has been no careful planning and transparency, the
essential elements needed to minimize the negative impact of a policy
that will affect millions of our citizens." Esele noted that the GON
has promised deregulation since 1999, but "important questions have
never been answered such as, at what price will you sell the
products, how do you arrive at this price, and how will you ensure
that the private sector will be transparent?" NUPENG President
Abdulwaheed Omar is still threatening a nationwide strike if the GON
follows through with deregulation.

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COMMENT
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8. (C) The GON and the National Assembly are pressing ahead with the
passage of the PIB and the deregulation of the downstream sector.
The use of LPG to offset higher gasoline prices, gain carbon credits,
and reduce refined petroleum product imports would play a key role in
the GON's PIB implementation strategy. However, it will be easier to
pass the PIB than to create the implementing regulations,
bureaucratic structures and physical infrastructure needed for the
widespread use of LPG. END COMMENT.

MCCULLOUGH