NIGERIA: LPG EXEC DESCRIBES KEROSENE SMUGGLING

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000183 SIPDIS DOE FOR GPERSON, CHAYLOCK E.O. 12958: DECL: 04/07/2019 TAGS: ENRG EPET EAIR PGOV NI SUBJECT: NIGERIA: LPG EXEC DESCRIBES KEROSENE SMUGGLING REF: A. 08 LAGOS 284 ¶B. 08 LAGOS 472 ¶C. LAGOS 25 Classified By: Consul General Donna Blair for Reasons 1.4 B and D ¶1. (C) Summary: During an April 6 conversation about the liquefied petroleum gas (LPG) market in Nigeria, the managing director of a large Nigerian LPG company said downstream petroleum distributors are exploiting Nigeria's kerosene subsidy by arbitraging the price difference between household kerosene and aviation jet fuel. According to the executive, large fuel distributors import household kerosene at GON-subsidized prices, then smuggle the kerosene to refineries outside of Nigeria where it is modified and turned into jet fuel then re-imported to Nigeria for sale to airlines and other users at a significant mark-up. While he did not provide details about the operation nor information about which companies were involved, his story does track with unusual activity we have seen in both the household kerosene and jet fuel markets in Nigeria. End Summary. Kerosene Smuggling Explained -------------- ¶2. (C) Dayo Adeshina, the Managing Director for the LPG firm Strategic Energy Limited and long time oil and gas executive told Energyoff on April 6 that downstream petroleum distributors are exploiting the GON-subsidized price of household kerosene (the major competitor to LPG in Nigeria) to reap windfalls in the aviation jet fuel market in Nigeria. (Note: Fuel for aircraft turbine engines is a high quality form of kerosene with certain chemical additives. End Note). According to Adeshina, fuel importers purchase household quality kerosene on the world markets paying the going price, then are reimbursed by the GON to cover the expense of selling the fuel to Nigerian retail customers at the lower, government mandated price. However, some of the fuel distributors then smuggle the household kerosene out of Nigeria to refineries in undisclosed locations where it is modified for use as jet fuel. The resulting jet fuel, the price of which is not regulated by the GON, is then imported into Nigeria where it is sold to airlines and other aviation users at a significant premium. (Note: It is possible, that the household kerosene is never delivered to Nigeria in the first place, with the kerosene cargoes being diverted and modified in refineries outside of Nigeria before they ever reach Nigerian ports. End Note.) Unusual Activity in Kerosene Markets -------------- ¶3. (C) While Adeshina did not provide specifics on which companies were involved, where the household kerosene was turned into jet fuel, and the actual mechanics of the smuggling, his story does track with a couple of unusual occurrences we have noted in the kerosene markets. In June 2008, around the time that oil hit its price peak, African Petroleum (AP),a major retail and wholesale distributor of refined petroleum, started selling household kerosene for 50 naira per liter (USD 1.26 per gallon),or 10 naira below the government's already low fixed price of 60 naira per liter. Politicians, including President Yar'Adua, praised AP, lauding the discount as a selfless act to be emulated by other downstream companies. (Note: No other company followed AP's lead. End Note.) It was never clear how AP could or why it would want to consistently sell kerosene at a price that guaranteed it would lose money. Locals complained that AP rarely had kerosene available at that, or any, price and Mission officers reported long lines of customers at AP stations in Lagos waiting, often in vain, to fill plastic jugs with kerosene (Ref A). Later that summer, Nigeria experienced shortages of household kerosene, with black market prices reportedly reaching almost twice the official price. ¶4. (C) In a November 2008 conversation, Nigeria-based executives with Delta Airlines and Arik Airlines recounted unusual activity in the local aviation jet fuel market (Ref B). They accused fuel distributors of routinely refusing to LAGOS 00000183 002 OF 002 honor worldwide fuel contracts and demanding mark-ups on jet fuel above agreed to prices. They noted that the price of jet fuel in Nigeria had reached a peak along with oil prices in June 2008, but despite decline in crude oil prices over the intervening months, the price of aviation fuel in Nigerian remained near record highs. In addition, the executives said the supply and, more telling, the quality of Nigerian aviation jet fuel was erratic, recalling that on two occasions earlier in 2008, Nigeria had experienced widespread domestic flight cancellations due to shortages of jet fuel. While the local press implied that simple supply shortages were to blame, the executives said the real reason for the cancellations was that several large shipments of jet fuel to Nigeria had failed to meet quality standards. ¶5. (C) Comment: It's difficult to flesh out the connections, if any exist, between our contact's allegation of kerosene smuggling and the activity noted above. Still, it appears clear that something unusual happened with kerosene markets in mid 2008 and may still be on going. As previously reported (Ref C),we continue to believe that refined petroleum product smuggling, while not as headline grabbing as crude oil theft, is a major source of illicit cash in Nigeria and is severely disruptive to the Nigerian economy. End Comment. BLAIR