NIGERIA: GAS EXEC SAYS GASOLINE, KEROSENE SHORTAGE IMMINENT

UNCLAS SECTION 01 OF 02 LAGOS 000198

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FOR GABORONE PASS PDROUIN
FOR BAGHDAD PASS DMCCULLOUGH
COMMERCE FOR KBURRESS
ENERGY FOR PERSON, HAYLOCK
TREASURY FOR DPETERS, RHALL, RABDULRAZAK
STATE PASS USTR FOR LISER, AGAMA
STATE PASS TRANSPORTATION FOR KSAMPLE
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STATE PASS TDA FOR EEBONG, DSHUSTER
STATE PASS EXIM FOR JRICHTER
STATE PASS USAID FOR NFREEMAN, GBERTOLIN

E.O. 12958: N/A
TAGS: EPET ECON EFIN EINV PGOV NI
SUBJECT: NIGERIA: GAS EXEC SAYS GASOLINE, KEROSENE SHORTAGE IMMINENT
AS IMPORTERS CUT BACK


1. (SBU) Summary: According to Adewale Tinubu, CEO of Oando Plc.,
Nigeria's largest indigenous energy group, the Government of Nigeria
(GON) owes importers of refined petroleum products, namely gasoline
and kerosene, USD 1 billion for products imported in 2008. Gasoline
and kerosene are two primary refined petroleum products still
regulated by the GON with a petroleum support fund (subsidy).
Importers are now cutting back on the imports of these two products,
and as a result, Nigeria will face a shortage of gasoline and
kerosene in the near future. Nigeria imports around 85 percent of
its refined petroleum product needs due to the low capacity
utilization and frequent breakdowns of its refineries. In addition,
Tinubu argued that Nigeria can no longer sustain the USD 6 million
it spends daily on subsidizing refined petroleum products, making it
imperative for Nigeria to deregulate the downstream sector, as
unpopular as that may be among ordinary Nigerians. End Summary.

Refined Petroleum Product Shortage Imminent As Importers Cut Back
-------------- -


2. (SBU) Importation of refined petroleum products, particularly
gasoline and kerosene, are expected to decline significantly in the
near term as importers cut back because of an outstanding petroleum
support fund (subsidy) of naira 150 billion (USD 1 billion) for 2008
which the federal government has failed to pay. On April 7, Wale
Tinubu, CEO Oando Plc, Nigeria's largest indigenous energy group and
a major indigenous refined petroleum products importer, told
executives at the Lagos Business School monthly meeting that Oando
recently canceled 26 shipments of refined product imports. He said
this is now common among product importers and he predicts the
cutback will soon result in a shortage of gasoline. He said Nigeria
is heading back to the days of the Abacha regime (Nigeria's late
military dictator from 1993 to 1998) when fuel scarcity and long
queues were the norm.


3. (SBU) Tinubu noted that it is imperative for Nigeria to
deregulate the downstream sector even though it could be extremely
unpopular and lead to problems for the incumbent government in the
next election. The country can no longer sustain the USD 6 million
it daily spends on subsidizing refined petroleum products, he said.

Refineries Operate At Ten Percent of Capacity
--------------


4. (SBU) Tinubu decried the state of Nigeria's four refineries which
he said are operating at 10 percent of the total installed capacity
of 450 thousand barrels per day. Nigeria imports around 85 percent
of the country's refined product needs due to the low capacity
utilization and frequent breakdowns of its refineries. By producing
mostly fuel oil, the most basic derivative of crude oil, instead of
higher margin refined products like gasoline, the refineries are a
constant drain on Nigeria's revenue, he said. Although Nigeria
could generate up to USD 2 billion annually from refining at full
capacity, a lack of political will to invest and maintain the
refineries has made it impossible. He advised the GON to promptly
privatize government-owned downstream infrastructure like depots,
refineries and pipelines to allow it to compete with imports and
drive down product prices.

Private Sector Investment Discouraged
--------------


5. (SBU) The private sector runs a parallel rather than a
complementary infrastructure network to the state owned network in
the downstream market, Tinubu said. However, private investment in
infrastructure is frustrated by politics and bureaucratic
bottlenecks. The system is inefficient because state-owned
infrastructure is dilapidated while private infrastructure is
difficult to construct in the face of Nigeria's bureaucracy and a

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highly regulated market. He cited the example of Oando's USD 100
million proposed investment to build an underwater pipeline to aid
the transportation of imported petroleum products at the Lagos port,
which was disapproved by the GON.

Oando Is Diversifying
--------------


6. (SBU) Tinubu said Oando is going into the upstream and gas
sectors because there is no real value in Nigeria's downstream oil
sector. He said the company could no longer operate in an
unstructured and sporadic sector that depends on intermittent
product shortages to recoup investment. From its origins in
downstream petroleum products marketing, Oando recently redefined
its business to encompass the entire value chain in the oil and gas
industry, from local distribution of natural gas via pipelines, to
independent power generation, he said. (Note: In November 2005,
Oando Plc was listed in the Oil and Gas Sector of the Johannesburg
Stock Exchange (JSE); becoming the first African company to seek a
cross-border inward listing on JSE. End note.)


7. (SBU) Comment: Refined petroleum products importers have been
threatening to cut off shipments to Nigeria since at least mid 2008.
Typically the GON drags its heels on making payments and then when
things appear to be reaching a breaking point, hands over enough
cash to temporarily calm the fuel importers. But Tinubu is right,
this game can't continue and the GON seems to realize this. In
February 2009, the government announced its intention to end subsidy
payments and deregulate the price of gasoline and household
kerosene. To date, the subsidies and price controls continue.
Tinubu is also right in saying deregulating the price of gasoline
and kerosene would be very unpopular. But Nigeria's current flawed
electoral process, assuming it is not significantly reformed before
the 2011 election, means that Tinubu is probably optimistic to think
the public's reaction to price deregulation would (or could)
manifest itself at the polls. Mass discontent in Nigeria, such that
it exists, is usually expressed outside the voting booth. End
Comment.


8. (U) This cable was cleared with Embassy Abuja.

Blair