NIGERIA: GAS EXEC SAYS GASOLINE, KEROSENE SHORTAGE IMMINENT

UNCLAS SECTION 01 OF 02 LAGOS 000198 SENSITIVE SIPDIS 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 STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 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 LAGOS 00000198 002 OF 002 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