US embassy cable - 03LAGOS2078

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 002078 
 
SIPDIS 
 
 
PARIS PASS OECD, IEA 
 
 
E.O. 12958: DECL: 10/06/2013 
TAGS: EPET, ELAB, ECON, NI 
SUBJECT: CHEVRON'S VIEW ON THE DYNAMICS BEHIND THE FUEL 
PRICE SHOWDOWN 
 
Classified By: ECON:FHDAY for reasons 1.5 (b) and (d) 
 
 
1.  (SBU) Summary:  According to Chevron management some two 
weeks ago President Obasanjo ordered the Nigerian National 
Petroleum Corporation (NNPC) to cancel all outstanding orders 
for refined petroleum products, thus committing the country 
to an abrupt course of petroleum market reform and 
liberalization.  Union and NGO reaction was to call for a 
general strike.  Oil companies met among themselves October 6 
and will meet with their unions and the NNPC October 7 to 
plot a course and to decide whether jointly to order a tanker 
load of refined product to put fuel in the Nigerian pipeline. 
 The downstream traders must assess the likelihood of being 
allowed to sell the fuel here at a market price.  They have 
assurances from the GON that they can, but the issue is 
highly political, and they will be prepared to divert the 
tanker until the last moment.  The outcome of the decision is 
not yet known.  Chevron believes the petroleum unions may 
have lost control of their own policy in the current crisis, 
and are being swept along towards a strike that is not in 
their best interests.  End Summary 
 
 
What's broken, and why 
---------------------- 
2.  (C)  CG Lagos and Consulate officers met with senior 
management at Chevron/Texaco October 6 for an extensive 
discussion of upstream and downstream petroleum issues 
(upstream, septel).  Under the current system, we were told, 
the NNPC imports all refined product and apportions it in a 
strikingly non-transparent manner among the 1000 or so 
independent distributors and the 6 major oil companies in the 
downstream market.  The supply is sharply limited by several 
logistical bottlenecks at Lagos port, so distribution is 
strictly a zero-sum game -- a situation guaranteed to give 
rise to the extensive bribery said to plague the NNPC.  Many 
of these independents don't actually sell in Nigeria at all; 
a sign and a canopy over some pumps are all that is required 
to get a distribution license from the NNPC.  These 
distributors, license in hand, fill their tankers at the NNPC 
and deliver the gas across the border.  Independents who do 
sell in Nigeria buy from the NNPC at the subsidized price and 
sell not at the N34 they are supposed to charge but at the 
highest price their locality can support. 
 
 
3.  (SBU)  Having done very nicely on the initial sale the 
independents improve matters by paying taxes on their volume 
as if they had sold the petrol for N34; an underpayment that 
Chevron believes costs the GON $1 billion a year.  The status 
quo is a high performance cash cow for the independent 
operators and the NNPC bureaucracy, two powerful opponents of 
reform.  The irony, of course, is that these people get rich 
by operating a defacto free market system, while consumers 
are gouged by shortages and exhorbitant prices. 
 
 
4.  (C)  The government is also getting fleeced.  The NNPC 
pays $2 billion a year to buy refined product abroad at 
market prices and pass it on to distributors at a subsidized 
price.  Added to the $1 billion in under-collected taxes, 
that is almost  seven percent of Nigeria's GDP, but there is 
more:  crude that could have been exported at $29 a barrel is 
provided to country's refineries at $22 a barrel.  In 
Chevron's view, President Obasanjo is personally persuaded 
that the system must be fundamentally altered, but does not 
trust anyone below the top leadership of the NNPC.  During 
the summer he personally "took over the (petroleum) file" and 
began working with a small alternative body, the Petroleum 
Products Pricing Regulatory Agency, to help him transform the 
downstream petroleum economy.  10 to 14 days ago, Chevron 
says, Obasanjo personally directed the NNPC to cancel all its 
contracts for supply of refined product (the NNPC had already 
contracted deliveries for the fourth quarter of '03 and the 
first quarter of next year).  He then informed the oil 
companies that they would be able to import what they wanted 
and sell it at market price, with the request that they not 
exceed N40 per liter in the first month.  This draconian 
step, just before his October 1 announcement of petroleum 
market liberalization, seems intended to demonstrate that the 
bridges back to the old system have been burned; if so, it is 
a bold gesture. 
 
 
Fixing it, and cutting the unions' power 
---------------------------------------- 
5.  (SBU)  At present Nigeria has seven to ten days of 
refined product on hand.  Nothing is in the pipeline.  The 
pricing baton has been handed abruptly to the oil companies, 
and they are deliberating what to do with it.  They met with 
their unions,  amongst themselves, and with the petroleum 
unions and the NNPC; the outcome is not yet known.  They are 
consulting among themselves to decide whether to pool 
resources and order a tanker load of fuel as a test case. 
The ship would lift in South Africa, and during its three to 
four days enroute the companies will monitor the fluid and 
intensely political situation here to gauge whether it will 
be possible to sell the cargo at market rates.  If it appears 
questionable they will divert the ship to a different market 
in the region. 
 
 
6.  (C)  Comment:  This is real brinksmanship on Obasanjo's 
part.  As the ship nears Lagos the country will be down to a 
few days reserve.  If the unions prevent it from discharging, 
he will take the country's empty fuel tanks and beat the 
unions over the head with them.  Obasanjo has already handed 
the unions the opportunity to disrupt the All Africa Games; 
an object of great national pride.  Now the unions must 
grapple with the awkward dilemma of what to do about the 
temptation; despite a rather puny call for Nigerians to stay 
away, so far the unions (and the population) have avoided 
using the Games to show their displeasure.  Chevron thinks 
Obasanjo's subtext in setting this crisis in motion at this 
time is to lure the unions into a series of untenable 
positions with the intent of curbing their power.  Obasanjo 
is not presenting an easy target and is making it harder for 
the opposition to agree on what the target (the government or 
the companies) actually is.  End Comment 
 
 
7.  (C)  Chevron thinks (and we agree) there isn't much 
solidarity between the two petroleum unions (NUPENG and 
PENGASSAN) and the rest of the opposition.  Chevron has been 
talking to its unions and is sure they understand that 
deregulation is good for them in the long run.  It means a 
larger, more efficient downstream sector and more gas going 
into gas tanks at a better price.  The unions know (they have 
told us as much) that the price of a liter of gas isn't the 
real issue here; it's the overall structure of the sector -- 
how much is imported, how much is refined here, and where and 
how it's refined -- that matters.  The unions, according to 
Chevron, have 25,000 well paid members sitting (mostly) idle 
in Nigeria's four refineries (which, again according to 
Chevron, really need 6000 workers), and they know well that 
those refineries cannot compete in price with imports sold at 
market prices. 
 
 
Making a deal 
------------- 
 
 
8.  (C)  Chevron believes the GON thinks its delapidated 
refineries at Kaduna and Part Harcourt II are salvageable. 
Our late-night conversations October 6 with the presidents of 
the petroleum unions suggest different mixes of salvagable 
capacity, but the common element is there:  a triage 
assessment, followed by a commitment to make competitive (at 
a market price in a deregulated sector) some subset of 
Nigeria's current capacity.  This is, however, not what the 
other unions and NGOs are looking for; they (and the public) 
are angry about a lot of things and don't care much about the 
subtleties that matter to the petroleum unions.  There will 
be intense pressure on those unions to reject a separate 
peace, and they may not be able to resist it; Chevron 
certainly believes they may be swept away in the current of 
popular anger over higher fuel prices. 
HINSON-JONES