US embassy cable - 03LAGOS2387

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002387 
 
SIPDIS 
 
 
PASS GURNEY, LONDON AND NEARY, PARIS 
 
 
E.O. 12958: DECL: 11/20/2013 
TAGS: EPET, EINV, ELAB, PHUM, PGOV, PINR, SOCI, NI 
SUBJECT: FOUR WORN AND UNDER-UTILIZED REFINERIES FOR SALE 
 
Classified By: J GREGOIRE FOR REASONS 1.5 (B) AND (D). 
 
 
1. (C) SUMMARY. Nigeria's Bureau of Public Enterprises (BPE) 
has set November 14 as the deadline for investors to submit 
expressions of interest to be core investors (51 percent) in 
the country's four refineries.  Major U.S. oil companies tell 
us they are not interested. Labor is taking a cautionary 
position. END SUMMARY 
 
 
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For Sale 
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2. (U)  Signaling a continuation of President Obasanjo's 
promises to reform the Nigerian economy, particularly the 
petroleum sector, on October 28 the Bureau of Public 
Enterprises (BPE) issued an announcement that the federal 
government intends to divest 51 percent of its interest in 
the nation's four refineries.  The GON later announced that 
prospctive "Core Investors" were to submit expressions f 
interest by November 14.  A similar advertisemnt was placed 
in the Economist magazine. 
 
 
3.(C) At a monthly lunch meeting of major U.S. based 
companies doing business in Nigeria on November 6 the 
managing directors of ExxonMobil (upstream) Mobil Producing 
Nigeria (downstream), Texaco Nieria (downstream) and 
ConocoPhillips (upstream) xpressed their surprise at the 
announcement, and their reservations about the proposed 
refineries sale.  While reticent about sharing data, the 
downstream executives said their companies would not buy 
stakes in the refineries, although John Pototsky of Mobil 
said his company would consider a management contract. 
 
 
4. (SBU) Nigeria's refineries -- two at Port Harcourt and one 
at Warri and Kaduna respectively -- are notorious for 
breakdowns, turnaround and maintenance contracts that never 
end, and a lack of crude feedstock due to vandalism and 
disrepair of feeder pipelines.  Technically capable of 
processing 445,000 barrels of crude per day, the refineries 
rarely work above 40 percent capacity, and frequently Nigeria 
imports almost all of the fuel it consumes.   The management 
of the Kaduna refinery told visiting Embassy Abuja PolCouns 
and ECONOFF in September that nearly half of the Kaduna 
refinery was designed to use high-sulfur crude from Venezuela 
rather than Nigeria's Bonny Light, so as to be able to 
extract feed stock for fertilizer and bitumen for road repair 
and other civil engineering purposes.  NNPC has also imported 
high-sulfur Saudi crude to use that refining capacity at 
Kaduna, but until March of this year, Kaduna was operating at 
less than 50 percent  capacity, about 750,000 liters a day, 
largely because no high-sulfur crude had been imported since 
the middle 1990s. 
 
 
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Any Takers? 
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5. (C) The American oil and gas company executives said they 
knew of no major oil company interested in buying a majority 
share of the existing refineries.  In a meeting with 
Consulate staff in October, executives at ChevronTexaco 
(upstream) and Texaco Nigeria (downstream) also doubted if 
any credible international company would invest in the 
refineries, and added that of thefour, only the newest 
refinery at Port Harcourt had any potential for commercial 
viability.  A Chevron executive said GON officials admitted 
to him that the older plant in Port Harcourt and the refinery 
in Warri may need to close, and that the GON would be 
hard-pressed politically to make the same statement about the 
Kaduna plant, although closing it may be the best course of 
action.  At the November 6 lunch, Pototsky of Mobil averred 
that his company is not interested in the refineries not only 
because of their disrepair, but also because of environmental 
concerns.  He said the impact they have on the environment 
could make investment in them a "dead-end issue for any U.S. 
company."  Jules Harvey of Texaco tacitly agreed with that 
assessment.  The two downstream captains of industry 
suggested Chinese or European bidders may be interested, but 
may not have the capital available to bring the refineries up 
to capacity. 
 
 
6. (SBU) Chief Uzodimma of Niger-Global told POLOFF and 
Econoff that his company has submitted an expression of 
interest in the refineries along with a U.S. partner. 
However, Uzodimma expressed concern that the process will 
become politicized, the result being refineries being sold to 
GON cronies with no real capacity to rebuild the ailing 
refining industry. 
 
 
7.  (C)  Austin Oniwon, a high-ranking NNPC official, told an 
Embassy Abuja Econoff in Abuja last week that former NNPC 
Group Managing Director Jackson Gaius-Obaseki and former 
Energy Advisor Rilwanu Lukman had advised President Obasanjo 
in mid-October that no company would buy the refineries in 
their present condition.  They then told him it was imprudent 
and foolish to attempt to sell the refineries before the 
end of the year.  According to Oniwon, Lukman explained to 
Obasanjo that no reputable company would buy the Kaduna or 
Warri refineries knowing that even under GON-ownership, the 
refineries, could not operate owing to sabotage and constant 
pipeline breaks.  Oniwon added that Vice President Atiku 
stated to Obasanjo during the same meeting that Lukman and 
Gaius-Obaseki were wrong and that the refineries could easily 
be sold by the end of the year.  Obasanjo, according to 
Oniwon, then said he too thought the refineries could be 
easily sold.  Oniwon went on that he and Gaius-Obaseki 
subsequently concluded that the Vice President and President 
did not want the refineries to work in the short-term because 
they wanted to pay off their cronies and supporters who are 
making millions of dollars by importing fuel into the 
country. 
 
 
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Labor has a Refined Approach 
----------------------------- 
 
 
8. (C) Recent newspaper accounts have alleged that the 
Petroleum & Natural Gas Senior Staff Association of Nigeria 
(PENGASSAN), a white-collar union, will strike if Nigeria's 
refineries are privatized.  Ogbeifun Brown, National 
President of PENGASSAN, told POLOFF on November 7 that the 
newspapers are "getting us wrong."  Brown stated that 
PENGASSAN supports the privatization of refineries if sold as 
the GON advertises, where NNPC will maintain 49% ownership 
and a private corporation have 51% ownership.  Brown stated 
that PENGASSAN would strike if the transaction were to be 
done without transparency and sold wholly to a private 
individual with no capital or experience in the oil industry. 
"We have an open mind; it is the Government's decision and we 
can only suggest," said Brown.  He also asserted that there 
are many multinationals that can properly finance the project 
and have the expertise "to do it right." 
 
 
9. (C) POLOFF quizzed Brown on the state of the nation's 
refineries.  Brown said that he has heard reports that the 
Warri refinery is having "turn-around maintenance" and should 
be operational by the first week of December.  He explained 
that the Kaduna refinery is not operational only because it 
has no crude to refine.  He bemoaned the state of the 
pipelines due to neglect and vandalism and identified their 
dilapidated condition as the source of Kaduna's problems. 
When asked if privatization would mean downsizing of the 
labor force, Brown said this would be a necessary step.  His 
concern is that the GON will not properly provide for 
displaced workers. PENGASSAN will thus demand that workers be 
provided with severance pay and guaranteed protection of 
their workers' benefits and pensions, "as it is done in 
civilized society."  Should these considerations be met, 
Brown believes downsizing will not be a contentious issue , 
and pointed to the successful mergers of AGIP/Unipetrol and 
Chevron/Texaco as models. 
 
 
10. (C) Brown expressed sober enthusiasm for Kupolokun as the 
new head of  NNPC and stressed that he is "not a new hand, 
but a group executive and engineer in the system who rose 
through the ranks."  Brown stated that he is ready to work 
with Kupolokun.  "He should be able to turn us around," he 
said, and foresees problems only if Kupolokun "formulates 
policy independently and forces it down our throats.  But if 
he his ready to consult, he can bring us along."  In 
principle, PENGASSAN supports Kupolokun's policy to break up 
the NNPC's Pipelines and Products Marketing Company and sell 
parts of it individually.  However, Brown reiterated that "we 
will not take dictation for one person" and stressed the need 
for consultation. Brown demurred when asked if he believes 
Kupolokun will change NNPC's reputation of extreme 
corruption, saying that PENGASSAN has no position on the 
subject since it has no proof and will not make judgments 
based on supposition and rumors. 
 
 
11. (C) COMMENT. The downstream petroleum sector in Nigeria 
is undergoing a dramatic transformation with deregulation of 
retail marketing, even if privatization of the refineries 
exists only in policy and dialogue. Assessing the viability 
of the companies that BPE announces as potential core 
investors will be the first test of credibility of this 
exercise. The next will be how BPE and the Presidency handle 
the process. (Note. Both the President's Assistant on 
Privatization Matters and the new chief of NNPC have pledged 
stakeholder participation in the privatization process and a 
greater GON effort at public awareness.)  Finding capable 
willing investors remains the GON's greatest challenge to 
refinery privatization.  END COMMENT. 
HINSON-JONES