US embassy cable - 04LAGOS30

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000030 
 
SIPDIS 
 
E.O. 12958: DECL: 01/07/2014 
TAGS: EPET, EINV, PGOV, ENRG, NI 
SUBJECT: NIGERIA'S LINGERING FUEL SCARCITY 
 
REF: A. 2003 ABUJA 1700 
 
     B. 2003 LAGOS 2078 
     C. 2003 LAGOS 2422 
     D. 2003 LAGOS 2574 
     E. 2003 LAGOS 499 
 
Classified By: JOSEPH GREGOIRE FOR REASONS 1.5 (B) AND (D) 
 
1. (C) SUMMARY: Nigeria continues to face periodic fuel 
shortages as the GON, fuel marketers and the public adjust to 
a quasi-deregulated environment.  Inadequate port facilities 
in Lagos create bottlenecks for delivery of imported fuel, 
and changing government policies create business uncertainty 
for sellers of fuel.  Short- and long-term relief may come as 
private marketers look to other Nigerian ports to ease 
shipping congestion and negotiate with the NNPC to assume 
management of key offloading facilities. END SUMMARY. 
 
2. (SBU) During the 2003 holiday season, Nigerian motorists 
again found themselves waiting in lines for gasoline and 
paying more for public transport as fuel stations ran short 
of supply.  Ongoing supply chain problems continue to plague 
the country's fuel markets, as do the GON's re-regulation 
policies for the downstream petroleum sector.  An executive 
with a major fuel retailer in Nigeria told Econoff that since 
deregulation took effect October 1 (ref A), Nigeria's 
domestic and imported fuel supply has been meeting only about 
55 percent of market demand, so retailers routinely close 
their stations on an ad-hoc basis.  An air freight company 
executive also reported that shortages of jet fuel at the 
Lagos international airport has forced airlines to adjust 
routes and fueling patterns. 
 
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SHIP TO SHORE: BOTTLENECKS AT THE LAGOS PORT 
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3. (C) In conversations with Econoff, Jules Harvey, Texaco 
International's Vice President for West Africa, listed port 
congestion as a major contributor to Nigeria's ongoing fuel 
crunch.  Because Nigeria's refineries remain largely offline, 
most fuel sold in the country is imported. After retail price 
caps were eliminated in October, private marketers entered 
the import business cautiously.  Harvey told Econoff that the 
six major private fuel marketers in Nigeria formed a 
purchasing committee to which each company submits bids 
indicating how much fuel it is willing to bring to Nigeria 
during a given time frame and at what cost.  Winning bidders 
then purchase fuel on international markets and arrange for 
its delivery to Lagos ia tanker ships.  Upon arrival, 
cargoes are divided among the companies roughly according to 
existing marketshare, the original purchaser being reimbursed 
at the time of delivery by each recipient company for its 
share of the cargo. 
 
4. (SBU) Problems arise as soon as fuel tankers arrive in the 
waters off the coast of Nigeria.  The water level at the 
berthing docks for the main fuel jetty at the Apapa port in 
Lagos is too shallow to handle large tankers coming from 
overseas (35,000 tons plus).  Consequently, fuel cargoes must 
be transferred to smaller vessels (15,000 tons) at sea before 
being brought into port. 
 
5. (SBU) The main fuel offloading jetty at Apapa belongs to 
the Nigerian National Petroleum Corporation (NNPC).  Once 
cleared by Customs and port managers, fuel ships berth at the 
jetty, and cargo is pumped through a manifold that sends fuel 
either to NNPC's storage tanks or to those belonging to one 
of the private marketers. (Besides the six major "private 
marketers," Nigeria licenses over 1,000 "independent 
marketers" (ref B). The independent marketers may own as few 
as one gas station, and generally purchase fuel from NNPC.) 
Delays occur because the jetty has insufficient capacity to 
handle the number of ships needed to relay fuel cargoes. 
Moreover, according to one fuel importer, regardless of when 
a private marketer's ship is cleared for offloading, NNPC 
vessels always take precedence at the jetty, forcing the 
marketers' ships to wait.  These delays in offloading result 
in significant demurrage fees for the marketers that drive up 
their business costs.  A backup of fuel deliveries is evident 
simply by scanning the horizon south of Lagos where ships 
wait to be offloaded or to bring fuel to port.  On a boat 
tour December 26, Econoff counted some 55 tanker ships 
anchored off the coast near the entrance to Lagos' harbor 
channel.  Most were small vessels registered in Lagos, but 
large tankers were also anchored at sea, including some 
transferring fuel to smaller ships. 
 
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COMPANIES AND THE CBN ENTER UNCHARTED WATERS 
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6. (C) Texaco's Harvey noted another element to the fuel 
supply challenge in Nigeria: designated importers sometimes 
fail to deliver their scheduled fuel cargoes.  He noted that 
some of the companies' managers grew accustomed to the old 
system whereby NNPC imported fuel, sold it to the marketers 
at a fixed rate, and mandated a retail price cap which 
effectively became the universal sales price.  For these 
managers, this early phase of deregulation is a new business 
model with which they are neither familiar nor comfortable. 
On several instances since October, companies chosen by the 
private marketers' ad-hoc import committee to purchase 
cargoes of fuel failed to deliver product on time (or at 
all), causing a supply problem for all of the private 
marketers. Harvey attributed such delivery failures to a 
combination of the inexperience and poor business decisions. 
 
7. (C) Marketers sometimes also have difficulty obtaining 
dollars from the Central Bank of Nigeria's (CBN) Dutch 
Auction System (DAS) to purchase fuel abroad (ref C). Under 
the current arrangement, the company purchasing fuel on the 
international market pays for that cargo in dollars, and the 
other marketers pay the purchaser for their respective share 
of the cargo in naira at the time of delivery.  Harvey told 
Econoff that at a stakeholders' meeting on January 5, 
President Obasanjo promised marketers that the CBN would make 
$200 million per month available to the industry for fuel 
stocks. 
 
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POSSIBLE SHORT-TERM FIX: PORT HARCOURT 
-------------------------------------- 
 
8. (C) Texaco's Harvey told Econoff that marketers are 
analyzing import options to ease the strain on the fuel jetty 
in Lagos, including delivering fuel to Port Harcourt in the 
far south of Nigeria and to Calabar in the southeast near the 
Cameroon border.  Such a move could help the companies move 
fuel more easily throughout Nigeria's southern, 
south-central, and eastern regions where supplies often run 
dry and black-market prices were reported to have been as 
high as 200 naira per liter in recent weeks. (Since 
deregulation, the going rate for gasoline in Lagos has been 
between 39 and 42 naira per liter, but the Department of 
Petroleum Resources (DPR) recently told marketers not to 
charge above 41 naira per liter in Lagos, and between 42 and 
48 naira per liter elsewhere (ref D).) 
 
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THE POTENTIAL OF ATLAS COVE 
--------------------------- 
 
9. (SBU) The Atlas Cove fuel jetty, now being completely 
rebuilt, may help alleviate port congestion for fuel 
shipments when it returns to operation.  Atlas Cove lies near 
the entrance to Lagos' harbor channel, and is deep enough to 
handle large tankers.  That would allow for faster, more 
efficient, and less expensive offloading of fuel.  Viewing it 
from a boat in the channel, the new jetty nearing completion 
does appear large and modern.  However, the Atlas Cove jetty 
is connected to NNPC storage tanks only, so under current 
arrangements, private marketers would not use Atlas Cove for 
their imports. 
 
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MANAGEMENT OF THE JETTIES 
------------------------- 
 
10. (C) Texaco's Harvey told Econoff that the marketers are 
negotiating with the NNPC to turn over management of both the 
main jetty at Apapa and the new jetty at Atlas Cove to 
private industry.  Harvey said his company is interested in 
forming a consortium to operate the jetty, but other 
proposals include hiring an international port management 
company, or offering a management contract to one of the 
marketers.  Marketers believe that many of the actual 
delivery delays could be eliminated with proper (private) 
management of jetty operations.  Harvey said President 
Obasanjo is pressing NNPC Group Managing Director Funso 
Kupolokun to turn over management of the Apapa jetty to the 
industry, but Harvey believes that the NNPC will not turn 
over Atlas Cove anytime soon.  Harvey said that if NNPC 
someday agrees to turn over management of Atlas Cove, the 
marketers will build an underwater pipeline network to move 
fuel directly from the jetty to the companies' storage tanks, 
which lie near each other about four miles from Atlas Cove. 
 
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OPPORTUNISM KNOCKS 
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11. (SBU) The Nigerian press and government regulators also 
point to greed as a cause of recent fuel queues.  In 
mid-December, President Obasanjo announced that as of January 
1, 2004, a fuel tax of one and one-half naira per liter would 
be imposed nationwide in an effort to raise revenue for road 
repair and maintenance.  Observers allege that after the 
President's tax announcement, some retailers began hoarding 
their fuel supplies in hopes that after the first of the year 
they could charge consumers the amount of the tax but 
under-report their sales to the government and pocket the 
difference.  That may not be a universal or even common 
practice, but motorists reacted to Obasajo's announcement by 
trying to fill their tanks before the end of the year, 
causing a run on already tight fuel supplies.  The usual 
exodus of Nigerians from urban centers to  villages for the 
holidays also contributed to a spike in demand, and 
subsequent gas station queues.  Since January 1, occasional 
fuel queues may be found at retail gas stations, but the 
situation is not out of the ordinary, at least when compared 
to conditions seen throughout 2003 when supply problems again 
became 
noticeable (ref E). 
 
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SAME OLD SAME OLD? 
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1. C) Fue maketers may have also reduced fuel imports in 
Decmber after the Department of Petroleum Resources (PR) 
reinstated a price-cap.  Higher than expecte crude prices 
and a decline in the value of the aira made the DPR price 
caps particularly unwelcoe to the arkeers astheir narrow 
profit margin degraded further. Moreover, a flurry of other 
poposals covering matters such as how prices must b posted 
at stations to how sales will be monitored and taxed have 
been bandied about publicly by government officials, 
legislators, unions and other activists at both the federal 
and state levels, gave retailers an increasing feeling of 
business uncertainty going into the new year.   Nonetheless, 
Jules Harvey of Texaco told Econoff on January 6 that his 
company has increased its retail gasoline price to 42.5 naira 
per liter in Lagos to absorb the new fuel tax, and that this 
move, so far allowed by DPR, provides Texaco a sufficient 
margin to continue importing fuel in the near-term.  But 
Harvey noted that the new year was rung-in under the same 
dark clouds of poor government planning and coordination, 
poor transportation infrastructure, and union strike threats 
seen throughout 2003.  He said President Obasanjo is trying 
hard to keep deregulation and reform of the petroleum sector 
on track, but he is "quite lonely at the top." 
HINSON-JONES