US embassy cable - 04LAGOS155

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000155 
 
SIPDIS 
 
E.O. 12958: DECL: 01/23/2014 
TAGS: EPET, EINV, PGOV, PINR, ENRG, NI 
SUBJECT: NIGERIA'S FUEL CRUNCH WORSENS AMIDST STRIKE 
CONFUSION 
 
REF: A. 2004 LAGOS 146 
     B. 2004 LAGOS 127 
     C. 2004 ABUJA 99 
     D. 2004 LAGOS 30 
     E. 2003 LAGOS 499 
 
Classified By: J. GREGOIRE FOR REASONS 1.5 (B) AND (D) 
 
1. (C) SUMMARY: While Nigerians try to determine if a 
national strike is on or off and whether or not there is a 
tax on gasoline (refs A, B), the country's fuel supply 
problems are not only clear, they are, in fact, worsening. 
Private marketers have scaled-back fuel imports in the face 
of business uncertainty, and a shortage of storage capacity 
has left much of the East of Nigeria without fuel. 
Meanwhile, international traders have reneged on GON orders, 
diverting cargo to more lucrative sales elsewhere.  Even 
while the GON insists deregulation is in effect, it continues 
to take actions that undermine the viability of a 
market-driven downstream sector, and may re-introduce a 
subsidized market scheme. Nigerians can expect fuel queues 
again by the end of January. END SUMMARY. 
 
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TAX? WHAT TAX? 
-------------- 
 
2. (SBU) In late-December, President Obasanjo announced 
during the presentation of his budget request that the GON 
would assess a 1.50 naira per liter fuel levy.  According to 
the President, the income from this levy would be used to 
finance desperately needed road repairs, and accordingly, the 
system of poorly (and corruptly) managed tollbooths along 
Nigerian interstate highways would be dismantled.  As of 
January 1, fuel retailers charged the extra naira-fifty at 
the pump, and tollbooths were closed. 
 
3. (C) Labor, other civil society groups, and some 
legislators immediately assailed the measure and questioned 
the legality of what they dubbed a new "fuel tax." (The 
National Assembly's House of Representatives Finance 
Committee Chairman, Alhaji Farouk Lawan, told EconCounselor 
January 21 that the President's 2004 budget submission 
specified that the Executive expected to raise 45 billion 
naira by the new "fuel tax" in 2004.)  In reality, the 
assessment was not a tax on fuel consumption, but rather a 
levy on fuel imports.  According to a Mobil executive, 
beginning on January 1, 1.5 naira was assessed on each liter 
of fuel marketers offloaded at the port of Lagos, and that 
amount was then passed on to consumers through the pump 
price. (Nigeria continues to import most of the fuel it 
uses.) GON representatives, including Funso Kupolokun, the 
Group Managing Director of the Nigerian National Petroleum 
Corporation (NNPC), publicly defended the propriety of the 
measure as an existing levy that merely lapsed in 
enforcement, and not a new tax requiring legislative approval. 
 
4. (SBU) With a Nigeria Labor Congress (NLC) strike threat 
looming larger, the GON began backing away from its 
commitment to the levy by the second week of January.  The 
President went so far as to state in a letter to the National 
Assembly that the implementation of the "tax" was unintended; 
he merely meant to highlight a policy option.  On January 20 
a federal court "advised" that the fuel tax be rescinded (ref 
C), and the GON soon insisted it no longer assessed the levy. 
 As proof, the GON said the pump prices at the two fuel 
stations operated by NNPC, one in Abuja and one in Lagos, had 
reverted to pre-levy prices.  In fact, by Wednesday, January 
21, the pump price at NNPC's station in Lagos had decreased 
by 1.50 naira. 
 
5. (C) Jules Harvey, Texaco International's Vice President 
for West Africa, told Econoff on January 20 that the 
Petroleum Products Pricing Regulatory Agency (PPPRA) sent a 
notice to marketers in late December explaining the levy and 
how it would be assessed by the Department of Petroleum 
Resources (DPR).  Harvey said that his company would consider 
the levy in effect until informed otherwise by PPPRA.  A 
union official told Labatt that GON representatives 
specifically told  union representatives a letter signed by 
President Obasanjo rescinding the levy was sent to marketers 
in recent days.  As of January 21, private marketers' pump 
prices in Lagos were one naira-fifty or more higher than the 
NNPC price, suggesting such letters had not been received, or 
that marketers were still trying to recoup the cost of the 
levy already paid on existing fuel stock. 
 
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SUPPLY TIGHT, AND ONLY GETTING WORSE 
------------------------------------ 
 
6. (C) We previously reported that Nigeria's fuel supply was 
tight due to infrastructure problems, poor business 
practices, and government regulation (ref D).  According to 
Texaco's Harvey, private fuel marketers are importing only 
about 20 percent of the fuel now on the market, with NNPC 
importing the remaining 80 percent. (Harvey said that private 
marketers have been importing an average of 10 cargoes per 
month since October.) Harvey previously estimated that this 
combined volume represents only about 55 percent of Nigeria's 
current market demand.  Harvey says his Texaco stations in 
the East and Northeast of Nigeria are almost always closed 
for lack of supply.  Texaco and other private marketers have 
little or no storage capacity in those regions, and the 
volume of imports is insufficient to maintain a supply chain 
via tanker trucks from Lagos (the poor state of roads in the 
South and East also contribute to transport difficulties). 
Harvey said he has discussed this matter with GON officials, 
who have suggested that private marketers may be able to 
lease storage tanks from NNPC at some point in the future. 
 
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INTERNATIONAL PRESSURES 
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7. (C) Harvey noted that NNPC will likely run short of fuel 
by the end of January.  He said international traders of fuel 
have reneged on contracts with NNPC to bring fuel to Nigeria. 
 Harvey said traders who agreed to NNPC purchase offers in 
2003 are now facing losses as high as one million dollars per 
cargo on those contracts due to higher-than-expected crude 
prices and high winter demand for petroleum products in the 
U.S. The traders are diverting cargoes slated for Nigeria to 
more lucrative ports.  Such international market forces, 
combined with ongoing refinery problems, leave Nigeria with 
an almost identical fuel shortage situation it faced during 
the first two months of 2003, when fuel queues returned to 
the country after a three year hiatus (ref E). 
 
8. (C) Harvey said NNPC's Kupolokun has decried the practice 
of diverting cargoes, and threatened to blacklist traders who 
breach contracts with NNPC, insisting the GON will never do 
business with such companies in the future.  When asked if 
the international traders simply don't care if they are 
blacklisted by Nigeria or face penalties for breach of 
contract, Harvey said it is not that they don't care, but 
when assessing their options, they choose not to lose a 
known, large quantity of money in the short-term.  Harvey 
noted that such a choice is made easier given the GON's 
history of blacklisting companies only to reinstate their 
privileges after intercessions from a Nigerian state governor 
or other interested party. 
 
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THE STRUGGLE CONTINUES 
---------------------- 
 
9. (C) Harvey also told Econoff that Kuplokun and Obasanjo 
himself have met with marketers in recent weeks to continue 
ironing out downstream deregulation; Kupolokun actually came 
to Harvey's office in Lagos in mid-January. Harvey says that 
Kupolokun has tried to win concessions from the private 
marketers over pricing, and even tried to persuade them to 
absorb the fuel levy without passing the cost on to consumers 
at the pump.  Nonetheless, Harvey said both men generally 
agree with the marketers' assertion that the companies 
should not be expected to operate in Nigeria at a loss. 
Harvey said Obasanjo, while appearing sympathetic to the 
business realities of the marketers, also expressed his 
frustration over the pressures he faces to scale-back 
deregulation.  Harvey said Kupolokun is clearly still in line 
with Obasanjo's thinking on this issue, but is forced by 
political realities to try to negotiate concessions regarding 
price caps and profit margins.  Harvey described Kupolokun as 
"very good and straight forward" as NNPC's chief executive, 
still capable of pressing forward with deregulation. 
 
10. (C) Harvey noted one option floated by the GON that 
smacks of pre-October government encumbrance of the 
downstream sector.  He said some GON officials have suggested 
that to maintain the semblance of deregulation  during this 
period of tumultuous world prices and domestic unions 
challenges, private marketers would be encouraged to continue 
importing fuel by having NNPC purchase their cargoes at 
market rates.  Under this plan, NNPC would then sell the fuel 
back to the marketers at a reduced price, which would be 
passed on to consumers.  In effect, the GON would return to 
subsidized fuel sales, artificial pricing, and a closely 
regulated downstream sector.   Harvey did not say how 
seriously this option is being considered by either the GON, 
or the industry. 
HINSON-JONES