US embassy cable - 04LAGOS1188

UNCLAS SECTION 01 OF 03 LAGOS 001188 
 
SIPDIS 
 
STATE PASS TO EXIM, OPIC AND TDA 
LONDON AND PARIS PASS TO AFRICA WATCHERS 
KABUL PASS TO SROSS 
DIA/J2 PASS TO GHAYES 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: EPET, EINV, PGOV, ECON, NI 
SUBJECT:  BAD WITH THE GOOD - FUEL PRICES RISE  AS  OIL 
PRICES SOAR 
 
REF: A: 2004 LAGOS 30 
 
     B: 2003 Lagos 2422 
 
1.   (SBU) SUMMARY.  As Nigerians wonder if a 
nationwide strike will be called yet again over fuel 
prices, private fuel marketers have decided to scale 
back their import level of the last 60 days as they 
launch a public awareness campaign of their own to 
explain the rise in gasoline prices.  Official consumer 
fuel prices have risen nearly 20 percent in the last 
month with the rising tide of world petroleum prices, 
and the government will be hard pressed to meet demands 
of labor unions threatening to strike unless prices are 
reversed to December 2003 levels.  While the GON has 
not been collecting the controversial fuel tax that 
sparked strike threats in January and led to a court 
order maintaining a fragile peace between the federal 
government and the unions, NNPC is still in the fuel 
business and keeping prices from rising even faster by 
marketing at least half of Nigeria's fuel consumption 
at subsidized rates.  END SUMMARY. 
 
2. (U) As world petroleum prices reached record highs 
in recent weeks, the price of fuel in Nigeria has also 
been rising.  Pump prices for gasoline in Lagos on June 
7 were generally 49.90 naira per liter, 20 percent 
higher than a month ago, and news reports indicate 
prices are even higher in distant regions of the 
country.  The Nigeria Labour Congress (NLC) has 
threatened a nationwide strike on Wednesday, June 9, in 
protest of the high prices, and is demanding that the 
federal government reduce fuel prices to the December 
2003 level of 36 naira per liter.  The NLC is backing 
away from a claim that the GON violated a court order 
of January 2004 that prohibited it from imposing a fuel 
tax of 1.5 naira per liter.  Industry sources tell us 
the fuel tax has not been collected by the government 
nor charged by marketers since the court order was 
issued, however. 
 
----------------------------- 
Root Cause: Supply and Demand 
----------------------------- 
 
3. (U) Marketers insist that the rise in fuel prices in 
Nigeria is directly linked to rising world petroleum 
costs and other market forces.  Nigeria's refineries 
are operating well below capacity, which forces Nigeria 
to continue to import most of the fuel it consumes 
including gasoline (petrol), diesel, kerosene and jet 
fuel.  The government, for the most part, seems to 
accept the marketers' explanation.  While some 
officials at the Department of Petroleum Resources 
(DPR) and the Petroleum Products Pricing Regulatory 
Authority (PPPRA) have publicly stated displeasure over 
"unauthorized" fuel price increases, it seems 
regulators are allowing fuel prices to rise without 
taking action against retailers. 
 
4. (U) Marketers have also felt a cash flow pinch in 
recent weeks, after the Nigerian National Petroleum 
Corporation (NNPC) shortened its credit window on fuel 
purchases from 30 to 15 days for major marketers.  Some 
marketers responded by revising their per-liter 
consumer price in order to more quickly cover the cost 
of NNPC-sourced fuel and to cover the high cost of 
borrowing money when required for international or NNPC 
fuel purchases. 
 
------------------------------- 
Just When It Thought It Was Out 
------------------------------- 
 
5. (SBU) O.T. "Jimmy" Adelekan, Executive Director of 
Texaco Nigeria, told Econoff on June 7 that during much 
of March, April and May, private marketers imported 
roughly half of the fuel consumed in Nigeria, leaving 
NNPC responsible for the other half through refinery 
production and imports.  Adelekan said that during 
April and through May 20, marketers imported 100 
percent of the fuel offloaded at the Apapa fuel jetty 
in Lagos, which accounts for half of the nation's total 
fuel consumption. Adelekan said that the Port Harcourt 
refinery may be producing up to 40 percent of its 
capacity, but NNPC must still import a large volume of 
fuel to meet market demand.  He said NNPC imports fuel 
through the recently upgraded Atlas Cove transfer 
facility in Lagos, as well as through other ports such 
as Port Harcourt. 
 
6. (SBU) Adelekan said the landed price of petrol in 
Nigeria is about 50 naira per liter. He said NNPC is 
selling fuel to retailers for 38.50 naira per liter, 
indicating that NNPC continues to subsidize fuel 
prices.  Retailers, including the major marketers such 
as Texaco and Mobil, mix their own fuel stocks with 
purchases from NNPC, which lowers the average cost to 
around 44.5 naira per liter.  The retailers then add in 
distribution and profit margins, reflected in an 
average retail price of 49.5 naira per liter in Lagos. 
(NOTE: On June 7 most stations in Lagos sold gasoline 
at 49.9, while Mobil stations uniformly sold at 49.8. 
Diesel was selling at 50 naira per liter at all 
stations observed. END NOTE.) Transport costs to move 
fuel to other parts of Nigeria result in regional price 
differences throughout the country. 
 
7. (SBU)  Texaco's Adelekan noted that the rising flap 
over fuel prices has spooked the major marketers, who 
import fuel jointly through an import tendering 
committee (ref A).  According to Adelekan, the 
marketers informed NNPC that they are reducing their 
imports for June, and will continue to do so if they 
are given cause to question their ability to recoup 
import costs, such as government attempts to impose 
price caps below profitability. 
 
-------------------- 
Supply Steady So Far 
-------------------- 
 
8. (U) We have not seen queues stretching for miles 
outside of fuel stations as is the usual occurrence in 
advance of strike-talk and amidst fuel price increases. 
The reason may be that Nigerians have become accustomed 
to NLC strike threats not materializing.  Also, prices 
have been creeping upward based on market pressures, 
rather than radically rising overnight as in the past 
in reaction to government edict.  Recent heavy rains 
have also restricted movement around cities such as 
Lagos, and perhaps have dampened motivation to wait in 
line.  Moreover, supplies have been steady, giving no 
indication of shortage, which usually sparks panic 
buying, hoarding, and roadside black market sales. 
 
9. (U) NOTE: Tankers for NNPC can be seen docking at 
Atlas Cove's new jetty at the mouth of the Lagos harbor 
channel, but the facility appears capable of handling 
only one ship at a time.  Atlas Cove also operates a 
single point mooring (SPM) buoy approximately six miles 
offshore Lagos.  Even with the new state-of-the-art 
jetty, offloading at Atlas Cove can be hampered by 
facility problems elsewhere. Atlas Cove is an 
offloading point only, and problems with pipelines or 
distribution equipment at its nearest depot some 60 
kilometers away sometimes slow the offloading process. 
END NOTE. 
 
10. (SBU) COMMENT: Because of marketers' skittishness 
regarding market prices and potential domestic price 
caps, the outcome of strike negotiations this week will 
have a direct effect on major marketers' participation 
in fuel importation in the short-term, and possibly on 
fuel supplies if NNPC cannot make up the difference. 
NNPC is clearly still in the business of fuel importing 
and marketing, and still in the business of subsidizing 
fuel prices in Nigeria.  Officials at NNPC, PPPRA and 
DPR seem of two minds over just how far the GON will go 
to deregulate the downstream sector.  For example, 
NNPC's Group Managing Director Funshi Kupolokun 
recently reiterated his support for total 
liberalization of the sector, but he did so while 
warning marketers that hoarding and price gouging will 
be met by harsh government penalty, and while 
commissioning a new NNPC "Mega Station" in Enugu, one 
of several new government-owned retail fuel outlets 
planned around the country.  Given world petroleum 
prices and market pressures in Nigeria, the GON will be 
hard-pressed to meet NLC demands of a fuel price 
rollback without deepening the government subsidy, and 
potentially eating up any windfall from high crude oil 
prices; the GON has not budgeted for NNPC fuel 
subsidies.  In the meantime, fuel marketers have 
launched a public awareness campaign with 
advertisements in major papers explaining what they say 
is the real reason for price increases. 
 
11. (SBU) But as usual (ref B), most eyes are on petrol 
prices, possibly leaving room for a compromise allowing 
for diesel, kerosene, and jet fuel prices to continue 
rising.  Such a move might allow the NLC and GON to 
save face while avoiding another round of strike 
brinkmanship, but it would worsen the hardship of 
Nigerians who would experience higher long-haul 
transport charges and thus higher commodity prices, 
higher airline ticket prices, and the higher cost of 
using generators passed on to final consumers.  Since 
retail petrol sales are the key to the industry, any 
overt or de facto price cap now would put up yet 
another obstacle in the way toward fuel deregulation in 
Nigeria.  END COMMENT. 
 
HINSON-JONES