US embassy cable - 04ABUJA1048

UNCLAS SECTION 01 OF 02 ABUJA 001048 
 
SIPDIS 
 
DOE PASS TO CAROLYN GAY 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, ENRG, EPET, PGOV, PREL, NI 
SUBJECT: FUEL SUBSIDIES IN NIGERIA:  BETWEEN A ROCK AND A 
HARD PLACE 
 
REF: ABUJA 1012 
 
1.  (U) SUMMARY:  Up until April or May, the Nigerian 
National Petroleum Company (NNPC) received an allocation of 
petroleum from the GON at below-market rates, sold part of it 
on world markets, and used the rest to subsidize gasoline 
prices domestically, all outside the government's formal 
budget.  In April the GON started selling to the NNPC at 
international market rates, thereby ending the subsidy.  If 
strikers are successful at getting the price of gasoline down 
to 38 Naira per liter, the NNPC would be required again to 
subsidize the domestic price of gasoline, and the 
continuation of subsidies "off the books" through NNPC would 
become unsustainable. The GON would be left with the choice 
of either backpedaling its economic reform program and 
subsidizing gasoline through the formal federal budget, which 
currently has no allocation for this, or else make gasoline 
prices subject to market forces.  END SUMMARY. 
 
2.  (U) At the heart of the current strike in Nigeria over 
rising fuel prices is the issue of the subsidization of 
gasoline prices.  The GON for years has effectively 
subsidized the price of fuel through the Nigerian National 
Petroleum Company (NNPC), yet none of this subsidy appears in 
the federal budget. 
 
3.  (U) The subsidy operation has been conducted by the GON 
selling a domestic allocation of crude oil to the Nigerian 
National Petroleum Company (NNPC), a parastatal, at a 
lower-than-market price, currently estimated at USD 25 per 
barrel.  The allocation, roughly equal to Nigeria's assumed 
domestic demand, is approximately 445,000 barrels per day. 
 
4.  (U) Although its allocation for domestic consumption is 
445,000 bpd, NNPC has the refining capacity for only around 
200,000.  Most of the remaining 245,000 bpd appear to have 
been sold abroad at market rates. 
 
5.  (U) Normally, when crude petroleum is sold abroad above 
the federal government's budgeted price of USD 25, any 
revenues above that are considered "excess revenues" and are 
sterilized, being deposited in a special account at the 
Central Bank of Nigeria (CBN).  This is not true, however, 
for crude petroleum from Nigeria's domestic allocation that 
NNPC sells abroad.  Because in this case it is not the GON 
selling the crude abroad, but rather a parastatal, the 
"excess revenue" above USD 25 per barrel that NNPC earns is 
not reflected in the federal budget and therefore is not 
deposited in the federal government's "excess revenue" 
account.  If we assume a purchase price from the GON of USD 
25 per barrel and a sales price on international markets at 
USD 35 a barrel.  Up until recently, this could have meant an 
annual profit for NNPC of roughly USD 900 million. 
 
6.  (U) The profit on the sale abroad of crude petroleum 
earmarked for domestic consumption gave NNPC a war chest with 
which to purchase gasoline abroad and subsidize its low 
wholesale price.  The landed price of gasoline in Nigeria is 
currently around N 50 per liter, and NNPC has been selling it 
wholesale to marketers at N 38.5 per liter.  The National 
Labour Council (NLC) is demanding (reftel) that the price at 
the pump be reduced to around N 38. At that rate, marketers 
tell us that NNPC will have to sell it to them at N 33.5 per 
liter in order for them to clear their transportation and 
marketing margins. According to Wale Tinubu, Managing 
Director of  Oando (formerly Unipetrol), a downstream 
petroleum products marketing company, as quoted in an 
interview with Olusegun Adeniyi in THISDAY Newspaper on 
Thursday, June 10, 2004, NNPC's subsidies of gasoline during 
the past five months were as follows: 
 
January -   N 194,907,861 per day (USD 1.43 million) 
 
February -  N 223,721,904 per day (USD 1.65 million) 
 
March -     N 221,913,871 per day (USD 1.63 million) 
 
April -     N 370,732,860 per day (USD 2.73 million) 
 
May )       N 460,438,839 per day (USD 3.40 million) 
 
(Exchange rate used is N 136 to USD 1) 
 
7.  (U) Taking the average of this, we get USD 2.168 million 
per day in subsidies, or USD 780 million on an annualized 
basis, spent on subsidies. 
 
8.  (U) Nigeria's consumption of refined petroleum products 
is estimated at around 30 million liters a day.  This breaks 
down approximately as 60% gasoline, 20% diesel, 15% kerosene 
and 5% other.  The landed cost of imported gasoline is 
currently around N 50, and the NLC is insisting that the 
price of gasoline be reduced to N 38 per liter, effectively 
forcing the NNPC to either subsidize it at N 12 per liter or, 
for gasoline refined in Nigeria, forgo the extra profit that 
NNPC could have realized had they sold it at international 
market rates.  If we assume that all refined petroleum 
products carry a subsidy of N 12 per liter (N 50 landed price 
minus N 38 sales price), then this amounts to an effective 
subsidy of USD953 million per year going forward.  By way of 
comparison, the entire budgetary revenue of the Nigerian 
government for 2004 is N 1,303 trillion (USD 8.25 billion). 
 
9.  (U) As part of its economic liberalization, the GON began 
selling crude to NNPC at world market prices in April and 
announced this policy publicly in May.  In May, NNPC reduced 
its the number of credit days for its sales from 30 to 15, 
and Nigerian media reported NNPC Group Managing Director 
Funsho Kupolokun on Monday, June 7 as saying that if NNPC 
continued to buy crude at market rates and subsidize the 
price of gasoline, the company would soon be "kaputt." 
 
10. (U) Ulu Akani, Senior Technical Advisor to Kupolokun, 
confirmed to Econoffs on June 10 that NNPC was purchasing 
crude petroleum from the GON at market rates.  He further 
noted that the 200,000 bpd that are refined in Nigeria are 
being sold at below their cost of production. 
 
11.  (U) Attempts to reach Embassy contacts at the MOF to 
reconcile the difference between NNPC's allocation of 445,000 
bpd and Nigeria's refining capacity of 200,000 bpd were 
unsuccessful. 
 
12.  (U) Comment:  So far, the GON economic team appears to 
be serious in its efforts to deregulate the downstream 
petroleum sector, unbundle the NNPC and privatize its 
downstream subsidiaries. NNPC will not be able to resume the 
off-the-books subsidy indefinitely if the government does 
restore the fuel subsidy.  The choices are either to go back 
to the status quo ante, incorporate subsidies into the formal 
federal budget, or lift all subsidies and face the political 
consequences. 
CAMPBELL