US embassy cable - 04ABUJA1070

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 001070 
 
SIPDIS 
 
E.O. 12958: DECL: 05/09/2014 
TAGS: PGOV, EPET, ECON, EFIN, NI 
SUBJECT: STRIKE WAS MINOR SETBACK FOR GASOLINE 
DEREGULATION, LITTLE OTHER IMPACT ON ECONOMIC REFORM 
 
REF: ABUJA 1054 AND PREVIOUS 
 
CLASSIFIED BY AMBASSADOR JOHN CAMPBELL FOR REASONS 1.5 (b&d). 
 
1. (C) Summary: The strike and rollback of prices are a 
temporary setback for gasoline deregulation, similar to the 
other rollbacks on price and the fuel tax over the past year. 
 The GON likely will regroup and raise the basic pump price 
again in a few months, as it has done over the past year from 
N34 per liter last June to the N50-52 range before the latest 
strike and the N40-42 after it.  The GON appears intent on 
continuing in this herky-jerky fashion toward ending the 
gasoline subsidy, and if the subsidy diminishes over time it 
will have only a marginal effect on the rest of the economic 
reform policy.  End Summary. 
 
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NNPC'S GASOLINE SUBSIDY 
----------------------- 
 
2. (C) The Nigerian National Petroleum Corporation (NNPC) has 
been complaining loudly about the deleterious effect of fuel 
subsidization.  NNPC Group General Manager Barkindo called 
for a (Naira) N70/liter price, telling Econoff June 14 that 
the price rollback was unsustainable.  Barkindo said GON has 
wanted to make NNPC "fend for itself," operating in a 
competitive manner, generating its own revenue, and paying 
taxes as well as shareholder dividends to the GON.  Two 
Central Bank (CBN) Deputy Governors echoed that sentiment to 
Econoff, noting that fuel deregulation is one plank of the 
NEEDS development program, and that deregulation was also 
necessary to free resources for building infrastructure and 
widening the productive base of the economy. 
 
3. (C) Their case appears a bit overstated, given the 
mechanics of how NNPC subsidizes gasoline imports.  The GON 
allocates 445,000 bpd to NNPC for domestic use, only a paper 
transaction of the NNPC's own oil.  NNPC Senior Assistant 
Akani told Abuja Econ Specialist that 200,000 bpd (around 45 
percent) of that domestic allocation goes to Nigerian 
refineries and becomes gasoline sold at less than the cost. 
The other 245,000 bpd is sold in the international market, 
and the revenue from the sales is used to import refined 
products for local consumption.  The domestic allocation 
crude is accounted by the GON as being bought from, and then 
sold to, NNPC at a price a reliable source recently told 
Lagos Econoff was USD 28/bbl.  Whatever of the domestic 
allocation crude NNPC then sells on the international market 
at USD 38/bbl, for example, yields some USD 4.45 million for 
buying gasoline. 
 
4. (SBU) NNPC tells us domestic gasoline consumption is about 
30 million liters/d.   The 45 percent produced by GON 
refineries means 16.5 million liters/d must be imported. 
NNPC claims the landed cost per liter is about N50 (approx. 
USD 0.37), but it sells to marketers at N38.5, a loss of 
about N 11.50/liter.  Multiplying that loss of N11.50 by 
imports of 16.5 million liters means the subsidy is some N190 
million per day (about USD 1.4 million).  Subtracting this 
from the revenue NNPC makes off selling that 55 percent of 
its domestic allocation abroad (USD 4.45 million), and not 
taking into account Akani's assertion that domestically 
refined fuel is sold at less than cost, we arrive at around 
USD 3 million per day in profits for NNPC. 
 
5. (C) If NNPC is not losing money, the GON is losing that 
USD 4.45 million as an opportunity cost in the sense that it 
could otherwise go into the budget as revenue.  Certainly the 
GON is not telling anyone how the NNPC subsidy, necessary for 
importing gasoline at a higher price than NNPC sells it to 
retailers, works.  (Comment: If all of Nigeria's refineries 
were fully operational, all of the NNPC domestic crude 
allocation would be refined domestically and NNPC's 
opportunity for arbitrage by selling most of the domestic 
crude allocation abroad would no longer exist.  This 
arbitrage may be one reason why there has been no serious 
effort to put Nigeria's refineries in working order. End 
Comment.) 
 
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ECONOMICALLY SUSTAINABLE? 
------------------------- 
 
6. (SBU) Whether or not the gasoline subsidy is financially 
sustainable depends on several factors, including the time at 
which the subsidies are paid, the international price for 
gasoline, the quantity of gasoline imported (an inverse 
function of domestic refinery output), and the volume and 
price of the crude oil on international markets.  The subsidy 
may well be sustainable, even when retailers are selling 
gasoline as low as the N38 base pump price, since 
international gasoline prices are likely to decline in late 
summer as vacations end and Iraqi exports and refining come 
on line.  Of course, reduced crude oil prices would reduce 
the amount available to pay the subsidy on gasoline, unless 
the arbitrary GON-internal pricing of the crude was lowered 
too. 
 
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SUSTAINABLE AS POLICY? 
---------------------- 
 
7. (C) Most Nigerians are amazingly and willfully ignorant 
about the economics of gasoline deregulation.  Gasoline 
should be cheap because Nigeria is an oil producer, in their 
view, and cheap prices has meant in practice keeping the 
price wherever it was last time they went to the pump. 
Nigerians in general are also skeptical of gasoline price 
reforms pursued by the GON, particularly since past raises 
were supposed to be used for infrastructure investments that 
have never materialized.  Most Nigerians believe fuel price 
deregulation favors a small group of people, namely who 
possess easy access to foreign exchange and illicit funds. 
In the obvious sense that deregulation has not been finished, 
that part of the GON's economic reform policy has not been 
accomplished and faces a popular challenge. 
 
8. (C) It would be a mistake, in our view, however, to 
interpret the continuation of fuel subsidies as proof that 
the GON is not committed to economic reform.  This would be 
taking a small part of the picture and extrapolating it to 
the whole.  Nigeria's reform blueprint, the National Economic 
Empowerment and Development Strategy (NEEDS), encompasses 
many reform measures, and the removal of the subsidy on 
gasoline is but one of them.  Backpedaling on gasoline price 
levels has been common in Nigeria's recent history, and those 
prices are likely to go up stealthily again once the strike 
is a few months past. 
 
9. (C) Although it is certainly not intended, continuing the 
subsidies on fuel actually has some short-term marginal 
benefits for the economy which redound to the benefit of 
reform efforts.  Nigeria has no viable rail system or viable 
electrical grid.  Everything in Nigeria moves by motor 
vehicle and much electricity is generated by private 
diesel-fueled generators, so lower fuel prices act as a 
buffer on already problematic inflation.  Agricultural 
development benefits from lower transport costs.  As the NNPC 
subsidy occurs outside the budget, before NNPC revenues are 
the GON's budget revenues, there is no direct addition to the 
budget deficit.  Obviously, however, the main short-term 
negative effect is that the NNPC profits could be channeled 
into GON budget revenue if they were not used to subsidize 
gasoline imports. 
 
10. (C) There is another issue on transparency.  The NNPC 
subsidy for gasoline is totally opaque to the general public, 
both amounts and process, although under EITI and the new G8 
Compact the GON is committed to publishing NNPC revenues and 
costs.  Many Nigerians assume the GON is subsidizing gasoline 
imports somehow, and should be subsidizing them, with the 
"excess crude revenues" that are the difference between the 
GON's budget target price of N25/bbl and the rather higher 
prices it is actually receiving.  All of that is currently 
required by law to go into an escrow account the Finance 
Ministry must report to the National Assembly on a quarterly 
basis, and thus could not go toward the present gasoline 
subsidy which is outside the budget.  National Assembly 
leaders have recently proposed, however, setting up a 
supplementary budget to fund gasoline subsidies. 
 
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POLITICALLY SUSTAINABLE? 
------------------------ 
 
11. (C) The long-term political effects from this course of 
slow and gradual deregulation by stealth may be a more 
serious threat to the government than to the particular 
policy.  The complete lack of transparency in the subsidy 
system only adds to Nigerians' angst, as expressed in the 
continuing cycle of raising price, crises from opposition to 
raising prices, the GON appearing to retreat from raising 
prices, and then raising prices a few months later to begin 
the cycle again.  Political alienation is very high, across 
Nigeria, and this "one step back, two steps forward" strategy 
adds considerably to that alienation even if is ultimately 
successful in ending the gasoline subsidy. 
 
12. (C) This cycle also plays havoc with the proper phasing 
and sequencing of other economic reforms.  And it has 
virtually precluded foreign investment to bring Nigeria's 
refineries back to being capable of producing Nigeria's 
gasoline needs, absent the GON divesting itself of all public 
equity in the refineries by auctioning them off to the 
highest bidder without insisting on a floor price.  As CBN 
Deputy Governor Lemo noted, "We need to enlighten the public 
to understand that subsidizing fuel is not in their long-term 
interests," 
CAMPBELL