US embassy cable - 05LAGOS61

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000061 
 
SIPDIS 
 
STATE FOR AF/W 
STATE FOR CA/OCS/FROBINSON 
STATE FOR EB/ESC/IEC/ENR/BLEVINE 
STATE FOR DS/IP/AF 
STAT FOR INR/AA 
STATE PASS DOE FOR DAS JBRODMAN AND CGAY 
STATE PASS TREASURY FOR ASEVERENS AND SRENENDER 
STATE PASS DOC FOR PHUPER 
STATE PASS TRANSPORTATION FOR MARAD 
STATE PASS OPIC FOR CDUFFY 
STATE PASS TDA FOR BTERNET 
STATE PASS EXIM FOR JRICHTER 
STATE PASS USTR FOR ASST USTR SLISER 
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ 
 
E.O. 12958: DECL: 12/27/2014 
TAGS: ECON, EINV, EPET, PGOV, NI 
SUBJECT: LAGOS BUSINESS EXECS GRIM ON NIGERIAN BUSINESS 
CLIMATE 
 
REF: A. ABUJA 001946 
 
     B. ABUJA 02040 
     C. LAGOS 02447 
 
Classified By: Classified By: Acting Consul General Ronald Kramer for R 
easons 1.4 (D & E) 
 
1.  (C)  Commercial and Energy Officers recently met with 
group of senior business executives from American firms based 
in Lagos, who expressed substantial concern with the Nigerian 
business environment and import bans.  They believe the GON 
is failing to develop the institutions and policies needed to 
promote growth in the private sector.  The Exxon Mobil 
Managing Director noted the GON is not even funding oil 
projects at a sufficient level to maintain current production 
capacity of approximately 2.4 million barrels/day.  The 
Texaco MD predicted the labor dispute over fuel prices would 
become an issue again in January, when authority for the fuel 
price reduction expires.  The Citibank MD expressed concern, 
given that politicians are already jockeying to position 
themselves for the 2007 election, with how the GON will spend 
the $16 billion in reserves accumulated due to record high 
oil prices.  End Summary. 
 
Serious Concern about Trade and Business Environment 
--------------------------------------------- ------- 
 
2.  (C)  Commercial and Energy Officers recently met with 
group of senior business executives from American firms based 
in Lagos.  They groused about the Nigerian business 
environment and import bans.  There was general agreement 
that the GON's economic 'dream team' is a well-educated but 
relatively powerless group.  (Reftel B) There was a consensus 
that President Obasanjo instead seems susceptible to a small 
coterie of political insiders and businessmen who use 
nationalist economic rhetoric to justify import bans and 
trade restrictive practices that promoted the group's narrow 
self-interest.  Discussants noted that there is a plan to 
phase out the import bans by 2007, but also remarked on a 
failed promise to do so two years ago. 
 
Personal Connections Needed where Institutions Fail 
--------------------------------------------- ------ 
 
3.  (C)  The Commercial Officer reported on the recent TIFA 
negotiation in Abuja, noting the prepared statements by USTR, 
DOS and USDA were quite critical of the GON.  The business 
executives were disappointed but not surprised that GON 
interlocutors did not view the import bans and other trade 
restrictions as negative.  There was general alarm at the 
situation suffered by Proctor and Gamble, which had to 
temporarily shut down its new Lagos diaper factory in 
September due to an import ban that blocked raw material 
essential to diaper-marking from coming into Nigeria. 
Despite successful operations in difficult markets around the 
world, Proctor and Gamble apparently has not able to break 
even after thirteen years of operation in Nigeria. (Reftel A) 
 Discussants noted that while Finance Minster Okonjo-Iweala 
appears to have intervened to resolve Proctor and Gamble's 
specific issue, the GON is failing to develop the 
institutions and policies to promote a functioning private 
sector.  Instead, problems continue to be addressed through 
informal methods and personal relationships. 
 
EM Foresees Production Decline at Current Funding Levels 
--------------------------------------------- ----------- 
 
4.  (C)  Exxon Mobil Managing Director John Chaplain stated 
that joint venture (JV) projects with the parastatal Nigerian 
National Petroleum Corporation had been funded at $4.23 
billion for the year, with Exxon Mobil's funding requests cut 
by one-third (Reftel C).  Chaplain assessed that gas projects 
had been funded sufficiently, but not oil projects.  (Note: 
This shift likely reflects the GON's strategic move towards 
exploitation of Nigeria's ample gas reserves, estimated to be 
the 7th largest in the world.  End note.)  Chaplain expressed 
serious concern the GON is not funding oil projects at a 
level sufficient to maintain current production capacity of 
approximately 2.4 million barrels/day.  If oil production 
declines, Chaplain noted that government revenues will also 
decline, as currently about 70 percent of GON revenues are 
derived from oil production.  Discussants noted a decline in 
oil revenues would have serious fiscal implications for 
Nigeria.  Chaplain observed that the GON appears to be 
deliberately starving oil projects of revenue; he believes 
the GON is attempting to force energy firms to accept 
alternative funding arrangements, where the firms are paid in 
oil or through other financial arrangements, rather than 
through their share of the revenue stream generated by JV 
projects. 
 
Authority for Fuel Subsidy Runs Out in January 
--------------------------------------------- -- 
 
5.  (C)  Jules Harvey, Vice President and Managing Director 
of Texaco Nigeria (Chevron Texaco's downstream subsidiary) 
predicted the dispute over fuel prices would remain mute 
until January, when temporary authorization for subsidies 
allowing for lower consumer fuel prices runs out. 
 
Refinery Privatization Pace May Accelerate 
------------------------------------------- 
 
6.  (SBU)  On the issue of refinery privatization, Harvey 
noted that Credit Suisse First Boston had been commissioned 
to manage the refinery privatizations, but the Bureau of 
Public Enterprises had apparently never paid the firm.  After 
the temporary departure of the consultants carrying out the 
work, NNPC has now agreed to pay the CSFB bill.  He 
anticipates new developments in refinery privatizations as 
soon as the consultants return to Nigeria.  (Comment: Mission 
anticipates that absent full deregulation of the downstream 
fuel sector, the GON will continue to experience serious 
difficulties in attracting credible foreign investors to 
rehabilitate existing refineries or to build new ones.) 
 
Concern over Bill Mandating Local Refining 
------------------------------------------- 
 
7.  (C)  Harvey explained that energy firms remain concerned 
about legislation which may force them to refine a set 
percentage of their crude oil locally.  (Note: The four 
domestic refineries currently run at about 20 percent of 
capacity.  As Nigeria currently lacks sufficient domestic 
refining capacity to implement this bill, many in the 
industry view this measure as a backdoor attempt to force the 
majors to construct a domestic refining industry in Nigeria. 
The majors have strenuously resisted prior attempts to force 
them to carry out refining in Nigeria.  In various past 
showdowns with the majors, the GON has threatened them with 
loss of production rights; the majors have countered that 
they would  halt production if forced to refine domestically. 
 The GON has then backed off.  If successful deregulation of 
the downstream market is carried out, Mission believes the 
majors would entertain refining some products locally. 
Industry members are also concerned such a bill would force 
them to sell a percentage of their products domestically, 
when the Nigerian fuel market remains regulated and prices 
below actual international values. 
 
$13 Billion in Reserves;Where will the Money be Spent? 
--------------------------------------------- ---------- 
 
8.  (C)  Harvey remarked that due to high international oil 
prices in excess of budget assumptions, Nigeria increased its 
foreign reserves from around $2 billion 16 months ago, to 
over $13 billion today.  Harvey noted the GON budget was 
based on benchmark assumptions of monthly oil production of 
2.7 million barrels/day at $27/barrel. While there has been 
no final decision on the allocation of these excess funds 
above the benchmark price, the GON plans to use them for an 
unspecified combination of building a 'rainy day' fund, 
paying off international debt, and financing infrastructure 
improvements.  A low benchmark also allows the GON to avoid 
boom and bust budgetary cycles that have plagued past 
Nigerian governments.  The 2.7 million barrels/day production 
benchmark, while well above Nigeria's current 2.4 million 
barrels/day capacity, appears to take into account production 
anticipated to come on-line in 2005 at Shell's Bonga and 
Exxon Mobil's Yoho fields.  Khaled Qurashi, Managing Director 
of Citibank, noted that while the GON says it plans to spend 
excess oil revenues on infrastructure and debt reduction, 
there has not yet been any meaningful drawdown of these 
reserves, despite the GON's many overdue bills with its 
contractors.  Qurashi expressed concern that, in the run-up 
to the 2007 elections, this money might be spent on poorly 
conceived projects or diverted for election spending.  He 
also noted that the perception of Nigeria having a large 
surplus fund might also argue against some countries 
considering debt relief for Nigeria. 
 
Need for an American Business Association? 
------------------------------------------ 
 
9.  (C)  There was a consensus among the discussants that the 
Nigerian-American Chamber of Commerce is not performing its 
proper role of a bi-national chamber, in terms of business 
and free trade advocacy.  Discussants noted several current 
Chamber members had spoken out in favor of import bans, as 
their personal businesses benefited from these trade 
barriers.  With the growing complexity of U.S. and Nigerian 
business and trade relations, discussants agreed there is a 
need a vehicle to genuinely fulfill the role of a bi-national 
Chamber of Commerce.  While not wanting to alienate the 
current Chamber, discussants agreed that the establishment of 
a new organization is worth exploring. 
KRAMER