US embassy cable - 05LAGOS1376

UNCLAS SECTION 01 OF 03 LAGOS 001376 
 
SIPDIS 
 
SENSITIVE 
 
DOE FOR DAS JBRODMAN AND CGAYE 
TREASURY FOR ASEVERENS AND SRENANDER 
DOC FOR KBURRESS 
STATE PASS TRANSPORTATION MARAD 
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ 
STATE PASS EX-IM FOR JRICHTER AND KVRANICH 
STATE PASS OPIC FOR ZHAN AND JEDWARDS 
STATE PASS TDA FOR NCABOT AND BTERNET 
 
E.O. 12958: N/A 
TAGS: EPET, ELAB, EPET, KDEM, PGOV, NI 
SUBJECT: NIGERIA: FUEL PRICE HIKE AND NATIONAL STRIKE UPDATE 
 
REF: LAGOS 1350 
 
Summary 
-------- 
 
1.   (SBU)  On August 26, the Petroleum Products Regulatory 
Agency (PPPRA), citing increased international oil prices, 
raised gas prices from 50 Naira/liter to 65 Naira/liter. The 
Nigerian National Petroleum Corporation (NNPC) requested the 
increase, claiming it could no longer shoulder the financial 
burden of importing products at high international prices 
but selling them domestically at lower subsidized prices. 
The PPPRA claims $1 billion has been spent in 2005 
subsidizing domestic fuel consumption.  Civil society 
immediately protested the price increase.  The Nigerian 
Labor Congress, (NLC), Trade Union Congress (TUC), and other 
civil society groups are meeting to decide on holding a 
national strike.  However, weakened by half-hearted 
adherence to strikes over the last year, the NLC may no 
longer have the power to launch a hard-hitting strike. 
 
2.   (SBU)  The PPPRA wants to eliminate all subsidies, 
which would mean a price hike to approximately 72 
Naira/liter for gas.  However, given today's high oil 
prices, a subsidy in the 5-7 Naira range would be a 
palatable compromise.  However, if a subsidy continues, the 
PPPRA Executive Secretary advocates a "stabilization fund", 
rather than allow NNPC to continue the non-transparent 
process of "dipping its hand" into the national Treasury to 
cover financial shortfalls caused by the subsidization. End 
Summary. 
 
PPPRA Raises Gas Price to 65N/Liter to Keep Pace with Oil 
Prices; NNPC Says it Cannot Finance Growing Subsidies 
--------------------------------------------- ----------- 
 
3. (U) On August 26, the Petroleum Products Regulatory 
Agency (PPPRA) raised the price of gasoline (termed premium 
motor spirit in Nigeria) from 50 Naira/liter to 65 
Naira/liter -- 7 Naira short of 72 Naira/liter price 
increase announced in the press earlier.  The GON directed 
that prices of diesel and kerosene remain at 70 Naira/liter. 
NNPC requested the price increase, on the grounds that it 
can no longer afford to import, supply, and distribute at 
the lower subsidized domestic prices.  GON officials claim 
NNPC spends about 300 million Naira daily (about $220,000 
USD) financing the 30 million liters of petroleum consumed 
in Nigeria. 
 
Filling Station and Transport Costs Rise, Gas Queues 
Initially Result; GON Warns Against Price Gouging 
--------------------------------------------- ------ 
 
4.  (U) In Lagos, most filling stations quickly adjusted to 
reflect the price change; motorists griped but lined up to 
buy at the new price.  Queues appeared when the price was 
initially announced, but have disappeared as people 
grudgingly adjust to the change. Commuter costs on public 
transport jumped immediately. Nonetheless, the GON is acting 
to prevent "price gouging."  On August 29, the GON warned 
petroleum marketers to refrain from selling above the 
approved price of 65 Naira/liter for gasoline and 70 
Naira/liter for diesel and kerosene. The Department of 
Petroleum Resources (DPR) has been directed to ensure 
compliance with the new price regime. (Comment: Since the 
new price became effective on August 26, marketers outside 
Lagos and some states in the southwest have been selling gas 
for 67 to 72 Naira/liter.  End comment.) 
 
NLC, TUC, Meeting to Discuss Strike, 
Plan to Disregard Nat'l. Strike Ban 
-------------------------------------- 
 
5.  (SBU)  Organized civil society, led by the Nigerian 
Labor Congress (NLC), swiftly critiqued the price increase. 
The populist National Assembly joined cause, yet again 
refusing to support the Executive on the need to revise 
prices upwards.  The Nigerian Labor Congress (NLC) is 
holding a meeting August 31 to decide its course of action. 
It has already directed 36 states councils and 29 affiliate 
unions to begin mobilizing for a strike.  NLC leaders told 
us that the labor law passed in March, inter alia, prevents 
the NLC from calling a fuel strike, will not be an issue in 
their discussions.  The NLC has decided to ignore the law. 
Nevertheless, the NLC is encouraged by the initial 
conciliatory response from NNPC to the NLC's overtures. The 
NLC is unlikely to take a final decision to strike without 
further discussion with NNPC.  The NLC will attempt to 
involve the President and National Assembly in discussions, 
so a lasting decision can be made. 
 
6.  (U)  The Trade Union Congress of Nigeria (TUC), the 
umbrella union for senior staff workers, is scheduled to 
meet September 1 to decide steps to force a price reversal. 
Local newspapers report the TUC had issued a 10-day 
ultimatum (ending September 6), to the GON to revert to the 
old pump price of petroleum products, or face mass protest 
from an angry TUC-led public. 
 
Petroleum Unions Engaged in Negotiations 
------------------------------------------ 
 
7.  (SBU)  Members of NUPENG and PENGASSAN, the junior and 
senior staff petroleum workers' unions, are currently 
discussing the price hike with NNPC. Union members are 
concerned about transparency in fuel pricing decisions, and 
adherence to due process procedures when adjusting prices. 
The two unions recently signed a communique outlining their 
arguments.  On Wednesday, August 31, the unions plan to 
release another communique advocating better-defined 
structures for fuel pricing matters.  Negotiations are 
progressing, and union leaders feel that a decision to 
strike will not be taken soon. 
 
Civil Society Protests Against 
Fuel Price Hike Increasingly Shrill 
-------------------------------------- 
 
8.  (SBU)  Despite these private remarks pointing to 
moderation, the tenor of press comments by some civil 
society groups are growing shrill.  In an August 30 press 
report, the NGO Environmental Rights Action/Friends of the 
Earth called the price hike, "wicked and inhuman," saying 
the Federal Government is "implementing the agenda of the 
International Monetary Fund and the World Bank, who want 
nothing for Nigeria but poverty and hardship."  The 
Conference of Nigerian Political Parties, an amalgam of 
opposition parties, directed its members to prepare for mass 
action. 
 
PPPRA Questions Sustainability of a Strike 
------------------------------------------- 
 
9.  (SBU)  In an August 25 meeting with the Executive 
Secretary of the Petroleum Products Pricing Regulatory 
 
SIPDIS 
Agency (PPPRA) Dr. Oluwole Oluleye, he thought the NLC would 
strike to test the GON's resolve regarding fuel prices.  He 
pointed out that if the NLC leadership did not strike, 
"their constituency will throw them out." However, he 
questioned if the strike would be sustainable. 
 
Conversation with Petroleum Products Pricing Regulatory 
Agency Highlights Role in Deregulation of Downstream Sector 
--------------------------------------------- -------------- 
 
10.  (SBU)  Oluleye explained the PPPRA's mandate in the 
deregulation of Nigeria's downstream petroleum market. 
PPPRA is responsible for controlling prices while the GON 
gradually phases out subsidies.  PPPRA also serves as an 
advocate for deregulation within the GON, and to the 
Nigerian public and press, making the (often unpopular) case 
that deregulation serves the long-term needs of the Nigerian 
people. PPPRA, an independent agency, reports directly to 
the President. 
 
Eliminate Fuel Subsidies, or Establish Stabilization Fund; 
GON Spent nearly $1 Billion on 2005 Subsidies 
--------------------------------------------- ----------- 
 
11.  (SBU)  Dr. Oluleye told us PPPRA advocates for full 
cost recovery and the elimination of all subsidies in the 
downstream market.  However, if the GON decides full market 
pricing is too much for the public to bear, Dr. Oluleye 
advocates a stabilization fund to finance the subsidy.  The 
GON has never budgeted a fuel subsidy.  Rather, NNPC simply 
"dips its hand" into the national Treasury to cover the 
subsidy.  Dr. Oluleye stated the GON spent about 124 billion 
Naira, or nearly 1 billion USD, to subsidize fuel products 
during the first 8 months of 2005.  Dr. Oluleye explained 
that if a subsidy were budgeted, the GON could make a policy 
decision to subsidize until the fund was depleted; however, 
the fund at least would have a transparent, well-understood 
limit. 
 
PPPRA: 72 Naira/Liter is Current Goal; 
5-7 Naira Subsidy May be an Acceptable Compromise 
--------------------------------------------- ---- 
 
12.  (SBU)  Dr. Oluleye explained the PPPRA would currently 
like to set the fuel price at N72/liter, to allow for full 
cost recovery.  However, given the current quagmire over 
fuel prices, Dr. Oluleye indicated a 5-7 Naira/liter subsidy 
would be a reasonable compromise. 
 
PPPRA Unlikely to Get Full Cost Recovery Now, 
but Confident in Long-Term Strategy 
--------------------------------------------- - 
 
13.  (SBU)  Dr. Oluleye has reason to be confident PPPRA 
will have some success in closing the subsidy gap.  He 
recounted that from 2003 to January 2004, the GON managed to 
eliminate the subsidy; consequently petroleum products were 
readily available in the market.  However, in May 2004, 
international crude prices started their relentless climb. 
PPPRA raised fuel prices significantly in November 2004, but 
has been unable to keep pace with accelerating world prices. 
As for the current impasse, Dr. Oluleye admitted PPPRA is 
unlikely to get to full cost recovery in the current row. 
 
Comment 
-------- 
 
14.  The rise in international prices doubtless triggered 
the GON move to raise domestic prices.  Unfortunately, the 
GON will be chasing a moving goal post if international 
prices continue to climb.  The political will to deregulate 
is there, but so is the political reality of a grumbling 
public, and a not so good underlying economy.  In this 
environment, the GON will be hard pressed to achieve 
complete deregulation.  The current increase may be as much 
as the public will bear without igniting a backlash. 
 
15. (U)  This cable was cleared by Embassy Abuja. 
 
BROWNE#