US embassy cable - 05ABUJA2087

UNCLAS SECTION 01 OF 02 ABUJA 002087 
 
SIPDIS 
 
SENSITIVE 
 
E.O.  12598: N/A 
TAGS: ECON, EFIN, EPET, PGOV, NI, OIL 
SUBJECT: OIL PRICE IMPACT ON NIGERIA 
 
REF: STATE 186514 
 
1.  (SBU) Summary:  High oil prices have proved a very mixed 
blessing for Nigeria. While greatly boosting government 
revenues, they have increased the challenge of managing 
those revenues.  Though the government is wisely directing 
much revenue to debt repayment, some of the windfall is 
finding its way to potential "white elephant" projects and 
exacerbating intra-government power struggles. Higher oil 
prices have complicated government efforts to deregulate the 
downstream petroleum sector. Nigeria's population has 
suffered through series of price hikes, without yet seeing 
the end of subsidized fuel. High fuel prices are having 
knock-on effects for other goods. The rising cost of 
fertilizer, in particular, will reduce Nigeria's low use and 
affect agricultural output. Shifts in demand and pricing are 
also causing the investment climate in the oil sector to 
evolve. Finally, high oil prices increase the incentive for 
oil theft and diversions. End Summary. 
 
More Revenue, More Headaches 
---------------------------- 
 
2. (SBU) With 85% of Nigeria's government revenue coming 
from oil, and with the GON getting a significant slice of 
oil earnings, including for the moment everything over $35 
per barrel, revenue has tripled in the last several years. 
Given Nigeria's limited absorptive capacity, and limited 
ability to spend it revenue effectively, managing this 
windfall presents a challenge. Under the strong leadership 
at the Finance Ministry and with the support of the 
President, the GON has directed all revenue above a 
benchmark price of $27 per barrel into a special account, 
meant to help temper swings in oil prices. The Finance 
Ministry has determined to direct much this funding toward 
retiring Nigeria's debt to remove debt service obligations 
from future budgets. Still, some of the money is directed 
toward infrastructure investments that might not prove their 
worth.  For example, some of the money is being used to 
build several gas-fired electric power plants, even though 
in the as yet unreformed power sector most plants are not 
covering their costs. 
 
3. (SBU) Nor are the Finance Ministry's plans for 
stewardship of the windfall uncontroversial. The National 
Assembly passed a budget with a higher benchmark price for 
crude oil, allowing higher spending, but the President has 
refused to implement it. It is not clear the Assembly will 
approve the repayment of debt. In addition, the federal 
government legally controls only 48% of revenue, with the 
remaining 52% belonging to the states, many of whose 
governors do not support the proposed uses, which divert 
funds from their control. When the federal government 
ignores or overrides the National Assembly and the 
governors, even under the banner of good fiscal management, 
the rule of law is undermined. 
 
Price of Reform Rises 
--------------------- 
 
4. (SBU) In order to attract investment into oil refining 
and other downstream processes, Nigeria has been seeking to 
remove subsidies and deregulate the downstream petroleum 
sector. Raising prices to market levels is one of the basic 
building blocks of that reform. Unfortunately, each increase 
in domestic prices has quickly been followed by a new 
increase in global oil prices, and despite a series of 
heavily protested price increases, the moving target of 
market prices has not yet been reached, constantly 
postponing the next stage of reform. 
 
All Pain, No Gain 
----------------- 
 
5. (SBU) For the average Nigerian these price increases are 
all there is to see from rising oil prices.  Any material 
benefits have eluded those at the grass roots level.  Rising 
fuel costs, which include not just petrol, but also kerosene 
commonly used for cooking, have contributed to rising prices 
for food and other basic goods. In rural areas, higher 
kerosene prices are forcing many to substitute wood, 
increasing tree cutting and environmental impact. Rising oil 
prices are also pushing up the cost of fertilizer.  Nigeria 
already produces and imports too little to meet it needs, 
and farmers use far less than the optimal amount.  Higher 
prices are likely to reduce fertilizer intensity further, 
with a negative impact on agricultural output, and while 
further pushing up food prices. 
 
Changing the Investment Climate 
-------------------------------- 
 
6. (SBU) Rising prices and shifting demand are affecting oil 
sector investment in Nigeria.  It is bringing new investors, 
some with little experience. For longstanding partners, with 
the price per barrel $60 and upward, the government has 
agreed to talk to oil companies about rethinking how revenue 
above $35 per barrel is split. On the other hand, higher 
prices and profits are raising the pressure on oil companies 
to take responsibility for resolving a growing number of 
issues in Nigeria, such as refining, power generation and 
community development. 
 
Temptation 
---------- 
 
7. (SBU) High prices and tight availability increase the 
already considerable incentives to steal oil and trade in 
domestic quotas. With oil at the heart of corruption in 
Nigeria, the growing returns make it harder to bring 
transparency to the system and to reduce the scope for 
skullduggery. CAMPBELL