US embassy cable - 03LAGOS499

UNCLAS SECTION 01 OF 03 LAGOS 000499 
 
SIPDIS 
 
PARIS FOR OECD/IEA 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EFIN, ECON, EINV, PINS, NI 
SUBJECT: NIGERIA: ENERGY UPDATE, FEB 28 
 
REF: ABUJA 00048 
 
1. This periodic update covering energy issues 
includes: 
--Long Lines - Short on Answers; Fuel Crisis Continues 
--Obasanjo Offers Onshore/Offshore Compromise 
--Exxon-Mobil Produces Early from Yoho Fields, and 
--Marginal Oil Fields Awarded 
 
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LONG LINES - SHORT ON ANSWERS; FUEL CRISIS CONTINUES 
--------------------------------------------- ------- 
 
2. Just as the strike by workers of the Department of 
Petroleum Resources (DPR) was drawing to a close, 
Nigeria faced a new challenge in its energy sector; 
failed deliveries of finished petroleum caused serious 
fuel shortages throughout Nigeria last week, closing 
gas stations and forcing consumers to queue in lines 
not seen in years.  In cities across Nigeria, lines 
snaked up to two miles from filling stations open only 
a few hours a day, and in some instances cars were 
simply left idle in place, adding to already chaotic 
traffic situations.  Those consumers who were able to 
top off their tanks faced hiked prices by pump 
attendants or roadside black marketers, and those who 
used public transport paid higher fares when they 
managed to find their way onto a running vehicle.  Area 
boys took advantage of the captive audiences, extorting 
money from motorists and passersby by intimidation and 
force. 
 
3. Original theories that the DPR strike was the root 
of the gas lines gave way to the reality that Nigeria 
was simply running out of fuel.  Nigeria imports nearly 
half of the refined petroleum products it consumes, and 
the Nigerian National Petroleum Corporation (NNPC) 
revealed that, in the wake of rising world petroleum 
prices caused by the growing tension over Iraq and the 
ongoing troubles in Venezuela, its suppliers redirected 
January and February shipments to more lucrative sales 
to the US and Venezuela.  NNPC received just 30 percent 
of its contracted cargo in January, driving its fuel 
stock down from a 20-day reserve to an 11-day reserve 
by February 24.  It is reported that NNPC has changed 
its import pricing formula to better reflect market 
trends, which will add a 10 to 20 percent premium to 
Nigeria's import costs. 
 
4. To combat the shortages, NNPC ordered its second and 
third quarter shipments for delivery at the same time. 
The government also hopes to have its two refineries at 
Port Harcourt, which have been offline due to power 
problems and maintenance, running again soon. In the 
short term, two ships recently off-loaded 56 million 
liters of gasoline, but this may offer only a very 
brief reprieve as the daily national demand runs from 
18 to 25 million liters.  Further, an Exxon-Mobil 
official told Econoff that the sorry state of tanker 
facilities in Lagos will slow all off-loading, so that 
even when ships come in, fuel will not flow quickly to 
consumers.  The situation did improve over the weekend, 
as gas lines receded and filling stations were 
returning to normal business hours this week.  However, 
spot reports of new queues are coming in again as the 
week goes on. 
 
5. Comment: The irony that the world's seventh largest 
crude oil exporter must import half of its refined 
petroleum products has not been lost on commentators 
and consumers alike. A fuel crisis reminding Nigerians 
of bygone days of military rule and of the fragile 
state of their economy comes at a terrible time for 
President Obasanjo, less than two months before the 
national election.  With each new incident of ethnic 
violence, tensions are certain to rise if an ongoing 
fuel shortages continue to hamper the daily routine of 
business and personal lives.  Suggesting the gravity of 
the government's concern over the situation, 
Information Minister Jerry Gana publicly blamed the gas 
lines on a smear campaign by Obasanjo opponents, and 
radio news reports quoted Obasanjo as saying there is 
no fuel shortage, but rather, people are simply 
hoarding gasoline. Fuel shortages will continue should 
Nigeria fail to make market-competitive purchase offers 
for gasoline as US demand for it rises on the eve of 
possible conflict in Iraq and the upcoming summer 
driving season. 
 
6. Comment continued: One positive outcome of this fuel 
shortage may be renewed interest in deregulating and 
commercializing Nigeria's downstream petroleum sector. 
John Pototsky, Managing Director of Mobil Oil Nigeria 
(MON), was recently quoted as saying that while MON 
enjoyed higher sales volume in 2002, its profits were 
very low due to the GON's pricing scheme.  As recently 
as 2000 and 2001, downstream marketers imported 
gasoline since the world market price and the domestic 
retail pump price were aligned closely enough for the 
companies to manage small but notable profits.  More 
recently, world market prices have far exceeded those 
that the retailers are allowed to charge at the pump, 
so the NNPC has essentially become the sole importer of 
gasoline. The downstream international operators import 
gasoline for the NNPC at world market prices, fuel that 
the NNPC sells at artificially low prices. Obasanjo's 
energy adviser, Rilwanu Lukman, was quoted as saying 
the system cannot be maintained at current prices owing 
to the large government subsidies it entails. A 
"BusinessDay" editorial called for a shift to free 
market mechanisms, including invitations to foreign 
companies to purchase and maintain existing refineries, 
pipelines and depots. End comment. 
 
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OBASANJO OFFERS ONSHORE/OFFSHORE COMPROMISE 
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7. President Obasanjo offered a compromise in the 
ongoing legislative battle over the allocation of oil 
revenue between the federal government and those states 
from which oil is extracted (reftel).  In a letter read 
to the Senate this week, Obasanjo calls for abandoning 
the earlier proposals by him and the National Assembly 
for demarcating what production is onshore versus 
offshore for revenue sharing purposes.  Obasanjo had 
previously proposed that a 24-mile contiguous zone off 
the coastline should be used to determine which 
production sites are subject to the special derivation 
fund, from which oil producing states are entitled to a 
13 percent share of oil tax and royalties.  The 
National Assembly's formula would have extended the 
reach of the derivation fund to the Continental shelf 
and the Economic Zone.  Obasanjo now argues both plans 
have technical and political drawbacks, and instead, 
proposes that all production lying within 200 meters of 
water should be subject to the derivation fund. 
 
8. An Exxon-Mobil representative confirmed that all 
existing producing oil fields lie within a 200-meter 
depth zone, which is roughly equivalent to the edge of 
the Continental Shelf.  This proposal would then place 
all deepwater oil discoveries not yet producing outside 
the scope of the derivation fund and within the sole 
purview of the federated account, the funds of which 
are distributed on the basis of a complicated formula 
amongst the federal government and all states and local 
governments. 
 
9. Comment: The Exxon-Mobil representative noted that 
prior to last year's Supreme Court ruling defining 
onshore and offshore to the federal government's 
advantage, Akwa Ibom state received three billion Naira 
each month from the derivation fund, but was left with 
no revenue from that account as a result of the ruling. 
(The federal government has been providing the state 
600 million Naira per month in the intervening period, 
according to our industry source.) He estimates that 
Obasanjo's proposal will provide Akwa Ibom with the 
same revenue it previously enjoyed.  Thus, he 
anticipates the littoral states will support Obasanjo's 
new proposal, as is evidenced by public support voiced 
by the governor of Delta State.  If this measure is 
successful in the National Assembly, it could go a long 
way toward shoring up political support for Obasanjo in 
the South South; the leaders from the Northern states, 
however, are unlikely to easily accept any proposal 
conferring benefit to the South. End comment. 
 
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EXXON-MOBIL PRODUCES OIL EARLY FROM YOHO FIELDS 
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10. Exxon-Mobil has begun production from its Yoho 
development project two years ahead of schedule, by 
using a temporary floating, production, storage and off- 
loading (FPSO)vessel as an early production system 
(ESP).  The Yoho project is a Mobil Producing Nigeria 
(MPN)and NNPC joint venture (JV), located in the 
relatively shallow waters of Oil Mining Lease(OML) 104. 
The $1.2 billion project has estimated recoverable 
resources of 0.4 billion barrels of oil, and represents 
the first deployment of an ESP in West Africa.  The 
Yoho JV will have a production capacity of 
approximately 650,000 barrels per day I(bpd), and while 
press reports indicate it is currently producing 90,000 
bpd, an Exxon-Mobil executive told Econoff it is 
already reaching or exceeding 100,000 bpd. 
 
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MARGINAL OIL FIELDS AWARDED 
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11. After a sometimes contentious two-year process, the 
federal government this week announced 31 companies who 
have won licenses to operate 24 marginal oil fields in 
the Niger Delta.  The fields may hold up to 2.3 million 
barrels of crude oil, and are considered marginal 
because each produces no more than approximately 5,000 
bpd, which the major oil companies consider 
economically unviable for the scale of their 
operations.  The GON hoped to spur development of 
indigenous companies, greater domestic income and more 
local jobs through the sale of these marginal fields. 
It reviewed bids from 66 companies, including several 
state-owned firms.  Presidential energy adviser Lukman 
called on the winning firms to aggressively develop 
their operations, and implored the financial industry 
to assist these companies in raising capital. 
 
HINSON-JONES