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FM AMEMBASSY ABUJA
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RUEHWR/AMEMBASSY WARSAW 0089
RUEHCD/AMCONSUL CIUDAD JUAREZ 0087
RUEAUSA/DEPT OF HHS WASHDC
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RUEKJCS/SECDEF WASHDC//USDP/ASD-HD//
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RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 04 ABUJA 000164 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12598: N/A 
TAGS: ECON EPET ENRG EINV PGOV NI PETROL
SUBJECT: NIGERIAN PARADOX - PETROL SHORTAGES 
 
REF:  LAGOS 39 
 
ABUJA 00000164  001.2 OF 004 
 
 
¶1. (SBU) SUMMARY:  Long gasoline queues have become endemic in the 
past two months.  The Nigerian National Petroleum Corporation (NNPC) 
insists that the product stock available is enough to serve the 
entire country and that pipeline vandalisms is causing the supply 
hiccups.  Pipeline sabotage has increased and is having a 
debilitating effect on fuel supply and the economy.  It is not clear 
the GON has a plan to deal with continuing problems.  END SUMMARY. 
 
Petrol Queues 
------------- 
 
¶2. (U) Fuel queues started across the country beginning in December. 
 The media reported that the problem was due to an artificial 
scarcity caused by the hoarding of petroleum products by retailers. 
In the past, retailers hoarded petrol in anticipation of a price 
hike and historically price hikes have come in January. As reported 
in reftel, petrol scarcity has led to astronomical increases in 
prices and a black market.  In some parts of the country petrol 
sells for as much as 300 naira in the black market and at the pumps 
it sells for well above the official price of 65 naira. 
 
Agricultural Production Affected 
-------------------------------- 
 
¶3. (U) Due to the petrol shortage in Jos, a farm that supplies 
produce to the Embassy community reported farmers cannot run 
irrigation pumps or transport produce creating shortages of and 
higher prices for carrots, cabbages and potatoes.  The high cost of 
petrol has led to an increase in transportation costs and 
commodities prices in general.  A journey from Lagos to Ibadan 
before cost 500 Naira, but now costs as much as 1,500 Naira.  In 
addition, the long lines at petrol stations have resulted in lost 
employee work hours as people wait in queues six hours or more to 
buy fuel when it is available. 
 
MAJOR OIL PRODUCER = SHORTAGES?? 
-------------------------------- 
 
¶4. (U) According to the Energy Information Administration of the 
U.S. Department of Energy, Nigeria is the tenth largest producer of 
crude oil in the world and the largest in Africa.  At the same time, 
life in Nigeria is characterized by erratic supply of petroleum 
products.  Shortages are not new.  Nigeria experienced occasional 
acute petroleum products shortages, especially in 1974 and 1975.  In 
the past, the GON set up a judicial commission of enquiry to unravel 
the causes and suggest solutions.  Previous commissions found that 
the lack of effective distribution channels and facilities was a 
fundamental factor.  The commissions recommended the urgent 
provision of a pipeline system and storage depots, engendering the 
present oil pipelines and depots in Nigeria.  This alleviated the 
problem until 1986, when domestic production could not meet demand, 
requiring petroleum products import. 
 
Sources of Petroleum Products 
----------------------------- 
 
¶5. (U) There are two sources of petroleum supply in Nigeria - local 
refineries and imports.  There are four refineries in the country: 
Port Harcourt I, Port Harcourt II, Warri and Kaduna.  The four 
refineries have a combined capacity of 445,000 barrels per day 
(bpd), and a refining capacity of 18 million liters of gasoline per 
day (lpd) when working at full capacity.  Currently, national demand 
is 30 million lpd.  The remaining 12 million liters is supplied by 
imports.  Due to mismanagement and poor maintenance, the refineries 
routinely operate below capacity, sometimes requiring importing the 
total volume of national demand.  The NNPC has reported that the 
refineries operate at near 70% capacity, but experts told us that 
these claims are much too high. 
 
Storage of Petroleum Products 
----------------------------- 
 
¶6. (U) The NNPC, major marketers, and independent marketers are the 
three major owners of storage and dispensing facilities.  The NNPC 
owns 22 facilities/depots while the major and independent marketers 
each own one major facility.  The combined holding capacity in cubic 
meters for petroleum product depots in Nigeria are: 1,284,290 for 
gasoline; 708,900 for kerosene; 1,084,900 for diesel; and 85,500 for 
aviation fuel.  Functioning at optimum levels, the depots can hold a 
stock of refined products equal to 30-90 days of national supply. 
Presently, the Atlas Cove Terminal, an offshore terminal and the 
 
ABUJA 00000164  002.2 OF 004 
 
 
country's main petroleum products import receiving facility, is in a 
state of disrepair and not functioning.  Additional constraints 
include inadequate tugboats or pilot cutters for berthing and 
un-berthing vessels; shallow and winding approach channels; and the 
draught and overall vessel length allowed in most berths.  These 
constraints have resulted in delayed ships and increased demurrage, 
exacerbating shortages. 
 
Petroleum Product Distribution 
------------------------------ 
 
¶7. (U) The NNPC controls the distribution of petroleum products 
through its subsidiary, the Pipelines and Products Marketing Company 
(PPMC).  Petroleum products are distributed via pipelines, road, 
rail, and sea.  The pipeline network is made up of multipurpose 
lines and dedicated lines.  PPMC uses the 5,001 kilometer 
multipurpose network to move products from the refineries and 
imported products from receiving jetties to 21 storage depots 
nationwide.  Pipelines transport 70% of gasoline and 68% of 
kerosene.  Other means are used to transport low pour fuel oil 
(LPFO), high pour fuel oil (HPFO), base oil, asphalt, wax, sulphur, 
and petroleum chemicals (PC).  Based on the latest figures, 36% of 
the products from Port Harcourt refinery were moved via the 
pipelines system, and the percentages for Warri and Kaduna were 47% 
and 49% respectively.  Seventy percent of the products were 
transported from the refineries to the depots by pipelines and the 
remainder was shared between road and rail. 
 
Road, Rail and Marine Transportation 
------------------------------------ 
 
¶8. (U) Due to the decrepit state of roads and the poor condition of 
trucks in Nigeria, transporting petroleum products by road is slow, 
unsafe, unreliable and expensive over long distances.  As a result, 
petroleum products have been transported by road for short haulage 
distances.  Increased pipeline vandalism has increased the volume 
transported by road and some experts estimate it is now up to 78-82% 
of domestic consumption, exacerbating shortages.  Rail 
transportation is the least expensive means of transporting 
petroleum products, but the near collapse of the Nigerian railway 
system has not made it a viable alternative.  Its very slow speed 
and unreliability limit rail transport even in periods of serious 
pipeline outages.  The PPMC also supplies products to some locations 
by sea using spot-charter vessels.  However, jetties at Okrika, 
Calabar, Warri, Atlas Cove and Apapa, crucial for successful 
maritime operations are old and in poor condition, hampering the 
movement of products by marine vessels and from the coastal 
refineries of Port Harcourt and Warri. 
 
Additional Distribution Factors 
-------------------------------- 
 
¶9. (U) An important factor affecting the efficient distribution of 
petroleum products is the concentration of oil resources in the 
Niger Delta region.  Although Kaduna refinery is in the north and 
depots are located across the country, depots and pipeline locations 
are not optimal, and the connectivity and accessibility of the 
country's pipeline network is poor.  The PPMC has the sole 
responsibility for marketing and distributing petroleum products, as 
well as managing a 5,001 kilometer pipeline network and associated 
depots.  This leaves no room for healthy competition.  The reliance 
on imports to meet local demand puts excessive stress on the limited 
import facilities and infrastructure. 
 
NNPC Blames Sabotage 
-------------------- 
 
¶10. (SBU) Funso Kupolokun, Group Managing Director of NNPC discussed 
the shortages with us.  Kupolokun claimed the shortages were caused 
by the recurrent destruction of pipelines by vandals, predominantly 
in three areas crucial to petroleum product distribution - Port 
Harcourt, Warri and Mosimi.  In Port Harcourt from January to 
September 2006 more than 1,650 line breaks occurred compared to 600 
in 2003.  In the Warri area 600 breaks were recorded in 2006 
compared to 100 in 2003.  The Mosimi area, in the south-west, 
recorded 50 breaks in 2003 but reported 375 between January and 
September 2006.  In the past pipeline breaks in the north were rare 
but now Kaduna and Gombe have been affected by frequent pipeline 
breaks.  He said even if the refineries were working at full 
capacity, it would not help since criminals can easily break into 
pipelines. 
 
¶11. (SBU) The Kaduna and Warri refineries had been shut down since 
 
ABUJA 00000164  003.2 OF 004 
 
 
February 2006 as a result of the sabotage of the Escravos Warri 
pipeline that transported crude oil to both refineries.  Prior to 
the destruction of the pipeline, both refineries operated at about 
75% capacity producing about 8 million liters of gasoline per day, 
according to Kupolokun. 
The NNPC had to rely on imports to meet the shortfall arising from 
production loss.  There was a limit to the volume of imported 
products the country's import facilities could handle when the two 
refineries were down.  Within days the disruptions were noticed on 
the streets.  Normally in the event of small supply disruption, 
strategic reserves were triggered from the various depots, however, 
since vandalized pipelines have not been restored strategic reserves 
had fallen. 
 
¶12. (SBU) Austen Oniwon, Head of Research and Development of the 
NNPC said that he believed the vandals were part of an organized 
crime network that knew when petrol was passing through the lines 
and had sophisticated equipment to cut the pipelines and discharge 
the product into trucks of 33,000 liters capacity.  Oniwon said "it 
is impossible to rule out the connivance of NNPC staff in the act of 
sabotage because the staffers are the only ones that know the type 
of product passing through the lines at any point in time." 
Regarding public charges that there was a shortfall in gasoline 
imports, because the NNPC anticipated a lower than actual demand 
during the Christmas holidays, Oniwon commented that technically 
there was a shortfall but it should not have been noticeable because 
the NNPC kept an 11-day reserve stock.  At the moment there were 
vessels on the high seas waiting to discharge petroleum products, 
but the damaged pipelines at the Atlas Cove terminal made it 
impossible to pump product to storage depots. 
 
¶13. (SBU) The Atlas Cove terminal was the only facility that could 
handle 30,000-ton vessels, but it was not in use because of damage. 
It was recently repaired but then damaged by vandals.  Apapa port in 
Lagos, which was the alternative to Atlas Cove, could only handle 
vessels not exceeding 9,000 tons thereby requiring the discharge of 
products into smaller vessels before it could be unloaded at the 
Apapa port.  This cumbersome process takes extra time.  Whenever a 
pipeline was sabotaged, the NNPC must stop pumping petroleum 
products from the storage depot that feeds the pipeline, resulting 
in local shortages that must then be supplied by truck. 
 
Are GON Price Hikes Imminent? 
----------------------------- 
 
¶14. (SBU) Oniwon said he was unaware of a plan to increase prices. 
Since the international price of crude oil hovered below $55 per 
barrel, an increase in the domestic price of petroleum products 
could not be justified.  If the international price had remained 
around $75 per barrel an increase would be justified.  Despite 
Oniwon's assertion, the GON made a commitment to the IMF to increase 
fuel prices in early 2007 and reduce the fuel subsidy to 1.25% of 
non-oil GDP during the recently concluded second review of Nigeria's 
Policy Support Instrument (PSI). 
 
¶15. (SBU) The GON had planned to increase prices over the Christmas 
holiday season, but was foiled by the Nigeria Labor Congress (NLC), 
according to Adams Oshiomhole, outgoing President of the NLC.  He 
claimed retailers hoarded petroleum products in anticipation of an 
increase to earn larger profits.  Oshiomhole's assertions were 
seconded by Benson Upah of the NLC, who told us the ruling party 
wanted to use the proceeds of the fuel price hike to fund its 
election campaign. 
 
NNPC Fails to Compensate Importers 
---------------------------------- 
 
¶16. As reported in reftel, licensed importers Total, Texaco, Oando, 
and MRS Oil and Gas stopped importing petroleum products in late 
2006 because GON subsidy arrears had accumulated into the billions 
of naira.  Dr. Oluwole Oluleye, Executive Secretary Petroleum 
Products Pricing Regulatory Agency (PPPRA), told the media that the 
PPPRA had commissioned auditors to investigate the claims of the 
importers and that once the investigation was complete importers 
will be paid their claims.  The media reported that approximately 
19.5 billion naira was owed to importers and that 17.8 billion naira 
in arrears was paid the week of January 15. 
 
¶17.  The NNPC recently met with major oil marketers to seek a 
temporary solution to the lingering shortages.  The NNPC and major 
oil marketers agreed to deploy seven private import reception 
jetties for three months to receive petroleum products.  The major 
marketers have agreed to designate some gas stations as special 
 
ABUJA 00000164  004.2 OF 004 
 
 
outlets to the public, which will work beyond normal hours to clear 
the backlog demand. These will include Obat Petroleum, Folawiyo 
Petroleum, Wabeco and Total, all in Lagos; and the Oando facility in 
Onne. 
 
Comment 
------- 
 
¶18.  Nigeria, a major oil producer, cannot guarantee a steady supply 
of refined petroleum products for domestic use.  The four 
state-owned refineries have not worked at full capacity since 1999 
and some experts claim close associates of top government officials 
are benefiting from imports.  The deregulation of the downstream 
petroleum sector is only complete, perhaps due to these vested 
interests in imports.  Eighteen private refinery projects were 
licensed in Obasanjo's first term, however, none have been built. 
Most Nigerians still expect a price hike.  Our contacts point the 
finger at the failure to address pipeline sabotage.  So far the 
NNPC's strategy has sought to appease those in pipeline areas by 
paying local village hunters and enlisting Nigeria's corrupt and 
inefficient police to protect the pipelines.  The main culprit is 
presumably import bottlenecks both physical and financial due to 
lack of cash at importers due to arrears in subsidy payments. 
 
CAMPBELL