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C O N F I D E N T I A L SECTION 01 OF 04 LAGOS 000054 
 
SIPDIS 
 
SIPDIS 
 
DOE FOR GPERSON, CGAY 
TREASURY FOR ASEVERENS, SRENENDER, DFIELDS 
COMMERCE FOR KBURRESS 
STATE PASS USTR FOR ASST USTR FLISER 
STATE PASS TRANSPORTATION FOR MARAD 
STATE PASS OPIC FOR ZHAN AND MSTUCKART 
STATE PASS TDA FOR NCABOT 
STATE PASS EXIM FOR JRICHTER 
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ 
 
E.O. 12958: DECL: 01/25/2016 
TAGS: EPET ENERG ASEC PTER NI
SUBJECT: SHOUTING IN THE EAR OF A DEAF GOVERNMENT: 
NIGERIA'S FUEL "CRISIS" 
 
 
LAGOS 00000054  001.4 OF 004 
 
 
Classified By: Consul General Brian Browne for Reasons 1.4 (B,D) 
 
¶1.  (C) Summary:  Bunkerers tapping into crude oil pipelines, 
vandalized refineries too costly and dangerous to repair or 
maintain, organized looting of downstream pipelines, 
complicated import procedures that encourage corruption and 
force importers to bear the costs of the fuel price subsidy, 
coupled with the government's persistent refusal to 
deregulate fuel prices all contribute to the current fuel 
crisis in Nigeria.  A Total executive predicts that the 
Government will take steps to ease the crisis in February, to 
avoid friction before the election.  Deregulation is the 
long-term solution to the problem.  However, deregulation 
remains politically unpopular. End Summary. 
 
Scarcities Problem Begins Upstream 
---------------------------------- 
 
¶2.  (C)  Levi Ajuonuma, General Manager for Public Affairs, 
Nigerian National Petroleum Corporation (NNPC), told Pol-Econ 
Chief on January 22 that multiple factors contribute to the 
current fuel shortage. Ruptures and leakage in upstream 
pipelines carrying crude to the refineries are more numerous 
even than those in the downstream lines. It is just that with 
tragedies like the deadly fire in Lagos' Abule Egbe district, 
downstream mishaps attract greater public attention, Ajuonuma 
claimed.  Ajuonuma verified NNPC's inability to repair the 
pipelines that take crude to the Kaduna and Warri refineries 
that have been vandalized in February 2006 by the Ijaw 
militants in Delta State. 
 
Vandalized Refineries Too Costly to Repair, Maintain 
--------------------------------------------- ------- 
 
¶3.  (C)  Not only is NNPC unable to pump crude to two out of 
four of Nigeria's refineries, the refineries cannot produce 
sufficient fuel to meet domestic demand.  The Warri and 
Kaduna refineries have long been the favorites of vandals; in 
February 2006, vandals used dynamite to damage both 
facilities.  According to Ajuonuma, the vandals will not give 
NNPC access to the Warri refinery to conduct repairs unless 
certain demands are met.  Even if NNPC could gain access, 
Ajuonuma said, the cost of repair would be exorbitant because 
few companies are willing to risk the kidnapping of their 
employees in order to do the repairs.  The two Port Harcourt 
refineries suffer from technical problems, he said. 
Privatizing the refineries has proven difficult as no prudent 
investor would buy at anything more than rock bottom prices, 
and the Government is unwilling to sell at a low price, 
partially because it would be detrimental politically to be 
seen as selling off the national wealth on the cheap.  The 
Chinese and South Koreans may be willing to buy the 
refineries, provided they are assigned additional oil blocks 
as part of the deal, he said. 
 
Organized Crime Behind Downstream Breaks 
---------------------------------------- 
 
¶4.  (SBU)  Ajuonuma confirmed newspaper reports detailing 
increasing vandalism in the pipelines carrying refined fuel. 
There has been a significant rise in the number of breaks in 
the Atlas Cove-Mosimi, Abuja-Suleja and Port 
Harcourt-Aba-Enugu-Makurdi legs of the downstream system.  In 
Port Harcourt, the number of breaks has risen from 600 in 
2003 to 1650 for the first three quarters of 2006; in Warri, 
the number has risen from 100 to 600; and in the Mosimi area, 
from 50 to 375 breaks during the same time periods.  Line 
breaks in Kaduna and Gombe, which in the past had been 
relatively trouble-free, are now occurring with frequency. 
 
LAGOS 00000054  002.2 OF 004 
 
 
In December, Ajuonuma said, Mosimi was only able to pump for 
three uninterupted days; most nights, the lines were broken 
and the flow disrupted. 
 
¶5.  (C)  This increase in breaks is the result of organized 
crime activity believed financed and conducted by individuals 
and groups with sufficient wealth to purchase tank trucks 
costing naira 9-10 million (USD 70-80,000) each, Ajuonoma 
believed.  He recently visited the site of a fire in which 
three large tank trucks were destroyed, he said.  Fuel 
marketers, who already own such trucks, are heavily involved, 
he alleged. 
 
Government's Non-Solutions 
-------------------------- 
 
¶6.  (C)  Nigeria officially is not meeting its OPEC export 
quotas; the country should be producing from 2.4 to 2.5 
million barrels per day.  However, the country has been 
producing between 1.5 to 1.8 million barrels per day.  The 
loss is anywhere between 600,000-8000,000 barrels per day, he 
said. 
 
¶7.  (C)  As a result of militant activity in the Delta, 
Ajuonuma said, the Navy has been given secret orders to go 
after MEND and other militant groups.  The militants have 
become a government of their own in the Delta, he said. 
Restraint has not worked.  "If you ask me, they need a strong 
hand; if action had been taken earlier, the problem would not 
have festered," he said.  Now, however, the militants have 
more firepower than the Navy;  arms are being imported from 
everywhere, Ajuonuma exclaimed.  As a result, he believes, 
the situation is no longer susceptible to a peaceful 
solution.  "This will end as it ended for Jonas Savimba, 
Ajuonuma predicted;  every overture for peace was refused 
until finally he was killed." 
 
¶8.  (C)  It is technologically possible to protect the 
upstream and downstream pipelines, Ajuonuma said.  Ever since 
the fire that took place in Lagos's Abula-Egba district in 
January, Ajuonuma has been taking calls from pipeline 
security firms in Europe, Australia and other countries 
hoping to sell Nigeria equipment to protect the pipelines. 
The technology, including sensors and drones, is available in 
the United States and Israel that would make it possible for 
NNPC to control the lines.  In light of the billions of naira 
the Government is losing as a result of the breaks, it would 
be a good investment to install security systems, Ajuonuma 
said.   However, the Government is not ready to make the 
expeditions, he lamented. 
 
Marketer:  Pipeline Breaks Perpetrated by Transporters 
--------------------------------------------- --------- 
 
¶9.  (C)  O.B. Haffner, Corporate Affairs Manager, Total 
Nigeria Ltd., the major marketer of diesel fuel, denied 
flatly the claim that marketers are involved in the pipeline 
breaks.  Marketers don't own trucks, he told Pol-Econ Chief 
in a conversation on January 23.  The companies that 
transport the fuel are involved in breaking the pipelines and 
stealing fuel, he alleged.  These companies, many of which 
are owned by NNPC officials, already have the trucks and 
needed knowledge of the system. 
 
Complicated Import Process Contributes to Scarcities 
--------------------------------------------- ------- 
 
¶10.  (C)  According to Haffner, the NNPC through the 
Petroleum Products Marketing Commission (PPMC) authorizes 
 
LAGOS 00000054  003.2 OF 004 
 
 
each quarter all importers to import a specific amount of 
fuel in the following quarter.  The importers then establish 
contracts with foreign suppliers.  The Petroleum Products 
Fund (PPF), a subsidiary of NNPC, pays the importer the 
difference between the landed price and the regulated price. 
The PPF's payments are typically six months in arrears, for 
the simple reason, Haffner said, that the Government cannot 
afford to pay the subsidy. Because of the arrearages, many 
importers have to bear additional bank charges and interest 
on the contracts for imported fuel for which they have not 
yet received payment from the Government.  Many importers 
find themselves unable to buy the third quarter's imports 
when they have not been paid first and second quarters' 
subsidies. As a result, the importers have had to delay 
additional orders until they are paid, he said. 
 
¶11.  (C)  If the NNPC decides that it will allow importers to 
import in one quarter amounts of fuel that more than meet 
demand, then the scarcity from any delays in imports in the 
following quarter may not be felt immediately.  However, if 
NNPC decides that it will allow importers to import an amount 
that will only meet demand, or allows importers to import an 
amount that falls short of demand, delays in imports will 
immediately translate into scarcity of fuel. 
 
¶12.  (C)  NNPC functionaries who control payment of funds 
often demand a percentage just to release them to the 
cash-hungry importer, Haffner said.  The problem of 
corruption at NNPC will only be solved, he said, when the 
functions of the NNPC's subsidiaries are either abolished or 
taken over by the private sector.  Things are unlikely to 
improve after the election, Haffner said.  Yar A'dua's 
campaign committee includes the president of Zenon Oil, Femi 
Adetola.  That company already has preferential lifting 
rights for imported fuel;  Zenon has product when Total does 
not, he said.  The money Adetola contributes to the campaign 
he can surely be earning back through lucrative NNPC 
connections within a short time. 
 
Marketers Are the Scapegoat 
--------------------------- 
 
¶13.  (C)  The scarcities will end by the second week in 
February, Haffner predicted.  The Government has decided to 
import enough fuel to appease public opinion and to forestall 
any unrest before the election.  Government wants to make the 
importers and marketers the scapegoat, and to use them 
against the unions.  The unions are quiet now, he said, 
because the Government has not prompted them by raising 
prices.  People are willing to pay black market prices 
because this is a crisis. 
 
¶14.  (C)  If, however, the Government tried to raise fuel 
prices of fuel to 75 naira per liter (Note:  The regulated 
prices is currently naira 65 per liter. End Note), the unions 
would surely call for a strike, Haffner said. If so, an 
actual strike would not last more than a week because people 
want and need to work, he said.  And, the Government would 
probably be able to compromise with the unions on a price 
increase to naira 70 per liter, Haffner reasoned. 
 
Shouting in the Ear of A Deaf Government 
---------------------------------------- 
 
¶15.  (C)  The only way out of this chronic dysfunction is for 
the Government to marketize the downstream sector, Haffner 
said.  This would be to the benefit of the common man.  It 
would also help businesses;  Total Nigeria's President will 
be in Paris February 10 because the company's bottom line has 
 
LAGOS 00000054  004.2 OF 004 
 
 
been hurt by the performance of the Nigeria company.  If thecompany does not rejuvenate, it will lay off Nigerian 
workers, not expatriate workers, Haffner said.  The unions 
are sensible;  they see the pipeline problems, the jetties 
collapsing, and they want Government to improve the system 
and its infrastructure, thus preserving their jobs.  However, 
there is a limit to what the unions can do, he said.  "They 
are shouting in the ear of a deaf government." 
 
¶16.  (C)  Comment:  Both the NNPC and the private sector 
executive paint a picture of an oil system bordering on 
disorder. However, at least one of Haffner's proposed 
solutions, to wrest control of the downstream sector from the 
NNPC and eliminate entities such as the PPMC and PPF, may be 
in the offing if the Downstream Natural Gas Act is passed in 
a form which establishes an independent regulatory commission 
for the sector. (See septel.)  Haffner also may be right 
about the willingness of organized labor to consider the 
prospects of an increase in the price of fuel in order to 
save their jobs. End comment. 
 
BROWNE