Cablegate: Nigeria: Delta Oil Crisis May Pinch the Economy

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ABUJA 000653

SIPDIS

STATE FOR AF/W, AF/EPS AND EB/TPP
SATE PASS COMMERCE FOR ITA/MAC
STATE PASS USTR
CAIRO FOR MAXSTADT
PARIS FOR OECD/IEA
TASHKENT FOR BURKHALTER

E.O. 12958: N/A
TAGS: ECON EFIN EPET ENRG EINV PGOV PREL NI
SUBJECT: NIGERIA: DELTA OIL CRISIS MAY PINCH THE ECONOMY

REF: LAGOS 731

Summary
-------
1. News that Chevron returned to Escravos to gradually resume
oil production is encouraging. Shell also may soon return.
However, armed local groups remain a wild card. Their ability
to foil resumption of oil production is all too real as
evidenced by the April 6 pipeline disruption only a few days
after Chevron announced the resumption plan. Even under the
most roseate projections for resumption of oil production at
the sites, financial damage has been done to the GON and, by
extension, the national economy. Deputy Director of the
Central Bank Research Department Olekah told Econoff on April
5 that the ongoing crisis in Warri (reftel.) would affect GON
finances and macroeconomic policy. The hit taken by the oil
sector, combined with the related domestic gasoline shortage,
will stifle economic output and activity during the first
half of 2003 and maybe the third quarter as well. This is bad
news for President Obasanjo's reelection prospects. End
Summary.

Government Spending Likely to Fall
----------------------------------
2. About 90 percent of government revenues are derived from
profits on oil sales. Deputy Director of the Central Bank
Research Department Olekah told Econoff on April 5 that with
fixed costs for oil production unchanged, the 40 percent cut
in oil output could translate into an even larger cut in
Nigerian National Petroleum Corporation (NNPC) profits
remitted to GON accounts. (Comment: The story is the same
even for a 25 percent cut in output, as would be the case if
Chevron's Escravos facility does come back online soon.
Meanwhile, falling world oil prices could compound the
problem. End Comment.)

3. GON spending is difficult to track, but Olekah says
spending increased somewhat over the first quarter of 2003,
the run-up to elections in April. That spending was financed
by larger than expected profits on oil, as prices reached a
high of $35/barrel for Bonny Light and Nigeria pumped about
2.08 million bpd., well above GON budget estimates of
$18/barrel for 1.8 million bpd. (Comment: Given the
significant drop in revenue, the GON's spend-as-you-earn
budget rule could put a break on spending during or shortly
after this crucial election period, unless the GON decides to
abandon its 12.5 percent cap on deficit financing. State and
local government spending, with more limited access to
deficit financing, may be forced to cut spending even more
than the federal government. In particular, southern states
that benefit from the GON oil derivation rule may be hard
hit. End Comment.)

Downward Pressure on the Naira
------------------------------
4. Nearly all foreign exchange earnings are derived from NNPC
oil sales. Consequently, Olekah admitted, foreign exchange
reserves are taking a hit because of the crisis. He could not
provide current figures, but said depletion of the reserves
could be significant if the crisis continues, unless the GON
decides to devalue the naira. (Comment: The GON will be
reluctant to devalue the naira--devaluation is a policy tool
of last resort here. It is more likely that the GON will tap
into its foreign currency holdings over the next couple
months to maintain current import levels while also propping
up the inflated naira. Should the crisis linger, however,
that option would prove unsustainable, and a substantial
devaluation--popular or not--would be the only option left.
Over the last three weeks, the exchange rate has held steady
at 127 naira/dollar. End Comment.)

Comment: Macroeconomic Impact Could be Far-Reaching
--------------------------------------------- ------
5. The oil sector accounts for about 12.5 percent of Nigerian
GDP, so we can expect to see economic growth take a
noticeable hit as a result of this crisis. Oil service
companies and other companies dependent on oil production
will suffer most. The government also will be hamstrung in
meeting cash calls for joint-venture production agreements,
which, in turn, will slow further investment in the oil
sector.

6. However, direct losses sustained by the oil sector are
only part of the equation--the other is the economic impact
of gasoline shortages (reftel.). The transportation system is
grinding to a halt, delaying and increasing the costs of the
movement of goods (food, for example) and services (labor)
and causing employers to scramble for inputs--especially
diesel needed to run generators that augment unreliable power
provided by NEPA. In addition, with the oil crisis
constraining government spending at all levels, fiscal policy
will be unavailable as a tool to cushion the blow. It is too
early to tell what impact this economic slowdown will have on
President Obasanjo's reelection prospects for April 19. End
Comment.

Comment: Gasoline Price Controls
--------------------------------
7. If there is any silver lining to this clouded scenario, it
is that the GON can mitigate some of the oil crisis' impact
on the average Nigerian by removing price controls on
gasoline. After suffering through hours-long gas lines for
several weeks now, many consumers would be willing to spend
more than the 26 naira/liter service stations now charge.
Black market fuel sells for between 120 and 150/liter, and
people are paying the higher price. However, there are
political concerns about increasing gasoline prices during
the election period; also, influential vested interests whose
profiteering in the black market would be diminished should
market forces be allowed to determine domestic gas prices
would oppose lifting controls. End Comment.
JETER

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