Cablegate: Fuel Subsidies in Nigeria: Between a Rock and A

Published: Fri 11 Jun 2004 01:25 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
1. (U) SUMMARY: Up until April or May, the Nigerian
National Petroleum Company (NNPC) received an allocation of
petroleum from the GON at below-market rates, sold part of it
on world markets, and used the rest to subsidize gasoline
prices domestically, all outside the government's formal
budget. In April the GON started selling to the NNPC at
international market rates, thereby ending the subsidy. If
strikers are successful at getting the price of gasoline down
to 38 Naira per liter, the NNPC would be required again to
subsidize the domestic price of gasoline, and the
continuation of subsidies "off the books" through NNPC would
become unsustainable. The GON would be left with the choice
of either backpedaling its economic reform program and
subsidizing gasoline through the formal federal budget, which
currently has no allocation for this, or else make gasoline
prices subject to market forces. END SUMMARY.
2. (U) At the heart of the current strike in Nigeria over
rising fuel prices is the issue of the subsidization of
gasoline prices. The GON for years has effectively
subsidized the price of fuel through the Nigerian National
Petroleum Company (NNPC), yet none of this subsidy appears in
the federal budget.
3. (U) The subsidy operation has been conducted by the GON
selling a domestic allocation of crude oil to the Nigerian
National Petroleum Company (NNPC), a parastatal, at a
lower-than-market price, currently estimated at USD 25 per
barrel. The allocation, roughly equal to Nigeria's assumed
domestic demand, is approximately 445,000 barrels per day.
4. (U) Although its allocation for domestic consumption is
445,000 bpd, NNPC has the refining capacity for only around
200,000. Most of the remaining 245,000 bpd appear to have
been sold abroad at market rates.
5. (U) Normally, when crude petroleum is sold abroad above
the federal government's budgeted price of USD 25, any
revenues above that are considered "excess revenues" and are
sterilized, being deposited in a special account at the
Central Bank of Nigeria (CBN). This is not true, however,
for crude petroleum from Nigeria's domestic allocation that
NNPC sells abroad. Because in this case it is not the GON
selling the crude abroad, but rather a parastatal, the
"excess revenue" above USD 25 per barrel that NNPC earns is
not reflected in the federal budget and therefore is not
deposited in the federal government's "excess revenue"
account. If we assume a purchase price from the GON of USD
25 per barrel and a sales price on international markets at
USD 35 a barrel. Up until recently, this could have meant an
annual profit for NNPC of roughly USD 900 million.
6. (U) The profit on the sale abroad of crude petroleum
earmarked for domestic consumption gave NNPC a war chest with
which to purchase gasoline abroad and subsidize its low
wholesale price. The landed price of gasoline in Nigeria is
currently around N 50 per liter, and NNPC has been selling it
wholesale to marketers at N 38.5 per liter. The National
Labour Council (NLC) is demanding (reftel) that the price at
the pump be reduced to around N 38. At that rate, marketers
tell us that NNPC will have to sell it to them at N 33.5 per
liter in order for them to clear their transportation and
marketing margins. According to Wale Tinubu, Managing
Director of Oando (formerly Unipetrol), a downstream
petroleum products marketing company, as quoted in an
interview with Olusegun Adeniyi in THISDAY Newspaper on
Thursday, June 10, 2004, NNPC's subsidies of gasoline during
the past five months were as follows:
January - N 194,907,861 per day (USD 1.43 million)
February - N 223,721,904 per day (USD 1.65 million)
March - N 221,913,871 per day (USD 1.63 million)
April - N 370,732,860 per day (USD 2.73 million)
May ) N 460,438,839 per day (USD 3.40 million)
(Exchange rate used is N 136 to USD 1)
7. (U) Taking the average of this, we get USD 2.168 million
per day in subsidies, or USD 780 million on an annualized
basis, spent on subsidies.
8. (U) Nigeria's consumption of refined petroleum products
is estimated at around 30 million liters a day. This breaks
down approximately as 60% gasoline, 20% diesel, 15% kerosene
and 5% other. The landed cost of imported gasoline is
currently around N 50, and the NLC is insisting that the
price of gasoline be reduced to N 38 per liter, effectively
forcing the NNPC to either subsidize it at N 12 per liter or,
for gasoline refined in Nigeria, forgo the extra profit that
NNPC could have realized had they sold it at international
market rates. If we assume that all refined petroleum
products carry a subsidy of N 12 per liter (N 50 landed price
minus N 38 sales price), then this amounts to an effective
subsidy of USD953 million per year going forward. By way of
comparison, the entire budgetary revenue of the Nigerian
government for 2004 is N 1,303 trillion (USD 8.25 billion).
9. (U) As part of its economic liberalization, the GON began
selling crude to NNPC at world market prices in April and
announced this policy publicly in May. In May, NNPC reduced
its the number of credit days for its sales from 30 to 15,
and Nigerian media reported NNPC Group Managing Director
Funsho Kupolokun on Monday, June 7 as saying that if NNPC
continued to buy crude at market rates and subsidize the
price of gasoline, the company would soon be "kaputt."
10. (U) Ulu Akani, Senior Technical Advisor to Kupolokun,
confirmed to Econoffs on June 10 that NNPC was purchasing
crude petroleum from the GON at market rates. He further
noted that the 200,000 bpd that are refined in Nigeria are
being sold at below their cost of production.
11. (U) Attempts to reach Embassy contacts at the MOF to
reconcile the difference between NNPC's allocation of 445,000
bpd and Nigeria's refining capacity of 200,000 bpd were
12. (U) Comment: So far, the GON economic team appears to
be serious in its efforts to deregulate the downstream
petroleum sector, unbundle the NNPC and privatize its
downstream subsidiaries. NNPC will not be able to resume the
off-the-books subsidy indefinitely if the government does
restore the fuel subsidy. The choices are either to go back
to the status quo ante, incorporate subsidies into the formal
federal budget, or lift all subsidies and face the political
View as: DESKTOP | MOBILE © Scoop Media