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Cablegate: Nigeria: Will Gon Raise Gas Prices As Year Long

VZCZCXRO3117
PP RUEHDE RUEHMA RUEHPA
DE RUEHOS #0199 1581241
ZNR UUUUU ZZH
P 061241Z JUN 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 9933
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHHH/OPEC COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9642
RUEHC/DEPT OF LABOR WASHDC
RUFOADA/JAC MOLESWORTH AFB UK
RUEKJCS/SECDEF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEWMFD/HQ USAFRICOM STUTTGART GE

UNCLAS LAGOS 000199

SENSITIVE
SIPDIS

DOE FOR GPERSON, CHAYLOCK
DOL FOR SUDHA HALEY

E.O. 12958: N/A
TAGS: EPET ENRG ELAB PGOV NI
SUBJECT: NIGERIA: WILL GON RAISE GAS PRICES AS YEAR LONG
MORATORIUM ENDS?

REF: 07 ABUJA 1342

1. (SBU) Summary: The year-long agreement between the GON and labor
union on gasoline prices comes to an end this month. Unions and the
government are already holding informal talks on the future of
subsidized gasoline prices. In 2007, the subsidy totaled USD 1.6
billion. While the increasing world price of gasoline is pressuring
Nigeria's budget, rising crude oil prices lessens the impact and
hence the urgency for the GON to act. End Summary.

2. (SBU) The agreement between the GON and labor unions to freeze the
retail price of gasoline at 70 naira per liter (USD 0.59 per liter or
USD 2.26 per gallon) expires this month. In June 2007, the then
newly inaugurated Yar'Adua administration backed down from plans
announced under the outgoing Obasanjo administration to increase the
retail price of gasoline from 65 to 75 naira per liter (USD 0.55 to
USD 0.64). After four days of nationwide protests and strikes, the
labor unions agreed to a price of 70 naira per liter with government
assurances that it would not seek another price increase for one
year. The GON also agreed to form a committee with unions and
government representatives to review future price increases
(reftel).

3. (SBU) One industry contact at a large European downstream
petroleum company reports that the GON will meet with labor union
representatives at the end of June to discuss a variety oil and gas
issues. He believes a possible price increase will be at the top of
the agenda, but said his company has not been advised of any official
plans. A top trade union official told Econoff that labor unions are
already holding informal discussions with the government. He expects
a formal announcement on an agreement in late June or early July, but
declined to speculate on what would happen to gasoline prices.

4. (SBU) Press reports of the end of the agreement have been almost
non-existent, with only a brief back and forth between the GON and
labor officials in March and April when the Minister of State for
Energy (Petroleum) was quoted on the need to "do something" and labor
officials responded by saying a price hike was unacceptable. While
government, labor union, and oil industry contacts are keeping quiet
on the future of the agreement, a general consensus among downstream
industry executives and local industry trade papers is that the
rising price of refined petroleum is squeezing government coffers.
Nigeria continues to import most of its gasoline, despite the
resumption of output from the Kaduna and Warri refineries. The 2007
gasoline subsidy totaled USD 1.6 billion. In a February 2008 report,
the Petroleum Products Pricing Regulatory Agency, responsible for
implementing the subsidy and running Nigeria's gasoline importation
mechanism, estimated that Nigeria would spend another USD 1.6 billion
in 2008. Why the GON flatlined projections for gasoline subsidy
expenditures is not clear, although it may have been counting on
increased output from domestic refineries while underestimating the
rise in worldwide gasoline prices.

5. (SBU) Comment: The unions, emboldened by a successful strike
against ExxonMobil and seeing government coffers filled with revenues
from record crude oil prices may feel they have no need to back down
from a hard-line stance against a gasoline price increase.
Government on the other hand, while wanting to avoid a strike, needs
relief from the rising international price of gasoline. The subsidy
makes budget planning difficult and diverts substantial funds that
could be better used elsewhere. However, Nigeria's gasoline subsidy,
when compared to subsidies in countries like Indonesia, Malaysia, and
India, is relatively modest. In the end, the most politically
expedient solution for the government would be to leave gasoline
prices unchanged, taking comfort in the fact that the rising cost of
the subsidy, while painful, is partially hedged by higher crude oil
prices. End Comment.
HUDSON

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