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Cablegate: Nigeria: Energy Update, Feb 28

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

REF: ABUJA 00048

1. This periodic update covering energy issues
--Long Lines - Short on Answers; Fuel Crisis Continues
--Obasanjo Offers Onshore/Offshore Compromise
--Exxon-Mobil Produces Early from Yoho Fields, and
--Marginal Oil Fields Awarded

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2. Just as the strike by workers of the Department of
Petroleum Resources (DPR) was drawing to a close,
Nigeria faced a new challenge in its energy sector;
failed deliveries of finished petroleum caused serious
fuel shortages throughout Nigeria last week, closing
gas stations and forcing consumers to queue in lines
not seen in years. In cities across Nigeria, lines
snaked up to two miles from filling stations open only
a few hours a day, and in some instances cars were
simply left idle in place, adding to already chaotic
traffic situations. Those consumers who were able to
top off their tanks faced hiked prices by pump
attendants or roadside black marketers, and those who
used public transport paid higher fares when they
managed to find their way onto a running vehicle. Area
boys took advantage of the captive audiences, extorting
money from motorists and passersby by intimidation and

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3. Original theories that the DPR strike was the root
of the gas lines gave way to the reality that Nigeria
was simply running out of fuel. Nigeria imports nearly
half of the refined petroleum products it consumes, and
the Nigerian National Petroleum Corporation (NNPC)
revealed that, in the wake of rising world petroleum
prices caused by the growing tension over Iraq and the
ongoing troubles in Venezuela, its suppliers redirected
January and February shipments to more lucrative sales
to the US and Venezuela. NNPC received just 30 percent
of its contracted cargo in January, driving its fuel
stock down from a 20-day reserve to an 11-day reserve
by February 24. It is reported that NNPC has changed
its import pricing formula to better reflect market
trends, which will add a 10 to 20 percent premium to
Nigeria's import costs.

4. To combat the shortages, NNPC ordered its second and
third quarter shipments for delivery at the same time.
The government also hopes to have its two refineries at
Port Harcourt, which have been offline due to power
problems and maintenance, running again soon. In the
short term, two ships recently off-loaded 56 million
liters of gasoline, but this may offer only a very
brief reprieve as the daily national demand runs from
18 to 25 million liters. Further, an Exxon-Mobil
official told Econoff that the sorry state of tanker
facilities in Lagos will slow all off-loading, so that
even when ships come in, fuel will not flow quickly to
consumers. The situation did improve over the weekend,
as gas lines receded and filling stations were
returning to normal business hours this week. However,
spot reports of new queues are coming in again as the
week goes on.

5. Comment: The irony that the world's seventh largest
crude oil exporter must import half of its refined
petroleum products has not been lost on commentators
and consumers alike. A fuel crisis reminding Nigerians
of bygone days of military rule and of the fragile
state of their economy comes at a terrible time for
President Obasanjo, less than two months before the
national election. With each new incident of ethnic
violence, tensions are certain to rise if an ongoing
fuel shortages continue to hamper the daily routine of
business and personal lives. Suggesting the gravity of
the government's concern over the situation,
Information Minister Jerry Gana publicly blamed the gas
lines on a smear campaign by Obasanjo opponents, and
radio news reports quoted Obasanjo as saying there is
no fuel shortage, but rather, people are simply
hoarding gasoline. Fuel shortages will continue should
Nigeria fail to make market-competitive purchase offers
for gasoline as US demand for it rises on the eve of
possible conflict in Iraq and the upcoming summer
driving season.

6. Comment continued: One positive outcome of this fuel
shortage may be renewed interest in deregulating and
commercializing Nigeria's downstream petroleum sector.
John Pototsky, Managing Director of Mobil Oil Nigeria
(MON), was recently quoted as saying that while MON
enjoyed higher sales volume in 2002, its profits were
very low due to the GON's pricing scheme. As recently
as 2000 and 2001, downstream marketers imported
gasoline since the world market price and the domestic
retail pump price were aligned closely enough for the
companies to manage small but notable profits. More
recently, world market prices have far exceeded those
that the retailers are allowed to charge at the pump,
so the NNPC has essentially become the sole importer of
gasoline. The downstream international operators import
gasoline for the NNPC at world market prices, fuel that
the NNPC sells at artificially low prices. Obasanjo's
energy adviser, Rilwanu Lukman, was quoted as saying
the system cannot be maintained at current prices owing
to the large government subsidies it entails. A
"BusinessDay" editorial called for a shift to free
market mechanisms, including invitations to foreign
companies to purchase and maintain existing refineries,
pipelines and depots. End comment.


7. President Obasanjo offered a compromise in the
ongoing legislative battle over the allocation of oil
revenue between the federal government and those states
from which oil is extracted (reftel). In a letter read
to the Senate this week, Obasanjo calls for abandoning
the earlier proposals by him and the National Assembly
for demarcating what production is onshore versus
offshore for revenue sharing purposes. Obasanjo had
previously proposed that a 24-mile contiguous zone off
the coastline should be used to determine which
production sites are subject to the special derivation
fund, from which oil producing states are entitled to a
13 percent share of oil tax and royalties. The
National Assembly's formula would have extended the
reach of the derivation fund to the Continental shelf
and the Economic Zone. Obasanjo now argues both plans
have technical and political drawbacks, and instead,
proposes that all production lying within 200 meters of
water should be subject to the derivation fund.

8. An Exxon-Mobil representative confirmed that all
existing producing oil fields lie within a 200-meter
depth zone, which is roughly equivalent to the edge of
the Continental Shelf. This proposal would then place
all deepwater oil discoveries not yet producing outside
the scope of the derivation fund and within the sole
purview of the federated account, the funds of which
are distributed on the basis of a complicated formula
amongst the federal government and all states and local

9. Comment: The Exxon-Mobil representative noted that
prior to last year's Supreme Court ruling defining
onshore and offshore to the federal government's
advantage, Akwa Ibom state received three billion Naira
each month from the derivation fund, but was left with
no revenue from that account as a result of the ruling.
(The federal government has been providing the state
600 million Naira per month in the intervening period,
according to our industry source.) He estimates that
Obasanjo's proposal will provide Akwa Ibom with the
same revenue it previously enjoyed. Thus, he
anticipates the littoral states will support Obasanjo's
new proposal, as is evidenced by public support voiced
by the governor of Delta State. If this measure is
successful in the National Assembly, it could go a long
way toward shoring up political support for Obasanjo in
the South South; the leaders from the Northern states,
however, are unlikely to easily accept any proposal
conferring benefit to the South. End comment.

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10. Exxon-Mobil has begun production from its Yoho
development project two years ahead of schedule, by
using a temporary floating, production, storage and off-
loading (FPSO)vessel as an early production system
(ESP). The Yoho project is a Mobil Producing Nigeria
(MPN)and NNPC joint venture (JV), located in the
relatively shallow waters of Oil Mining Lease(OML) 104.
The $1.2 billion project has estimated recoverable
resources of 0.4 billion barrels of oil, and represents
the first deployment of an ESP in West Africa. The
Yoho JV will have a production capacity of
approximately 650,000 barrels per day I(bpd), and while
press reports indicate it is currently producing 90,000
bpd, an Exxon-Mobil executive told Econoff it is
already reaching or exceeding 100,000 bpd.


11. After a sometimes contentious two-year process, the
federal government this week announced 31 companies who
have won licenses to operate 24 marginal oil fields in
the Niger Delta. The fields may hold up to 2.3 million
barrels of crude oil, and are considered marginal
because each produces no more than approximately 5,000
bpd, which the major oil companies consider
economically unviable for the scale of their
operations. The GON hoped to spur development of
indigenous companies, greater domestic income and more
local jobs through the sale of these marginal fields.
It reviewed bids from 66 companies, including several
state-owned firms. Presidential energy adviser Lukman
called on the winning firms to aggressively develop
their operations, and implored the financial industry
to assist these companies in raising capital.


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