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Cablegate: Oil Price Impact On Nigeria

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 002087

SIPDIS

SENSITIVE

E.O. 12598: N/A
TAGS: ECON EFIN EPET PGOV NI OIL
SUBJECT: OIL PRICE IMPACT ON NIGERIA

REF: STATE 186514

1. (SBU) Summary: High oil prices have proved a very mixed
blessing for Nigeria. While greatly boosting government
revenues, they have increased the challenge of managing
those revenues. Though the government is wisely directing
much revenue to debt repayment, some of the windfall is
finding its way to potential "white elephant" projects and
exacerbating intra-government power struggles. Higher oil
prices have complicated government efforts to deregulate the
downstream petroleum sector. Nigeria's population has
suffered through series of price hikes, without yet seeing
the end of subsidized fuel. High fuel prices are having
knock-on effects for other goods. The rising cost of
fertilizer, in particular, will reduce Nigeria's low use and
affect agricultural output. Shifts in demand and pricing are
also causing the investment climate in the oil sector to
evolve. Finally, high oil prices increase the incentive for
oil theft and diversions. End Summary.

More Revenue, More Headaches
----------------------------

2. (SBU) With 85% of Nigeria's government revenue coming
from oil, and with the GON getting a significant slice of
oil earnings, including for the moment everything over $35
per barrel, revenue has tripled in the last several years.
Given Nigeria's limited absorptive capacity, and limited
ability to spend it revenue effectively, managing this
windfall presents a challenge. Under the strong leadership
at the Finance Ministry and with the support of the
President, the GON has directed all revenue above a
benchmark price of $27 per barrel into a special account,
meant to help temper swings in oil prices. The Finance
Ministry has determined to direct much this funding toward
retiring Nigeria's debt to remove debt service obligations
from future budgets. Still, some of the money is directed
toward infrastructure investments that might not prove their
worth. For example, some of the money is being used to
build several gas-fired electric power plants, even though
in the as yet unreformed power sector most plants are not
covering their costs.

3. (SBU) Nor are the Finance Ministry's plans for
stewardship of the windfall uncontroversial. The National
Assembly passed a budget with a higher benchmark price for
crude oil, allowing higher spending, but the President has
refused to implement it. It is not clear the Assembly will
approve the repayment of debt. In addition, the federal
government legally controls only 48% of revenue, with the
remaining 52% belonging to the states, many of whose
governors do not support the proposed uses, which divert
funds from their control. When the federal government
ignores or overrides the National Assembly and the
governors, even under the banner of good fiscal management,
the rule of law is undermined.

Price of Reform Rises
---------------------

4. (SBU) In order to attract investment into oil refining
and other downstream processes, Nigeria has been seeking to
remove subsidies and deregulate the downstream petroleum
sector. Raising prices to market levels is one of the basic
building blocks of that reform. Unfortunately, each increase
in domestic prices has quickly been followed by a new
increase in global oil prices, and despite a series of
heavily protested price increases, the moving target of
market prices has not yet been reached, constantly
postponing the next stage of reform.

All Pain, No Gain
-----------------

5. (SBU) For the average Nigerian these price increases are
all there is to see from rising oil prices. Any material
benefits have eluded those at the grass roots level. Rising
fuel costs, which include not just petrol, but also kerosene
commonly used for cooking, have contributed to rising prices
for food and other basic goods. In rural areas, higher
kerosene prices are forcing many to substitute wood,
increasing tree cutting and environmental impact. Rising oil
prices are also pushing up the cost of fertilizer. Nigeria
already produces and imports too little to meet it needs,
and farmers use far less than the optimal amount. Higher
prices are likely to reduce fertilizer intensity further,
with a negative impact on agricultural output, and while
further pushing up food prices.

Changing the Investment Climate
--------------------------------

6. (SBU) Rising prices and shifting demand are affecting oil
sector investment in Nigeria. It is bringing new investors,
some with little experience. For longstanding partners, with
the price per barrel $60 and upward, the government has
agreed to talk to oil companies about rethinking how revenue
above $35 per barrel is split. On the other hand, higher
prices and profits are raising the pressure on oil companies
to take responsibility for resolving a growing number of
issues in Nigeria, such as refining, power generation and
community development.

Temptation
----------

7. (SBU) High prices and tight availability increase the
already considerable incentives to steal oil and trade in
domestic quotas. With oil at the heart of corruption in
Nigeria, the growing returns make it harder to bring
transparency to the system and to reduce the scope for
skullduggery. CAMPBELL

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