Provision of N450bn Fuel Subsidy it Fresh Deregulation Fire or
-By Benjamin Ike
Unless immediate moves are undertaken to address the imbalance between the actual landing cost and retail pump price of fuel across the country, Nigeria’s financial crises may ultimately take a turn for the worse in the years ahead. This apprehension came on the heels of a recent disclosure by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, that the Federal Government was setting aside the sum of N450 billion in the 2020 budget for fuel subsidy. This mind-boggling figure is about N145 billion higher than N305 billion it budgeted for fuel subsidy in 2018. The Minister said the provision of N450 billion was made for under-recovery of cost in respect of the importation of Premium Motor Spirit (PMS), popularly called petrol. That revelation came after the Petroleum Products Pricing Regulatory Agency (PPPRA) in its November 2019 report disclosed that the Nigerian National Petroleum Corporation (NNPC) subsidised the cost of petrol by N19.37 per litre with the national daily consumption of petrol put at 55.8 million litres, and the national oil company spending an average of N1.06 billion on daily consumption.
According to official data, the landing cost of petrol as at November 2018 was N144.7 per litre, with distribution margin at N19.37 per litre. Under this regime, the consolidated cost of petrol (landing and distribution cost) stands at N164.07 per litre even`though the NNPC takes the distribution costs off the private marketers as subsidy. In Nigeria, petrol is sold at a fixed price of N145 per litre at filling stations across the country. In May, 2019, the Senate approved N129 billion as subsidy payment to cover debts to local oil firms related to fuel subsidy programme. This approval came as landing cost of petrol rose to N180 per litre, N35 higher than the official pump price of N145 at the end of April 2019. But the recent spike in subsidy payment was expected as a former Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had earlier argued that the rise in global crude oil prices after 2016 hike in petrol price brought back subsidy. The NNPC, the sole importer of petrol into the country for about two years after private oil marketers withdrew from the importation of the product, bears the burden of subsidising the product. The stakeholders were recently at the Nigeria Petroleum Summit (NIPS) to dissect the effects of subsidy on the economy, advising the Federal Government to muster the political will to deregulate the downstream sector to free up the funds to develop other critical sectors of the economy.
However, while urging the Federal Government to ensure that its refineries are working at optimal capacity, they decried a situation whereby crude oil is exported in return for imported refined products as an unsustainable economic model.
According to them, the continuous payment of subsidy by the Federal Government will further cripple its already fragile economy as low investments by operators would aggravate underdevelopment and shrink the economy.
In his contribution, Managing Director of OVH Energy, an Oando Licensee, Mr. Hubb Stokman, lamented that the NNPC’s role as sole importer of almost 10 per cent of Nigeria’s petrol needs, contrasts sharply with its statutory mandate as a regulator and has the capacity to stifle the industry. Worried that Nigeria may not be able to reap the full benefits of the downstream sector under the current arrangement except it deregulates, he argued that deregulation will free up the market both on the supply and demand end, leading to robust investments.
Stockman frowned at the fact that Nigeria has the lowest margin for petrol in all the places he has worked and is equally the most fragmented, he posited that “despite a legacy nameplate refinery capacity of 445,000 barrels per day (bpd) with operational challenges keeping production below 15 per cent, Nigeria has historically imported over 80 per cent of refined products. The enhanced refining capacity from imminent conventional and modular refineries would shift Nigeria from import-driven supply to self-sufficiency which is a catalyst for the downstream industry. If Nigeria wants to capture the full benefits of the downstream value chain after the enhanced refining capacity comes on-stream, the other downstream sectors need to use this short time window to make improvements in customer experience and safety and operational standards: driven by technology. This will only be possible through major investments which are not feasible at current margins”.
For his part, the Executive Chairman, Integrated Oil and Gas Limited, Emmanuel Iheanacho, has called on the federal government to enable more refineries to be built so as to maximize the benefits of oil production in the country. Iheanacho, is a former Minister of Interior.
“We are not investing enough in refineries. Instead of waiting for OPEC to give us a quota of 2 million barrels per day (bpd), we can produce 4 million barrels per day, mbpd and build refineries to refine and add value to our crude” he stated. Ihenacho compared the Nigeria downstream market structure and that of the United States of America, a non-member of the Organization of Petroleum Exporting Countries (OPEC). “The US is has a population of 327 million with a total of 139 refineries with the refining capacity of 16.7mbpd. Texas, a state in the US has a population of 28.7 million with 47 refineries and a refining capacity of 5.7 million barrels per day. Compare these numbers with Nigeria that has a population of 200 million people with 4 refineries with installed refining capacity of 520,000bpd but is only able to refine 5 per cent of installed capacity.” He decried the plight of the country that has not been able to get things right despite having been in the oil and gas business for over 60 years. He further implored the government to take a second look at the market structure in terms of cost and efficiency. “Open market competition creates efficiency in the system. In that vein, government must take a look at the subsidy regime and regulation. The subsidies do not really benefit the common people” he said.
Managing Director and Chief Executive Officer of 11 Plc, formerly Mobil Oil Nigeria Plc, Mr. Tunji Oyebanji, said Nigeria must make-up its mind whether fuel for moving people around is a social issue or an economic one. Accordingly to him, if the country decides to make fuel a social welfare contact, then Nigerians must be ready to make more and more resources available to sustain petrol price at the current level which he said is no longer sustainable. Oyebanji said deregulation is not about closing down government regulatory agencies but rather, the power to unleash the potential of the private sector to grow and develop the industry. Insisting that if the country does not create the right investment climate, products even from the Dangote refinery will eventually continue to find its way outside the country because it would be more profitable for smugglers to continue to do their trade to the detriment of the economy.
In his submission, the Chief Operating Officer (COO) Downstream, NNPC, Mr. Tunji Adeyemi opined that in line with the policy directive of the Federal Government, the Corporation will continue to subsidise petrol until otherwise directed, maintaining that the role of NNPC is to ensure that there is adequate energy security for Nigerians, despite the challenges of the environment, stressing that recent couple of mergers and acquisitions, in the sector are pointers to the fact that the prospects remain bright for the downstream sector. According to him, some independent oil marketers are beginning to play big and are getting closer to becoming major marketers, a development that signals the sector is not entirely distressed as being speculated in some quarters. Adeyemi said government is already talking to investors to key into pipeline infrastructure to help assist in its quest for efficient and safe-delivery of petroleum products, including CNG and LPG. He revealed that plans are in to gear to ensure that LPG consumption is ramped up to 5000 million metric tonnes from the current 1000 metric tonnes.
Executive Secretary and Chief Executive Officer, Petroleum Equalisation Fund (PEF), Mr. Ahmed Boboi, could not agree more. According to him the PEF through payment of bridging cost has continued to ensure that petrol is sold for N145 per litre across the country. “The intervention of PEF has ensured that industries in the remotest parts of the country continue to survive because without PEF, there would have been high unemployment rate because many SMEs would have closed shop.” Said Boboi who was represented by Goddy Nnadi, General Manager, Corporate Services, the support of PEF has helped to reduce rural-urban migration since petroleum products are available in every nook and cranny of the country, adding that plans are on to include LPG as one of the core areas of focus and intervention by PEF by ensuring that it is available in rural areas at a cheaper cost in a bid to discourage the use of dirty fuel and reduce environmental degradation.
