Nigeria's foremost Online Energy News Platform

Subsidy Re-introduction Rattles Oil and Gas Sector

-By Gideon Osaka

There has been a continuous argument between experts and stakeholders in the oil and gas sector on whether subsidizing petrol has any advantage on Nigerian masses or not.

While some argued that subsidy benefits only the elite, others believe that if the petroleum sector is completely deregulated, independent marketers will determine prices and will make the sector competitive.

Reports from the Nigerian Extractive and Transparency Initiative, NEITI shows that from 2006 to 2019, Nigeria reportedly spent N10.7 trillion subsidizing the consumption of Premium Motor Spirit (PMS).

However, the Federal Government through the minister of state for petroleum resources in March 2020, announced plans to deregulate the downstream sector of the petroleum industry and end the subsidy scheme.

The announcement came as a with cheering news, as Nigeria is considered a top producer of crude oil and as such, has the capacity for a globally recognized downstream sector, where products are locally refined and where industries like petrochemical, agriculture, electricity and others should thrive because of the presence of a robust downstream sector.

Mele Kyari

Although economically, subsidy may not be entirely a bad idea, however infrastructure development, strengthening of local industry and production through subsidy has been encouraged rather than supporting consumption.

In the petroleum industry, the downstream sector deals with petroleum product refining, transporting, storing, marketing and distribution.

The sector serves as a catalyst for critical industry growth such as petrochemical, construction, agricultural, industrial sectors, and others. Though it is a vibrant segment and major revenue earner for most oil-producing countries across the world, the sector has remained a shadow of itself in Nigeria.

Therefore, the retarded growth recorded in the downstream sector is seen as the causative agent for the minimal contribution of the oil and gas sector to real Gross Domestic Product, although it accounted for over 70 per cent revenue generation.

Nigeria is reportedly the only oil and gas producing country that relies solely on importation of refined products of the raw commodity it produces and exports.

This is because its downstream sector has been crippled by poor pricing, obsolete regulations, undue government interference, harsh operating environment, dearth of infrastructure, insecurity, and other challenges, which continue to deter investment.

 As a result of these setbacks to the long-term growth of the sector, high level of divestments was witnessed in recent times. There are high safety issues, which has contributed to loss of lives and properties. With poor margins, there has also been steady degradation of assets and equipment thereby compromising safety issues – no thanks to the series of fire incidents, repeated pipeline attacks and truck accidents in the country.

This is further compounded by degradation of the environment by Oil Companies during exploration, which has resulted in years of agitation and militancy.

Last year, Nigeria opted for deregulation of the downstream. Being a decision that was long due, most stakeholders expressed their support for the scheme, believing that job creation, inflow of investment, sustainable business climate and other benefits would become a reality in the industry.

The other side of deregulation and halt of subsidy payment is that citizen would have to bear the full cost of the product. By implication, crude oil, which is the feedstock for petrol and foreign exchange, becomes a major driver of what the price of petrol would be at the pump.

Immediately the government deregulated the sector, the pump price of petrol was reviewed downward since the global price of crude was very low at that particular time. Afterwards, the price rose from N121.50 to N123.50 per litre in June; N140.80 to N143.80 in July and N148 to N150 in August. In September, pump prices rose further to N158 and N162 per liter.

When attempt was made to increase the pump price in December last year, labour unions demanded the head of the Minister of State for Petroleum. They, the Nigerian Labour Congress (NLC) and Trade Union Congress (TUC), were furious over the repeated hike in petrol price, and dragged the Federal Government to a dialogue, where NNPC agreed to slash N5 from N167.44, a development which the Minister of Labour and Employment, Dr. Chris Ngige, said would bring down the price of petrol to N162.44K.

Recently, the price of crude oil surged to over $70 per barrel, the highest in 13 months. This was after oil price sank to sub-zero level in the wake of the Covid-19 pandemic in 2020. While the price rally should have been good news for a country that is heavily depending on crude oil for revenue, the development is an indicator of price increase in petrol. This is normal under a deregulated market even if Nigeria has functioning refineries. Cost of freight would have been the only saving grace provided local refiners buy crude at international market rate and in US dollar.

During the launch of the Nigerian Upstream Cost Optimization Programme (NUCOP) recently, both the Minister of State for Petroleum Resources, Timipre Sylva, and Group Managing Director of NNPC, Mele Kyari hinted at the prospect of a rise in the pump price of petrol in the country in line with the deregulation regime considering the increase in the price of crude oil.

Nigerians and indeed the global community have been facing critical challenges due to the outbreak of Covid-19 pandemic. With so many people already out of job and the inability of many employers to meet up with payment of salaries, it is therefore not out of place for the organized labour to resist increase in pump price. But years of mismanagement of resources and obvious depleted revenue mean that the country is already boxed and unless the stakeholders find a common ground to move forward, there are indications that further crisis would only compound existing challenge for Nigerians.

The increase in the price of crude oil at the international market means more revenue for the Federal Government, which had opted to borrow over N5 trillion to finance the 2021 budget. Except Nigerians want to have their cake and eat it, an increase in the pump price remains obvious since the landing cost of petrol into the country using the interbank official exchange of N379.5 is projected at about N180 per litre.

Although there are no provisions for petrol subsidy in the 2021, the differences between the current official cost of N162 and the expected price of over N190 per litre would have amounted to about N43 billion monthly, which may mean a return of subsidy.

The NNPC had maintained there wouldn’t be price increase in March despite the PPPRA announcing a price template of between N209 – N212 per liter, a decision which was greeted with outrage, forcing the agency to quickly delete the new price template from their website

As such, it becomes incumbent to choose between returning the country to subsidy regime, which according to some arguments, likely favours the rich with high purchasing power or canvass for the growth of a sector, which has the capacity to improve the lots of future and present generations

Social
Enable Notifications OK No thanks