By Fred Ojiegbe
The Petroleum Industry Act has been described by all and sundry as a game changer that will revolutionize the oil and gas sector in Nigeria and make it more attractive to investors.
Asides investment, the Act, provides for total deregulation of the sector, making the Nigerian National Petroleum Company Ltd, an operator in the industry as well as provide an avenue for companies who can import petroleum products to do so. Industry stakeholders welcome the signing of the Bill into an Act after almost two decades of hanging in the balance.
However, President Muhammadu Buhari had on Jan. 25 approved suspension of the removal of fuel subsidy. The suspension of subsidy removal was followed by a threat by the labour unions to embark on strike if the federal government removes subsidy. The removal of subsidy on petrol, was earlier scheduled to take effect from July 2022. The PIA which was signed into law by the President on Aug. 16, 2021 and scheduled to commence in February 2022 was expected to boost investors’ confidence in the industry and create more employment opportunities for the populace in the host communities.
The Federal Government recently announced that only N443 billion was provided in the 2022 budget for subsidy from January to June. However, NNPC requested N3 trillion to continue funding fuel subsidy in 2022. With the recent development, there are fears that investor confidence in the PIA will be dampened. Again, with the postponement, it means President Muhammadu Buhari has handed over the choice to implement subisdy removal to another administration.
Experts Weigh In
Experts have reacted to the extension of subsidy payment which has now set aside the implementation of the passed Petroleum Industry Act 2021. According to them, it will hinder the growth and development of the sector and dampen the spirit of investors as long as NNPC remains the sole importer of petroleum products into the country. They believe that the PIA was crucial to get local refineries working optimally and deregulate downstream segment of the petroleum industry, as clearly prescribed by the petroleum industry law.
In his submission, Mr Mustapha Badaru, an oil and gas expert disclosed that the biggest problem of fuel subsidy in Nigeria was that it was artificial and does not reflect its true nature. An consultant, Badaru explained that there was need to remove the subsidy because it serves as a big drain on Nigerian economy.
“Because its calculation is not transparent, nobody knows the exact amount of subsidy, though we know how much we are told that fund the subsidy but the format is not available in a way that a third party can verify. At the moment there may be galloping inflation and riot from the way the government plans its removal and obviously it may affect this administration. Politically it is not expedient for the government and that is why they cannot afford to remove it at the moment.
“Until there is a verification process, you cannot ascertain how the subsidy payment is being calculated and how much is spent on subsidy. We need to know how much we pay for subsidy. If there are no independent people to verify it and all we have is the government that can tell us how much is spent, nobody knows whether what is going on is right,’’ he noted.
Speaking on the way forward, he said the subsidy process must be made transparent to all, and secondly the government should be careful while taking stringent measures on subsidy to avoid certain people who would take unfair advantage of the system.
Also speaking, Chidi Kalu an economist, said the capitulation on the subsidy removal did not come as a surprise; rather there were many odds against the move. He stated that there were obvious concerns about the potential political cost to government and the ruling party and worries about the social cost given the excruciating poverty in the country. According to him, there is also the waning goodwill required by government to enlist the support of the people.
He explained that the whole subsidy story became a political matter and was moved from the realm of economics and investment, adding that the outcome was predictable, especially with impending general elections next year.
“But the economic cost of the capitulation is equally weighty. The truth is that you cannot eat your cake and have it. Nigerians should expect the cost of funding the subsidy to be much higher this year because of the surge in crude oil price. If the oil price remains high for most part of the year, the subsidy cost could go as high as N2.5 trillion or even more by the end of the year. This will surely affect funding for critical infrastructures such as roads, railways, healthcare, education and even security,’’ he explained.
He further explained that the petroleum products smugglers, beneficiaries of the fiscal leakages in the fuel subsidy ecosystem and their collaborators would continue to smile to the banks for the next one and half years. According to him, some states will struggle to pay salaries, especially states that are heavily dependent on federal allocation while some may have to lay-off some of their workforce. Many will struggle to meet their financial obligations as sub-nationals. He noted that macroeconomic risks would become elevated as fiscal deficit and borrowing significantly surpasses projections in the 2022 budget.
On this note, he stated that the Central Bank of Nigeria (CBN) may have to continue to cover financing gaps through ways and means, which of course has serious inflationary implications as prospective investors in the downstream oil sector would withhold their investments until the policy environment becomes conducive.
On the partial suspension of the PIA, the expert described it as another instance of policy somersault which also reflected the absence of political will to reform the oil and gas sector.
“This has been the struggle over the past few decades. Perhaps there are entrenched and powerful interests working against the PIA. These forces have succeeded in upturning a major economic reform programme,’’ he said.
Describing it as a sad development, he said this would further aggravate the political and policy risk of investing in Nigeria, adding that the oil and gas sector was one sector that was starved of investment for several decades because of policy and regulatory issues.
“Regrettably, at a time when we thought we had turned the corner, we are now faced with the stark reality of a complete suspension of a major instrument of reform. It also implies that the implementation of the Act will not commence in the life of the present administration. It is difficult to predict what the succeeding administration will do. Meanwhile, attracting investment into the oil and gas space will be extremely difficult going forward,’’ the expert noted.
According to another oil and gas expert, Mr Charles Majomi, though the Federal Government says removing subsidy will drive up inflation, but that higher inflation is the bitter short term pill that we have to swallow. “But we have to swallow it if we are to free up money to invest in sectors of the economy that will ensure longer term growth and prosperity for Nigerians, there is no other way out.
“Failure to remove the subsidy means that three trillion Naira will be borrowed, adding to our debt. Imagine what three trillion Naira can do for the national economy and welfare of Nigerians if spent wisely.
However, for Barr. Sanya Adereti, an oil and gas lawyer, there is no best time to take the decision to remove the subsidy, adding that the country has only succeeded in postponing the evil day.
He also believed that the government halted the plan to buy the favour of Nigerians ahead of the upcoming elections. “The postponement might be political. On one hand, we need complete deregulation for a seamless take-off of the PIA. We cannot keep the subsidy and expect a holistic impact on the positive effects of PIA. The government must have the political will to remove the subsidy,” he said, adding that the Dangote refinery coming on stream could provide succor.
Chairman/Chief Executive Officer, International Energy Services Limited (IESL), Diran Fawibe, said labour unions must be convinced and take the right decision instead of always fighting the removal of subsidies. According to him, the government shares part of the blame on subsidy for not being able to fix refineries for over 20 years. With low crude oil production, Fawibe noted that Nigeria is now facing double jeopardy, adding that the high crude oil price will return smuggling of products, as perpetrators are expected to smile to the bank.
He said: “If the government that has signed the PIA into law fails to implement it, who will take the government to court for violation? Let’s hope that the situation gets better and the government revert to full implementation of PIA in the downstream sector.”
Federal Government Optimistic
Meanwhile, the federal government has reinforced it’s stands that autogas conversion of vehicles will yield the desired results, which is why it m has set aside N250 billion for willing investors in autogas assembly plants in the country. Minister for State Petroleum Resources Chief Timipre Sylva had explained that the decision to make the money available was as a result of the huge amount spent by government on fuel subsidy, adding that it was in line with President Muhammadu Buhari’s commitment to adopt gas as an alternative fuel for the country.
“The amount of money government is spending on fuel subsidy is high so the President Muhammadu Buhari-led government, in a bid to ease the pains of Nigerians, decided to look inward and evolved ways to reduce the cost. If we focus on moving from fossil fuel to Liquified Petroleum Gas (LPG) and Compressed Natural Gas (CNG), it will save us a lot of money because the benefits are enormous.
“Apart from the fact that autogas is cheaper, we are also concerned about making the conversion of cars affordable so that Nigerians can indeed reap the advantage of this new policy,” the minister said. He added that the conversion underscored the seriousness of the new government initiative and urged Nigerians to embrace gas-powered vehicles as they were cheaper and more environmentally friendly”, Sylva said.
