The Inside Story of Petroleum Subsidy Saga

30 Oct 2011

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Minister of Petroleum, Diezani Allison-Madueke

By Lawson A. Omokhodion

No doubt, elements of subsidy exist in the pricing of petrol and kerosene sold in Nigeria. But before the federal government throws all of us into an unprecedented confusion by an unplanned removal of this subsidy, we must ask questions because once the nation starts to burn you never know.

The refineries in Nigeria produce some quantity of petrol, what is the cost of that fuel? Diesel is deregulated already and so nobody bothers about that type of fuel. What of kerosene, called DPK, how much does it cost to produce it in Nigeria and how much is it sold? What of jet A1, also known as DPK (the fuel to fly aeroplanes), where is it from and how much is it sold? The back page article in the PILOT newspaper of October 15, 2011 should interest a lot of readers because it contained a summary of per litre fuel pump price in both OPEC and non-OPEC economies.

The survey says per litre pump price of petrol in Iran is N58.40k; Kuwait N30.66k; Qatar N32.12k; Saudi Arabia N17.52k; UAE N54.02k; Venezuela N5.84k; Libya N15.95k; Egypt N46.72k; Malaysia N73; Mexico N81.76k; Bahrain N39.42k; Russia N90.52k; USA N108.04 and Indonesia N81.14. As at August 15, 2011, based on its pricing template, Petroleum Products Pricing Regulatory Agency (PPPRA) said the landing cost of a litre of petrol in Nigeria is N129.21; the margin for transporters and marketers is N15.49; the expected pump price ought to be N144.70 per litre instead of the N65 per litre that is charged. This means a so-called subsidy of N79.70 assumed by government on every litre of petrol sold in Nigeria.

All the countries mentioned above own functioning and efficient refineries to produce petrol, diesel and kerosene for their domestic economies. Nigerian refineries also produce some quantity of petrol; let the PPPRA tell the Nigerian public what the per litre cost of locally refined petrol is in Nigeria. As a people, we should introduce rigours in our public life so that transparency and accountability can be promoted. If the true selling price of per litre of imported fuel in Nigeria is N144.70 and the government has not found it necessary to invest in refineries, who should be blamed?

Let us examine the cost components of imported petrol. But this imported fuel is actually round-tripped because the original crude is taken from the shores of Nigeria and sold to dedicated refineries. When the crude oil is loaded into the ships in Nigeria, there are huge handling charges at the port, plus insurance and haulage charges to cover the cargo as it sails to the foreign refineries, port charges as it enters into the foreign countries and production cost. After the refining has been done, the refined petrol now is sold to big oil traders who now sell to Nigerian government big boys and the fuel is then loaded onto ships bound for Nigeria and the cost builds-up again viz: port charges in the host country, excise duties, and then haulage and insurance on the vessel and its content to Lagos plus port charges at destination, demurrage and security charges. Details of exchange of Sovereign Debt Notes and the off-takes at the ports will not interest readers here. But the cost of locally refined petrol is not the same as imported fuel. The Nigeria Labour Congress must find out.

The matter is beyond the existence of a fuel cartel. It touches the heart of the federal government from pre- President Goodluck Jonathan era and exposes the naivety of National Assembly members.

Two more areas need to be examined. These are the role of the Petroleum Equalisation Fund (PEF) and the use and abuse of DPK (dual purpose kerosene). The main duty of PEF is to ensure that by picking up the haulage charges on distribution trucks from one depot location to another, it ensures that the price of fuel is equalised across the country. To move a truck of petrol from Lagos to Kano, for instance, would cost about N200, 000.00 per truck in haulage cost and it is the duty of PEF to reimburse the major marketers for this cost and thereby maintaining a flat rate of N65 per litre in the country. If a major marketer moves 1,000 trucks to several of such locations in one month, PEF reimburses the company.

It is this component that is the subsidy in this case. If a major marketer moves 60 trucks and enters PEF claims for 500 trucks, who cares, when everyone is happy? If this is replicated across the seven odd major and numerous independent marketers, Nigerians can imagine how much is truly lost in haulage claims and where part of the subsidy really ends up. The pockets of Petroleum Products Marketing Company staff, Nigerian National Petroleum Corporation staff, government officials and major petroleum marketing companies are full to the brim and bursting. But the nation groans. Let PEF be cancelled today and fuel pricing at different locations in the country should reflect full haulage rate.

The other item in this subsidy saga is the kerosene factor. The Nigerian refineries actually produce kerosene and it is a known fact that DPK is used for household needs and to fly aeroplanes. The government has fixed a price of N50 per litre of kerosene but consumers get it for N95 per litre. No matter what government does, it won’t change anything in DPK. The pressure on kerosene comes from one major source – airlines.

The kerosene used by airlines has to be very pure because even a speck of dust in a huge volume of DPK can cause havoc in an aircraft. Ninety percent of the kerosene produced by the refineries is allocated to the major oil marketers and it ends up in the tanks of aircrafts. If PPMC sells kerosene to major marketers at N44 per litre, the major marketers sell this kerosene to the airlines at N165 per litre. 

The consumption of DPK by aircraft is quite substantial. A 747 aircraft from Lagos to London uses as much as 30,000 litres of DPK and a 737 aircraft to Kano from Lagos uses as much as 5,000 litres of jet fuel in the minimum. However, the poor Nigerians are only allowed to buy 50 litres of DPK per transaction, over and above the government rate of N50 per litre and, yet, not enough kerosene for the poor. It is obvious where the kerosene goes and everyone in government and in NNPC knows what the true story is. The recent statement by Deizani Alison-Madueke, the petroleum resources minister, that the subsidy on kerosene is to remain is a fraudulent statement because the games played with kerosene are known and government officials want some subsidy to remain for the boys and their girls. If the haulage subsidy is removed and DPK from refineries is coloured, there will be kerosene all over Nigeria at N50 per litre and it won’t be diverted to jet fuel. Colouring kerosene for domestic use is the answer not subsidy retention. Let DPK for aircraft be priced appropriately.

Removing subsidy on petroleum products must be done correctly and within the proper context.  Experts say that 200,000 barrels per day refinery can be built in nine months at a cost of US$4.0 billion. Let government partner with Nigerian and foreign investors and oil majors such as Shell, Exxon-Mobil etc, draw from its foreign reserves, as was done to pay foreign creditors in 2006, and build two of such refineries within 2012 in readiness for subsidy removal. The management of these new refineries can be contracted out to the technical partners for 50 years while Nigerians acquire technical and managerial competence in the interim. On the existing refineries, the federal government should assign the responsibility for their maintenance to those companies that built them, in the first place. The output of the local refineries will then be sold at local market rate – no PEF, no imported inflation! If new refineries are built, old ones are working and crude oil is available at market rate, fuels from them are sold at market prices, private investors would be persuaded to invest in refineries.

But there is a huge challenge. If fuel subsidy is removed, savings of N1.2trillion will be made and to be used for what? It is very clear in my mind that the governors, ministers, legislators and politicians will, ultimately, embezzle the money. The number of ex-governors and former ministers in court over corruption charges justifies my expectations. National Assembly members will earn N30 million each a month for the very hard work they do. Proceeds of subsidy removed will now end up in the pockets of politicians rather than in the hands of the private sector boys; it is mere abracadabra! Fuel subsidy removal in Nigeria is always preceded by so much turmoil.

Government then promises palliatives to calm frayed nerves. When President Ibrahim Babangida removed subsidy in 1987 he set up Directorate of Food, Roads and Rural Infrastructure and it failed. He then set up Oil Mineral Producing Areas Development Commission and it also failed. It was only General Sani Abacha that succeeded in transferring subsidy removal benefits to Nigerians through the instrumentality of Petroleum Trust Fund. All the promises made by President Olusegun Obasanjo on the use of subsidy proceeds failed to materialise. So President Goodluck Jonathan needs to tell us what he wants to do with proceeds of removed subsidy and the framework to apply. State governors must pledge to remove the inglorious immunity clause before subsidy is removed. We have to police governors more closely.

But is it timely to remove fuel subsidy? Are we inviting chaos of the Arab type? My honest advice is to ask the federal government to properly run existing refineries and build two or more refineries in the next 12 months before it fully removes subsidies. It should abolish PEF, in the first instance, and sell locally produced petrol at its true cost plus graduated marketers’ margin to take care of distance from refineries’ location. Oil majors and independents can import fuel by themselves without interfering with Nigeria’s crude export and such fuel is acquired by PPMC based on need and sold at the same price as locally produced petrol, thereby reducing the subsidy elements in fuel price. When other preconditions are met subsidy can be finally removed.

•Omokhodion is ex-MD/CEO, Liberty Bank Plc.

Tags: Business, Featured, petroleum subsidy

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Comments (8)

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  • Well written article, less the frothy emotion of other articles or commentators. Removal of subsidy should be done to a properly planned timeline and ordered sequence of planned events.

    From: The Saint

    Posted: 4 years ago

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  • This is by far one of the most informative piece on the issue of policy. I appreciate.

    From: Ladi Admis

    Posted: 4 years ago

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  • This is what is called investigative journalism. Thanks for opening our eyes.I wish others can follow your lead. If government wants to remove subsidy let them abolish school fees at all levels. Give free health care to all citizens. This action will remove all burdens from the poor.

    From: Jerry

    Posted: 4 years ago

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  • This is by far the best article I have read on fuel subsidy removal. The suggested road map to the removal of subsidy is also very well thought out and pragmatic. I have read the article midway before looking up the name of the author and, little wonder, it was vintage LAO! Thank you for the enlightenment, but seriously Sir, you MUST be in Abuja this week for the proposed subsidy debate by the House of Reps. Many of us are truly ignorant and need to separate facts from 'adverts'.

    From: Preye Ogriki

    Posted: 4 years ago

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  • PEF as described in this article is misleading. PEF equalizes by charging marketers who have lower transportation costs and subsidizing marketers who have higher transportation costs. It cancels out

    From: Ikenna

    Posted: 4 years ago

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  • This is an eye opener to the game being played by our leader in the name of subsidy, thank you for garnishing our expectation with such information. The truth has been said but will they adhere to respect the yarning of the poor masses.

    From: ejike owuh

    Posted: 4 years ago

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  • My dear Respected Sir, what you have mentioned in PURE black & whiteis absolutely true,
    but the very fact no one will acceptwhat you say. May like you have to keep opening out these facts
    so the whole nation is full aware of what is going on, there is no need for any removal of subsidy,
    as subsidy does not exist, (Extra Pockets collectors) or Hidden pockets under the coat.
    Nigeria can re organise to let the refinery to start work but in fact they do not want this to happen as then the pockets would be drying with no fillings.

    From: kumar

    Posted: 4 years ago

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  • High educative. A must read for all Nigerians wishing to contribute to the fuel subsidy debate

    From: Innocent

    Posted: 4 years ago

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