THEFRONTLINES BY Joseph Ushigiale
Recently, the Minister of Finance, Budget, and National Planning, Zainab Ahmed announced that Nigeria will remove fuel subsidies by 2022 and replace them with an N5000-a-month transportation grant to the poorest Nigerians.
Speaking at the launch of the World Bank Nigeria Development Update (NDU), the minister said the grant will go to about 20 to 40 million Nigerians who make up the poorest population of the country. She added that the final number of beneficiaries will depend on the resources available after the removal of the fuel subsidy.
This would not be the first time the federal government would be making such pronouncements. It has become apparent that each time the government is broke and seeks new sources for revenue generation, fuel subsidy removal is usually the first step to take. The reason, according to the International Centre for Tax and Development (ICTD) is that fuel subsidies in Nigeria are enormous. At last estimate, the state subsidizes gasoline to the tune of USD 3.9 billion — almost double the entire health budget. Subsidies exist because the government fixes the price of gasoline for consumers below the international price and uses government resources to pay for the difference.
The history of fuel subsidies is traceable to the ‘70s, they were first introduced in Nigeria in the 1970s as a response to the oil price shock in 1973. However, despite numerous attempts at reform, Nigeria has never successfully removed fuel subsidies, in large part due to strong popular opposition to reform. Such subsidies come at a great cost: spending on other development objectives is lower; the distribution of resources to the state governments is reduced; the vast majority of the subsidy goes to better off Nigerians; and cheaper gasoline encourages greater pollution, congestion, and climate change. Despite this, a survey conducted by the ICTD indicates that 70 per cent of Nigerians oppose the reduction or removal of subsidies.
According to ScienceDirect, those in favour of reform look particularly at the traditional economic factors, such as price and availability, to associate with support for reform; where customers are charged more than the regulated price, or where they have experienced a lack of fuel, they tend to be more in favour of reform. On the other hand, if Nigerians believe that savings from reducing fuel subsidies will not be used appropriately because of corruption or because the government is not capable of running programs efficiently, then their support for subsidy reforms appears to dwindle.
Indeed, corruption reduces support for reform more than any other factor. While general trust in government does not appear to be associated with support for reform, the delivery of reasonable national and local services is, supporting the idea that building the ‘social contract’ is key to reform.
Another consideration for support is personal norms, such as active participation in religious groups, which also appear correlated with support for reform. Intriguingly, actual knowledge about subsidies is not – people appear to form their opinions on the issue regardless of their understanding of it.
In debating the merits of fuel subsidy removal, it is important to understand who benefits the most from the program. Contrary to popular belief, according to the World Bank, it is the rich, not the poor who disproportionally benefit from Nigeria’s fuel subsidy. With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy.
Nigeria’s poor rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighbouring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling.
In addition, the World Bank, for instance, in the development update had said the poorest 40% in Nigeria consume less than 3% of the total PMS in the country, highlighting that the rich were benefiting more from the subsidies.
The Coalition under the aegis of “Civil Society Coalition for Economic Development (CED), comprising of 82 groups speaking through Yusuf Maitama lamented that the fuel subsidy regime which had been in place for the past 20 years has enriched few individuals and denied citizens of what was supposed to be collective wealth, adding that moves by the present administration to end the subsidy regime were the right step.
No matter how well-tailored the government marshals its argument, it has become clear that its position or narrative is trite and rather unconvincing. Over time, the government has stuck to only one side of the narrative which is to remove subsidies, while neglecting to explore the other narrative which is how to develop the country’s refining capacities to optimize local production to satisfy local and export demand and raise the much-needed revenue it so craves for.
Additionally, while it is always asking Nigerians to brace up and sacrifice by promising to develop a comprehensive safety net to cushion the pains and deploying fleeting palliatives that do not stand the test of time, government officials and their family members hardly sacrifice and therefore do not feel the pinch of the pains inflicted by the removal of fuel subsidies.
The federal government has displayed outright treachery by sticking wholesomely to the importation of petroleum products as if there alone lies the solution. For instance, in sticking only with products importation, the NNPC is already claiming that the source of its subsidy is because of a higher landing cost than that of the PPPRA. Under the current subsidy regime, the NNPC claims it is under-recovery and has left the pump price at a band between N162 and N165 per litre. If you compare that with the PPPRA landing cost of N264.65 per litre there exists subsidy or an under recovery of N102.65 per litre according to the officials.
To show clearly that the government has been very economical with the truth, lacks creativity, and is wasteful, let us interrogate whether it is beneficial for Nigeria to retain its importation regime or explore creative ways of stimulating local production to satisfy local and international demands. Let us begin with the pricing template put in place by the PPPRA. This is driven by ten key factors: the first is the spot market price of a barrel of crude oil in North-Western Europe(NWE); the second is freight which is calculated in 30,000 Metric tonnes from NWE to West Africa. Here, a trader’s margin of $10/mt is factored in the freight cost.
This is followed by Lightering expenses incurred on the transshipment of imported petroleum products from the mother vessel into daughters vessel to allow for the onward movement of the vessel into the Jetty. This charge includes receipt losses of 0.3% in the process of products movement from the high sea to the Jetty and then to the depot. The mother vessels expenses are based on the allowable 10 days demurrage exposure at the rate of $28,000 per day.
The Lightering Expenses also include the Shuttle vessel’s chartering rates from Offshore Lagos to Lagos and Port Harcourt which currently stands at N2.00 per litre and N2.50 per litre
Next is the cargo dues (harbor handling charge) charged by the NPA for use of Port facilities. The charge includes VAT and Agency expenses. Currently, the NPA charge attracts $10.50/MT on the pricing template.
This is followed by financing. It refers to stock finance (cost of the fund) for the imported product. It includes the cargo financing based on the International London Inter bank Offered Rates (LIBOR) rates+5% premium for 30 days (for Annual Libor rate of 2.07%, LIBOR cost would be 7.07%).
Also included in the Finance cost is the interest charge on the subsidy element being awaited for an allowable 60 days period at the Nigerian Inter-Bank Offered Rate (NIBOR) rate of 22%. Next is the Jetty Depot Thru Put. This is the tariff paid for use of facilities at the Jetty by the marketers to move products to the storage depots. The value is currently N0.80/litre.
Also incorporated is the Storage Margin which is for depot operations covering storage charges and other services rendered by the depot owners. The charge is currently N3.00/litre. After this is the landing cost. It is the cost of imported products delivered into the Jetty depots. It is made up of all the components highlighted above.
To cater to the distribution chain, distribution margins are factored in. These include Retailers (N4.60 per litre), Transporters margins (N2.75 per litre), Dealers margin (N1.75 per litre), Bridging Fund (plus Marine Transport Average) (N3.95 per litre), and Administrative charge (N0.15 per litre). This amounts to N13.20 per liter on the template. The overhead cost and other running costs have been considered in the determination of these margins.
After these are the taxes. These include highway maintenance, government, import and fuel taxes. It has the overall objectives of revenue generation, social infrastructure investment, and servicing and efficient fuel usage. At the moment, all these attract zero taxes. A cumulative landing cost of imported products plus reasonable distribution margins equals the retail prices of petroleum products.
Now, given this breakdown of pricing template for imported petroleum products, would these whole costs still count if we are to completely embrace local refining? Is it not clear that the federal government has been blackmailing its citizens and subjecting them to untold hardships when there are alternatives to a better life? Nigerians would have been better off if the successive governments had vigorously looked inwards for solutions to ending the subsidies menace through stimulating our local refining capacities?
To show the level of dishonesty in the way the government has handled the subsidies problems, I would copiously navigate you through a 2017 projection by PwC clearly pointing out the way how government can turn its refining woes around to a success story.
In the report, PwC noted that Nigeria is the second largest producer of oil in Africa, producing over 1.5 million bpd (as of January 2017). With proven crude oil reserve estimates of about 37 billion barrels as at 2015, Nigeria boasts of about 29% of the continent’s crude reserves (2nd in Africa). Nigeria is also one of the largest consumers of refined products in Africa (5th as at 2014, behind Egypt, South Africa, Algeria, and Morocco) and accounts for over 7% of Africa’s refined products consumption.
It noted that in 2015, the consumption of refined products was estimated to be about 24 billion litres and products consumed include Premium Motor Spirit (PMS), Automotive Gas Oil (AGO), Dual Purpose Kerosene (DPK) and Aviation Turbine Kerosene (ATK). To the detriment of national earnings, these products are majorly imported from United States, North-Western Europe and other sources.
The PwC went ahead to clearly outline how local refining was the way to go for Nigeria, arguing that imports currently account for over 80% of Nigeria’s refined product supply, creating a huge potential for local refining. The West African market also holds significant potential as refineries such as SIR (Ivory Coast), SOGARA (Gabon) and SAR (Senegal) cannot meet the current demand for refined products in the region, estimated at 39 billion litres. There is an opportunity for potential uptake by neighboring countries if the market has Nigeria’s refined products readily available.
It also went ahead to specifically pinpoint the products that hold the keys to growth and profitability in the refining business. Take the Premium Motor Spirit (PMS) for instance, it said Nigeria consumes over 17 billion litres of PMS annually. Transportation and power are the major drivers of demand for PMS in the country. Imports currently account for over 90% of PMS supplied in the country and this is likely to continue in the future. Imported PMS is primarily sourced from North Western Europe and the United States. West Africa consumes over 22 billion litres of PMS annually. Imports currently account for over 90% of PMS supplied to the region
AGO was another viable product where it pointed out that Nigeria consumes over 3 billion litres of AGO annually. The erratic state of the country’s power sector has been the major driver of AGO demand. The power sector is currently plagued by a plethora of challenges, increasing the demand for self-generation options such as AGO-powered generators. Imports currently account for about 60% of AGO supplied in the country. West Africa consumes about 11 billion litres of AGO annually. Imports currently account for over 70% of AGO supplied to the region.
On aviation fuel, it explained that Nigeria consumes over 400 million litres of aviation fuel annually, most of which is primarily sourced from the United States. In 2014, Nigeria was the 2nd largest importer of US aviation fuel in the world. Imports account for 100% of the aviation fuel supplied in Nigeria due to the inability of existing refineries to produce the fuel.
It went on to project that there was a current deficiency in supply which was likely to continue in the short to medium term and this is primarily due to the shortage of foreign exchange and less to do with the availability of the product. West Africa consumes over 1 billion litres of Aviation fuel annually with imports currently accounting for over 80% of Aviation fuel supplied to the region. SIR (Ivory Coast) is responsible for a significant portion of locally refined Aviation fuel within the region.
It noted that Nigeria’s refining sector is currently not operating at full potential and laudable attempts are being made by the current administration to drive private investment. These include plans to upgrade existing refineries and the issuance of 25 refining licenses (conventional and modular) to indigenous companies. These initiatives, if executed rigorously, It said, will drive growth and reforms within the sector in the medium to long term. The combined capacity of the 25 candidate refineries stands at approximately 1.6 million bpd. Three (3) of the licensed companies are billed to construct conventional stick-built plants with capacity estimated at over 850,000 bpd, while 22 licenses are to construct modular units estimated at about 700,000 bpd in combined capacity
Making a futuristic projection, the PwC predicted that Nigeria will become a net exporter of refined products by the start of the next decade through a number of scenarios that depict possible outcomes in the refining sector up until 2030. It said the scenarios are based on some forward assumptions about refining in Nigeria and the West Africa region.
“Our outlook illustrates the potential of the sector with the focus on the volumes that modular refineries can contribute to bridging the supply gap in the country and regionally. These are presented in three different scenarios.
“In our scenarios, key assumptions are made across refinery setups: modular and conventional. Modular refineries are assumed to be set up close to crude sources either within existing refineries or on onshore marginal fields. They are also assumed to be set up close to consumption clusters thereby making them better positioned for domestic supply. On the other hand, conventional refineries are assumed to be set up to source crude internationally and to supply both international and domestic markets.
“The 650,000 bpd Dangote refinery, a crucial development within the sector, is expected to come onstream by 2019. At optimal utilization, the refinery is capable of meeting the country’s demand, however, a major headwind to achieving a fully optimized run is the availability of crude feedstock. At full capacity, the refinery will require about 19 (1 million barrel) cargoes of crude monthly, approximately half of Algeria’s (third-largest producer in Africa) production.
“For the initial years of operation, this may be a significant challenge. Therefore, the current supply gap within the country and region creates an opportunity not just for conventional refineries such as the Dangote refinery but also for modular refineries which will be set up primarily to meet domestic demand. This provides the “bottom-up” supply into the fuels value chain. Another critical assumption is that the modular refineries’ yield will be limited to fuel oils and diesel as the lightest hydrocarbon produced, the report declared.
It is worth noting that, the PwC’s projection was to crystalize in 2019, but two years on, no one is sure when the Dangote refinery would be ready and come on stream. Yet, the federal government does not see any other avenue or alternative to seeking a solution than in the Dangote refinery where it has sank about $2b recently buying equity.
Regardless, the PwC made three assumptions: the first was that Dangote refinery (650,000 bpd) opens its gates mid-2019, operating at 50% utilisation, existing refineries (445,000 bpd) are operating at 15% utilization and modular refineries (combined capacity of 100,000 bpd) also come onstream early 2019, operating at 90% utilization. These ramp up to 70%, 20% and 90% respectively by 2030. Net effect: By 2019, Nigeria becomes Africa’s 3rd largest refiner of petroleum products and a net exporter of refined petroleum products. Its exports are estimated to exceed 37,000 bpd (approximately 6 million litres daily). The modular refineries bridge a supply gap of 53,000 bpd (approximately 8.5 million litres daily) in Nigeria. Nigeria becomes West Africa’s refining hub by 2019, supplying the region with at least 37,000 bpd (approximately 6 million litres daily). By 2026, Nigeria’s exports to the region exceed 130,000 bpd (approximately 21 million litres daily), reducing the region’s imports from the US and Europe by approximately 80%.
The second assumption was that Dangote refinery (650,000 bpd) opens its gates mid-2019, operating at 50% utilisation, existing refineries (445,000 bpd) are operating at 20% utilization and modular refineries (combined capacity of 200,000 bpd) also come onstream early 2019, operating at 90% utilization. These ramp up to 90%, 30% and 90% respectively by 2030. Net effect: With production figures exceeding 590,000 bpd (approximately 94 million litres daily), Nigeria becomes the largest producer of refined products by 2019. Its exports are estimated to exceed 150,000 bpd (approximately 24 million litres daily) by 2019. The modular refineries bridge a supply gap of 30,000 bpd (approximately 5 million litres daily) in Nigeria. By 2023, West Africa becomes self-sufficient with over 70,000 bpd (approximately 11 million litres daily) being traded to other regions.
The third and last assumption was that Dangote refinery (650,000 bpd) opens its gates mid-2019, operating at 60% utilization, existing refineries (445,000 bpd) are operating at 20% utilization and modular refineries (combined capacity of 300,000 bpd) also come onstream early 2019, operating at 90% utilization. These ramp up to 90%, 70% and 90% respectively by 2030. Net effect: By the turn of the decade, Nigeria assumes the status of the largest producer of refined petroleum products in Africa. Its exports exceed 300,000 bpd (approximately 48 million litres daily) by 2019. In the same year (2019), West Africa becomes self-sufficient, eliminating the need to source for refined products from US and Europe. Nigeria becomes an international trading hub similar to Asia Pacific, northwest Europe, and US Gulf Coast (USGC).
While it remains sacrosanct according to PwC that increasing refining capacity remains crucial to the government’s plans for the downstream sector but the abandonment of the Ministry of Petroleum Resources’ 7 Big Wins framework which aimed to reform the industry has deprived the country of positioning as the main vehicle to transit Nigeria from being a large-scale importer of petroleum products to a net exporter of petroleum products.
Rather than the incessant recourse to the removal of state-imposed subsidy as a result of import dependency PwC believes that Focus should also be on an increase in value-added petrochemicals to diversify its export base and enhance import substitution. Plans within the framework include committing about USD 1.8 billion for the rehabilitation of local refineries through private sector participation and promoting the set up of modular refineries. Prima facie, these are encouraging steps in the right direction which increase the likelihood of a revitalization of the existing refineries as well as the enactment of reforms like the passage of the Petroleum Industry Act (PIA) that will drive private investment into the oil and gas industry.