By Idu Jude
With the current undesirable situation being experienced in the nation’s petroleum industry, it is imperative that the country’s oil and gas industry reposition to higher glory, experts say. Years of improper financial appropriation, particularly over the nagging issue of petroleum subsidy, inability to trace records, endless probes and sundry issues may only aggregate to expose ‘decades of deceit’ by several administrations, particularly in the subsidy programme.
According to records emanating from Petroleum Products Pricing Regulatory Agency (PPPRA), some N8.9 trillion was expended in subsidising fuel within ten years in the country.
In other words, the country would have lost counts of the amount expended since the introduction of subsidy in the 80s, in accordance with the Price Control Act of 1977.
In line with the Structural Adjustment Programme (SAP), at the time, the subsidy programme acted as a temporary measure to control the prices of petroleum products while the refineries underwent rehabilitation.
However, the payment of subsidies for refined petroleum products continued afterwards, and most attempts by successive governments to remove subsidies and increase prices to reflect actual market prices were met with stiff opposition by labour unions and citizens, who were oblivious of the true picture of things.
A key driver of the continued payment of subsidies is the sustained increase in demand for refined petroleum products, amidst relative decline in local refining capacity.
Thus, the inability of domestically refined products to meet the huge and growing demand, led to an increase in the importation of petroleum products which are subsidised.
In Nigeria, two petroleum products are subsidised: Premium Motor Spirit (PMS), popularly called petrol, and Household Kerosene (HHK).
In 2012, under former President Goodluck Ebele Jonathan, N1.35 trillion was paid as subsidy, the highest in the time under review.
The PPPRA says the Federal Government spent a total of N8.94 trillion on oil subsidy between 2006 and 2015, paid to oil marketers and the Nigerian National Petroleum Corporation (NNPC) in the period under review.
A breakdown of the money indicated that in 2006 a total of N257.36 billion was paid, in 2007, N271.51 billion, while in 2008 N630.57 billion was paid to marketers.
Also, oil marketers in 2009 were paid N409.31 billion and N667.08 billion in 2010 respectively as subsidy claims.
In the year 2011, the Federal Government paid a total of N2,105.92 trillion, an increase of N1,437.84 trillion, from 2010 payment.
The PPPRA in the document noted that in 2012, N1.35 trillion was paid as subsidy.
“A total of N 1, 316.63 trillion in 2013, N1,217.35 trillion in 2014 and N653.51 billion in 2015 was paid as subsidy claims,“ it added.
A former member of the Edo State House of Assembly, Hon. Festus Edughele, argues that the issue of subsidy has been a recurring decimal in the country.
He believes that the long-awaited idea of deregulation and subsidy removal has come at last, but not without reservations on the imminent danger of mismanagement.
But he submits that ‘’it is better subsidy is removed so that we know where we stand; let the market drive itself. It makes more sense if they remove it, like they did with the restriction or monopoly of NITEL and others.”
Politics of Fuel subsidy
The Federal Government has been subsidising fuel for decades, and with fixed retail prices of petroleum products.
While some experts have called for total deregulation of the downstream oil sector, others have opposed it, saying the majority poor Nigerians may not be able to afford the products if the prices were not regulated and subsidised.
Prof. Anna Dunoma of the Department of Economics, University of Abuja, told ThisNigeria that governments -both present and past -have been deceiving the Nigerian public on the issue of product importation. She said that while the former set indulge in importation without proper accountability, the replacing governments promised deregulation, but conducted subsidisation without appropriation by the National Assembly.
According to the university don, “While diesel has been largely deregulated and retail prices at different filling stations allowed to vary based on market forces, the government has regulated the price of petrol, the most common of the petroleum products, especially in urban Nigeria.
‘’When President Muhammadu Buhari assumed office in May 2015, he promised to abolish petrol subsidy from the fuel pricing templates of the Petroleum Products Pricing Agency ((PPPRA) and allow market forces to determine retail prices at the filling stations.
On May 11, 2016, he announced a controversial removal of fuel subsidies across the country. The development saw the petrol price reduced initially to N86.50 per litre from N87, before adjustment upwards to N141. Later, the price was adjusted further upwards to N145 per litre.
‘’Since then, the government quietly restored subsidy in the pricing template of petrol without any formal announcement. What a shame.”
“Rather than call the excess cost above the N145 per litre ceiling fuel subsidy, the government gave the NNPC approval to describe it as ‘under-recovery’ as part of its operational cost.
‘’The NNPC then became the sole importer of petrol into Nigeria and was essentially subsidising the product for users. The price remained at N145 per litre despite variations in the international price of crude.”
In 2018, Nigeria spent about N722.3 billion on fuel subsidy, according to the Nigeria Extractive Industry and Transparency Initiative, NEITI.
Nigerians respond on the issue of unappropriated subsidy since 2016
A member of the opposition party, the Peoples’ Democratic Party (PDP), Dr. Paul Okwudili Ezeh, argues that ‘’We will soon see an increase in pump price; it may be 250 naira as has been rumoured. You will also see skyrocketed prices in everything you can think of, because every item in the market both food items are moved from one state to the other through transportation means. So, you can see that more hardship awaits you and I.’’
Also speaking via a telephone chat, the National Publicity Secretary to the main opposition party, PDP, Mr. Kola Ologbondiyan, described the NNPC GMD’s announcement of deregulation as a mad man’s dance in a marketplace.
“You see, the common man in Nigeria can no longer live with little money in his pocket. And now that the announcement is made, the price of items will jump to high heavens and that is to say that these people do not care for the masses.”
NNPC rebuffed?
As the NNPC Group Managing Director, Mele Kyari, reiterates the need for total deregulation of the industry, his administration since assumption of office has battled with the subsidy funding problem without National Assembly appropriation.
The oil chief had said, “There would be no resort to either fuel subsidy or under-recovery of any nature. The NNPC will play in the petroleum marketplace, just like another marketer in the space.’’
He added: “But we will be there for the country to sustain the security of supply at market price,” indicating the government was not deregulating the petrol sub-sector, and would still fix prices.
Mr Kyari described the NNPC as a transparent organization, the “only company in the world that publishes its monthly financial and operations reports.”
On the country’s current oil production amidst the decline in oil prices, he disclosed that as at March 2021, Nigeria produced about 2.3 million barrels of crude oil, including condensates. He maintained that the plan was for the country to ramp up its production to about three million barrels per day, in the nearest future.
The NNPC helmsman assured Nigerians of ample supply and distribution of petroleum products across the country, saying despite the Coronavirus pandemic, the corporation had in stock about 2.6 billion litres of petroleum products that could serve the country’s energy needs for the next two months.
PPPRA explains
According to the price regulatory body, subsidies for petroleum products are provided for by paying the difference between the market price (Expected Open Market Price, or EOMP) and the government-stipulated retail price, in order for petroleum product marketers to sell fuel below the EOMP.
The government, through the PPRA, sets the maximum retail price for petrol arbitrarily, while the EOMP is market-determined and comprises product costs, freight, lightering expenses, depot charges, financing, and distributor margins, among others.
The Executive Secretary of PPPRA, Abubakar Saidu Umar, told ThisNigeria that the new market price will now be determined by the EOMP, which is natural. “This will bury the lies and the capital flight in the oil industry. Before now, no consumer is sure of the next price of the item as he or she approaches the next petrol station.
“In other words, the consumer pays about 80 per cent of the cost of importation; landing costs represent around 85 per cent of total allowable costs in the calculation and therefore factors that affect landing costs will also affect the eventual subsidy paid. The pricing mechanism is based on Import Parity Pricing adjusted for cost of transportation, distribution and marketing.”
Further speaking on the proposed deregulation of the sector, the executive secretary noted that the recent rise in crude oil prices has resulted in an increase in the landing cost of petrol to N180 per litre which exceeds the current price of between N162-N165 per litre meaning that the country may have temporarily returned to the subsidy regime.
Saidu indicated that Brent crude price in the international market on the said day closed at US$56.42/barrel which is sometimes high.
“There have been attempts in the past to remove the fuel subsidy, but a steep devaluation in the currency and an increase in crude prices in the international market which implies an increase in the landing cost, on many occasions, has necessitated the continuation of the subsidy regime, now booked as under-recovery losses in the books of NNPC.”
Saidu stated that PMS prices would henceforth be determined by the forces of demand and supply and the international cost of crude oil. The agency said it would no longer release guiding price bands for Premium Motor Spirit (PMS).
He said that 2020 came with a steep decline in global crude prices triggered by the global pandemic which completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of petrol in mid-March.
The PPPRA announced a reduction in ex-depot price to N113/litre and official pump price to N125/litre. Since then, the PPPRA has gone on to raise fuel pump price to N135-145/litre in April, before implementing a reduction to N121.50-N123.50/litre in June.
An increase to N140.80-N143.80/litre in July 2020 was implemented and was raised again in August same year to N148-N150/litre to reflect rising crude prices. In November, the NNPC increased its ex-depot price which led to an increase in the pump price of petrol to between N168 and N170/litre.
“We continue to reiterate that the removal of the subsidy on Petrol is a critical free-market reform in our view, and we believe it is beneficial to the economy and government finances. However, we have always expressed concerns that the timing may be inopportune, and the government will be forced to return to the subsidy regime given the effects of the pandemic and recent hike in electricity tariffs on the already squeezed Nigerian consumer.
Huge deficit
According to a unionist with the Petroleum and Natural Gas Workers (PENGASSAN), Mr. Sunday Okere, In the past ten to twenty years, Nigeria has subsidised energy, especially fuel, which its subsidies have constituted a significant portion of government revenue and overall Gross Domestic Product (GDP).
It is estimated that total subsidy payments to fuel marketers constitute on average 1.75 per cent of overall GDP. On a yearly average, actual subsidy costs have gradually increased over the years: from N251 billion in 2006 to as high as N1,348 billion in 2011.
However, fuel subsidy payments fell subsequently; reaching N200 billion in 2015 and was eventually removed in 2016, largely on account of its fiscal unsustainability amid declining government revenue.
“As the gap between the domestic retail price of fuel and the import parity price increased, the cost of fuel subsidies has often been much higher than anticipated by the government in its national budgets. Thus, actual subsidy payments have often surpassed budgeted fuel subsidy payments.
“In addition, the deep-rooted corruption in the country has also contributed to such divergence in actual and budgeted funds for subsidy payments. For instance, during the Farouk Lawan Committee Probe in 2012, it was uncovered that 197 subsidy transactions worth N229 billion were illegitimate, and N232 billion fuel subsidy payments to marketers were not supplied in 2011,” he said.
Okere added that, while the EOMP typically fluctuates with the global crude oil prices, the government-approved price is altered less frequently at the discretion of the Presidency.
Given that domestic prices for petroleum products do not quickly adjust to market price, there is usually a gap between budgeted subsidy payments and the actual amount paid as subsidies.
The deviation in budgeted and actual subsidy payment is typically driven by three main factors: changes in rate of inflation and changes in the Naira-Dollar exchange rate and to the largest extent, changes in global crude oil prices, Hence, since fuel prices are fixed at nominal value subsequent increases in oil prices, and to a lesser extent, inflation and the Naira-Dollar exchange rate increases the cost of subsidy.
NEITI’s response
The transparency agency in the extraction industries, the Nigerian Extraction Industry and Transparency Initiative (NEITI), observed that removal of the subsidy in petroleum products would ensure transparency and judicious use of government funds.
“The market should now be more competitive. It is instructive to note that the strategic increase is part of pragmatic efforts to completely remove the subsidy which the government said had cost the nation trillions of naira.
‘’The question of subsidy and the resolve of the Buhari administration to end the corruption were breached in 2020 by some top government officials thereby setting it as a national agenda.
‘’The vexed issue of subsidy had over the years constituted a drain on the nation’s finances, with the efforts of few unpatriotic importers who work with several administrations”
N120bn fuel subsidy: Tougher times await Nigerians
From 2009 to 2011 alone, over N3 trillion was spent on fuel subsidy by the government, according NEITI’s audit report. Economic experts say the trillions of naira that subsidy had gulped would have been channelled into other critical sectors of the economy for national development such as road infrastructure, health care system, education and housing.
Details of the various records are quite similar. NEITI’s report shows petrol subsidy payment increased by 71 per cent from N406 billion in 2009 to N695 billion in 2010, and by 174 per cent to N1.9 trillion in 2011.
For the corresponding period, the NEITI report said subsidy payments by the NNPC alone rose by 110 per cent from N198 billion in 2009 to N416 billion in 2010, and 89 per cent to N695 billion in 2011.
The report said while the Office of the Accountant-General of the Federation said about N2.83 trillion was paid as fuel subsidy for the period, the PPPRA claimed about N3.002 trillion was approved for payment to marketers and the NNPC.
The figures from both agencies showed a disparity of about N175.9 billion in the claims of payment for fuel subsidy for the period.
Also, in 2018, the NEITI audit said Nigeria’s payments on fuel subsidy rose by over 210 per cent from N722.3 million per day in March 2018 to N2.4 billion per day in May, amid rising fiscal deficits and growing debts.
While the organised labour remains resolute against removal of subsidy and on the defence of masses being at the receiving end, a petroleum engineer, Tony Nwigwe, has canvassed a strong position for the deregulation of the downstream sector of the oil and gas industry
Petroleum Subsidy Blues: The Patriots, The Pretenders – Mike Ozekhome
He said deregulation will ensure competition, increase investment in the refining business and facilitate exponential growth in the nation’s refining capacity, as well as put an end to ‘deceit’ by subsequent administrations.
According to him, Nigerian consumers should be made to know what the system brings to the table. ‘’They would want a deeper and more focused collaboration among downstream petroleum sector players across Africa to provide solutions to the challenges posed by the supply of substandard fuels to consumers.’’
He adds: “If you trace the genesis of petrol subsidy to the 1970s, you will see that the idea of petroleum products price stabilization had led to the introduction of fuel subsidy which was noble, but that it had become a “huge financial burden’’ on the nation over the years, owing the way we abuse the system.
“Deregulation policy which will allow the market forces of demand and supply of petroleum products to dictate prices will help eliminate market distortion, foster competition between operators, get more private sector players to build refineries in the country and promote efficiency across the entire fuel value chain.
An economic expert, Prof. Hassan Abdulahi of the Department of Statistics, Ahmadu Bello University, Zaria, Kaduna State, in a telephone chat, said, “It has become expedient for the Ministry of Petroleum to explain misconceptions around the issue of petroleum products deregulation.
“After a thorough examination of the economics of subsidising PMS for domestic consumption, the government concluded that it was unrealistic to continue with the burden of subsidising PMS to the tune of trillions of naira every year.
“More so, subsidy was benefiting in large part, the rich rather than the poor and ordinary Nigerians.
