Petrol Subsidy And Nigeria’s Dilemma

The Insight

By Lateef Adewole

Nigeria is a peculiar country. Both the nation and her citizens. Oftentimes, it is very difficult to understand the way we think, do things and many things that happen here. One of such situations is the issue around one of our God-given natural resources: crude oil. Nigeria is the number seven on the list of oil producing countries in the world. At a time like this, when many of our co-oil producing countries are smiling to the bank, “we are in pain”, like our President Buhari once said.

The invasion of Ukraine by Russia that started in the last three weeks has distrupted the world’s oil economy. This is due to the massive economic sanctions imposed on Russia by other countries around the world, especially in Europe, United Kingdom, Canada and the United States of America, most of which constitute the North Atlantic Treaty Organisation (NATO). The sanctions include the blocking of oil sales and purchase businesses with Russia, which sadly, is the third largest oil producer in the world. This has distrupted the global oil distribution equilibrium.

ALSO READ: Kaduna: 70-Year-Old Man, Four Others Killed By Terrorists

Consequently, by the economic laws of demand and supply, the price of crude oil, which was on the rise earlier due to other factors before the invasion, skyrocketed. In fact, it was about eight years ago that the world experienced crude oil price as high as we have had in the last one month. As at last week, brent crude, the type obtainable from Nigeria was selling for 125 dollars per barrel. It has just crashed to 105 dollar per barrel as I write.

In this kind of situation, an oil producing country like ours is supposed to be raking in billions of dollars in foreign exchange earnings, swelling her foreign reserve, strengthening her currency, making a lot of savings and having great time. However, here, the reverse is the case. We are not raking in the billions as expected because of many problems bedevilling our oil exploration (upstream) sector. This is not the core of this write-up today.

As a result, billions of dollars that are supposed to accrue to us from such “expected humongous” sales are not swelling our foreign reserve. The low forex earnings and weak reserve also impact negatively on our currency, which has continously get weakened. We are not saving anything as well. So, what about the quantities we normally sell then, no matter how “little”? Where is the money? It is largely swallowed by subsidy, as reported by the NNPC Limited!

I don’t want to believe there are people who do not understand what subsidy is now, especially on petrol. It is one of the most popular words in Nigeria. Right now, of all the petroleum products, only the Premium Motor Spirit (PMS), popularly called petrol, is subsidised in Nigeria. Others like Automotive Gas Oil (AGO) called diesel, Aviation Turbine Kerosene (ATK) for aircrafts and Household Kerosene (HHK) for domestic use, are subjected to the market forces. While the official pump price of petrol is still a maximum of 165 naira per litre, diesel is selling as high as over 700 naira per liter. Same with ATK, which was responsible for the exorbitant flight tickets now and even compelled the airline operators to threaten to shut down by next week, if nothing is done to remedy the situation. HHK is as expensive too.

So, when you buy petrol at 165 per litre, the difference from the “true” price, which is far higher than that like those of the AGO, ATK and HHK, is borne by government, through NNPC, which paid for it in their new fancy word: “underrecovery”. I know many readers will already be challenging me if I get the product at that regulated price at this time. Well, not getting it at that price in the last ten weeks was “abnormal”. That’s due to scarcity!

This was caused first by the importation of bad fuel, which disrupted the supply and distribution chain across the country. This was later compounded by the Russia’s invasion of Ukraine. We have been buying petrol at higher than government’s approved “subsidised” price of 165 naira per litre. Till now, the common price is 200 naira per litre in Lagos, from most independent marketers’ stations. It is higher in many other parts of the country. This is based on what they buy from the “open market” at the depots which is even higher than 165 naira. At the height of scarcity, we bought petrol as high as 1000 naira per litre. So, what is 200 naira?

The unfortunate double jeopardy for us as citizens and country is that, NNPC will still claim subsidy on these petrol we are buying at very high prices. These underrecovery (subsidy) claims are deducted from source. Once crude oil is sold, rather than remit the money wholly to the federation account, NNPC deducts whatever is spent to keep the price at 165 naira per litre. These deductions have led NNPC to remit zero amount to the account many times. Which translated to little or nothing to share among the three tiers of government in some months. Why is this so?

There are fundamental and superficial problems responsible. How can a country in the seventh position on oil producing countries’ list have no single functional refinery? Crude oil was discovered in Oloibiri, in the present Bayelsa state, in 1956. That’s 66 years ago. Nigeria has estimated population of over 200 million people. So, was it enough time that we did not have or the human capacity?

Nigerians are some of the most brilliant human beings on the surface of the earth. Around the world, it will shock many that Nigerians still populate many oil companies, including foreign refineries from where we buy and import our fuels. Even at home, in 66 years, are we saying we have not developed sufficient capacity to build and maintain just a refinery? No! The answer is failure of leadership, enmeshed in corruption.

The youngest of our refinery is the second one in Port Harcourt, which started in 1985 and completed in 1989. Oldest is the first one in Eleme, Port Harcourt, built in 1965 and expanded in 1971. In between, Warri started in 1975, commenced operation in 1978 and expanded in 1989. Also, Kaduna started in 1975 and commenced operation in 1979 and expanded in 1989. All are between 33 and 57 years ago. How come we could not increase their number which remained just four? How come we could not expand their combined installed capacity which remained 445,000 barrels per day (bpd)? How come we could not even just maintain them, make them work and produce fuels for our local consumptions, instead of importing at exorbitant costs? The answer is corruption! This is a fundamental problem.

The refineries have remained drain pipes to the little funds we get. Turn-Around Maintenance (TAM), which costs billions of dollars, are carried out on them some times, yet, they produce little or nothing. Even at zero production, they continue to gulp billions of Naira in overheads by staff who do nothing. How can a country survive like that?

The superficial part is even more interesting. To guarantee uninterrupted supply of petrol to the country, NNPC has “trade-by-batter” arrangements with foreign refiners. It is called “Direct Sale Direct Purchase” (DSDP). NNPC takes crude oil allocated for local refineries, gives it to the foreign refiners and asked to be supplied in return, an equivalent value of PMS (petrol).

The crude is taken at global oil prices, exported at a cost, refined at a cost and imported back to Nigeria at additional cost, as against our local refineries taking crude from their “backyard”, transported via pipelines and refined. By the time the petrol arrives in Nigeria, all these associated costs are built into it, making it very high, hence the subsidy or underrecovery or whatever, before it could be sold at the officially approved pump price.

If the management of this “anormaly” is transparently done, it would have been manageable. The process is very opaque and prone to fraud. Just some days ago, the Auditor General for the Federation (AuGF) queried the NNPC management and asked them to account for 107.2 million barrels of crude oil lifted for domestic consumptions. This came to light at the public hearing of the joint sitting of the Senate and House of Representatives Public Account Committee. Let’s hope NNPC will be able to explain where such large quantity of crude oil is “hiding”.

Beyond this, the transparency in the actual amount of refined petrol imported and consumed locally has remained a source of controversy, with many seeing the regular figures bandied by NNPC as untenable, unreasonable, and unjustifiable. Sadly, these are the figures used to calculate the subsidy paid to themselves. How can Nigeria consume over 70 million litres of petrol per day? And at times, the figure reached 100 million litres. “For where?”

Towards 2015, when daily consumption was said to be about 40 million litres, it was fiercely criticised, especially by the opposition party and their members then, who are now in power. The price was also at 87 naira per litre. Same was condemned too, as being too “high”. Many Nigerians were doing well economically at the time and could afford to buy and run multiple personal cars, a wasteful lifestyle actually. Fuel was cheap nah!

Now, at higher price of nearly double (165 naira per litre – 89.7% actually), with serious economic difficulties, increased unemployment, hunger and poverty, weakened naira, lower citizens’ purchasing power, and so on, facing the populace, how could our daily consumptions skyrocketed so high? “Ayam not understanding”. Many people have abandoned their private cars for public transportation. Those who still use theirs are very economical with their movements. The usual frivolous merry-go-rounds have been largely curtailed. Who then is consuming these volumes?

Many will be quick to say population has increased. What percentage? In 2015, Nigeria’s estimated population was 180 million. Now, it is 200 million. That’s 10% increase. If we had a “criticised” daily consumption of 40 million litres per day in 2015, a 10% increase should translate to 44 million litres per day (ceteris paribus). But we now average 65 to 70 milion litres per day. Where does the 20 to 25 million litres per day go to?

The most plausible reason has been smuggling to neighbouring countries due to our price differential. Nigeria’s fuel is the cheapest in the ECOWAS subregion due to the subsidy. However, that did not start today or in 2015. It was the same reason that past administrations gave to justify those figures that were criticised. So, that is not enough for daily consumptions to have doubled within seven years. Something is not right.

Worse still, the Minister for Finance and National Planning, Mrs. Zainab Ahmed was reported to have said that Nigeria will raise Eurobond (more borrowings, more debts) to pay for subsidy? Is something wrong with us? I hope this is actually not true. Already, it has been projected that over 3 trillion naira will be spent on subsidy this year. What manner of fiscal irresponsibility is that?

But, are Nigerians ready to make the needed sacrifice to stem this by supporting the complete removal of subsidy on petrol? That’s really not the main problem. The problem is that the citizens do not trust their leaders to judiciously use the savings from such removal. “Abi no be these same leaders”, who have never shown financial discipline in all their public service, even when the country is in deep financial troubles as we are now.

In the midst of mounting national debts, where we now use about 98% of our oil revenues for debt servicing, their profligacy was never tamed. I remember how expensive luxurious jeeps (SUVs) were purchased for the 469 national assembly members during Covid-19 crisis in 2020, while many citizens could not feed. None of the Executive or Legislative members has had their emoluments reduced due to no money. Rather, their overheads are on the increase. Why should the citizens trust them to remove subsidy on petrol?

Why should they sacrifice one of the few things they “think” they benefit from? Subsidy on electricity has already been removed quietly. I put “think” in quotes for emphasis because, in reality, petrol subsidy does not really benefit the masses but the elites, who could afford to buy and drive many cars for themselves, their family members, including their girlfriends and concubines. They can afford to buy and run generators in the absence of public power supply. Not the masses!

The country needs to fix the refineries or privatise them if impossible. More local refineries should be built or encouraged and supported by government, to be built by private investors. Government needs to be stable in their policy making. The suspension of a part in the well lauded, recently passed and signed Petroleum Industry Bill (PIB), that deals with petroleum subsidy, is a setback. No investor will put their money in uncertain economy.

More transparency should be ensured in the DSDP contracts, daily consumptions and subsidy regimes for petrol. Of what use is the borders that were closed for the past three years if petrol is still being smuggled out of Nigeria in large scale? Something is wrong somewhere. All these must be looked into. When we have sufficient local refinery capacity, if there is still subsidy, Nigerians can then determine whether they want it removed or to continue. How can a whole country be waiting on an individual, Alhaji Aliko Dangote, to help us solve the local refinery conundrum? That’s a shame!

In many areas where malfeasance have been seen and identified, from bad fuel to oil theft to unaccounted crude oil interchange to fictitious daily consumption figures to selling above approved prices when supplied by NNPC at regulated prices at the depots and filling stations to smuggling across borders to the compromised officers at the borders, and every of these stages, culprits should be appropriately punished to serve as deterrent to others. But, will this ever happen? Time will tell. Leaders should also lead by example by being financially disciplined. You cannot claim that there is no money to subsidise petrol for the citizens but continue in your profligacy. No one will believe you.

May God continue to protect us and guide us aright.

God Bless Nigeria.

You can follow me on:
Twitter: @lateef_adewole
Facebook: Lateef Adewole.
Email: [email protected]
Whatsapp: +2348179512401