Fuel, dollar subsidies harming Nigeria’s economy

It is a tale of Déjà vu for Nigeria, as a series of Central Bank policies aimed at ensuring a fixed price and steady supply of petrol is instead leading to rising subsidies, growing losses for the state oil firm , the Nigerian National Petroleum Corporation (NNPC) and a dysfunctional foreign exchange (FX) market and downstream oil sector.

The culprit for Nigeria’s ongoing FX and downstream oil sector dysfunction is government’s insistence on fixing the price of petrol at N145 (0.45 c) per litre, through a non dynamic pricing template that refuses to take into account the negative effect of a surge in oil prices on margins of marketers who mostly import petroleum products.

The CBN in a bid to achieve the government’s aim of fixed fuel prices at N145 per litre, directed International Oil Companies (IOCs) some months ago to sell dollars to importers at the Reuters FX rate.

Sources tell BusinessDay that the CBN is the sole determinant of the Reuters FX rate (set at N305 per dollar last week), which is manipulated and not reflective of market rates.

Such permutations by government have been overtaken by events, as crude oil rallied from its lows earlier in the year, to above $50 per barrel last month.

This means that subsidy is back and it is being put on the books of NNPC as losses, as fuel importers are no longer picking the dollars from the IOCs because the business of selling fuel at N145 is unprofitable, industry sources tell BusinessDay.

“There is some form of subsidy in the industry as it is not fully deregulated. The only way to escape this mess is if marketers are allowed to buy and sell petrol at whatever it costs to source forex plus our margin,” said Dapo Abiodun, CEO/MD of Heyden petroleum.

“No marketer is importing today, as they now pay $20 per ton out of pocket at current oil prices. They are now moving to the NNPC as a supplier of last resort and it is obvious NNPC will pick up the subsidy which is set to get worse,” Abiodun said.

The stealth subsidy is creeping back into Nigeria without legislative appropriation and the NNPC or the executive, seemingly unwilling to disclose this to the general public.

Oil marketers are also dealing with a backlog of un- liquidated dollar lines on previous imports delivered to NNPC  at N199/$.

Marketers are said to now be uninterested in IOC dollars (which are subsidised to a tune of c.N80 per dollar) to fund imports, as current landing costs exceed N145.

“Landing products at current pricing is a major issue for marketers with where crude oil prices are,” said Olaposi Williams, Chief Operating Officer (COO) for OVH Energy Marketing, in Lagos.

“We would be selling at a loss if you expect us to retail at N145. It is either we deregulate or not,” Williams said.

Industry sources say if N13 is added to the landing cost of N137.9 under the matrix of ‘suppressed exchange rate of $/N305’ and crude of $50 the landing price exceeds the pump price of N145.

The NNPC is now bearing this loss to deliver fuel at N145 to Nigerians, as it imports and sells fuel to marketers at a lower price than its cost of importation or non transparent swaps.

Nigeria is the largest oil producer in Africa, pumping some 1.9 million barrels a day of crude.

It is however forced to rely on imports to meet 70 percent of its domestic refined petroleum products demand as the NNPC’s  four refineries produce at less than 20 percent of installed capacity of 450,000 bpd.

Thirty percent of  foreign exchange demand in Nigeria is used for fuel imports, according to data from the CBN.

Government’s meddling has led to the collapse of liquidity in the inter-bank FX market, shortage of Aviation fuel, vital for linking Nigeria to the global economy and chaos in the downstream sector.

“There are a lot of avoidable crises in Nigeria’s downstream sector, which seems to be in permanent crises mode,” Victor Eromosele, CEO of ME consulting and ex CFO of NLNG said.

“The PPPRA model is flawed as the N145 per litre arrived at in May was a crises solution. We need a sustainable model, which accommodates variable components such as the rise or fall in crude.”