Can the NNPC GMD suspend fuel subsidy?

One week after the group managing director of the Nigerian National Petroleum Corporation (NNPC), announced plans to suspend a wasteful subsidy on petrol prices, the oil sector regulator has yet to provide clarification.

As the boss of the state-oil firm, the NNPC GMD is hired by the government to manage its commercial oil business not to frame public policy. The Petroleum Ministry headed by Muhammadu Buhari and the Petroleum Products Price Regulatory Agency (PPPRA), are qualified to speak on policy according to extant laws.

Speaking on a Channels Television breakfast talk show, Sunrise Daily, one week ago, the NNPC’s helmsman said the decision to finally end the fuel subsidy regime is in the interest of ordinary Nigerians as it would free up funds for the various tiers of government to develop basic infrastructure in the education, health, transport, and other sectors for their benefit.

“Subsidy is elitist because it is the elites that benefit from it. They are the ones that have SUVs, four, five cars in their garages. The masses should be the ones to benefit. There are many things wrong with the under-recovery because it makes us to supply more than is needed. This makes the under-recovery to be bloated because we unwittingly subsidize fuel for the whole of West Africa. That has to stop,” the NNPC boss said.

Kyari explained that the removal of subsidy would automatically correct the distortions it created in the market such as products arbitrage and smuggling, stressing that it would also provide the needed impetus for the NNPC to establish retail outlets in neighbouring countries.

In his media interview announcing the policy, Kyari did not clarify who made this decision and he did not provide coherent framework on how the plan would be operationalised.

Analysts say he lacks the power to make such pronouncements. “I think it is the primary role of the Federal Government of Nigeria through the PPPRA,” says Ayodele Oni, energy lawyer and partner at Lagos-based Bloomfield law firm.

Oni further said that it could also be that he may be speaking for the ministry based on an understanding he may have reached with them from prior communication.

Chuks Nwani another energy lawyer at Lagos-based consultancy PowerHouse International, said he envisaged the actions of the labour unions throwing a wrench in the plan. “The problem is that labour may come in and insist that the government must pay subsidies.”

However, there are yawning gaps in Kyari’s announcement. NNPC boss said it would no longer get foreign currency at preferential rates but how could it keep costs at government’s regulated price if the landing cost and foreign exchange become unfeasible at current price?

According to the NNPC, the corporation has not been paying subsidies since 2016, It sees subsidies in terms of payments by the government to marketers for importing and selling petrol at a controlled price that falls below the landing cost. It prefers the term ‘underrecovery’ which means the cost the NNPC pays for retailing petrol below landing cost. It removes this cost before remitting the balance to the Federation Account.

The nagging question is what would the NNPC do when the price of crude oil recovers and the landing cost exceeds the current pump price of petrol? Would the organization resist the pressure from the Federal Government to keep prices low amidst growing public outrage? Would the corporation not be pressured to review prices downward and begin new underrecoveries following labour protests?

The labour unions have argued that it is immoral to remove petrol subsidies while the nation’s refineries lay comatose. Now Kyari has said that the refineries would be handed over to private operators but has yet to clarify how this model would work. This is not the first time it is proposing an arrangement to have private organisations manage the refineries but it has been unsuccessful.

Analysts say the government has to clarify what policy it is pursuing for the downstream sector. The current move would suggest the government is heading towards liberalisation which eventually could lead to full deregulation. Now, is when it must manage public expectations if it hopes to avoid problems in future, experts say.