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Nigeria's leading finance and market intelligence news report.

Nigeria sinking as petrol subsidy mounts

Nigeria’s controversial fuel subsidy, projected to hit N3 trillion by the end of 2021, is sinking the country and fuelling confusion among economists and business leaders who are at a loss on why the Federal Government is reluctant to kick the habit as provided for by the Petroleum Industry Act (PIA).

Section 205 (1) of the PIA, which became law on August 16, 2021, states that “subject to the provisions of this section, wholesale and retail prices of petroleum products shall be based on unrestricted free market pricing conditions.”

What the section implies is that the price of petroleum products will no longer be fixed by the government but would be determined by market dynamics.

In spite of this, petrol continues to sell at well below half of the actual free market price, leading to a subsidy of N2.1 trillion in the first nine months of this year alone, according to BusinessDay’s estimate which factors in rising oil prices and a weakening exchange rate.

Oil prices have now rallied to over $80 per barrel from the $70 price level they were when Mele Kyari, the group managing director of state-oil company, NNPC, put the figure at N150 billion monthly back in June.

By December, it could reach N3 trillion and will be Nigeria’s largest subsidy bill ever and under a government that claimed at the beginning that there was no subsidy on petrol in the country.

This total amounts to what the federal government has unilaterally deducted from the purse meant to be shared by all three tiers of government and lawyers say this in itself is illegal.

This government fought and lobbied for years to come up with a bill acceptable to the majority and then spent considerable amount of political capital to pass it into law but same the government is now curiously seeking to buy time by embarking on a long twisting road to implementing the law the president accented to two months ago now.

Instead of preparing the industry and setting about a prompt end to the subsidy regime, critics say the government is instead relying on a bogus section of the PIA that allows it to work out a timeline for its implementation.

Read Also: More pain for Nigeria as petrol subsidy consumes N608bn

“If as this government claims it fought hard to pass the PIB and it holds it up as one of its great achievements, is it not mind-boggling that it is also failing to implement the law promptly by ending subsidies,” asked Keri Kolo, a Kaduna-based lawyer.

He said, “Nigeria is on a borrowing binge while the government is wasting the cash it does not have to subsidize petrol with accounts of actual local consumption levels varying wildly from time to time while the government of President Muhammadu Buhari presides over the largest fuel subsidy bill ever.”

Many senior managers in the downstream petroleum industry believe that government data putting local consumption of petrol at 72 million litres a day cannot be believed given that a former minister of state, Emmanuel Ibe Kachikwu had put that figure at only 30 million litres a day three years ago.

“This whole system is opaque and deliberately made so,” said the Managing Director of an oil company. “The data we see today cannot be verified and in our view are way above what is possible.”

The cost to the nation cannot be imagined, industry experts say.

One situation was used to characterise the burden of Nigeria under the subsidy mechanism.

It is said that at a given time, Nigeria had 26 cargoes of crude oil it could export. Of this total, 15 cargoes were dedicated to fuel supply and its associated under recovery while the balance of 11 cargoes were described as “encumbered”, meaning they were either to meet Nigeria’s debt service obligations or other sovereign commitments with nothing left to fund either the federation account, FAAC, or the country’s foreign reserves.

Several months ago, the national oil company, NNPC caused a stir when it alerted Nigerians that it will no longer be able to pay anything into FAAC for a while and in truth government officials now say four months have passed since NNPC last made contributions to the federation account.

How Nigeria can end subsidy

In order to kick out the expensive subsidy, a cat with many lives, there are six actions the federal government must implement in order to transit to a fully deregulated downstream sector before February 2022, the Major Oil Marketers Association of Nigeria (MOMAN) has recommended.

For the umpteenth time, Africa’s largest oil-producing country is on another voyage to deregulate its downstream sector and end its opaque subsidy, backed by section 205 of the Petroleum Industry Act (PIA) which provides that wholesale and retail prices of petroleum products should be based on unrestricted free-market pricing conditions.

According to the Nigerian petroleum downstream industry association, these six recommendations range from setting up an industry regulatory agency to declaration of NNPC as a lender of last resort, implementation of autogas policy, resolving access to Forex, having stakeholder engagement and public sensitization.

Explaining further, MOMAN advised the ministry of petroleum to set up an industry regulatory agency composed of industry experts who have an understanding of global practices which will help in the optimal running of the downstream sector.

On October 7, the Senate confirmed the appointment of four nominees as members of the Nigerian Midstream and Downstream Petroleum Regulatory Authority.

The nominees are, Idaere Gogo Ogan (Chairman); Farouk A. Ahmed (Chief Executive Officer); Abiodun Adeniji (Executive Director, Finance and Accounts); and Ogbugo Ukoha ( Executive Director, Distributions System, Storage and Retail Infrastructure).They are expected to be sworn in this week.

The marketers association advised the federal government to declare NNPC Limited as a supplier of last resort as specified by section 317 (6) which lawfully allows the company to ensure “adequate supply and distribution of Premium Motor Spirit (PMS) for a period not exceeding six months and all associated costs shall be for the account of the federation”.

“Reform the domestic crude supply and Forex allocation scheme to ensure level playing market conditions preparatory to full market price competition,” MOMAN added.

Concerning the implementation of the autogas policy, MOMAN suggests the program be designed to ensure zero cross-subsidies between fuel for economic viability and sustainability.

“Achievement of the one million commercial vehicle conversion target from PMS to gas would provide the buying public with a viable alternative to PMS, moderating the impact of PMS price cap removal,” the marketers association explained.

MOMAN says resolving access to forex challenges for importers would allow the private sector to resume PMS importation until local refining capacity is restored.

In order to have a successful implementation plan, MOMAN advised the government to engage critical players such as the general public, unions, industry operators, and trade groups for detailed communication and collaboration plans.

“Specific public sensitization and enlightenment campaigns about energy conservation, domestic gas utilization, safe energy use and care for the environment strategies need to be launched immediately to recondition public perception and ensure better uptake and adoption,” MOMAN explained.

With the PIA allowing for a six-month implementation period culminating to February 2022, MOMAN says these six recommendations will ease the transition plan for a vast majority of Nigeria’s 200 million people, who see cheaper fuel as the only benefit they get from a state that built no social-safety net for its citizens during the oil boom.

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