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Weak oil prices present business case for eliminating fuel subsidy

Oil & Gas

The current oil price volatility that has seen the price of crude oil in the international market drop to $78 per barrel, presents Nigeria a rare opportunity to remove the entire controversial and highly abused fuel subsidy regime in the country. This was part of the emerging consensus among over 150 participants at a BusinessDay conference in Lagos yesterday.

The conference  discussed the impact of falling oil price on the Nigerian economy. Imo Itsueli, former NNPC chairman, was the moderator, while speakers included Bismark Rewane, CEO of Financial Derivatives, Ayo Teriba, CEO of Economic Associates and Mansur Ahmed, a director  with Dangote Group. Others were Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry (LCCI), Obafemi Olawore, executive secretary of Major Oil Marketers Association of Nigeria (MOMAN) and Laoye Jaiyeola, supervising director, Nigerian Economic Summit Group (NESG).

Participants marshalled evidence to demonstrate that at the current world market price of $78 per barrel, the subsidy element associated with Nigeria’s regulated price of N97 per litre of premium motor spirit(PMS) is about N20 per litre (not the N12.43 reported by BusinessDay yesterday).

READ ALSO: Seplat Petroleum cuts debt leverage by $100m as low oil prices hit profit

As BusinessDay pointed out in an editorial of July 8  2014, titled “Towards a private oil refinery market in Nigeria”, Nigeria, Africa’s largest crude oil producer, is arguably the biggest importer of refined petroleum products on the continent, creating a lucrative market for refineries particularly in Europe and the United States (US).

Africa’s largest economy and home to over 170 million people imports more than 80 percent of its refined petroleum products for the servicing its economy because of inadequate domestic refining capacity.

With fuel needs put at 35 million litres daily, equivalent to 279,000 barrels per day (bpd) while crude oil production averages about 2 million bpd, Nigeria’s four refineries with a combined capacity of about 445,000 bpd have for long been operating far below their installed capacity, as they are in various states of disrepair.

The four refineries operated at an average of 31.1 percent of capacity in 2012 according to data from the Central Bank of Nigeria. However, data from the national oil company, NNPC showed that the situation deteriorated further in June 2014 when the country’s refineries operated at an average of 10.46 per cent of their combined nameplate capacity of 445,000 barrels per day.

Industry sources yesterday told BusinessDay that any petroleum refinery producing at less than 70 percent of installed capacity is destroying value. Besides, corruption has played a role in the poor state of the refineries because billions of dollars, have been wasted by successive administrations on several rounds of turnaround maintenance (TAM).

Even more worrisome, analysts said, is the fact that the subsidy structure of fuel sales incentivises the import of premium motor spirit (PMS) from EU refineries, which oversupply the European market.

While Nigeria continues to fritter a fortune on importing petroleum products and TAM on the refineries, attempts by government to sell off the existing refineries to competent private investors, remain hampered by misguided policies, corruption and the lack of political will to confront entrenched, short-term interests.

A number of private companies have expressed readiness to step in to build and operate their own refineries, but their efforts have often been delayed or cancelled, partly due to uncertainties around the government’s plans to deregulate the downstream sector.

Stakeholders commend Aliko Dangote, Africa’s richest man and business mogul, for taking concrete steps to build a $9 billion refinery/petrochemical/fertiliser complex in Nigeria but urge government to privatise all the refineries and end the subsidy regime. As some analysts pointed out, the N2trn that Nigerian spends on subsidy per year, can build new modular refineries. Also, they said, rural dwellers continue to pay more for fuel, way above the regulated prices.