Attempts to remove petrol subsidy by past administrations triggered protests and stiff resistance. After swearing-in on May 29, President Bola Tinubu’s administration removed fuel subsidy in Nigeria.
Nigeria’s refineries are non-functional thereby necessitating the continuous importation of refined petroleum. Fuel importation strains the local currency while the subsidy primarily favoured the cabals and a leeway for arbitrage and the illicit transportation of petrol to neighbouring countries.
The economy’s key sectors suffer due to low earnings already consumed by inflated subsidy payments. The trade deficit of $20 million recorded in November 2022 from the low crude oil export receipts signals the urgency to jettison petrol subsidy, develop local production capacity and end fuel import dependency for a favourable balance of trade.
Fuel subsidy was riddled with corruption, manipulation and mismanagement. The N3.92 trillion allocated for petrol subsidy between January 2020 and June 2022, surpasses the combined federal budgets for healthcare, education, and defence throughout the 30-month period.
Nigeria spent about 10 trillion Naira on petroleum subsidies between 2006 – 2018. It gulped N5.82 trillion 2021 – 2022 and N3.36 trillion being proposed for the first six months of 2023.
These figures indicate a significant drain on the government’s finances, impeding its ability to invest in crucial sectors which could bolster economic growth and people’s well-being.
Nigeria did not profit from the surge in oil prices due to low oil output and the spike in fuel subsidy expenses. As the country’s total public debt nears N80 trillion, it is not surprising why Governor Godwin Obaseki raised an alarm that “It would be a miracle for the Federal Government and state governments to pay salaries beyond June this year without resorting to massively printing of money or removing fuel subsidy. Either of these decisions will bring more hardship and pain to Nigerians, particularly workers.”
Such a dilemma and tough decision. The government is confronted with either continuing the subsidy and deepening an unsustainable fiscal deficit or risk potential social and economic unrest by its removal.
Notwithstanding, the subsidy had to go. Fuel subsidy removal could save Nigeria around N7tn annually which could be channelled to infrastructure, education and health.
Ghana removed fuel subsidies in 2013, causing petrol, kerosene, diesel, and LPG prices to increase by 15% to 50% until reaching market levels by mid-September. They invested the savings into critical sectors.
Subsequently, after the fuel subsidy removal, Nigeria’s daily fuel consumption dropped from 66m to 40m; suggestive of actual daily consumption. Also, the pump price difference across the neighbouring countries is no longer that wide – creating a disincentive to smuggling.
Pump prices in the Republic of Benin rose from 450 CFA to 800 CFA approximately. The price difference between Nigeria and Benin Republic is less than N150 and approximately N200 per litre for some neighbouring West African countries.
Despite the recent passing of the Petroleum Industry Act (PIA), the development of the oil and gas downstream sector has not reached the desired levels. Until now, the existing subsidy system and legal framework in the downstream sector tend to discourage investments.
Nigeria’s moribund refineries and the influx of private refineries
Former NNPC’s GMD, Funsho Kupolokun, once described the moribund refineries as the “proverbial bottomless pit”. Nigeria’s Kaduna, Port-Harcourt, and Warri refineries, constructed several decades ago, are not currently functional.
Nigeria spent a sum of over N11 trillion on rehabilitating the refineries from 2010 to date. The three moribund refineries have become burdensome for the government, prompting the need for their privatisation. Selling them will save the country from wasting the lean resources on the ‘bottomless pit’ of unproductive maintenance.
The underutilization of Nigeria’s refineries not only impedes the country’s economic potential but also hinders job opportunities and local value creation. Privatisation creates an avenue for Nigeria to finally build refinery capacity and thereby increase its potential revenue from the oil sector.
Moreover, some refineries already possess licences. None of them is willing to commence operations under the (subsidy) regulated fuel pricing. They feel secure when they can sell at the market rate and recover their investments and make reasonable profits. Subsidy removal presents an attractive opportunity for investors in the oil and gas sector.
Dangote refinery was commissioned recently. When the 650,000 barrels per day refinery commences full operations, it is expected to meet 100% of Nigeria’s refined petroleum product demands; Nigeria’s domestic fuel consumption of about 450,000 barrels per day and excess for export.
Alongside Dangote Refinery, other refineries, including the Oando Refinery, NNPC Modular Refineries, Waltersmith Petroman Energy Refinery, and Niger Delta Petroleum Resources Refinery, are in the offing. Their combined capacities will strengthen Nigeria’s refining sector and eradicate dependency on imported oil products.
Nigeria’s foreign exchange reserves could experience a substantial boost through annual savings of approximately $25 billion to $30 billion, as a result of the Dangote Refinery’s operations, minimising strain on the country’s balance of payments.
Mixed bag of challenges and renewable energy opportunities
The elimination of fuel subsidy brings both challenges and opportunities. The withdrawal of fuel subsidy led to a 150% to 200% surge in fuel costs (N 500 – 600) across the country.
The Small and Medium-sized Enterprises (SMEs) are facing difficulties in accessing affordable power. Individuals and businesses have a stronger reason to see opportunities in clean energy by embracing cleaner options like electric vehicles, biofuels, or solar-powered technologies.
The prevailing high cost of petrol will undoubtedly stimulate investments in affordable renewable energy infrastructure, leading to a greener economy and sustainable transportation systems.
For instance, the buses in major cities globally are powered by Compressed Natural Gas (CNG). Rather than flaring gases indiscriminately, Nigeria’s 209.5 trillion cubic feet (tcf) of proven gas reserves is capable of powering vehicles which reduces operating cost by 30% and carbon footprints by 95%. Gas which is priced significantly lower than PMS would foster a diversified energy mix with less dependence on petrol and diesel.
Nipco Plc already converted about 5,600 (petrol engine) vehicles in Nigeria to CNG engines. The CNG market could create over 1 million jobs locally. The global market for gas as a vehicular fuel is expanding rapidly and Nigeria is better positioned to maximise the gas resources.
Foreign investments in the middle and downstream sectors of oil and gas would increase, while Nigeria can leverage the African Continental Free Trade Area (AfCFTA) to expand the burgeoning gas market.
This, along with increased investments in the gas value chain, would allow for the utilisation of domestic gas resources to address energy access, affordability, and achieve energy independence.
The opportunities would stimulate economic growth, improve Nigeria’s balance of trade and strengthen its foreign exchange reserves.
Abayomi, a lecturer at Kaduna Polytechnic and a Free Trade Fellow at Ominira Initiative, tweets @ODEWALEAbayomi