Not yet ‘Uhuru’ for fuel subsidy removal

Fuel subsidy regime in Nigeria has been a controversial issue over time due to the inherent corruption in the system. Marketers and politicians have been alleged to deliberately use the fuel subsidy regime to siphon funds meant to develop other vital infrastructure in Nigeria. However, when the Group Managing Director (GMD), Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, announced that subsidy regime is gone forever; most Nigerians expressed mixed reactions to the news. OLATUNDE DODONDAWA examines if NNPC GMD has the powers to make such policy statement.

After over 60 years of crude oil discovery, Nigeria still struggles to be self-reliant in domestic refining capacity, hence, its dependence on importation of refined petroleum products. The downstream sector in Nigeria comprises of product refining, storing, marketing and distribution and only appropriate government policy will ensure it attains its full potential.

Nigeria may have started gradual removal of fuel subsidy in downstream sector because there is no more subsidy payment for products like Automotive Gas Oil (AGO) otherwise called diesel and Household Kerosene (HHK) otherwise called kerosene.

Petrol is seen as most vital in the value chain because of its importance to most households in Nigeria and it remains the highest consuming petroleum product in Nigeria with an average daily consumption of 60million litres per day.

On April 7, 2020, NNPC GMD, Mallam Mele Kyari stated, during a live television show, that the era of fuel subsidy is gone forever in Nigeria.

According to him, “There is no fuel subsidy anymore in Nigeria. It is zero subsidy forever. There would be no resort to either fuel subsidy or under-recovery of any nature. NNPC will play in the petroleum marketplace, just like another marketer in the space. But we will be there for the country to sustain the security of supply at market price.”

Nigerians were divided over the comment because they wonder if such shift in policy can be announced by the NNPC GMD with policy document by the Minister of Petroleum Resources or the President.

 

Critical issues for consideration before downstream deregulation is achieved

The most important factor is to establish a legal framework that will state the roles of marketers/importers/traders and the NNPC in refining, importing, storing and distribution of petrol in Nigeria.

The Petroleum Industry Bill (PIB) is yet to be sent by the Executive to the National Assembly; therefore, such legal framework may not realistic in near future. The President/Minister of Petroleum Resources must draft a policy document that will clarify how marketers can compete favourably with NNPC in the downstream sector without undue advantage to the NNPC.

NNPC is playing critical roles in the upstream sector with the International Oil Companies (IOCs) and independents, through joint ventures and other business models. But it is the sole importer of petrol in the downstream sector.

The issue of foreign exchange is another critical issue. If marketers and NNPC will be importing similar products for the same market, NNPC will definitely have more access to forex from Central Bank of Nigeria (CBN) than the marketers. NNPC has dedicated accounts for crude proceeds domiciled with the CBN, unlike the marketers.

Without a legal framework, an astute marketer will not undertake risk of fuel importation without government’s guarantee that it will not reverse its decision when crude prices go north or when there is civil unrest regarding rising pump price of petrol.

According to the Chairman of Major Oil Marketers Association of Nigeria (MOMAN), Mr. Tunji Oyebanji, “We want the market to determine the price. There should be a level playing field. Everybody should have access to foreign exchange to be able to import and sell petrol at a pump price taking its landing and distribution costs into consideration.”

When the federal government fully deregulates the downstream, all the above positions will be clearly clarified in the government policy document.

Other issues begging for attention under the present arrangement include but not limited to Petroleum Equalization Fund (PEF) which is another form of subsidy; the fate of the dilapidated NNPC refineries; what will happen to the 445,000 barrels per day crude allocation to NNPC refineries and products transportation.

According to an industry source, the 5120km pipelines spread across the country for transportation of refined products are not functioning and will never function at optimal capacity. This is because the government has abandoned about 70 per cent of the pipeline network due to vandalism and products theft.

He said the corporation continues to operate the system 2B pipeline network despite losing about 30 per cent of the volume to oil theft and pipeline vandalism. “But the corporation loses over 80 per cent of its volume in other pipelines, hence, the need to shut them down permanently,” he said.

 

Conclusion

Between 2006 and 2018, Nigeria spent no less than N10 trillion on fuel subsidy for petrol. According to BudgIT, the N10 trillion consumed by the subsidy regime is sufficient to construct 27,000MW of electricity or build about 2,400 units of 1000-bed standard hospitals across 774 local government areas of Nigeria, which would have been effective in handling COVID-19 pandemic ravaging not just Nigeria but the world.

The problem is that government has retained for itself by law the power and the responsibility to fix pump prices of petrol, and it puts it under immense pressure to raise pump price of petrol whenever crude prices soar.

Oyebanji said a market-driven policy will promote competition, equal access to foreign exchange at competitive rates by all marketers and players.

“This means discontinuation of the Direct Sales and Direct Purchase (DSDP) program and all foreign exchange proceeds from all sales of crude be paid into the same pool from which all importers can access at the same rate,” he said.

An oil and gas consultant, RonkeOnadeko, argued that in the absence of PIB, there is need for a strong policy backing from the government on subsidy removal. She stressed that without a strong policy framework, NNPC Retail expansion programme, which includes its new lubricants brand, may be a clog in the wheel, because it may enjoy undue advantage over other marketers operating in the same market space.

 

 

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