As Nigeria enters political campaign mode in preparation for the 2023 general elections, government’s domestic petrol subsidy has also traditionally surged to new heights despite the highly glorified Petroleum Industry Act (PIA) which ought to have activated deregulation of the market since last quarter of 2021.
As traditional in every penultimate year to the general election, fuel subsidy estimates have escalated to unprecedented $9.6 billion or about N4.0 trillion. This is a monumental leap from the controversial N800 billion which the incumbent Buhari government had seriously interrogated on assumption of office in 2015.
The prevailing pre-election situation casts a familiar pattern of controversies that predictably find the Nigerian National Petroleum Company (NNPC) Limited in an accounting mess. Even with the almost one party national legislature that is subservient to the president, the scale of financial drain from the subsidy programme and other manner of losses declared by the national oil company have caused serious agitation across the nation.
While most of the losses might not be visible to the undiscerning public, two major loss centers are in full public glare: ballooning fuel subsidy budgets and dwindling foreign exchange receipts from the export market. The situation leaves the economy bleeding from both the vein and the artery.
The new subsidy figure represents whopping 500 percent jump from the N800 billion which President Muhammadu Buhari’s government fiercely interrogated when it came to power in 2015. Vilification of the players in the domestic fuel market as Buhari stepped into office led to a revolt by marketers and subsequent mass divestment in the downstream petroleum sector.
Public expectation was high that the Buhari government which rode to power on the anti-corruption mantra would harness the full efficiencies of the midstream industry capacity of NNPC to wean Nigeria of imported petroleum products, activate full industry value chain and enhance productivity in the domestic economy by providing cheaper energy.
But quite to the contrary, the administration of President Buhari has captured the petroleum subsidy programme into the various intensive consumption patterns that stand out his government as one of the most profligate in the nation’s history. And subsidy spend has seen significant jumps during the two election years in the two terms of President Buhari’s tenure.
However, the resilience of the programme as new governments roll in and roll out, and its continuous growth in fiscal size, amplify entrenched suspicions that successive governments in the country have hijacked the only benefit available to the forgotten masses that own the nation’s mineral resources. Greater suspicion is on the role of the national fuel subsidy in financing political campaigns for every administration that comes to power.
Thanks to civil society and labour movements, fuel subsidy has remained one of the most vexed but sustained social welfare programmes perceived by as the only palpable hydrocarbon resource dividend for the masses.
The forces against fuel subsidy
All public and private players in the domestic players in the domestic fuel market have sustained campaigns for total deregulation and liberalization of the market to allow market forces determine the prices of petroleum products. They cite examples from other countries where fuel is cheaper than in Nigeria.
The NNPC, Major Oil Marketers Association of Nigeria (MOMAN), Independent Petroleum Marketers Association of Nigeria (IPMAN), Depot and Petroleum Marketers Association of Nigeria (DAPPMAN) and smaller market groups that trade on the premium motor spirit (pms), also called petrol, all demand deregulation on the product.
Their principal argument centers on saving money for government and enhancing the level of competition that would bring in efficiency, phase out perennial scarcity and expand the capacity of the market absorb more investments.
NNPC has in several public statements pointed out several factors working against price caps to include seepage of subsidized products across the borders to neighboring countries; rising cost of importation; deficits in government’s fiscal budgets; alternative demands for funding; operational losses; et cetera.
Minister of Finance, Mrs Zainab Ahmed, declared that only 50 percent of the purported 70 million litres of petrol fed into the domestic market on daily basis is actually consumed in-country. She said the rest of the volumes cannot be accounted for, hinting that some 50 percent of imported petrol in the country actually flow into neighbouring countries.
The Group Managing Director of NNPC, Mallam Mele Kyari, points at marketers in the country as the potential suspects in massive cross border smuggling of subsidized petrol from the country.
NNPC, the big elephant
Industry players and policymaker are not divided on the need for the midstream petroleum industry to be recovered and optimized for overall process efficiency, full loop value generation and wide scope opportunity for ancillary players in the industry. This would yield overall resource dividend for all stakeholders and address the recurrent fight over petrol price subsidy.
However, what has always remained in contention is the willingness of state players to take role and responsibility for delivering government’s economic aspirations in the petroleum industry.
The NNPC has remained the butt of all unkind comments about inefficiency and corruption primarily due to its inability to project convincing indices of best business practices.
With its three refining companies that operate four plants with combined processing capacity of 445,000 barrels per day of crude oil, direct access to feedstock and alternate arrangements for crude for petrol swap; NNPC is perceived in the public space to hold immense midstream industry potentials to not just meet internal fuel demand in Nigeria but also tap into the huge commercial opportunities in the African market to diversify foreign exchange income.
Again, from its greenfield refinery, refinery collocation, modular refinery and public-private partnership models, the company has run costly and protracted reforms that have ended only in conference presentations. The company has since 2005 burnt billions of dollars in endless and vain rehabilitation and resuscitation of its ailing refineries. Some of the refinery rehabilitation contracts have recycled multiple times without delivery deadlines in order to extend spending flow.
Yet, since it started publication of its monthly financial and operating reports, the NNPC has consistently presented the refineries as the worst loss centers in the group’s overall business performance. The refining companies have annually posted hundreds of billion Naira in commercial losses. And the Nigeria Natural Resource Charter (NNRC) explained in a separate and unrelated note that the operating cost for the underperforming refineries remains among the highest in the world.
And the organized labour insists that in the face of imperfections that are evident in the system, the only option in protecting the stake of the masses in Nigeria’s resource wealth is to develop the domestic midstream petroleum industry capacity for local refining. Civil society groups have also argued that a competitive domestic refining industry would dismantle the prevailing import oligopoly that is operated by powerful cabals.
Instead, the NNPC has usurped internal supply roles in the market and also retained the full internal subsidy budget in the hands of the government. With the installation of market supply monopoly, the national oil company pulled a curtain over the accounting templates that determine the accumulated differentials between the actual commercial retail price for petrol and the subsidy caps.
Worse still, the annual subsidy budget which was expected to phase out or drastically decimate with consolidation of supplies in the hands of NNPC has instead ballooned to unprecedented proportions.
The private players in the market however vehemently dispute with NNPC over its dominance of petrol supply and control of associated subsidy funds. Most of them have openly blamed NNPC for the continued price regulation in the market, pointing at the bulk subsidy funds as the incentive for continued price cap in the market.
They lament that NNPC now determines the fate of its competitors in the market by determining without consultation the quantity of supply to any marketer, the ex-depot price and the margin allowable at the retail sites.
Chairman of MOMAN had at a briefing with journalists lamented that the prevailing allowable margins cannot offset the cost of retail operations which, according to him, is powered with diesel fired generators. He pointed at the high retail price of diesel as major cost input that erodes the thin margins allowed for marketing firms.
Thus, the agreement between NNPC and private players in the market is limited to public statements and sustained arguments that support rising subsidy bills. In actual terms, it appears that NNPC is standing against deregulation and liberalization of the market as long as it sustains the prevailing monopoly to supply deals and slush funds for subsidy.
The case for subsidy
Nigeria has been widely regarded as most prominent in the few remaining countries that form classic examples of resource curse, a term which clearly defines the paradox of pervasive poverty and underdevelopment amidst huge resource wealth.
Nigeria which started oil export in the late 1960s remains the least developed among her peer oil economies in Africa, Middle East, Russia and South America. Despite earning hundreds of billion dollars from oil and gas export, the country is officially designated the world’s poverty capital, housing the highest number of poor people in the world. The World Poverty Clock has consistently rated Nigerian population the poorest in the past four years with over 70 percent of the people surviving below poverty lines.
Comparative data analysis shows that Nigeria also has the highest unemployment rate among all oil exporting countries of the world, with unemployment rate among the youths reaching a disturbing 42.5 percent in 2021. The Lagos State Employment Agency says attrition rate for small businesses in the country floats at over 80 percent due to poor infrastructural and hostile regulatory environment for business start-ups.
Nigeria also runs one of the world’s lowest official minimum wages.
Thus, the poor state of business environment, rising unemployment and high dependency rate, aggressive regulatory frameworks and harsh fiscal policies have not just exacerbated poverty but also laid solid arguments for subsidies and social welfare palliates for the poor citizens.
Like President Buhari declared when he responded to calls by external creditors to scrap fuel subsidy, the practice is not peculiar to Nigeria. It is in fact a time tested economic stimulus package that cuts the cost of energy for domestic, social, commercial and industrial application. And almost all fact developing economies of the world, including net fuel importers, subsidize energy consumption to palliate poverty and stimulate growth.
According to the International Energy Association (IEA) Nigeria is still nowhere near the top developing countries that run huge budget fuel subsidy.
“Fossil fuel consumption subsidies are most prevalent in the Middle East and in North Africa. Iran leads the world in fossil fuel consumption subsidies providing over $82 billion from its government resources to lower the cost of fossil fuels to end-users in its country. Of the $82.19 billion in fossil fuel consumption subsidies, over 50 percent covers oil, 28 percent funds natural gas, and the remainder (21 percent) goes towards electricity.
“Saudi Arabia is the second largest country subsidizing end-use fossil fuel prices, providing 76 percent of its almost $61 billion in fossil fuel consumption subsidies to oil and 24 percent to electricity.
“Russia comes in third with over $40 billion in fossil fuel consumption subsidies, with natural gas getting 54 percent and electricity 46 percent of the total.
“India and China rank fourth and fifth, respectively, both funding over $30 billion in fossil fuel consumption subsidies. India’s fossil fuel consumption subsidies totaled $39.7 billion in 2011 and mainly fund lower oil prices. China is one of the few countries that subsidize coal consumption. Of China’s $31.05 billion in fossil fuel consumption subsidies in 2011, oil receives the most (59 percent), then electricity (36 percent), and coal at 4 percent.
“Uzbekistan leads the world in the amount of its GDP that it subsidizes; its $12.74 billion in fossil fuel consumption subsidies represents 28 percent of its economy. Turkmenistan’s abundant natural gas supplies along with oil and electricity are subsidized to the level of 22.7 percent of its economy while Iraq’s subsidies for oil, natural gas, and electricity represent 19.3 percent of its economy. China has the largest coal subsidies among the 6 countries that subsidize coal, but China’s fossil fuel consumption subsidies represent only 0.4 percent of its GDP.
“On a per-person basis, fossil fuel consumption subsidies are highest for the United Arab Emirates at $4,172 per person, Kuwait at $3,729 per person and Saudi Arabia at $2,291 per person.
Like Nigeria, IEA noted, many of the countries providing fossil fuel consumption subsidies own state energy companies, including countries that comprise the Organization of Petroleum Exporting Countries, such as Iran, Saudi Arabia, and Venezuela.
The agency explained that net exporting countries see these subsidies as an opportunity cost, noting that fossil fuel consumption subsidies are often used to alleviate energy poverty.
Therefore, the sustained argument of freeing subsidy funds for development financing runs against deep feelings of deprivation and popular demands for economic stimulus for the vast segment of the population.
Second, the highly projected argument that low domestic petrol price subsidizes consumption does not withstand empirical calculations in the factors that propel productivity. The argument hosts the erroneous assumption that Nigerians use petrol only for vehicular transportation.
In fact, petrol play far greater role in the firing micro-electricity generation for micro, small and medium scale enterprises (MSMEs). It is also the major factor in electricity supply to homes, places of worship and other forms of permanent and temporary accommodation.
It is on record that the national electricity supply industry (NESI) is currently limited to delivery capacity of 4,500 megawatts (MW) of electricity for over 200 million residents in Nigeria. It would therefore be unthinkable that economic calculation of power input in social and business activities would be limited to such a ridiculous number.
Managing Director of Seplat Energy Plc, Mr Roger Brown, had told The Oracle Today that the company’s investment in gas production would relieve the country of dependence on petrol to meet part of the current micro-generation of 25,000 megawatt hours.
He pointed at data that indicate graphically that Nigeria currently consumes about 30,000 MW of electricity/hour, stressing that about 25,000 MW/h comes from self generation: both diesel and petrol fired generation.
Therefore, it must be calculated that retail price of petrol in the country subsidizes both transportation and micro power generation which is the key propellant of MSMEs. This falls in line with acceptable global template for subsidizing production as a reliable means of taming inflation.
Conversely, fuel price increase in our present circumstances is a sensitive trigger for inflation. One of the key concerns of the organized labour about fuel price increase is the inflationary impact on the meager income of wage earners in Nigeria’s depressed economy.
It is on the valid fears that spikes in the prices of petrol in the country would trigger inflationary jumps that the civil society and organized labour have always mounted stiff resistance to persistent moves by the government to withdraw subsidy as means of shoring-up fiscal funding.
The push and shove
The Oracle Today reports that arguments among stakeholders over the acceptable path to closing position gaps on deregulation are almost closed on the understanding that removal of import components in the pricing templates would achieve the multiple objectives of pulling down prices, re-streaming of the midstream industry and phasing out dollar denominated supply financing.
However, contentions still remain strong on other issues of economic stability, resource accountability and fiscal prudence. Thus, push for any level of petrol price increase continues to prove difficult in the foreground of chronological cases of brazen financial profligacy and corruption in government.
The Oracle Today reports that despite being designated the world poverty capital and accumulating record debts in the African continent, the present administration of the federal government still pays one of the world’s largest financial benefits to political leaders. The fat financial benefits of political leaders and top government bureaucrats continue to widen the income gap between resource managers and the vast impoverished population of resource owners, leading to income concentration in the hands of minority bourgeoisie.
Marketing groups and consumers representatives who declared their positions on deregulation of petrol at the 2022 International Strategic Conference of the Association of Energy Correspondents of Nigeria (NAEC) strongly called for deep cuts in the allowances and benefits lavished o political office holders to make the price correction proposal sellable to the public.
They insist that overall cost of governance must also be slashed to convince the public on the need to save money for government’s fiscal plans.
The next ground of argument against subsidy removal is the nation’s shameful reliance on mass importation of petroleum products to fire her domestic economy. Nigeria is Africa’s biggest oil and gas exporter and stands eminent among the members of the Organization of Petroleum Exporting Countries (OPEC) and the Gas Exporting Countries Forum (GECF). The nation’s four refineries are however mismanaged and have remained moribund for decades despite hundreds of billion Naira spent on botched rehabilitation attempts.
Additional puncture on subsidy claims, industry pundits point out, is the verified allocation of 445,000 barrels crude oil feedstock to NNPC’s dilapidated refineries. The entire crude oil allocation is traded by the national oil company in barter for petrol. Other products from the swapped crude are not subsidized to allow full cost and margin recovery from the market.
Marketers and labour leaders in the industry argue that full swap of the refinery crude allocations could yield over 46 million liters of products which, when converted to petrol on the swap arrangement, should meet total domestic demand.
It is therefore obvious that NNPC does not actually import petrol at market determined price, but at refiner’s price plus commercial cost of processing. The company’s process of shipping its crude oil to refine offshore runs against basic business principles and highlights high degree of inefficiency. This builds additional costs that include insurance, freight, demurrage, import duties, and sundry port charges. These cost components for the key templates that are calculated to form landing cost of petrol.
Comrade Osifo argued at the NAEC conference in Lagos that it would be illogical and unfair for government to transfer the cost of its inefficiency on the people, pointing out that massive fuel importation has deprived the domestic economy all the cost benefits of local refining and imposed drain on the nation’s foreign exchange reserves base.
Sister Nigerian Labour Congress (NLC) holds similar position on deregulation.
Leaders of NLC which attempted nationwide strike over the moribund state of the refineries are angry that government has persistently failed to revamp the nation’s downstream facilities, leading to Nigeria’s dependence on imported refined petroleum products.
They argue that the situation has broadened supply cost templates with sea freight charges, international price of crude oil, cost of demurrage, numerous import taxes. They also pointed at the persistent volatility in foreign exchange rates as a result of fuel import demand.
In a communiqué issued after the National Executive Council (NEC) meeting in Abuja to suspend planned strike, President and General Secretary of NLC, Messrs Ayubba Wabba and Emmanuel Ugboaja respectively, stated that “the NEC resolved to reject deregulation as long as it is import driven.”
“NEC reiterated the traditional position of congress that government should rehabilitate and revamp Nigeria’s local refineries as a sustainable solution to incessant increases in the pump price of petrol. The NEC posited that Nigeria’s refineries can be made to work in a short time once the government asserts the political will to do so,” the groups stated in the communiqué.
While agreeing that domestic petroleum product pricing should ultimately yield to market forces, the labour leaders insisted that all imports must be displaced with domestic refining,pointed at the need to avoid increasing stress level in the society where, he noted, most people live below the poverty line.
Next point in deflating government’s anti-subsidy narrative is the perceived disputes on the consumption rates that form the basis for calculating accruable subsidy claimed and drawn at source by the NNPC. And the argument is based on two considerations: financial and volumes; and both are contested.
Besides the cost build up on imported petroleum products, the actual volume of imported petrol which constitutes the multiplication factor for cost calculation remains even more controversial; differing significantly between industry players and government agencies. And there has never been any agreement on the figures among regulators, NNPC, organized private sector and marketing companies.
Government runs a state fuel import monopoly criticized by the industry players as opaque and bogus. The Organized Private Sector (OPS) comprising the Manufacturers Association of Nigeria (MAN) and Nigerian Association for Chambers of Commerce, Industry and Agriculture (NACCIMA) contends that vehicles and machines that run on petrol in the country cannot consume more than 40 million liters per day.
MOMAN which accounts for nearly 60 percent retails in the market puts its demand at about 18 million liters.
Then the NNPC Limited which is currently the sole importer for the country and also the sole beneficiary of internal petrol subsidy claims that Nigeria which hosts the largest number of poor people on earth according to the World Poverty Clock consumes over 70 million liters of only petrol every day! This surpasses the petrol consumption figures from some of the most advanced economies of the world that host highly empowered middle class populations.
Regulators in the industry have since stopped publishing import and consumption figures in deference to NNPC.
According to Worldometer, Nigeria accounts for 0.4 percent of global petroleum fuel consumption estimated at 428,000 barrels per day. Annual per capital consumption, according to Statistics Times, is estimated at 176.5 litres; and the country is ranked number 37 in the list of world’s petroleum guzzling nations.
From the figures on various ranking platforms, Nigeria’s official fuel consumption estimates are higher than those of some of the world’s industrialized countries like Greece, Hong Kong, Sweden, Kuwait, Switzerland, Austria, Finland, Portugal, Norway and Denmark.
Expectedly, the high internal petrol consumption figures have been the subject of perennial investigation by the relevant committees of the National Assembly which has assembled data inputs on consumption from several and differing industry stakeholders. Hesitancy in the release of the committees’ reports is said to reflect political influence.
A source in MOMAN told The Oracle Today that committees of the National Assembly investigating subsidy numbers had completed their consultations with relevant market players and were delaying release of their report until after their party primary elections.
The marketing group is worried that the large volume of subsidy declared by government does not reflect in the volumes and commercial margins trickling down to its members who form the largest bloc of investors in the domestic retail market.
Another member of the group stated that the investigation of consumption figures by the APC led National Assembly was truncated by the new humongous subsidy demand from President Muhammadu Buhari who is also the de-facto head of the party.
“The demand was an instruction of some sort. ‘You need to stop the investigation and release the money.’ And you know the party primaries were underway and the legislators needed their tickets.”
A joint NASS committee has however resumed its investigations and the NNPC has maintained its supply figures at 68 million liters of petrol per day.
Just recently the Comptroller of Customs at the Apapa import quays, Hammid Alli, joined in dismissing claims by NNPC on daily consumption of 70 million litres. He was reported at declaring that the official figure of fuel consumption in the country is untenable, pointing at weak and fragile logistics for wheeling such a massive volume from a single import point in the country.
The NNPC relies on road transportation to distribute petroleum products in the country, a process that has been criticized by industry analysts as most inefficient, costly, unsafe and unreliable. And Alli argues that there is no way such an inefficient and slow distribution method could circulate 70 million liters of petrol per day using trucks of 33,000 capacity.
Thus, the disputes over the actual consumption rate for petrol is directly related to disagreements over the actual cost of subsidy claimed by the government and investigated by the federal legislature.
All industry stakeholders at the last NAEC conference including the Nigetrian Extractive Industry Transparency Initiative (NEITI), Major Oil Marketers Association of Nigeria (MOMAN) members of Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN) and the LPG Distributors Association of Nigeria, called on NNPC to liberalize sourcing of petrol in the market and make the its operations more transparent.
Their calls allude to continued retention of state monopoly in the domestic fuel market despite the passage of the Petroleum Industry Act (PIA) which has stripped NNPC of sovereign status in the industry.
Operational opacity, according to industry players, can only be a strategy for concealing accounting data. And the argument of the industry investors brings operational transparency and resource accountability into focus; persistently interrogating the integrity of government’s fuel subsidy claims.
At the NAEC conference, Comrade Festus Osifo, insisted that the Nigerian workers would not accept subsidy withdrawal under the prevailing poor accountability in the NNPC’s import programme.
Yet another denting perception that pitches the Buhari’s government against Nigerians is the widely held belief that the government incubates corruption and transfers the economic impact on the citizens.
President Buhari had surprisingly granted pardon to some politicians who were serving jail terms for corrupt practices, further downgrading his government’s commitment to fighting corruption. His use of executive fiat to unlock the jails for serving political allies has drawn a spate of public outcry over rising allegations of corruption in the present administration of the government.
Whereas government dangles the highly contested N4.0 trillion subsidy bill as the prime reason for demanding higher cost regime in the economy, pundits see urgent need to sanitize the entire recurrent fiscal framework and reorder national priorities for overall economic reset. They argue that driving efficiencies would achieve the multiple economic objectives that also include greater government revenue and cheap domestic energy.
The petrol subsidy bill is also challenged by poor accountability, sharp spirals in the volume of cash claimed by government as retail price differentials, and import dependence which provides the basis for complicated supply cost templates used in calculating the subsidy figures.
There is consensus among key stakeholders that government should explore sustainable ways of addressing the country’s economic crisis rather than fixating on short term measures like subsidy removal. They pointed out that NNPC has continued on the costliest routes to domestic fuel supplies since past 30 years while leaving its three refineries located in Port Harcourt, Warri and Kaduna moribund.
There is also the call on government to urgently restore the domestic refineries back to production as a way of reopening the midstream and downstream sectors to new investments that would guarantee sustainable deregulation and liberalization.
There is a chorus of voices singing that Nigeria must exit the prevailing high cost import reliance and activate full scale domestic refining ahead of deregulation. There is also the demand for a strong regulator that provides equal opportunity for all players.
Fast developing economies of the world, including energy importers, run state sponsored subsidies that alleviate poverty and stimulate economic growth by cutting cost of energy. What is important is to install systems and processes that protect such fiscal and social palliatives from political and bureaucratic predators.