Sunday , 18 March 2018

Appraising new subsidy regime’s impact on government’s fiscal position

Close watchers of the problematic downstream sector of the nation’s petroleum industry had heaved a sigh of relief when the era of low oil prices put paid to subsidy payment to oil marketers in the nation. The reasons were not farfetched. First, the subsidy payment had imposed huge financial burden on the Federal Government. For instance, as at last August, almost N600 billion was owed to marketers over a one year period. Second, there was also speculation that subsidy breeds corruption as well as contributed to the development of other economies while stifling indigenous growth in the nation.
Consequently, they did not expect an early return, especially as the Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachickwu had raised hope that the novel price modulation mechanism currently in place would enable the Federal Government to record zero expenses on fuel subsidy this year. Kachikwu, while delivering the 45th convocation lecture of the University of Nigeria, Nsukka, had noted that the zero fuel subsidy regime is already in place and would be sustained based on the prevailing modified pricing template for petroleum products which has eliminated extraneous cost elements.
But this may not be as the rise in crude oil prices from below $30 to $40 per barrel has once again justified the need for subsidy payment in the nation. A survey of major oil markets showed that oil prices, including Nigeria’s Bonny Light have increased from about $29 to $40 per barrel, meaning additional cost to refineries who pass the cost to traders in form of high fuel prices. Expectedly, the Petroleum Product Pricing Regulatory Agency, PPPRA has advised the government to pay N4.09 per liter to marketers this month. In its April, 2016 template posted over the weekend, the agency put the subsidy at N4.09 per liter. This amounted to N163 million daily as the nation’s estimated daily demand for fuel hovered at 40 million liters.
The PPPRA puts the nation’s landing cost for fuel, including cost and freight, traders margin, lightering expenses, NPA, NIMASA, jetty/depot thru charge a storage charge at N75.79 per liter. The agency put total sub margins, including administrative charge, marine transport average, bridging fund and margins at N14.30 per liter. It puts total cost, including highway maintenance, government tax, import tax, fuel tax and subtotal taxes at N90.09 per liter. The PPPRA also puts the official ex-depot, ex-depot and ex-coastal prices at N71.70, N76.00 and N71.19 arrived at an under recovery of N4.09 per liter.
The executive secretary of Major Marketers Association of Nigeria, Mr. Femi Olawore said in a telephone interview that the subsidy is justified because of the slight increase in oil prices. He said the subsidy would enable marketers to recover cost involved in the process of importing commercial quantity of fuel into the nation. Experts have predicted that oil prices may continue to rise slowly in the coming months, thereby imposing additional subsidy challenge for the nation that would also earn more foreign exchange through direct export of crude.
The secretary general of the Organisation of Petroleum Exporting oil demand increasing by around 17 million barrels per day between now and 2040, reaching close to 110 million barrels a day by then. “And in terms of oil-related investment requirements, these are estimated to be around $10 trillion over this period. However, the current environment is putting this future at risk. At current price levels, it is clear that not all of the necessary future investment is viable.
“New barrels are needed not only to increase production, but to accommodate for decline rates from existing fields. We need to remember that low oil prices are bad for producers today and lead to situations that are bad for consumers tomorrow. And high oil prices are bad for consumers today and lead to situations that are bad for producers tomorrow.
“Thus, as I have often said, extreme prices – either too high or too low – are not in the interests of either producers or consumers. Of course, there are also many other ongoing and related challenges for oil markets, such as: the uncertain prospects for the global economy; excessive speculation and the role of financial markets; the impact of geopolitics; advances in technology and their impacts on exploration and production; and environmental concerns.”
Already, the government seemed ready to address the fuel subsidy. Kachikwu while addressing the Nigerian National Petroleum Corporation personnel in Abuja confirmed that: “This week, we address the fuel subsidy. It’s not by happenstance that you see me with my sleeves all rolled up. And I hope you’re visiting filling stations and helping us work this difficulty. This is probably the most challenging issue since I took over as GMD and Minister of Petroleum, and the reality is that a lot of us, even within the company (NNPC), do not know why this is so, and so for those who don’t know, I’ll first go through why you have this situation.
“First, on resumption in August, we had a major problem on our hands, because subsidies of close to N600 billion, had not been paid over a one year period, and so the majors, those who were importing, had began to quietly reduce the levels of importation allotted to them and, though I got the approval of the National Assembly and the President to eventually pay a good portion of that subsidy, sometime in November, by then it was too late. Too late because although they got the money, they didn’t have access to foreign exchange, so the main reason we have this supply gap now is that, although NNPC has its own 445,000 barrels allocation of crude and is meeting its own 50per cent of delivery, the individuals, who should provide the balance of the 40per cent component, are not bringing in any product.
“So, we’ve had to be very creative over the last 4 to 5 months, until we basically ran out of options and the sort of creativity that we put in place was forward buying, forward purchase, forward crude allocations, and also, just to bring in more product, because we saw NNPC transit from a 45per cent provider to suddenly 80per cent, and about this month really to 100per cent provider of petroleum products in Nigeria. That was not sustainable, we didn’t have the capacity, we didn’t have the funding, we didn’t have access to the products, we didn’t have the foreign exchange. So in very many ways, it’s surprising that we’ve even been able to survive this long.
“The key element has been, how to find foreign exchange for those who want to participate in the stream, who have been doing this traditionally, to get into the space, buy their products, come in, distribute. That’s something we’ve had to work on. Of course, the second problem was incessant pipeline disruptions. Literally, if you look at the statistics of this year, as against last year, we’ve had almost two times the number of pipeline disruptions than we’ve had over the last two, three years, in this year and that for us is very disturbing.”
He indicated that the government has convinced the upstream companies to provide some forex buffer over the next one year for those who are bringing in products. Kachikwu maintained that from Total Upstream to Total Downstream, Mobil Upstream to Mobil Downstream, Agip ENI to Oando, Shell to Conoil, many operators were getting involved. He maintained that the government has also box its way through the CBN to get a little allocation; because the NNPC provides the bulk of this foreign exchange.
From all indications, many oil marketers are well pleased, especially as the government has involved again in the importation of fuel. For instance, the Chairman of Major Oil Marketers Association of Nigeria, MOMAN, Mr. Akin Akinfemiwa confirmed that the Federal Government has provided sufficient Q2 allocations for the importation of petroleum products. Akinfemiwa said that the allocations have been evenly divided between the NNPC and the petroleum marketers. According to him, the Federal Government, NNPC and the Major Marketers have put in place a structure to ensure the effective distribution of these allocations to the retail outlets and as a result, PMS has become readily available.
“In order for the populace to reap the benefit of our joint efforts, we advise the public to refrain from panic buying and we assure the buying public that we shall continue to work hand in hand with the NNPC and the Federal Government to ensure uninterrupted fuel supplies all year round.” However, some stakeholders have made suggestions, capable of assisting the nation to tackle the various issues at stake. For instance, the Lagos Chamber of Commerce and Industry, LCCI has made a strong case for liberalisation of the downstream sector in order to attract the participation of increased investment. It indicated that there should be a level playing field for all operators, including the NNPC. It disclosed that this would put an end to the perennial problem of fuel scarcity in the country and the hardships suffered by citizens to fuel scarcity. The chamber noted that this would attract more investment, generate more jobs and reduce the pressure on the country’s foreign reserves. The LCCI maintained that the role of the NNPC needs to be clearly defined. It stressed that it should not be an operator and still have regulatory powers. It disclosed that a model that would allow for a level playing field for all operators including the NNPC should be adopted. It further proposed that the “the roles of the DPR and the PPPRA need to be better defined. The chamber said there are currently several instances of overlapping and duplication of activities and responsibilities. It noted that this poses a problem for investors in the sector. The chamber disclosed that the refineries should be operated as commercial business entities. It added that the NLNG model [which allows for private sector management] should be adopted for the refineries.
However, although the Dangote Group has embarked on the construction of a new refinery, there are indications that Nigerians would continue to depend on massive fuel importation with additional subsidy burden on the government in a short or medium term.
-          Udeme Akpan, National Mirror





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