a labour strike for the whole of this week.
On New Year's day, the government removed
government subsidies on petrol, the price
went from N65 to N141. Arguments rage
about whether or not removing the subsidies
is a good idea. A friend of mine has analysed
the problem scientifically, please read his
excellent piece below:
Arithmetic of Fuel Subsidy (by Wale Majaro)
The Nigerian government claims that
Nigerians consume 34million L of petrol per
day. Most experts disagree and give a figure
between 20ML and 25ML per day. For this
write up, I will use the government figure.
The government has also said that N141/L is
the unsubsidized pump price of petrol
imported into Nigeria, with N131.7 the
landing price and N9.3 as profit.
Now, the government has made claims of the
refineries working between 30% and 60%,
depending on whom you listen to. For the
sake of argument, I will assume that our
refineries don't work at all (i.e. 0%
Production). Thus, my calculation is based on
100% of petrol used in Nigeria being
imported, the worst case scenario. If the
refineries actually work at 60% as the
government claims, they should be
processing 270,000 bbl/day of crude. Each
barrel of crude produces 75L of petrol. So, if
the government is to be believed, the
refineries produce 19.5 million L of petrol a
day and we should therefore only import
14.5million L a day. My analysis will ignore
this completely.
So here is the arithmetic, using the
government's own figures:
Daily fuel consumption/importation:
34million L
Cost at pump: N141
No of days in a year: 365
Total cost of all petrol imported into Nigeria
= 34Mx141x365 = N1.75 trillion
Now, Nigerians have been paying N 65/L for
fuel, haven't we? Therefore, cost borne by
the consumers = 34Mx65x365 = N807
billion
Cost of the subsidy borne by the government
is:
Subsidy = Total cost of import – cost borne
by consumers
= N1.75 trillion – N807 billion
= N943 billion
So, even if we believe the claim that we
consume 34million L/day and we assume
that the refineries don't work, the
government should still not have spent up to
N 1 trillion on the subsidy in 2011. How did
they manage to spend N1.3 trillion by
October? Since N1.3 trillion was spent by
October, then the bill for the full year 2011
(assuming a constant rate of consumption)
is: N1.56 trillion!
What accounts for the difference between
N943 billion and N1.56 trillion? This is a
difference of N617 billion that the
government cannot explain. Did I hear a
government official claim that the difference
is what goes to subsidize our neighbours
through smuggling? Time for more
arithmetic.
Using figures from Okonjo-Iweala's World
Bank, here are the populations of West
African countries:
Nigeria: 158.4 million
Benin: 8.8 million
Togo: 6 million
Cameroun: 19.6 million
Niger: 15.5 million
Chad: 11.2 million
Ghana: 24.4 million
The total population of all our neighbours:
85.5 million.
Now, let us assume that fully 50% of the
petrol consumed in each of these countries is
illegally exported from Nigeria. Let us also
assume that each of these countries
consumes petrol at the same rate the
Nigerian government claims petrol is
consumed in Nigeria. I have deliberately
ignored the ff facts which show that petrol
consumption in these countries will
necessarily be considerably lower than
consumption in Nigeria:
1. Some of these countries have stable
electricity (eg Ghana) and thus do not
depend on petrol-driven generators for
power.
2. Ghana, Togo and Benin are much smaller
than Nigeria, thus traveling distances will be
smaller.
3. Niger and Chad are mostly desert and cross-desert transportation of
goods/people is
mostly by diesel-consuming trucks, not
petrol-consuming cars.
4. Apart from Ghana, the car density in each of these countries is
much, much lower than
the car density in Nigeria. In Nigeria, there
are 31 cars for every 1000 citizens. In Togo
and Chad, you have less than 10 cars for
1000 people.
5. Ghana has started to produce oil and will
very likely rely less and less on refined
products smuggled from Nigeria, once the
Ghanaian local refining capacity is built up.
Rate of petrol consumption in Nigeria = Total
consumed/total population
= 34ML/158.8M people
= 0.21L/person/day
Rate of petrol consumption in neighbouring
countries is assumed to be same as Nigeria =
0.21L/person/day
Petrol consumption by our neighbours =
Rate of consumption x total population
= 0.21x85.5M
= 18.35ML per day
Now, we have assumed that 50% of the
petrol consumed in each of these countries
comes from Nigeria. This value comes to:
9.18 millionL per day.
Let's pause here. Think about it again. Is it
possible for 9.18 million L of petrol to be
smuggled out of our borders and the
government cannot do anything about it?
The biggest fuel tankers in Nigeria have a
capacity of about 36,000L. How many of
these trucks do you need to smuggle 9.18 ML
of fuel? 254! Our government is telling us
that over 250 huge tankers pass through our
borders everyday and they cannot do
anything about it! Wow! Talk about
incompetence! This in itself is an urgent
security challenge – if you cannot stop 250
tanker trailers from crossing the borders
daily, how can you stop importation of
weapons or even an invasion by a foreign
army?
But that is not all.
Let's believe the government and assume
that about 9.18ML is actually taken to our
neighbours everyday and this is all
subsidized by the Nigerian government.
How much will this translate to?
Difference between pump price before and
after subsidy removal = N141-N65 = N76
Total spent on subsidizing petrol to our
neighbours annually = N76 x 9.18ML x 365
= N255 billion
I have assumed that:
1. There are no working refineries in Nigeria.
2. Nigeria actually consumes 34ML of petrol per
day.
3. Ghana, Togo, Benin, Cameroun, Niger, Chad
all get 50% of their petrol illegally, from
Nigeria.
4. Ghana, Togo, Benin, Cameroun, Niger, Chad
all consume petrol at the same rate as
Nigeria.
Yet, the government's figures still don't add
up! There is N362 billion missing. This is
the difference between N943 billion and
N1.56 trillion, assuming N255 billion is
wasted through subsidizing the rest of West
Africa. The government should tell us what/
who eats up this N362 billion ($2.26 billion).
These figures simply show the incompetence
and insincerity of our government officials.
The simplest part of the arithmetic is laid
down below:
NNPC crude oil allocation for local
consumption: 400,000 barrels per day
Assuming refineries work at 30%, 280,000
barrels can be sold on the international
market. (Remember that I assumed that
refineries don't work in calculating our
consumption, to give an absolute worst case
scenario).
Money accruing to FGN, through NNPC on
the sale, using $80/bbl: $22.4m a day. Note
that the true price is higher, as oil currently
sells for $100/bbl and Nigerian crude sells at
a premium to the benchmark Brent crude.
Annually, this translates to: $8.176bn or
N1.3trillion.
What does this mean? The government does
not subsidize our petrol imports, at least not
from the Federation Account. The same
crude that should have been refined by
NNPC is simply sold on the international
market (since our refineries barely work) and
the money is used to buy petrol. The
400,000 barrels/day given to NNPC for local
consumption can either be refined by NNPC
or sold to pay for imports. The "subsidy"
should be funded with this money, not the
regular FGN budget. If the government uses
its regular budget for subsidizing petrol, then
what happens to the crude given to NNPC for
local refining, but gets sold on the
international market?
Conclusion
Now that the petrol pump price has been
hiked by over 100% and resulted in
100-200% increases in the price of
transportation, personal electricity
generation and foodstuff, what do I advise
the government to do?
1. Revise the petrol price, not to N65, but to an amount which takes
inflation into
consideration. Cumulative inflation from
2008 to 2011 is about 27%. A new petrol
price of N88 should be a reasonable sacrifice
for Nigerians, while the government tries to
build trust by sorting out the real issues of
the midstream/downstream oil industry and
cutting down the cost of governance.
2. Partner with the International Oil Companies (IOCs) operating in
the upstream oil sector to carry out the deregulation of the
midstream/downstream oil sectors. Refineries are not very profitable
compared to other areas in the oil industry; with profit margins
ranging from 0-15% (this is why we don't see
companies queuing up to set up refineries).
The government needs to give incentives to
these companies to set up refineries in
Nigeria, in the form of tax breaks, duty
exemptions, crude price guarantees, etc. All
agreements should be in place, with an
enabling law, by September 2012.
3. The government has already shown and
admitted that it cannot manage refineries.
All new Greenfield refineries should use the
NLNG model, where government owns
enough equity to influence strategy in favour
of the Nigerian people, but is not involved in
the routine management of the company.
This is the best way to get the best out of
these refineries while protecting the national
interest. The new refineries should come on
stream by end of 2014.
4. Sell the existing refineries to the IOCs and
stop spending taxpayers' money trying to
revamp them within the current structure.
The IOCs have built and currently operate
hundreds of refineries across the world, so
refining is their bread and butter.
ExxonMobil's Torrance Refinery is over 80
years old, Total's Port Arthur Refinery is
about 100 years old – these companies know
how to manage refineries.
5. The sale of the refineries should be carried
out by September 2012. I know the refineries
have been very poorly managed, so we
should not expect to make tons of cash from
selling them. The main advantages of the
existing refineries to a buyer are the existing
Brownfield facilities (roads, utilities, power),
an existing pipeline distribution system and
a skilled workforce. The IOCs should be
mandated to revamp these new refineries to
70% nameplate production by January 2014
and 95% by January 2015.
6. Incorporate PPPRA into DPR by December
2012, with an appropriate legislation (I'm not
sure whether this is already included in the
PIB). Let us have one strong agency to
monitor all activities, including product
pricing in the downstream oil industry.
7. Balkanize PPMC and sell it off to private
investors, again with the government
retaining a non-controlling stake in the new
entities. This should be done by September
2012, in parallel with the sale of refineries.
8. Increase the fuel price in Jan 2014, not by
simply jacking up the prices, but by
introducing a tax on imported products. The
tax should be deducted at source when
making "subsidy" payments to the importers.
Jan 2014 is chosen because I expect the
output from local refineries to improve to at
least 70% within 1 year of operations by
IOCs.
9. Introduce a law that any company that will
be licensed to import petroleum products
from July 2013 must either be currently
running a refinery in Nigeria or be in the
process of building a refinery in Nigeria (i.e.
project has passed FID stage and execution
contracts are signed). The total products
each individual company can import must
not be more than 20% of the company's total
refining capacity (existing + in construction)
in Nigeria. This is the only way to break the
importation "cabal".
10. Immediately, start prosecuting all companies and individuals
suspected of involvement in the royal mess that the fuel importation
segment has become. Use the same vigour (or more) that was used in the
2009-2010 reform of the banking sector. Also, all companies and
individuals suspected of
involvement in the refinery TAM contract
scams should be prosecuted.
11. Immediately, tighten the borders to minimize smuggling of
petroleum products to
neighbouring countries and sack/prosecute
the relevant officials if smuggling remains a
major issue. Our petrol will always be
cheaper than that of our neighbours,
especially if/when local refining reaches/
surpasses local consumption. As every
economist knows, products will always be
cheaper in the source location than other
places.
12. Set up petroleum product trading
agreements for surplus products in Nigeria to
be sold to neighbouring countries in a legal
and transparent manner. All agreements
should be in place by July 2013, well in
advance of additional capacity coming on
stream. These agreements will assure
companies building refineries that there is an
available regional market for them to legally
sell products refined in Nigeria.
With all the above, "subsidy" will disappear
by Dec 2014, but in a gradual process,
ensuring no price shocks (such as the 100%
increase of Jan 2012) re-occur and ensuring
that the industry is actually sanitized. Of
course, the government also needs to keep
to its several promises of improving the
power sector and revamping rail lines, two
critical developments which will reduce our
consumption of petroleum products
significantly.
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