Nigeria’s Petroleum Subsidy: “The Winners and the Losers”

Nigeria’s Petroleum Subsidy: “The Winners and the Losers”

By Okiemute Esiri

Last week, a committee set up by the Nigeria Governors’ Forum (NGF) pressed for the immediate removal of petrol subsidy and recommended that the product be sold between N380/litre and N408.5/litre. The governors had in a communiqué released after thier meeting called for full deregulation of petrol.

According to the communiqué, the governors further revealed that between N70 billion and N210 Billion is spent monthly to subsidise the petrol price at N162 per litre. They further approve the increase in price of petrol to N385 per litre and butressed further that it would help stem the increasing smuggling of the product to neighbouring countries. 

Nigeria has lost billions of dollars as a result of the COVID-19 pandemic, and the states are now cash-strapped. The NNPC had said that it would remit zero allocation to FAAC due to the huge cost of subsidising petrol.

Fuel subsidy has been a growing liability to Nigeria’s budgets, in a systematic fashion for almost four decades, hence creating vested interest. The cost of fuel subsidy has risen at an unprecedented rate due to increasing crude oil prices on the foreign market, exchange rate fluctuations, and Nigeria’s population expansion, both of which have resulted in increased petroleum consumption; the combination of these three variables therefore made the cost of the fuel subsidy unsustainable. Understanding the current fuel subsidies magnitude is critical for advancing reform because it underscores the potential socio-economic benefits to be realized. In addition to the burden that fuel subsidy is placing on the national budget, keeping petroleum below the market value has discouraged additional investment in Nigeria’s oil sector, because the visibility of recovering the investment under the artificially low price structure is uncertain.

Subsidy is characterized as any government intervention in the private sector, whether in cash or in kind, for which the government receives no comparable benefit. In practical terms, the petrol subsidy is calculated as the difference between the Expected Open Market Price (“EOMP”) and the approved retail price of petrol, both of which are determined by the Petroleum Products Pricing Regulatory Agency (“PPRA”) in line with set policies. The EOMP is determined as the sum of landing costs of petrol and a distribution margin. In simple terms, it is composed of the cost of production (that is the cost of purchasing refined petrol and importing same into the country) and an expected profit margin per litre of petrol. The PPRA determines the approved retail price of petrol (the “pump price”) derived from a consideration of the EOMP vis-à-vis prevailing economic conditions and the FGN pays the difference between the EOMP and the pump price as Fuel Subsidy to the petrol marketers to ensure that petrol is sold to the public at the approved retail price without incurring losses for the marketers.  

While Nigeria produces 1.6 million barrels of crude a day, the state-owned Nigerian National Petroleum Corporation imports virtually all its fuel from abroad due to the country’s low refining capacity, reselling it locally at a subsidized price.

On Nigeria’s estimated daily consumption of about 60 million liters of fuel, the NNPC is absorbing monthly losses of between 100 billion and 120 billion naira, according to the firm’s group managing director, Mele Kyari, at a media briefing on March 25. The NNPC MD also said It was paying this below the table since the petroleum sector was supposedly deregulated last year. That the subsidy has now jumped to N720 billion in less than one month, points to the fact that the opaque administration subsidy regime is a riddle wrapped in confusion. This is a monumental disaster and makes the president’s record here, as almost everywhere else, rather spotty.

Fuel subsidy elimination has been a source of contention for a long time. It had been an open sore on which various flies feed fat

In 2011, the year of public demonstrations over it. It had surpassed the trillion Naira mark that year. Wives and children of politicians, many of 

whom had never worked in the petroleum industry, were fuel importers in a crowded area where only godfathers and godmothers were 

expected. Some of them did not import a litre of fuel yet they were handsomely paid from the national treasury.

The Nigeria Labour Congress (NLC) leadership cautioned that any effort by the government to raise the pump price of petroleum products will be met with strong opposition, after a meeting of its National Executive Council (NEC) yesterday.

The NEC meeting discussed the situation in Kaduna as well as the pending constitutional reform, which took place remotely when most Labour leaders were in their respective zones for the public hearing on the draft constitution amendment.

Despite the fact that the federal government said the governors lacked the authority to set the price of gasoline, the congress insisted that no price increase would be tolerated.

A labour leader said all the affiliate unions of the NLC have been put on notice, if the government does otherwise.

According to him, Labour rejected the recommendation that petrol be raised to N212/litre on Easter by the Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari.

He said: “We are not in support of petrol increase. All these governors, they don’t mean well for Nigeria. They have over 100 aides. They are stealing money every day; it is only the common masses they want to continue to inflict pains on. It is not fair.

“We will reject it totally. We will not accept any increase. We don’t need any further ultimatum to respond, to re-activate and resume our suspended action. We don’t need to give anybody ultimatum again. If they go into that area, we will just resume our suspended action.

“We have issued directives that all our affiliate unions should start mobilising. As soon as they increase the price of petrol, we will down tools, withdraw all economic activities.

“We don’t need to negotiate with government or write them that we are coming to meet them because the last time we met before Easter, the GMD of the NNPC came that fuel will be N212 or N208 per liter because the landing cost was N198 and we told him to go back to the drawing board; to do as others are doing.

“We told him to go and repair our refineries. That was what brought our meeting to a deadlock. Remember that after two months, they announced plans to repair the Port Harcourt refinery for $1.8 billion.

It is too early to tell whether the Nigerian government will succeed in these renewed efforts to remove subsidy after years of dancing around the issue and trillions of Naira spent, the removal of the fuel subsidy remains a “Live Cinema Theatre with the Goverment as the lead Actor and the Nigerian populace as Spectators.

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