Trouble Looms As Subsidy Debts Hits N314 Billion

Trouble Looms As Subsidy Debts Hits N314 Billion

By BusinessDay on September 3, 2015
Nigerians Pump price

The total fuel subsidy debt owed by Nigeria to importers of petroleum products has swelled to N314 billion as President Muhammadu Buhari hesitates on its removal, oil and gas sources tell BusinessDay.

“Not a kobo in subsidy has been paid since Buhari was sworn in,” one licensed importer of petroleum products said.

“We are still importing because we don’t want to be seen as economic saboteurs,” he said.

Nigeria depends on fuel imports to meet more than 70 percent of its domestic needs and pays importers to guarantee cheaper local prices.

The country’s four state-owned refineries built to refine 445,000 barrels per day of crude; enough to meet national demand of about 300,000 are ill-maintained and run at a fraction of their capacity.

The scandal prone Nigerian National Petroleum Corporation (NNPC), estimates that the country consumed 47.6 million litres of Premium Motor Spirit (petrol) in 2014.

However sources say that contrary to NNPC records, Nigeria consumed only about half of that amount last year, as consumption fell far short of distributed products.

“In our estimates, based on generator and automobile consumption, Nigeria consumes between 20 and 24 million litres daily, while over 20 million litres finds its way into our neighbouring countries to take advantage of double profits of subsidy and arbitrage,” said a second oil source.

Imports of petroleum products have grown considerable over the past 15 years, with huge implications on Forex demand, domestic refinery under utilisation and potential negative trade balance with the U.S, where most of the imports come from.

According to IHS Inc. a consulting firm, Nigeria imported more than half of its fuels from the U.S., even as the North American country almost completely stopped importing Nigerian crude due to its own increased shale gas output.

Nigeria’s removal of fuel subsidies could bring equilibrium to its Forex market, and ease the pressure on the naira which will impact positively on dollar reserves, according to Bismarck Rewane, CEO of consulting firm Financial Derivatives Company.

“This would reduce the import bill by 15-20 percent of bogus demand, putting the naira in the real equilibrium exchange rate path,” Rewane said in a recent presentation.

As imports of petroleum products into Nigeria grew, prices followed suit.

Nigerian gasoline prices are set by the Petroleum Products Pricing Regulatory Agency (PPPRA) using a template that is based on uniformity across the federation and affordability, as opposed to market forces, which is prone to abuse.

Prices have gone from 0.60 kobo per litre in 1990 to N87 in 2014.

The PPPRA template attempts to compensate all participants involved in the process.

There is a subsidy of N15.19 per litre on margin and bridging claims by retailers and dealers, a N.030 subsidy on distribution charges, N11.93 subsidy of other entry costs to importers and cost and freight subsidy of N18.45.

Without the subsidies, the open market price of PMS would be N132.87 (as at 22 July), based on Platts assessments.

The inefficiencies in Nigeria’s downstream oil sector are leading to distortions across the borders in other West African countries.

Cameroons only oil refinery has closed down because of smuggled oil from Nigeria, while the low cost of Nigerian PMS is leading to smugglers dealing in the product to countries as far flung as Burkina Faso, Chad and the Central Africa Republic.

“The subsidy system encourages refinery under utilisation as it creates rent seeking opportunities via fuel imports. Removing subsidies may also lower prices by eliminating charges associated with imports,” the first source said.

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