Double edged oil rally revives petrol subsidy controversy

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Nigeria claims it no longer incurs petrol subsidy costs, yet the renewed rally in oil prices make a N145 per litre price template set in May 2016 obsolete.
The price of Brent crude rallied to a near two-year high of $64 per barrel Tuesday, according to Bloomberg data, as political upheaval in top crude exporter Saudi Arabia reverberated through a market where prices were already elevated by signs of tightening supply.
At current prices, oil trades at a 42 percent premium compared to the $45 per barrel oil price used in arriving at the N145 per litre template.
Subsidy has crept back without state-owned Nigerian National Petroleum Corporation (NNPC) or the executive being bold enough to disclose this and without legislative appropriation, according to a source familiar with the matter.
“The subsidy is put on the books of NNPC as losses. The fuel importers are no longer importing because the business of N145 is unprofitable. So NNPC imports and sells to them in Naira,” the source said on condition of anonymity.
An oil rally is a double-edged sword for Africa’s largest oil producer, given that even though it translates to higher government revenue, it also means higher costs of imported refined products.
The NNPC imported 983.42 million litres of PMS (petrol) through the DSDP arrangements in August, down 16 percent from the 1,173.27 million litres supplied in the month of July 2017, according to most recent data available on the company’s website.
In July, the NNPC’s operating deficit doubled from N5.2 billion the previous month to N11.9 billion (US$39 million). In August, the corporation recorded a deficit of N5.74 billion.
The NNPC has denied claims that it incurs any subsidy costs, even as the Federal government dispels same by pointing to the non-provision for subsidy in the 2016 and 2017 budgets.
“The Federal Government has said several times that it is not incurring any subsidy costs. Yet the naira devaluation in June has added greatly to importers’ costs and pushed them above the N145/litre ceiling for premium motor spirit set by the regulator,” analysts at FBN Quest told BusinessDay in an earlier comment this year.
“We suspect that the importers, or at least the NNPC, are taking the hit on their books because the higher spot price of oil clearly feeds into the costs of importers of petroleum products.”
Some petrol importers told BusinessDay that they have stopped importing in the past six months and now rely on NNPC supplies.
Africa’s largest economy has been battered by falling oil price and a cut in production due to militant attacks on oil pipelines. Oil is the source of 90 percent of dollar earnings.
As foreign reserves plummeted, Nigeria became unable to meet the dollar requirements of fuel importers, having subsidised petrol prices for over a decade in order to ease the burden of high costs on its most vulnerable citizens.
Fuel importers became unable to import products and this soon led to acute fuel shortages, which played no small part in dampening economic activity in Nigeria, which slumped to its first recession in a quarter of a century last year.
Forced to intercede for businesses and households reeling from fuel scarcity and higher costs, the Petroleum Products Pricing Regulatory Agency (PPPRA) template in May 2016, increased the approved retail price of petrol by about 62 percent to a band between N135 – N145 per litre from N87.
But the price template has been due for review since July, following the naira devaluation in June and higher oil and gas prices.
The naira has shed some 7 percent against the dollar to N305.9 per US dollar at the Central Bank window (as at Tuesday), compared to the N285 per dollar template used for the retail price band.
Compared to the rate at the Investors’ and Exporters’ window, the naira is down 26 percent. The naira traded at N360 per US dollar at the said window.
While Nigeria has since resisted calls to review the obsolete petrol price template, OPEC members, Saudi Arabia and Mexico, will ditch artificially low petrol costs this year, as the increase in international oil prices combined with strained public finances make it too expensive to maintain artificially low prices.
“At root, the difficulty for Nigeria is that it exports too little oil per person, to offer a significant fuel subsidy,” according to Charles Robertson, chief economist at investment firm, Renaissance Capital.
“Gulf countries export 25 times more oil per person and even they have removed the fuel subsidy,” Robertson told BusinessDay.
Full deregulation of the downstream sector, where government no longer enforces a price ceiling, is the only path to a sustainable model, according to Esili Eigbe, a director at Exotix Partners Ltd.
“By allowing the invisible hand of the market play its role, the sector will attract more investors and it would engender competitive pricing. But if this doesn’t happen, then there will always be problems,” Eigbe said by phone.
Nigeria is the largest oil producer in Africa, pumping some 1.6 million barrels a day of crude.
However, it is forced to rely on imports to meet 70 percent of its domestic refined petroleum products demand, as state oil company, the Nigeria National Petroleum Corporation’s (NNPC) four refineries produce at less than 20 percent of installed capacity of 450,000 barrels per day (bpd).
The country needs an average of US$500 million every month to import refined petroleum products, given the dismal performance of its refineries.