A well structured deal whereby Nigeria ex- changes its crude di- rectly with Oil majors in exchange for refined petroleum products may give room for Presi- dent Muhammadu Buhari’s cash strapped government to chan- nel scarce resources away from wasteful subsidies.
Given the problems fuel sub- sidies have caused for fiscal transparency, and their regres- sive nature (those who consume most fuel benefit the most, so it disproportionately benefits the rich), analysts say there are strong economic arguments in favour of adjusting, or getting rid of the current subsidy regime.
“Having contracts directly with the oil majors for refined product would be a big win. It would cut out a lot of the middle- men and also aid transparency in government finances,” said Razia Khan, managing director, Head – Africa Macro Global Research at Standard Chartered, in a re- sponse to BusinessDay questions.
“Ultimately, the healthiest development would be to sell the refined product to end-users at cost-reflective prices.”
The subsidies are expensive, accounting for an average of 2.5 percent its gross domestic prod- uct from 2006-2012, according to the IMF.
The government set aside N914 billion ($4.6 billion) for it in 2014. Nigeria’s national oil com- pany the NNPC currently receives about 450,000 barrels per day for its refineries to process for do- mestic crude consumption.
However Nigeria is almost wholly reliant on imports for the 40 million liters per day of gaso- line it consumes, as most of the NNPCs four refineries produce at less than 20 percent capacity.
The NNPC has often had to engage in opaque crude for oil (swap) contracts with lots of mid- dle – men and direct importation of products to bridge about 50 percent of the supply gap.
Nigeria’s independent oil mar- keters often imported the balance; however there have been shortag- es recently as they feared not be- ing paid by the new government.
“The major fuel importers agreed to a verbal deal with the former minister of finance. But since nothing has been paid and the major oil marketers have stopped importing,” said Temi- lade Esho, an energy analyst with Renaissance Capital.Many of the marginal importers are doing so in good faith, as they have not been told anything by the government.”
Esho says the new govern- ment’s short term plan is to pay off the monies already owed.
Imports that have arrived so far this year, total at least N300 billion, according to pan-African lender Ecobank.
Until the government pays the marketers the subsidy owed, the fuel scarcity will persist, analysts say. Buhari has not made clear his plans for subsidies, which are paid by the Petroleum Prod- ucts Pricing Regulatory Agency (PPPRA) but there are reports of talks with the oil majors about bringing in cargoes as a short- term remedy.
Embedded in the subsidy are costs relating to exchange rate adjustments, demurrage and the N15 per litre markups for import- ers and transporters, which are all borne by the government.
Some of these costs could be eliminated with direct oil for products (swap) arrangements.
“Any savings from a fuel sub- sidy could increase the amount that Nigeria spends on social safety nets – so that the poorest, most vulnerable Nigerians ben- efit directly,” Khan said.
PATRICK ATUANYA
