FEATURE: Nigeria faces hard road to end costly gasoline subsidies

Nigeria's downstream oil sector is heading for crisis in 2022 as the government faces hurdles in implementing its policy of ending costly subsidies on imported gasoline, industry officials and analysts said Nov. 26.

Nigeria, which is struggling to cope with declining revenue amid lower crude output, announced Nov. 25 that from July 2022, domestic pump prices of gasoline would be determined by market forces.

Finance Minister Zainab Ahmed said the government was working on measures to cushion the socio-economic impact of the hike in the pump price, such as a monthly transport subsidy of Naira 5,000 ($11) to up to 40 million Nigerians. Despite this, labor unions and opposition parties vowed to resist the proposed removal of fuel subsidies on the grounds that it would further impoverish citizens.

In a statement issued Nov. 26, Nigeria's main opposition Peoples Democratic Party said this move "will engender enormous transportation difficulties and increase" prices of food and other commodities in the country. The same day, the Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) issued a seven-day ultimatum to the government to meet a raft of demands, failing which it would urge its members to go on strike.

Despite being Africa's largest oil producer, Nigeria imports almost all the gasoline it consumes locally, estimated at 1.25 million mt/month, due to the poor performance of the four state-owned refineries. The plants, with a combined nameplate capacity of 445,000 b/d, have been shut down for repairs for many years, and the government is currently working on overhauling them.

Nigeria currently caps the pump price of gasoline -- which is bought on the wholesale market on a dollar-denominated basis -- at Naira 162.5/liter (36 cents/liter). The government then pays the subsidy, which is the difference between the landing cost and the regulated pump price.

Divided on deregulation

But Nigeria's fuel marketers insist ending gasoline subsidies is the right step, as it will prevent the West African country from facing a major supply crisis next year.

"Allowing market forces to determine the fuel prices is very critical to the growth of the downstream industry," Tunji Oyebanji, Managing Director of fuel marketing company 11PLC, told S&P Global Platts. "Full deregulation of the downstream sector remains the most glaring boost to potential investors in the sector."

Group Managing Director of state oil group Nigerian National Petroleum Corp. Mele Kyari said Nov. 24 the government was compelled to end subsidies under the new oil reform legislation, the Petroleum Industry Act, which was signed into law in August.

Despite higher oil prices, the Nigerian government has seen its oil income dwindle mainly due to a dramatic fall in its crude production, leaving it unable to fund the subsidies which run to trillions of Naira.

The government wants private companies to help it import fuel and relieve NNPC of the burden of being sole importer of gasoline. But marketers are reluctant to import gasoline on the grounds that the pump price is regulated and therefore they won't be able to recover their costs.

However, the Nigerian Labor Congress, the umbrella body for Nigerian workers, said it rejected the government bid to remove them, insisting that by doing so, the government was inviting anarchy.

"The contemplation by government [to end subsidies] is a perfect recipe for an aggravated pile of hyperinflation and astronomical increase in the price of goods and services," NLC said in a statement.

NUPENG, whose members are mostly engaged in fuel supply and distribution across the country, is demanding the Nigerian government force some oil companies to pay its members a backlog of allowances and halt unfair labor practices.

"In spite of the various interventions and engagements with government agencies and institutions, issues concerning the welfare of members and unfair labor practices by some oil majors had yet to be fully resolved," it said in a statement.

Unpopular move

It is far from Nigeria's first attempt to tackle its decades-long dependence on fuel subsidies, with periods of weak international pricing generally seen as more conducive to such reforms, which are politically highly sensitive.

Removing subsidies on gasoline, or premium motor spirit as it is known in Nigeria, has always been unpopular. When former President Goodluck Jonathan announced such a move in 2012, massive fuel price protests brought the country to a standstill, forcing him to reverse the decision.

Nigeria looked to have finally got rid of fuel subsidies when in June 2020 the state fuel pricing regulatory agency, the Petroleum Products Pricing Regulatory Agency, removed the price cap that was in place for domestic retailing of gasoline and said it had moved to a market-based pricing regime for gasoline. But President Muhammadu Buhari later restored subsidies following strong opposition.