IHS Global Insight Perspective | |
Significance | The administration under President Umaru Yar'Adua has agreed to pay the millions of U.S. dollars owed to fuel marketers in subsidies under the government's price control system. As a result, fuel imports will resume. |
Implications | However, the settlement is likely to be an interim measure as the government mulls its options. Ultimately, it is likely to deregulate the downstream oil sector in a bid to reduce importation costs, encourage investment in refineries and relieve itself of the burden of paying for subsidising the price of oil. |
Outlook | While deregulation, particularly within the context of a global economic downturn, is likely to save the government money, the government is likely to face the wrath of fuel importers and opposition at a grassroots level as ordinary Nigerians seek to safeguard their privilege of low petrol prices. However, the current burden is unsustainable; the removal of subsidies and the sale of the nation's refineries would transform the downstream sector and lead to a much-needed new era of private investment. |
Between a Rock and a Hard Place
Caught between not wanting to be held to ransom by the powerful fuel marketers and the wrath of a population frustrated by fuel shortages, the administration under President Umaru Yar’Adua has agreed to pay the millions of U.S. dollars owed to fuel marketers in subsidies. Months of subsidy payments had accrued to marketers under a price control system, to which the marketers responded by reducing the volume of oil imports. However, now that the government has agreed to start paying the money owed, imports have resumed, which will ease petrol pump shortages for now. According to Wale Tinubu, the chairman of the Major Oil Marketers Association of Nigeria and also head of large oil retailer Oando, the government disbursed 20 billion naira (US$1.136 billion) in subsidy arrears a fortnight ago and will now pay a further US$275 million in exchange-rate losses owing to the delays in subsidy payments, the Financial Times reports.
Fuel Subsidies—A Benefit to Whom?
Fuel subsidies in Nigeria have been viewed by many ordinary Nigerians as one of the few benefits of the oil sector, which has otherwise been associated with undue enrichment of the few, environmental degradation, poverty and unrest. Arguably in a bid to “give something back” to the citizens of sub-Saharan Africa’s largest oil economy, the subsidisation policy ensures that the price of petrol never exceeds 65 naira per litre, but in turn creates a number of socio-economic distortions. Firstly, standardised cheap fuel actually benefits the rich more than it does the poor for it is the wealthy who can afford to pay more for fuel, but they end up paying the same price as everybody else. Secondly, the low cost of fuel encourages fuel smuggling to neighbouring countries where it is sold for a handsome profit, thereby driving up domestic fuel needs even more and consequently increasing the volume of imports. Thirdly, it creates a lucrative market for fuel importers. These powerful business elites benefit from the government’s annual payment of billions of U.S. dollars to keep the price at the petrol pump down.
With this in mind and in view of the current global economic context in which lower oil prices, coupled with OPEC quota caps, have squeezed government revenue, which is notoriously dependent on the oil sector, this populist goodwill gesture of subsidies is now under threat. Over the past three years, the government has spent around 1.63 trillion naira (US$ 11 billion) on fuel subsidies alone, according to Finance Minister Mansur Muhtar. The importation of around 85% of Nigeria’s fuel import needs is costly and the government would rather invest the money used to subsidise the sector in the rehabilitation of the country's four dilapidated refineries so that ultimately the need for importing fuel is greatly reduced.
Refined Idea
If the government does actually deregulate the downstream sector, the sale of the country’s four commercial refineries, which have been faulty and functioning below capacity for many years, can be expected. Lack of investment, bureaucratic constraints, corruption, vandalism and a lack of political will are at the centre of Nigeria’s failing refining process. Essential turn-around maintenance (TAM) for the facilities has not been occurring on a regular basis, which has left the four refineries—Kaduna in the north, Warri in the south, and two at Port Harcourt—in poor working order. The refineries have a total capacity of 445,000 b/d, but in recent years have been unable to process feedstock due to crude pipelines being sabotaged by militants in the oil-producing Niger Delta.
In the past, the supermajors, who invest billions of dollars in Nigeria's upstream sector, have not been prepared to invest in the nation's refineries as they have not been profitable due to the price subsidy. More work is also required in overhauling the fiscal and legal environment of the downstream petroleum sector in order to attract players and operators into the refining business, to which leaders from the National Union of Petroleum and Natural Gas Workers (NUPENG) and the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) urged the government to turn its attention earlier this year. Some of the changes requested by the unions included crude oil price concessions.
Outlook and Implications
While the government has begun to pay back the subsidies owed to fuel marketers, it is likely to be just an interim measure before it seeks to implement its policy of deregulating the downstream oil sector. Liberalisation appears to be a crucial way of reducing fuel imports and importation costs, relieving the government of the financial burden of subsidies, and of encouraging greater investment in Nigeria’s refining capabilities. However, in so doing, the government is likely to face the wrath of fuel importers and opposition on a grassroots level as ordinary Nigerians seek to safeguard their privilege of low petrol prices.
Nevertheless, deregulation seems to be the only viable solution in the near to medium term. The current burden is unsustainable; the removal of subsidies and sale of the nation's refineries would transform the downstream sector, leading to a much-needed new era of private investment. Recently India's Oil and Natural Gas Corp. (ONGC) and Mittal Group—in a joint venture (JV) under the ONGC Mittal Energy Ltd [OMEL] banner—have been granted approval from the Nigerian National Petroleum Corporation (NNPC) to build a new refinery in Nigeria. While OMEL's involvement in a new refinery has been discussed for a number of years, the possible policy change seems to have encouraged OMEL, which has carried out a pre-feasibility study for the planned refinery with a reputed international consultant. It is hoped that once market prices are paid in Nigeria, this could see a new series of large-scale refineries built with the involvement of the supermajors.