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Endless subsidy payments: The dysfunctional refineries’ connection

By Michael Eboh

The controversy on whether the country should continue or discontinue subsidy payments would continue to rage until Nigeria addresses the challenges confronting crude oil refining in the country. This is the view of stakeholders in the Nigerian petroleum industry, who have over the years, been divided on whether the Federal Government should fully deregulate the downstream petroleum sector, allowing market forces to determine the price of Premium Motor Spirit, PMS, also known as petrol; adopt partial deregulation; or continue to regulate the sector.

A refinery
A refinery

Vice President Yemi Osinbajo and the Minister of State for Petroleum Resources, Mr. Ibe Kachikwu, had a couple of weeks ago, disclosed that the country was spending N1 trillion annually on petroleum products subsidy, stating that the removal of subsidy would ensure that the amount is channeled to more productive use in the economy.

Presently the Federal Government is subsidizing petrol to the tune of N12.88 per litre. Using Nigeria’s estimated daily fuel consumption of 40 million litres per day, this translates to subsidy payment of about N515.2 million daily. This also translates to subsidy payments of N15.46 billion in one month and N46.38 billion over a three-month period.

On the one side, Professor Adeola Adenikinju, Director, Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan, argued that the fuel subsidy regime is unprofitable and wasteful and should be removed without delay.

He called for the deregulation of the downstream petroleum sector, so as to allow for increased private sector participation. According to him, current emphasis on crude petroleum exports must stop and be replaced with seeing petroleum as source of energy and growth enabler.

He also advocated the promotion of vertical integration within the oil industry in order to develop a fully integrated economy that is able to generate jobs and development. Speaking in the same vein, President of the Nigerian Association for Energy Economics, NAEE, Mr. Wumi Iledare, called for partial deregulation of the petroleum industry, since it is not possible to adopt total deregulation at the moment.

He said, “My opinion is that government should stop subsidizing private sector, let oil marketers go and look for risk capital. It is also not possible they will have petrol and not sell it, especially if they went out to borrow the money.

“What we have now is that the marketers are depending on the government and the government needs to find a way to let them go and look for foreign exchange to bring petroleum into Nigeria, sell it at the market clearing price, which might be N120 per litre, or N125 per litre and there would be a time at which it is going to be N100 or N90 per litre as the market stabilizes. Government cannot allow itself to be taken for a ride.”

However, the Nigerian Labour Congress, NLC, said it is opposed to subsidy removal at the moment, stating that the removal of fuel subsidy without the capacity to refine crude oil for local consumption would unleash hardship on workers and indeed the average Nigerian.

According to the NLC, as long as the country continues to depend on imported refined products, deregulation and the abandonment of a subsidy scheme will lead to hardship.   The NLC maintained that it is illegal for the Minister of Petroleum Resources or anyone to fix petrol prices without recourse the Board of the Petroleum Products Pricing Regulatory Agency, PPPRA, which it claimed had not been constituted.

According to the NLC, the PPPRA is the only government agency empowered by law to recommend the prices of petroleum products in the country, while it called on the Federal Government to constitute the board of the PPPRA to empower the agency to determine the pump price in line with current realities.

However, irrespective of the disagreement surrounding the subsidy issue, the stakeholders are unanimous in their views that the country’s refineries need to be working at full capacity, while newer refineries should be set up to meet the country’s crude oil refining demand.

Presently, the refineries production capacity   are 445,000 barrels of crude oil per day, which, according to Kachikwu, even when producing at 100 per cent of their capacity, they can still not meet more than 50 per cent of Nigeria’s PMS demand. Realising this challenge, the Federal Government is encouraging private investors to venture into building of refineries so as to support the existing refineries.

It is expected that when the Dangote refineries, the proposed co-located refineries and other modular refineries come on stream, the importation of PMS would end. Already, the Federal Government said it had set a three-year deadline to achieve self-sufficiency in refined petroleum products  and to become a net exporter of petroleum products.

According to the government, the objective is to increase domestic supply of refined products and reduce demand on foreign exchange for importing refined products in the country.

Therefore, it is expected that with the current plans for sufficiency in crude oil refining, the controversy surrounding subsidy payments would be laid to rest, while funds expended in that regard would be channeled to more productive economic uses. The question is when will this be?


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