ANALYSIS: Why subsidy payment will continue to rise — as things stand

Petrol

Subsidy payment on petrol has been on the rise, hitting N112 billion within a 10-month period in 2017.

According to the Nigerian National Petroleum Corporation’s (NNPC) monthly financial and operations report for October 2017, “a total of N112.079 billion was spent on petrol subsidy between January and October 2017.”

The report showed that “in January 2017, the NNPC made provision of N37.264 billion for under-recovery,” another term for subsidy payment.

In November of the same year, “subsidy payment rose by 145.08 percent, from N6.85 billion paid in October.”

The amount recorded as “under-recovery”, was the second highest, since subsidy payments on petrol resumed in 2017.

In November 2017, the Petroleum Products Pricing and Regulatory Agency (PPPRA) also said that “over N8.97 trillion has been spent on fuel subsidy under the Petroleum Support Fund (PSF) scheme between 2006 to 2016.”

A total sum of N257 billion was spent on subsidy in 2006, while from 2007 to 2011, N272 billion, N631 billion, N469 billion, N667 billion, N2.105 trillion respectively, were pumped into subsidy payments.

The PSF scheme was introduced by ex-President Olusegun Obasanjo’s administration in 2006 as a regulatory mechanism “to insulate Nigerians from the fluctuation in international crude and products prices, and stabilise domestic utilisation of petroleum products”.

What subsidy payment entails

Subsidy or “under-recovery” occurs when the expected open market price of PMS is below the approved official retail pump price.

The expected open market price is calculated from a combination of the cost of importation and distribution of the commodity – such as marketers’ margins, landing cost and freight cost.

TheCable reported that the federal government will have to pay N40.70 for every litre of imported petrol to maintain retail price at N145 per litre.

For this to hold true, the Petroleum Products Pricing Regulatory Agency (PPPRA) price template would have to be adopted.

Under the price template, marketers are allowed a profit margin of N14.30 to cater for distribution costs, even though some petrol stations in the country have been selling petrol for as high as N250.

While speaking at a press conference in December, Maikanti Baru, group managing director, NNPC, said the landing cost of petrol was N171 per litre, while the retail price in the domestic market was N145 per litre.

“The landing cost comprising CIF (cost, insurance and freight) of petrol as of last Friday was in the neighborhood of $620 per metric tonne, so with the official exchange rate of N305 to the dollar, the landing cost should be N171.40 per litre,” he said.

“The government has consistently indicated that N145 per litre is the price and it has mandated the NNPC to keep the depot price at N133.28 per litre, so as to maintain a cap of N145 per litre.

“So, there is a lot of profit in between after taking the transportation cost of N7 off; there is sufficient margin for marketers in that PPPRA template at the price cap.”

Rising crude oil prices ‘directly proportional’ to higher subsidy payments

A rise in crude oil prices would translate into higher subsidy payments because the naira landing cost of petroleum products also increases proportionally.

According to the US Energy Information Agency (EIA) crude oil prices make up 71 per cent of the price of petrol.

Its January 2018 oil market report projects oil price to remain between $60 and $70 per barrel this year.

This means domestic prices may have to go up or at best remain (in some parts of the country, petrol sells for as high as N250 per litre) because at present, petrol consumed in the country is solely imported by the NNPC.

Hence, the cost of subsidy has continued to grow exponentially, partly because government has had to spend even more to keep domestic prices stable, in addition to an increase in fuel consumption of 50 million litres per day.

Conversely, declining oil prices would mean a reduction in NNPC’s earning and their ability to cater for the extra cost incurred from the differential in landing cost of and pump price of petrol.

NNPC as ‘sole importer’ of petrol

In January, Ibe Kachikwu, minister of state for petroleum resources, disclosed to the joint committee of the national assembly investigating petrol scarcity in the country during that period that  NNPC, has incurred a loss of N85.5 billion over three months (N800-N900 million daily).

He said the loss arose from importing petrol and selling at a discounted price of N145 per litre, against the landing cost of N171 per litre, resulting in a differential of N26 per litre.

Kachikwu explained that “the N145 per litre price was fixed in the first quarter of 2016 when crude oil was selling for $49” and pointed out that “with crude oil price rising to $67 a barrel, the pump price may no longer be sustainable”.

The minister said the landing cost of petrol which was “N133.28 per litre in 2016, is now N171 per litre, which has resulted in the stoppage of importation of the product by independent marketers”.

According to him, the situation forced the national oil company to be the 100 percent importer of the product – with the federal government receiving backlash from major oil marketers in the country.

‘Overdependence on petrol increases cost of subsidy’

Kachikwu recently said subsidy on petrol currently costs the federal government N1.4 trillion annually.

Speaking at a liquefied petroleum gas (LPG) workshop organised by the ministry, he said Nigeria is overly dependent on imported petroleum and not exploring other sources of clean energy.

According to him, because of this, “there is an under recovery, a loss in the importation of the petrol being borne by the NNPC.”

“It is time for Nigeria to harness alternative fuel sources like LPG as under-recovery from the importation and sale of petrol at the government-regulated price of N145 per litre has hit N1.4 trillion,” he said.

“Clean energy is very essential and we need to move away from complete utilisation in our transport sector of only petrol.

“This is creating a lot of under-recovery of N1.4 trillion per annum of exposure to the government.”

In 2016, NNPC put petrol consumption at 17.41 billion litres, or 47.6 million per day.

But Baru said in January that petrol consumption rose to 55 million litres from December 2017.

He said the situation was “straining the ability of NNPC to sustain the prevailing 100 percent petrol importation in the face of increasing cost”.

Assuming an increase in importation costs is accompanied by a rise in crude oil prices, at the current level of consumption, under-recovery or subsidy would keep growing exponentially.

Also, Kachikwu’s recommendation not to subsist on petrol usage alone would be a long road to travel.

Research has shown that conversion of petrol-powered vehicles to LPG powered ones involve installing a separate fuel system as the liquid is stored in highly pressurised fuel tanks.

Moreso, the availability of vehicles that are LPG-fueled, as well as places to refill LPG are few and far between  in the country.   (The Cable)

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