As I write this, Nigeria has been paralyzed by a labour strike for the whole of this week. On New Year's day, the government removed government subsidies on petrol, the price went from N65 to N141. Arguments rage about whether or not removing the subsidies is a good idea. A friend of mine has analysed the problem scientifically, please read his excellent piece below:
Arithmetic of Fuel Subsidy (by Wale Majaro)
The Nigerian government claims that Nigerians consume 34million L of petrol per day. Most experts disagree and give a figure between 20ML and 25ML per day. For this write up, I will use the government figure. The government has also said that N141/L is the unsubsidized pump price of petrol imported into Nigeria, with N131.7 the landing price and N9.3 as profit.
Now, the government has made claims of the refineries working between 30% and 60%, depending on whom you listen to. For the sake of argument, I will assume that our refineries don’t work at all (i.e. 0% Production). Thus, my calculation is based on 100% of petrol used in Nigeria being imported, the worst case scenario. If the refineries actually work at 60% as the government claims, they should be processing 270,000 bbl/day of crude. Each barrel of crude produces 75L of petrol. So, if the government is to be believed, the refineries produce 19.5 million L of petrol a day and we should therefore only import 14.5million L a day. My analysis will ignore this completely.
So here is the arithmetic, using the government’s own figures:
Daily fuel consumption/importation: 34million L
Cost at pump: N141
No of days in a year: 365
Total cost of all petrol imported into Nigeria = 34Mx141x365 = N1.75 trillion
Now, Nigerians have been paying N 65/L for fuel, haven’t we? Therefore, cost borne by the consumers = 34Mx65x365 = N807 billion
Cost of the subsidy borne by the government is:
Subsidy = Total cost of import – cost borne by consumers
= N1.75 trillion – N807 billion
= N943 billion
So, even if we believe the claim that we consume 34million L/day and we assume that the refineries don’t work, the government should still not have spent up to N 1 trillion on the subsidy in 2011. How did they manage to spend N1.3 trillion by October? Since N1.3 trillion was spent by October, then the bill for the full year 2011 (assuming a constant rate of consumption) is: N1.56 trillion!
What accounts for the difference between N943 billion and N1.56 trillion? This is a difference of N617 billion that the government cannot explain. Did I hear a government official claim that the difference is what goes to subsidize our neighbours through smuggling? Time for more arithmetic.
Using figures from Okonjo-Iweala’s World Bank, here are the populations of West African countries:
Nigeria: 158.4 million
Benin: 8.8 million
Togo: 6 million
Cameroun: 19.6 million
Niger: 15.5 million
Chad: 11.2 million
Ghana: 24.4 million
The total population of all our neighbours: 85.5 million
Now, let us assume that fully 50% of the petrol consumed in each of these countries is illegally exported from Nigeria. Let us also assume that each of these countries consumes petrol at the same rate the Nigerian government claims petrol is consumed in Nigeria. I have deliberately ignored the ff facts which show that petrol consumption in these countries will necessarily be considerably lower than consumption in Nigeria:
- Some of these countries have stable electricity (eg Ghana) and thus do not depend on petrol-driven generators for power.
- Ghana, Togo and Benin are much smaller than Nigeria, thus traveling distances will be smaller.
- Niger and Chad are mostly desert and cross-desert transportation of goods/people is mostly by diesel-consuming trucks, not petrol-consuming cars.
- Apart from Ghana, the car density in each of these countries is much, much lower than the car density in Nigeria. In Nigeria, there are 31 cars for every 1000 citizens. In Togo and Chad, you have less than 10 cars for 1000 people.
- Ghana has started to produce oil and will very likely rely less and less on refined products smuggled from Nigeria, once the Ghanaian local refining capacity is built up.
Rate of petrol consumption in Nigeria = Total consumed/total population
= 34ML/158.8M people
Rate of petrol consumption in neighbouring countries is assumed to be same as Nigeria = 0.21L/person/day
Petrol consumption by our neighbours = Rate of consumption x total population
= 18.35ML per day
Now, we have assumed that 50% of the petrol consumed in each of these countries comes from Nigeria. This value comes to: 9.18 millionL per day.
Let’s pause here. Think about it again. Is it possible for 9.18 million L of petrol to be smuggled out of our borders and the government cannot do anything about it? The biggest fuel tankers in Nigeria have a capacity of about 36,000L. How many of these trucks do you need to smuggle 9.18 ML of fuel? 254! Our government is telling us that over 250 huge tankers pass through our borders everyday and they cannot do anything about it! Wow! Talk about incompetence! This in itself is an urgent security challenge – if you cannot stop 250 tanker trailers from crossing the borders daily, how can you stop importation of weapons or even an invasion by a foreign army?
But that is not all.
Let’s believe the government and assume that about 9.18ML is actually taken to our neighbours everyday and this is all subsidized by the Nigerian government.
How much will this translate to?
Difference between pump price before and after subsidy removal = N141-N65 = N76
Total spent on subsidizing petrol to our neighbours annually = N76 x 9.18ML x 365
= N255 billion
I have assumed that:
- There are no working refineries in Nigeria.
- Nigeria actually consumes 34ML of petrol per day.
- Ghana, Togo, Benin, Cameroun, Niger, Chad all get 50% of their petrol illegally, from Nigeria.
- Ghana, Togo, Benin, Cameroun, Niger, Chad all consume petrol at the same rate as Nigeria.
Yet, the government’s figures still don’t add up! There is N362 billion missing. This is the difference between N943 billion and N1.56 trillion, assuming N255 billion is wasted through subsidizing the rest of West Africa. The government should tell us what/who eats up this N362 billion ($2.26 billion).
These figures simply show the incompetence and insincerity of our government officials. The simplest part of the arithmetic is laid down below:
- NNPC crude oil allocation for local consumption: 400,000 barrels per day
- Assuming refineries work at 30%, 280,000 barrels can be sold on the international market. (Remember that I assumed that refineries don’t work in calculating our consumption, to give an absolute worst case scenario).
- Money accruing to FGN, through NNPC on the sale, using $80/bbl: $22.4m a day. Note that the true price is higher, as oil currently sells for $100/bbl and Nigerian crude sells at a premium to the benchmark Brent crude.
- Annually, this translates to: $8.176bn or N1.3trillion.
What does this mean? The government does not subsidize our petrol imports, at least not from the Federation Account. The same crude that should have been refined by NNPC is simply sold on the international market (since our refineries barely work) and the money is used to buy petrol. The 400,000 barrels/day given to NNPC for local consumption can either be refined by NNPC or sold to pay for imports. The “subsidy” should be funded with this money, not the regular FGN budget. If the government uses its regular budget for subsidizing petrol, then what happens to the crude given to NNPC for local refining, but gets sold on the international market?
Now that the petrol pump price has been hiked by over 100% and resulted in 100-200% increases in the price of transportation, personal electricity generation and foodstuff, what do I advise the government to do?
- Revise the petrol price, not to N65, but to an amount which takes inflation into consideration. Cumulative inflation from 2008 to 2011 is about 27%. A new petrol price of N88 should be a reasonable sacrifice for Nigerians, while the government tries to build trust by sorting out the real issues of the midstream/downstream oil industry and cutting down the cost of governance.
- Partner with the International Oil Companies (IOCs) operating in the upstream oil sector to carry out the deregulation of the midstream/downstream oil sectors. Refineries are not very profitable compared to other areas in the oil industry; with profit margins ranging from 0-15% (this is why we don’t see companies queuing up to set up refineries). The government needs to give incentives to these companies to set up refineries in Nigeria, in the form of tax breaks, duty exemptions, crude price guarantees, etc. All agreements should be in place, with an enabling law, by September 2012.
- The government has already shown and admitted that it cannot manage refineries. All new Greenfield refineries should use the NLNG model, where government owns enough equity to influence strategy in favour of the Nigerian people, but is not involved in the routine management of the company. This is the best way to get the best out of these refineries while protecting the national interest. The new refineries should come on stream by end of 2014.
- Sell the existing refineries to the IOCs and stop spending taxpayers’ money trying to revamp them within the current structure. The IOCs have built and currently operate hundreds of refineries across the world, so refining is their bread and butter. ExxonMobil’s Torrance Refinery is over 80 years old, Total’s Port Arthur Refinery is about 100 years old – these companies know how to manage refineries.
- The sale of the refineries should be carried out by September 2012. I know the refineries have been very poorly managed, so we should not expect to make tons of cash from selling them. The main advantages of the existing refineries to a buyer are the existing Brownfield facilities (roads, utilities, power), an existing pipeline distribution system and a skilled workforce. The IOCs should be mandated to revamp these new refineries to 70% nameplate production by January 2014 and 95% by January 2015.
- Incorporate PPPRA into DPR by December 2012, with an appropriate legislation (I’m not sure whether this is already included in the PIB). Let us have one strong agency to monitor all activities, including product pricing in the downstream oil industry.
- Balkanize PPMC and sell it off to private investors, again with the government retaining a non-controlling stake in the new entities. This should be done by September 2012, in parallel with the sale of refineries.
- Increase the fuel price in Jan 2014, not by simply jacking up the prices, but by introducing a tax on imported products. The tax should be deducted at source when making “subsidy” payments to the importers. Jan 2014 is chosen because I expect the output from local refineries to improve to at least 70% within 1 year of operations by IOCs.
- Introduce a law that any company that will be licensed to import petroleum products from July 2013 must either be currently running a refinery in Nigeria or be in the process of building a refinery in Nigeria (i.e. project has passed FID stage and execution contracts are signed). The total products each individual company can import must not be more than 20% of the company’s total refining capacity (existing + in construction) in Nigeria. This is the only way to break the importation “cabal”.
- Immediately, start prosecuting all companies and individuals suspected of involvement in the royal mess that the fuel importation segment has become. Use the same vigour (or more) that was used in the 2009-2010 reform of the banking sector. Also, all companies and individuals suspected of involvement in the refinery TAM contract scams should be prosecuted.
- Immediately, tighten the borders to minimize smuggling of petroleum products to neighbouring countries and sack/prosecute the relevant officials if smuggling remains a major issue. Our petrol will always be cheaper than that of our neighbours, especially if/when local refining reaches/surpasses local consumption. As every economist knows, products will always be cheaper in the source location than other places.
- Set up petroleum product trading agreements for surplus products in Nigeria to be sold to neighbouring countries in a legal and transparent manner. All agreements should be in place by July 2013, well in advance of additional capacity coming on stream. These agreements will assure companies building refineries that there is an available regional market for them to legally sell products refined in Nigeria.
With all the above, “subsidy” will disappear by Dec 2014, but in a gradual process, ensuring no price shocks (such as the 100% increase of Jan 2012) re-occur and ensuring that the industry is actually sanitized. Of course, the government also needs to keep to its several promises of improving the power sector and revamping rail lines, two critical developments which will reduce our consumption of petroleum products significantly.
- http://www.nigeriafirst.org/article_11527.shtml Para. 14