By Adewale Sanyaolu
The Nigerian National Petroleum Corporation (NNPC) recently stirred the hornets’ nest when it declared that it may not be able to make remittances to the Federation Accounts Allocation Committee (FAAC) due to the burden of fuel subsidy.
Recall that the Group Managing Director of the NNPC, Mr Mele Kolo Kyari, in a bid to leverage on the low price of crude oil had in April 2020, announced that the era of subsidising the pump price of petrol was over.
Kyari had said: “As at today, subsidy/under-recovery is zero. Going forward, there’ll be no resort to either subsidy or under-recovery of any nature. NNPC will just be another player in the market space. But we’ll be there for the country to sustain security of supply at the cost of the market”.
But by March this year, when crude oil prices started making a rebound, hitting almost $70 per barrel, Kyari revealed that the NNPC can no longer bear the burden of underpriced sales of petrol, adding that the market price needs to be implemented.
But a day after making the remark, the corporation said it will maintain the current ex-depot price of petrol until the end of negotiations with the organized labour.
The NNPC had said it will deduct N114.3 billion from its June remittance to the Federation Accounts Allocation Committee due in July.
In April, the corporation had written Ahmed Idris, accountant-general of the federation, informing him that the corporation would not make any remittance to the FAAC in May.
The NNPC had earlier deducted N126.2 billion from remittance to FAAC in June.
The corporation said it continues to bear the burden of the undepriced sales of Premium Motor Spirit (PMS), better known as petrol.
Signed by Bello Abdullahi, on behalf of Umar Isa Ajiya, chief financial officer, the document showed that N50 billion, which is part of the corporation’s financial obligations to its Joint Venture (JV) partners, meant to have been subtracted from the latest round of deductions remains pending.
“The sum of N126,298,457,944.36 was deducted as value shortfall resulting from the difference between the landing cost and ex-coastal price of PMS (petrol) recorded in April 2021,”.
However, the declaration by NNPC seems not to have gone down well with members of the Nigerian Governors Forum(NGF) as such will impact negatively on what accrues to them from FAAC.
The NGF then recommended the full deregulation of PMS.
The governors gave the recommendation at its 30th teleconference meeting which held last May.
In a communique released after the meeting, Kayode Fayemi, chairman of NGF, said that the forum received presentation from Nasir el-Rufai, governor of Kaduna, on the pricing of petrol.
It is reported that el-Rufai’s presentation was based on the position of a six-man committee headed by him.
In his presentation, el-Rufai “noted that between N70 billion and N210 billion is estimated to be spent every month to keep the PMS price at N162/litre”.
The governor said that the situation is “completely unsustainable”, thereby backing the deregulation of petrol.
El-Rufai reportedly said that the increase in the price of petrol to N385 per litre would help reduce smuggling of petrol to neighbouring countries.
He said that if petrol sells at N385 per litre, the FAAC would gain between N1.3 trillion and N2.3 trillion per annum.
The position of the governor is said to have been commended by some of his colleagues while others faulted the move, saying that it will impose more hardship on Nigerians.
Despite the widespread condemnation, most economists and stakeholders, agreed that the removal of the subsidy is a necessary step towards the long-needed reform, since the country has failed to make its refineries work.
The Managing Director of Oando Plc, Mr. Wale Tinubu, at the 2019 edition of Nigeria Oil and Gas Conference (NOG) had lamented that the $5 billion spent by the country on fuel subsidy in 2018 was no longer sustainable going forward.
The sum, he said, represents funds that could have been used to finance other critical infrastructure needed by the vast majority of the populace.
He called on all stakeholders to rise up to support the deregulation of the oil and gas sector and discourage the practice in order to engender growth.
According to him, other critical sectors of the economy, including education and health among others, were in need of funding, adding that such amount expended on subsidy could have been channeled to other critical sectors or towards infrastructure development.
“The government has chosen to effectively subsidise the price as a social palliative. Not that I support it, but we spent $5 billion on subsidy last year, which was even more than what we spent on education and housing combined.
“At a population growth rate of three per cent, the question is what is the best – to invest in infrastructure or consumption? There is a big debate that has to be made around this and as stakeholders we absolutely need to champion that debate with the Federal Government.
“The politicians want this to continue at all costs, but there is a long-term damage we are doing to our country and industry.
“We need to ensure that these subsidies are altered and the downstream sector needs to be commercialized. The refineries need to function and the pipelines must also be able to deliver products. There is no logic in transporting our products by road, which is extremely expensive,” he said.
On its part, Major Oil Marketers Association of Nigeria (MOMAN), noted that removing fuel subsidy at the period of drop in prices would eliminate waste, address the nagging issue of low margin for marketers as well as set the country on the path of determining appropriate pricing for the product in the country.
Chairman of MOMAN, Tunji Oyebanji, said: “Our current situation, lays bare by the challenges of Coronavirus to the health of our citizens in particular and economy of our country in general, demands that we are honest with ourselves at this time. A fundamental and radical change in legislation is necessary.
“When crude oil prices rise, government has always been unable to increase pump prices for socio-political reasons, leading to these high subsidies, and we believe the only solution is to remove the power of the government to determine fuel pump prices altogether by law.
“Purchase costs and open market sales prices should not be fixed, but monitored against anti-competitive and anti-trust abuses by the already established competition commission, subject to its clearly stated rules and regulations.
“We want the market to determine the price. There should be a level playing field. Everybody should have access to foreign exchange to be able to import and sell petrol at a pump price taking its landing and distribution costs into consideration.”
With higher oil prices, MOMAN noted that the removal of petrol subsidy and price control would no doubt lead to challenges for Nigerians, adding that debate among stakeholders should now move from the deregulation of downstream sector to seeking solutions to addressing such challenges.
Oyebanji said that with a fully deregulated downstream industry, the natural fear and anticipation of Nigerians is the increase in the price of transportation, food items and the attendant economic hardships.
According to him, solutions to these challenges can only emanate from a collective resolve by all stakeholders to face up to these challenges together, stressing that the nation must debate and share pragmatic and realistic initiatives to mitigate the impact of a pump price increase which could follow a fully deregulated downstream.
Recently, NNPC GMD, had said that with the current exchange rate, the pump price of petrol should be N256 per litre.
“I know that so much work is going on, and then we have to manage the volume that we are exposed to between this price of N162 and N256. The difference comes back to as much as N140 billion to N150 billion cost to the country monthly,” he said.
Kyari warned that rather than being a positive development, the rising prices of crude oil in the international market could cause major challenges for resource-dependent nations like Nigeria.
Kyari at a virtual Citizens Energy Congress, tagged: “Securing a Sustainable Future Energy System through Strategy, Collaboration and Innovation,” had described the rising price of crude oil as a “chicken and egg” situation.
He added that oil prices had started exiting the comfort zone set by the NNPC, and becoming a burden.
Kyari put the comfort zone globally at $58-$60, saying that for the NNPC, anything above $70-$80 will create major distortions in the projections of the corporation and add more problems to the company.
Kyari expressed concern that as the commodity prices rise, buyers of Nigeria’s crude may be compelled to accelerate their investment in renewable sources of energy, thereby leaving the industry in a quagmire.
He said: “In a resource-dependent nation like Nigeria when it gets too high, it creates a big problem because your consumers shut down their demand. Demand will go down and obviously even as the prices go up, you will have less volume to sell.
“So, it’s a chicken and egg story and that’s why in the industry when people make estimates for the future, they always make it about $50 to $60. Nobody puts it beyond $60.
“But for us as a country, as prices go up, the burden of providing cheap fuel also increases and that’s a challenge for us but on a net basis, you know, the high prices, as long as it doesn’t exceed $70 to $80, it’s okay for us.”
The IMF has also expressed concern over the re-emergence of fuel subsidy in Nigeria in the face of the country’s low revenue mobilisation.
The IMF in a statement at the end of its staff virtual meeting with top Nigerian officials, said the views expressed in the statement were those of the IMF staff and did not represent those of the IMF’s Executive Board.
The IMF team was led by IMF’s Mission Chief for Nigeria, Ms. Jesmin Rahman, in the virtual meetings with the Nigerian authorities, held from June 1st to June 8th, 2021, to discuss recent economic, financial developments and outlook.
At the end of the visit, Rahman, in the statement, said thst the Nigerian economy had started to gradually recover from the negative effects of the COVID-19 global pandemic.
He said: “The mission expressed its concern with the resurgence of fuel subsidies. It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor.
“The mission recommended stepping up efforts to strengthen tax administration to mobilise additional revenues and help address priority spending pressures.”
It stated that tax revenue collections in Nigeria were gradually recovering but with fuel subsidies resurfacing, additional spending for COVID-19 vaccines, added to address security challenges, the fiscal deficit of the consolidated government was expected to remain elevated at 5.5 per cent of Gross Domestic Product (GDP).