The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr. Mele Kolo Kyari, recently announced the removal of fuel subsidy. The announcement came on the heels of the low price of crude oil and petroleum products. The NNPC boss said the era of subsidising the pump price of petrol was over. Kyari also disclosed that henceforth, NNPC would not just be another player in the market space, but will also be there for the country to sustain security of supply of petroleum products.
Following the slump in the price of crude oil in the international market due to the coronavirus pandemic, the Federal Government last month reduced the pump price of petrol from N145/litre to N123/litre. The issue of subsidy on petroleum products remains very contentious, and dates back to 1990s. It was originally designed to be an interim measure to ensure that NNPC-licenced importers of refined petroleum products sell them at approved prices pending the time the nation’s four refineries in Port Harcourt, Warri and Kaduna would have undergone Turn Around Maintenance (TAM). Sadly, subsidy regime was riddled with corruption to the extent that many Nigerians regard it as a huge scam.
Without doubt, the Turn Around Maintenance of the refineries cannot be said to be free from corruption as well. The exercise has been executed without diligence to due process. It has witnessed inflated contracts and financial malfeasance in recent times. That is why the refineries have continued to produce at below installed capacity while the country continues to import refined petroleum products till date. For instance, in 25 years, Nigerian refineries reportedly gulped $5.178billion in TAM with capacity utilisation stalling at 20.66 per cent. Despite the huge expenditure on TAM, the NNPC the other day assured Nigerians that the refineries will begin full operations in 2023.
We believe that the removal of fuel subsidy can only be achieved if we have the capacity to refine petroleum products for local consumption as well as for export. The removal of fuel subsidy should not be done hastily. It should be thoroughly thought out and with input from all the stakeholders. It has dawned on us that the economy can no longer support the questionable subsidy regime. In every country, there is a level of subsidy to support the welfare of the people. Unfortunately, ours appears to enrich the importers of the petroleum products at the detriment of the masses. According to data from the Central Bank of Nigeria, between 2006 and 2018, N10 trillion was spent for fuel subsidy, N780billion in 2019. From 2013 to the first quarter of 2015, subsidy claims rose to N1.43trillion, with N8.32billion paid in 2013. In the 2020 budget, N450billion was provided as fuel subsidy. Available statistics also show that before November 2011, the business of fuel importation became an all-comers affair, a situation that resulted in manipulations and other sharp practices that swelled subsidy claims.
For the subsidy regime to continue, the downstream petroleum sector needs about N3.2trillion yearly investment, which it cannot afford at this time because of the slow growth. Therefore, the removal of subsidy will stimulate competition. As the World Bank has constantly advised, heavy subsidy is an unsustainable expenditure even in the long term. It also promotes energy inefficiency and imprudent consumption. It must be noted that, over the years, the government has taken some steps to deregulate the downstream sector. While these steps are welcome, more consultations are necessary before a decision on total removal of fuel subsidy should be implemented. Government should carry organised labour along to avoid industrial crisis. The country cannot afford any industrial unrest at this time of the COVID-19 pandemic.
While we are inclined to believe that there may not be meaningful investment in refining in the downstream until the sector is deregulated, the government must squarely address the challenges confronting the sector. These include funding, insecurity, crude oil theft and pipeline vandalisation. It is unfortunate that among the top 10 crude oil producers in the world, Nigeria is the only one that still imports petroleum products. And very often, the Federal Government and oil marketers bicker over how much that is being owed as subsidy payments. We think that this is the time to address the challenges affecting the oil sector and make the economy less dependent on it.