A recent report revealed that Nigeria spent N190.314 billion between January 2017 and January 2018 as under-recovery from the importation of petrol for local consumption despite government’s claim that it had exited the era of subsidy payment. The report was based on data from the Nigerian National Petroleum Corporation (NNPC).
According to the report, under-recovery are losses that oil companies incur as a result of the difference between the subsidised price at which oil marketing companies sell certain products and the price which they should have received for meeting their cost of production. Under-recovery was introduced after government scrapped the subsidy regime on petrol.
We think that the solution to the unsustainable subsidy regime is for the government to fully harness the local refining capacity to meet the local demand as well as export to other countries, especially in the West African sub-region. This was the case when the country built four refineries starting with the first Port Harcourt refinery. In fact, the second Port Harcourt refinery was mostly configured for the export market. Unfortunately, investment in the refining capacity of the country was stalled with the commissioning of the Kaduna Refinery in 1987, as no new refinery has been built since then.
While the country’s daily consumption of petroleum products has increased in recent times, the four refineries have, through neglect, become inefficient. Most times, they perform below their installed capacity. Some of them hardly perform up to 20 per cent of their capacity, which has been put at 445,000 litres of petroleum products daily. Even if they work at full capacity, the refineries can barely meet half of the country’s daily petrol need.
The situation has warranted the importation of petrol to meet the shortfall in supply. As long as the country continues to import most of its petroleum products to service the local demand, the ubiquitous subsidy regime will subsist. The Petroleum Industry Bill has long been heralded as the cure for all of the ailments in the oil industry.
But a stakeholders’ conspiracy, insider abuses and a lack of political will have combined to stall it since it was first mooted in 2007. The 8th National Assembly has vowed to see it through and has broken it into four component parts to ensure easier passage. Less than one year to the end of its tenure, however, only one of the four components has been passed.
As the international price of oil rebounds and presently peaking at around 80USD, the cost of landing the imported product on our shores has equally increased. This makes the fixed pump price of petrol at N145 unrealistic. We recall that the extant pump price was fixed in 2016, when the landing cost was less than N120 and allowed a reasonable margin of profit for all those involved in the business. It was the basis on which government announced that it was done with subsidy payments as a policy.
But the present realities have undone the calculation as the independent importers of the product have since pulled out as a result of the hostile market situation and left only the NNPC as the sole importer of the product. When the international price of oil was about 50USD at the end of last year and the shortfall experienced in the supply of petroleum products during the Christmas season, the NNPC said the landing cost was N171. That must have risen to over N200 now that oil is selling at about 80USD in the market.
With the pump price of petrol fixed at N145 and landing cost going above the expected threshold, who would pay the difference? This is what has led the country to the under-recovery regime. Now, the NNPC, as sole importer of the products has to come clean on its figures. The citizens on whose behalf they import the products, and lately the Governors’ Forum have doubts about their calculations.
A long-term solution would be for government to find the political will to do away with the questionable subsidy regime. Let the government provide the enabling environment for new refineries to be built and optimise the local refining capacity of existing ones. There is no way the government can sustain the current subsidy regime.