FG May Save N450bn Subsidy As Petrol Landing Cost Crashes
The sharp drop in crude oil prices on the back of the spread of coronavirus has wiped off subsidy on petrol, with the landing cost of the product hitting a record low.
The expected open market price of Premium Motor Spirit, popularly known as petrol, has dropped below the approved pump price of N145 per litre as the landing cost of the product plunged to N123.88 per litre on Thursday.
Going by the latest pricing template obtained by our correspondent from the Petroleum Products Pricing Regulatory Agency, petrol was expected to be sold at N143.25 per litre last Thursday if the price of the product was adjusted to reflect the change in crude oil prices.
The international oil benchmark, Brent crude, has been on a downward trend since the coronavirus broke out in China. It tumbled below the $50 per barrel mark last Friday for the first time in two and a half years from as high as $70 per barrel in January.
The expected open market price of petrol was N182 per litre at the end of last year as Brent, against which Nigeria’s oil is priced, traded around $67 per barrel.
Nigeria, Africa’s largest oil producer, relies largely on importation for petrol and other refined products as its refineries have remained in a state of disrepair for many years. While the diesel and kerosene prices had been deregulated, the government still pay subsidy to make petrol cheaper at the pump.
The PUNCH had reported in December that the Federal Government was expected to spend N750.81bn on petrol subsidy this year, according to data from the PPPRA.
However, the Minister of Finance, Mrs Zainab Ahmed, had, during the public presentation of the 2020 budget details, said a provision of N450bn had been made for under-recovery for petrol, a euphemism for petrol subsidy.
“A provision has been made in the budget for under-recovery for the PMS in the sum of N450bn provided in the fiscal framework. It is under-recovery because it is a cost operation for the NNPC,” Ahmed had said.
The landing cost of petrol declined from N162.68 on December 31, 2019 to N123.88 per litre on February 27, 2020, the PPPRA data showed.
The cost of the product plus freight stood at $668.29 per metric tonne (N152.99 per litre on December 31 but fell to $502.29 per metric tonne (N114.97 per litre) on February 27, 2020.
Other cost elements that make up the landing cost include lightering expenses (N2.75), Nigerian Ports Authority charge (0.84), Nigerian Maritime Administration and Safety Agency charge (N0.22), jetty throughput charge (0.60), storage charge (N2.00), financing (N2.49).
The EOMP is the sum of the landing cost and the total distribution margin, which the PPPRA put at N19.37.
On February 26, the EOMP of petrol stood at N151.31 per litre while the landing cost was N131.94 per litre.
The Nigerian National Petroleum Corporation has been the sole importer of petrol into the country for more than two years, after private oil marketers stopped importing the commodity due to crude price fluctuations among other issues.
“The oil price slump offers a great opportunity for the government to exit from the oil subsidy conundrum. If there is any benefit from the collapse of oil price, it is in the reduction of the burden of subsidy payment,” the Director General, Lagos Chamber of Commerce and Industry, Dr Muda Yusuf, said.
He described the subsidy regime as “perhaps the biggest fiscal burden on the economy at this time”, saying it also presented fertile opportunities for fiscal leakage.
Yusuf said, “It is a politically difficult issue to tackle. There are powerful forces against the needed reforms, making it even more complicated. But it is in the long-term interest of the economy and the country to fix this problem. The opportunity cost of oil subsidy is horrendous.
“Besides, it has been impossible to unlock value in the petroleum downstream sector because of the policy shortcomings. Putting an end to the subsidy regime will require a great deal of political will, sensitisation and stakeholder engagement.”
Yusuf said the current socioeconomic conditions had put most citizens on edge, adding that the strategy of a major policy transition or reform at this time must be right.
“But the question is how long will the oil price remain low? And what happens if it rebounds? Oil price is difficult to predict,” he added.
The Chief Executive Officer and Executive Secretary, Major Oil Marketers Association of Nigeria, Mr Clement Isong, told our correspondent on Saturday that if crude oil prices continued to drop, private marketers might resume the importation of petrol.
He said the fall in the price of oil meant that government revenue from the commodity would decline, noting that the country could not increase production because of the cap imposed by the Organisation of Petroleum Exporting Countries.
Noting that the country recently increased the minimum wage and had accumulated a lot of debts which must be repaid in dollars, he said, “So, it is not a very good time for the country’s revenues to go down.”
Isong, however, described the drop in petrol price as a good development, saying it presented an opportunity to do away with subsidy and fully deregulate the downstream sector of the oil and gas industry.
He said petrol price had been kept at N145 “in spite of the fact that the PPPRA is expected to adjust the price in line with costs. But government’s policy is against that. So, the PPPRA has not done that.”
He said, “There has to be a clear policy shift; there has to be a clear structural change in the whole operating environment, which will give confidence to operators if we want to arrive at a point at which other players are now importing products. Without importation of products, there can’t be competition, which is good for the economy and the industry.
“Currently, there is no competition, and I am not so sure that in the short time, people will have the courage to import. They will just continue to buy from the NNPC, except the drop in crude oil prices continue for a while. Then, there will be some incentive for people to go out to import.”
The Federal Government had on May 11, 2016 announced a new petrol price band of N135 to N145 per litre, a move that signalled the end to fuel subsidy payment to private marketers.
But the government later resorted to subsidy regime following the increase in the landing cost of petrol on the back of rising crude oil prices, with the NNPC incurring the subsidy, which it called under-recovery.
The corporation, through the ‘Direct-Sale-Direct-Purchase’ arrangement introduced in 2016, supply petroleum products into the country.
Under the DSDP scheme, selected overseas refiners, trading companies and indigenous companies are allocated crude supplies in exchange for the delivery of an equal value of petrol and other refined products to the NNPC.
The International Monetary Fund, in its Regional Economic Outlook published in October 2019, said Nigeria needed to reduce fuel subsidy to bring about more productive government spending.
According to the IMF, fuel subsidies tend to be poorly targeted, foster over-consumption, curtail investment and maintenance in related sectors, and crowd out more productive government spending.
