KWENU! Our culture, our future

KWENU! Our culture, our future

MIDWEEK ESSAY: 

On fuel price hike - and why we are where we are

Mobolaji E. Aluko, PhD

Burtonsville, MD, USA

alukome@aol.com

Wednesday, July 2, 2003

 INTRODUCTION

I have just returned from Nigeria after a one-month stay.   This write-up, however, is not a travelogue. 

In Ibadan, I visited an elderly relative in her home last week.  There was no electricity in the home during my entire visit.  NEPA had “taken light”, but during the course of my stay, she showed me a wrong bill from NEPA – for N227,000 – even though she lives in a modest home (not a factory), and in any case she was away in Lagos for that very month of the bill.  If she did not have a strong heart, she would have fainted, she said, because her monthly bill was usually in the N1,000 per month range.    Computer error, it was called, although her electricity was cut for a few days as a result of it.   One of her other relatives is currently fighting the ridiculous bill with NEPA Ibadan.

Even though I was not really hungry, my relative insisted on me having a meal – and she proceeded to heat up her sweet-smelling “obe” and use not the electric cooking range that she had, but her small kerosene cooker.   As she labored with it, I shook my head that in 2003 she could still be using a kerosene stove right in the middle of Ibadan – and that in another week, I would be returning to the comfort of the USA thousands of miles away.

NIGERIA’S OIL PRODUCTION AND REFINED PRODUCTS PROFILE

The kerosene reference provides an appropriate segue into this section.

Nigeria produces roughly 2 million barrels of crude oil per day. With Nigeria’s Forcados crude at roughly 7.22 metric tons per barrel and Bonny Light at 7.49 metric tons per barrel, that translates to roughly 14.5-15 million metric tons per day.

Nigeria’s total consumption need, on a daily basis, is about 0.4 million barrels per day of crude, which translates roughly to 38 million liters of refined products [petrol or gasoline (PMS), kerosene (DPK Dual purpose kerosene) and diesel (AGO)], of which 14 million liters is PMS.   This means that the total installed national refining capacity of 0.445 million barrels per day of our four refineries [Kaduna (0.110 mmbpd capacity), Warri (0.125 million mmbpd) and two in Port Harcourt (.060 mmbpd, 0.150 mmbpd)] would have fully satisfied our domestic needs, and still leave a 10% surplus.   It should be noted that other figures put these as Nigeria’s domestic demand of 25 million litres per day, with the four refineries having a combined capacity of 30-35 million litres per day. 

The most important back-of-the-envelope figure to remember here is that 1 barrel of crude oil yields roughly 100 liters of refined products, and that depending on the actual cost of crude per barrel and the dollar/naira exchange rate, the MINIMUM NO-PROFIT domestic cost of a liter of would vary.  For example an $Z/barrel crude oil cost would roughly translate upon refining to YZ  Naira per liter minimum cost for a $1/(N100Y) exchange rate.  If we use the easy $1/N100 exchange rate, then the dollar cost of a barrel directly translates in its figure to the naira cost per liter of refined products, ie a $25 per barrel crude has a minimum no-profit cost should be N25 per liter of refined product.  If the cost (maybe due to local production) is as low as $10 per barrel, then that minimum cost should be N10 per liter.

However, due to technical inefficiencies, political incompetence and leadership failures over the years, all the refineries have only been able to perform, even at peak form, at 40-60% of total installed capacity, or at 0% (total shut-down) at other times, like back in March 2003 when both Port Harcourt refineries suddenly had to shut down completely, or even now when both Warri and Kaduna had to be shut down because of vandalization of pipes in the Niger-Delta.

THE RECENT PRICE HIKE

 As I write, a biting workers’ strike is taking hold in Nigeria, with probably as many as ten Nigerians already dead from security forces’ misbehavior.  The strike is a bitter reaction to the most recent hike in retail prices of petroleum products, the eleventh one since uniform pricing was introduced by the Gowon regime on October 1, 1973.  (See Table 1).  While in the latest move petrol suffered a sudden 54% increase to N40, kerosene was exposed to a 58% increase to N38 per liter, and diesel by 46% to N38 per liter.   Since 1973, petrol has experienced a 42,000% increase in Naira terms, while kerosene, the “poor-persons’ fuel” has suffered a whopping 47,400% increase!

Why these increases? The usual reason has been the reduction or removal of subsidies, in order to move the price of gasoline to more economic values and to discourage rent seeking.  For example, according to a recent report, President Obasanjo is quoted as follows:

QUOTE

“Subsidising fuel to the tune of N12 per litre is a wasteful way of spending our money", noting that the N250 billion subsidy per annum could be saved and used in providing education, health, water supply, roads, security and food.

President Obasanjo explained that the age of the four refineries in the country and their lack of maintenance in the past, made them to produce only 13 million litres per day, below the national consumption rate of 30 million litres per day.

Government's continued importation of the shortfall of N17 million litres per day, he noted, is not only too costly, but also benefiting only a few rich individuals and neighbouring countries through smuggling.

UNQUOTE

The president’s figure puts the total capacity of our refineries at 43%, closer to 40% than the 60% often quoted.   A quick calculation using his subsidy numbers puts the annual subsidy at N74.5 billion (N12 per liter times 17 million liters per day times 365 days per annum) and not N250 billion – unless we are missing something like overheads and the inevitable additional corruption of government bureaucracy.  The new price of N40 per liter also means that at a daily consumption of 30 million liters per day, the Nigerian people will soon be spending N1.2 billion per day on fuel alone – or N438 billion per annum – or about 3% of our GDP (PPP purchasing power parity) .

Next, according to statement credited to Rasheed Gbadamosi, Chairman of the Petroleum Product Pricing Regulatory Committee (PPPRC), and more recently of the PPPRA (the committee is now an agency, though not yet backed by a signed law), we have:

QUOTE

"The parameters that have been brought to bear in the price restructuring exercise are clear and verifiable," said Gbadamosi. He listed these as:

*  Landing cost of PMS (petrol), Free on Board - N28.54 per litre;

*  Demurrage and Financing - N1.50 per litre;

*  Distribution margin - N7.33 per litre; and

*  Highway Maintenance - N1.50 a litre.  “

UNQUOTE

That amounts to N38.87 – rounded up obviously to N40 for petrol.

The reader is free to ask: why we are we talking about “landing costs” (from abroad) and “demurrage and financing”?   It is simply because we are importing as much as 60% of our refined needs from outside of the country.  The real questions that we must ask ourselves are therefore the following:

(1)    what really is the daily refined product demand of Nigeria?  It has variously been put at 25 million liters, 30 million liters and 38 million liters.  Until we have a handle on that, the true amount of subsidy is clearly undecipherable.

(2)    what is the actual cost of producing refined products in Nigeria  so that we can have what we might call our own “domestic landing cost” –  local cost of crude + refiners margin  -  before we start adding in other “margins.”

(3)    if more and more of our products were refined INSIDE Nigeria rather than IMPORTED, what would be the benefit to Nigerians at the gas pump?  Why has so much money spent on our refineries in the past four years (reportedly as much as $700 million) not resulted in increased domestic refining capacity?

To respond to some of these questions, I have below used Gbadamosi’s  “clear and verifiable” figures above, which in fact would be most appropriate if all the oil we use were 100% imported, as well as several official government documents. 

For example, we know that the “domestic landing cost” that I referred to above should be between the minimum no-additions cost of crude and the import landing cost of N28.54. Consequently, I have in Table 2 done a sensitivity analysis using a range of costs.  Also, another sensitivity analysis involved assuming various domestic production percentage ranges, from 100%  (full domestic satisfaction of local demand) to down to 40%.

The table shows that for domestic landing costs of N10 to 28.54 per liter, full satisfaction (100%) of our domestic needs by domestic refining would cut the cost of refined petrol to the range of N14.59 to N38.87 per liter, the higher figure being due only to the unrealistic assumption of a domestic landing cost equal to an imported products landing cost.  If the domestic production falls to 60%, that price range rises to N24.30 to N38.87.  Finally, a domestic production rate of 40% leads to a price range of N29.16 to N38.87.

A further reduction by half of the demurrage, distribution margins and highway maintenance charges would shave off anywhere from N2 to N5 from the top and bottom values of the above ranges.

WHY WE ARE WHERE WE ARE

The two government agencies responsible for getting fuel to the Nigerian citizenry are the NNPC (Nigerian National Petroleum Company), which owns all the four refineries in Kaduna, Warri and two in Port Harcourt, and the PPMC (the Petroleum Products Marketing Company) which distributes the products.  From government reports, we find that the problems facing our nation are both internal to these companies as well as external; both technical and financial; and both production- and distribution-related.

It is best to let the actors themselves speak, as revealed to the National Economic Intelligence Committee (NEIC) teams that visited various refineries and fuel depots extensively in August 1998, excerpts of which reports are presented in Appendices I – II.

To fix dates, Abacha died June 1998, Abdusalam Abubakar took over immediately afterwards, and MKO Abiola died July 1998.  Obasanjo became a candidate for the presidency October 1998, and became president May 1999.  Those reports were presented to President Obasanjo, on good authority. 

As you read the reports excerpts of which are presented in Appendix I – II below, and as you look more closely at the associated tables 1 – 3, the question to ask is whether things have changed with respect to NNPC and PPMC since 1998 – and why not. 

The actors may be different – but is the play different?

AND WHAT SHALL WE DO?

The reports in the Appendices show that government knows PRECISELY what ails the petroleum sector.  Consequently, the Nigerian citizenry should NOT be punished through arbitrary price increases for to the inefficiencies in government and outright corruption.  In fact, Government might actually NOT need to subsidize at all if the outrageous activities pointed out in the reports were removed.  Certainly the cost of fuel would be greatly reduced if more of the product were refined in the country and efficiently distributed to the consumers. 

Until Government convinces us CLEARLY about what it has done about past reports about this important petroleum sector, why monies spent in the last four years have not resulted in improved refining capacity in our refineries, who has been punished if our condition is a result of sabotage, etc., one should takes its present pleadings about removal of subsidies with a pinch of salt.  Furthermore, Oshiomole and co. should not agree to a penny more in terms of fuel increase on our behalf.

Ultimately, our petroleum sector must be fully liberalized to allow private players full access.  It is crucial however that such private players must include stand-alone companies floated by state governments and other civic-minded groups of citizens where the ordinary people will have controlling shares, so that a safety net might be placed under those who might otherwise be squeezed out by those who have only profit-maximizing motives.

Let us watch and pray.

MONDAY QUARTERBACKING:  On Fuel Scarcity, Politics and NNPC

Mobolaji E. Aluko

Monday, March 10, 2003

MID-WEEK ESSAY: On the Resource Control Battle:  From Dichotomy to Quartonomy, From Isopatials to Isobaths

Mobolaji E. Aluko

February 19, 2003

http://www.ngex.com/nigeria/govt/president/obasanjoonoil.htm

FUEL SUBSIDY MUST GO