By Izielen Agbon
“Who is
subsidizing who? The Nigerian oil industry was developed with Nigerian capital.
Most of the experts are Nigerians, if you go to the fields. It is Nigerian
capital; it is Nigerian oil. What I understand that Nigeria should charge Nigerians is
the cost of 1 barrel at the wellhead and then the cost of transportation to the
refinery, the cost of refining it and its cost at the pump. If anybody says he
is subsidizing anything, he is a fraud. So all these people talking about subsidy,
who is subsidizing who?”
*Buhari
A first
year student of refinery economics knows that the “crack spread” is a simple
way to determine the profitability of a refinery at the margin. The crack
spread is the difference between the sales prices of the refined products (PMS,
AGO, HHK) and the price of crude oil. A 3:2:1 crack spread means that at the
margin, 3 barrels (bbls) of crude oil will produce 2 bbls of Premium Motor
Spirit (PMS) and 1 bbl of Automotive Gas Oil (AGO) or Household Kerosine (HHK).
A barrel of Nigerian oil now cost about $40. One bbl of PMS at N87/litre cost
N14159 or $71.87 at a CBN exchange rate of N197/$1. The PPPRA product pricing
template of December 3, 2015 put the cost of AGO at N96.91/litre or N15772
($80.06) per bbl.
Thus,
the gross cracking margin for an average refinery in Nigeria is [(2*71.87) + 80.06 –
(3*40)] or $103.8 per bbl. The 3:2:1 crack spread is $103.8/3 or $34.6 per bbl.
We can substitute HHK for AGO. At N50/litre, one bbl of HHK cost N8137.5 or
$41.31. Therefore, the gross cracking margin using PMS and HHK is [(2*71.87) +
41.31– (3*40)] or $65.05 per bbl. The 3:2:1 crack spread is $65.05/3 or $21.68
per bbl. It is empirically impossible to convince anyone that Nigerian
refineries cannot operate profitably under an incorruptible efficient
management or that a fuel subsidy exists. What exist is the looting of public
resources by a cabal aided by a corrupt bureaucracy and gross mismanagement.
Today,
you can buy a gallon of PMS from a Valero gas station in Houston , Texas
for as low as $1.55 or N78.8 /litre. Prices range from $1.55 to $1.99 per
gallon throughout the state. The $1.55/gallon price consists of USA
Federal/State taxes (19%), Distribution and Marketing (11%), Refining
Cost/Profits (13%) and Crude oil cost/profit (56%). Therefore, without any
taxes, the PMS in Houston
would cost 19% less or N63.83/litre. Unconvectional (shale) oil production has
replaced all oil imports in Texas .
They produce all their oil like Nigeria .
In Nigeria , the PPPRA pricing template of December
3, 2015 declared that a litre of PMS in Nigeria cost N96.18 without any
taxes. Distribution margins made up 16.1% (N15.49/litre) of this amount. The
rest (N80.69) is the landed cost of the imported PMS. Platt Oil, a foreign
institution, determines the C+F price of imported PMS and therefore the landed
cost. The landed cost, in turn, determines the PMS OMP price by PPPRA. The PMS
price in Nigeria
is therefore determined by a foreign body. It is obvious that this World
Bank/IMF inspired import-parity-pricing model is wrong, anti-development and
generates a fertile environment for massive corruption. Petroleum products
prices should be determine by a production cost-pricing model as explained by
President Buhari above.
This
was the case before the World Bank/IMF convinced the President Obasanjo to
impose an import parity-pricing model on NNPC and the Nigerian economy as a
whole. The World Bank is currently putting pressure on President Buhari to
raise fuel prices using the import parity-pricing model. However, President
Buhari was the Executive Chairman of the Petroleum Trust Fund from 1997-2000
and he knows that fuel prices should be determined using the production
cost-pricing model.
In
1995, under the Petroleum (Special) Trust Fund (Amendment) Decree No.1 1995,
the cost PMS was set at N11/litre. The real cost of PMS using a production
cost-pricing model was N5.68/litre. Crude oil cost/profit made up 43.37%
(N2.35) of this amount. The Marketers’ Allowance made up 22.88% (N1.30), Excise
Duty & VAT was 5.81% (N0.33) and NNPC Cost/Margin was 29.93% (N1.70). The
excess (N11-N5.68) or N5.32/litre was used to fund the PTF. The prevailing
exchange rate was N133/$1 and oil prices were $17.3/bbl. There was no fuel
subsidy or a corrupt cabal.
Therefore,
before the discussions on fuel subsidy begins during the upcoming FEC meeting,
President Buhari should ask his ministers a few simple questions: How much does
a litre of PMS actually cost? How much PMS do we produce, import and consume
daily? What is “fuel subsidy”? How much “fuel subsidy” actually exist? What is
the impact of the removal of this fuel subsidy on the Nigerian masses/economy?
Who is subsidizing who?
In
December 2011, prior to the opening salvo of the fuel subsidy struggles, I
wrote; “At the refinery gate in Port
Harcourt , the cost of a barrel of Qua Iboe crude oil
is made up of the finding /development cost ($3.5/bbl) and a production/storage
/transportation cost of $1.50 per barrel. Thus, at $5 per barrel, we can get
Nigerian Qua Iboe crude to the refining gates at Port Harcourt and Warri. One barrel is 42 gallons or 159 litres .
The
price of 1 barrel of petrol at the Depot gate is the sum of the cost of crude
oil, the refining cost and the pipeline transportation cost. Refining costs are
at $12.6 per barrel and pipeline distribution costs are $1.50 per barrel. The
Distribution Margins (Retailers, Transporters, Dealers, Bridging Funds,
Administrative charges etc) are N15.49/litre or $16.58 per barrel. The true
cost of 1 barrel of petrol at the Mobil filling station in Port Harcourt or
anywhere else in Nigeria is therefore ($5 +$12.6+$1.5+$16.6) or $35.7 per
barrel . This is equal to N33.36 per litre compared to the official price of
N65 per litre. “ .
This
PMS price was determined using a production cost-pricing model. Therefore, it
is not dependent on the uncertainties of PMS market prices as determined by
Platts Oil. We will proceed to update this analysis in light of December 2015
conditions. The funding/development cost has not changed from $3.50 as the
445000 bbls of domestic crude oil is still been produced from more or less the
same wells. The Distribution margin is still N15.49/litre or $12.80/bbl. A 10%
increase due to recent FGN investment in the repair and turn around maintenance
of our refineries raises refining cost to $13.86/bbl.
The
major change has occurred in pipeline transportation. The NNPC claims
that pipeline sabotage and theft of petroleum products are responsible for the
poor domestic refinery output and disrupted pipeline supply. The NNPC declared
that it lost 531 million litres of PMS (51.07 billion Naira) in the first 9
months of 2015 due to sabotage of our petroleum product pipeline and theft of
products. Most of this loss occurred in the 30 miles Atlas
Cove/Moisimi pipeline. The same problem exists in the Bonny-Port Harcourt (34 miles ) and the
Escarvos-Warri crude oil pipelines which supply domestic crude to the Port Harcourt and Warri
refineries respectively.
Protecting
these pipelines is a security issue. Nevertheless, the NNPC chose marine route
alternatives to pipeline transportation at a cost of $5.37/bbl. NNPC hired PPP
Fluid Mechanics and Ocean Marine Securities to provide the marine services.
These 2 companies supplied 11.6% of the total requirements of the Port
Harcourt/Warri refineries from 2010 to 2015. Refinery capacity
utilization/efficiency was less than 10%. NNPC imported petroleum products
rather than solve the pipeline security problems.
In
2014, the Executive Secretary of the PPPRA stated; “For example, Port Harcourt refinery has a short distance of Bonny and Port Harcourt . We lose
about 30 to 40% of crude that is transported through the pipeline. When the
costs of the losses are calculated, it is even better for Nigeria to
import than refine locally”. He said nothing about corruption and national
losses from the importation of petroleum products.
Pipe
protection is a security issue. We can solve it with an added pipeline
transportation cost of $2.5/bbl. We get 2 men to protect 1 miles of pipeline for 8
hours. We will need 6 men/mile/day. There are 875 miles of petroleum
product pipelines and about 1325
miles of crude oil pipeline in Nigeria . So, we
need about 13200 men for a 24 hr daily protection. We add 20% for
support/auxiliary services, 10% for management/supervision and the rest for
backup.
Thus,
20000 men made up of 6000 soldiers from the Armed Forces and 14000 citizens
from communities along the pipeline routes can protect our pipelines. At a
monthly salary of N100000/month, we will spend N24 billion a year. An
additional 50% will cover equipment, offices, overhead etc. thereby raising
annual cost to N36 billion. An added pipeline transportation cost of $2.5/bbl
yields $0.614 million/day or N44.18 billion/year. Pipeline transportation cost
will increase from $1.5/bbl to $4/bbl. The cost of PMS in Nigeria will
therefore be ($3.5+$4.0+$13.8+$4.0+$12.8) or $38.1 per barrel. This is
N46.1/litre. There will still be no subsidy.
We need
to stop the corruption and looting of public funds in the downstream sector. In
2012, N996.8 billion was paid as subsidy to NNPC and 49 marketers for importing
17451.45 million litres or 47.68 million litres of PMS per day. But, daily
national PMS consumption was 38.4 million litres. The remaining 9.28
million/day litres of PMS was never delivered. We need better meter
measurement/monitoring. More Coriolis meters can be installed on the
inlet/outlet of every nodal point (process control, storage, truck loading,
transfer to tanks, jetty, depots etc) in the downstream system.
These
meters will provide direct accurate real time measurement of petroleum products
flows. They can detect pipe blockage and leaks as well as send data wirelessly
to a centralized control station using SCADA (supervisory control and data
acquisition system). We will then know how much petroleum products we produce,
import and consume per day in Nigeria .
In
2014, N1.69 trillion was spent as subsidy at 47.67 million litres/day. The FGN
paid N500 billion as subsidy from January to May 2015. The marketers demanded
N200 billion more and went on a PMS hoarding strike. In November 2015, the FGN
approved N413 billion as subsidy for June-September. The marketers went on a
PMS hoarding strike to support their demand for N470 billion. The FGN is asking
for an additional N108 billion for the 4th quarter of 2015. Even with low
prices and a PPPRA N10/litre corruption subsidy, we will spend N1.021 trillion
on ‘fuel subsidy’ in 2015.
The
impact of this corruption subsidy is destroying the Nigerian economy and
imposing unbearable burdens on the Nigerian masses. We can now answer President
Buhari’s question. The FGN is subsidizing a corrupt fuel cabal with public
funds.
The
proponent of fuel price increase or ‘fuel subsidy’ removal want to transfer the
cost of this corruption subsidy from the FGN to the Nigerian masses. They have
not published the findings of any rigorous study of the impact of fuel price
increase on the Nigerian masses and the economy. There are few multi-sectorial
general equilibrium models of the Nigerian economy with dynamic input-output
framework.
We have
a weak database. We have poor mluti-sectorial disaggregation of the petroleum
sector, the agricultural sector and the informal unwaged sector where the majority
of Nigerians carry out their daily activities. Our input-output tables and
social account matrices are outdated. The impact of fuel price change on other
sectors is mere academic/policy guesswork. Nevertheless, we can use our common
sense to predict the likely impact of an increase in fuel prices.
President
Buhari explained. “When people ask you to remove subsidy ask them to define it.
Who is subsidizing who? Let me make it clear. These people are gleefully saying
‘remove subsidy’…They want petrol to cost N500 per litre. If you are working
and subsidy is removed, you can’t control transport, you can’t control market
women, the cost of food, the cost of transport. ..If you are earning N20,000
per day and you are living in Lagos or Ibadan , the cost of
transport to work and back, the cost of food.
You
cannot control the market women they have to pay what transporters charge them.
But I’m thinking more than half the population of Nigeria virtually cannot afford to
live…Where will they get the money to go work? How can they feed their
families? How can they pay rent”. The consequences of such policy decision are
the differences between life and death.
I was
in Nigeria
in August 2015. The poor masses on the street corners were anger and tense. The
general opinion was that if the fuel cabal forces President Buhari to
capitulate and raise fuel prices, then the resistance will be fierce and
protracted. The 2012 subsidy struggles will be child play. If corruption pushes
the Nigerian masses to the wall, the Nigerian masses will push back. The
message from the streets is very clear. A wise man does not start a Savannah fire without
knowing which way the wind is blowing. The FEC should listen.
Izielen Agbon, izielenagbon@yahoo.com, Twitter:
@izielenagbon
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