Nigeria: How will removing the oil subsidy affect the oil marketing business? 

By Temitayo Lawal

Posted on Monday, 10 January 2022 12:19
A gas station attendant pumps fuel into a customer's car at the NNPC Mega petrol station in Abuja
A gas station attendant pumps fuel into a customer's car at the NNPC Mega petrol station in Abuja, Nigeria March 19, 2020. REUTERS/Afolabi Sotunde

Nigeria's federal government is planning to remove its fuel subsidy in the middle of the year. It is not the first time the government has promised to kill the subsidy. But with the arrival of new refineries, including Dangote's megaproject, the structure of the industry for marketers is changing.

In November last year, Nigeria’s Finance Minister, Zainab Ahmed, disclosed that the federal government was planning to end all oil subsidies in Nigeria by June 2022 and then replace it with N5K transport grant to “poor citizens” that they believe would be most affected.

While speaking to World Bank executives during the launch of the World Bank Development Update (NDU), she complained that “the subsidies regime in the [oil] sector remains unsustainable and economically disingenuous.”

“Ahead of the target date of mid-2022 for the complete elimination of fuel subsidies, we are working with our partners on measures to cushion potential negative impact of the removal of the subsidies on the most vulnerable at the bottom 40% of the population,” she added.

In 2021 alone, the World Bank estimated that the Nigerian government spent $4.5bn, which represented 2% of its GDP or 35% of its oil and gas revenue, subsidising fuel. This was a massive jump from the subsidy cost incurred in 2020, which only accounted for just 4% of the oil and gas revenue.

Analysts at the Lagos-based finance publication Nairametrics, explained that rebounding oil prices caused a spike in the cost of the Premium Motor Spirit or PMS subsidy due to the increase in the price of imported PMS from less than $200 per ton in April 2020 to $840 per ton by November 2021.

This effectively plunged the net oil and gas revenues remitted by the country’s national oil corporation, NNPC, to the Federation Account to N500bn from N1.1trn

What fuels the debate

Apart from its unsustainable and dent on government finances, stakeholders who campaign against fuel subsidy in Nigeria have argued that considering its opportunity costs, a country with a huge infrastructure deficit like Nigeria has no business spending that much to subsidise fuel. In addition, they argue that the process is riddled with corruption and largely benefits the rich who should pay cost-reflexive prices for the fuel they consume.

Nigeria’s lower house of parliament, the House of Representatives, in 2012 discovered a discrepancy of more than $4bn annually between how much government spends on fuel subsidy and actual consumption. They claimed that 59 million litres were discharged by vessels, but only 35 million litres were consumed daily. In 2017, the upper chamber launched an investigation into the allegations that the national oil company, NNPC, illegally inflated subsidy funds it collected between 2006 and 2015 to $17bn.

We welcome the decision of the government to stop subsidising petrol by 2022 and we are hoping it will attract more investments to the sector, especially with the passage of PIA (Petroleum Industry Act).

Oil marketers were not spared in the scandals. Just last year, the Nigerian Senate claimed that it unearthed a N120bn (over $292m) differential in subsidy payment to oil marketers under the umbrella, Independent Petroleum Marketers Association of Nigeria (IPMAN) by a government agency, Petroleum Products Pricing Regulatory Agency (PPPRA).

Despite all these issues, there is still massive opposition to the removal of the subsidy. Those who strongly oppose the removal argue that, though fraught with corruption and opacity, fuel subsidy remains one of the few avenues that poor citizens – such as those who power their small shops with gasoline generators or public transport workers who depend on cheaper fuel to make ends meet – feel the presence of the political leadership which they claim has been successively self-serving and anti-people.

That explains why the first major attempt to remove the fuel subsidy in 2012 was met with nationwide protests that lasted about two weeks and forced former president Goodluck Jonathan to rescind the decision. Like a repeat of 2012, many civil society organisations and labour union are already mobilising for nationwide protests against the removal that they believe will lead to a spike in prices of essential goods and services and thus worsen the economic woes of millions of ordinary Nigerians who are only struggling to get by.

The oil marketing business

The oil marketers are in support of the oil subsidy removal and that is largely because a deregulated market gives them freedom on pricing and encourages competition. This in turn leads to the expansion of the market and more profits for the oil marketing businesses.

“We welcome the decision of the government to stop subsidising petrol by 2022 and we are hoping it will attract more investments to the sector, especially with the passage of PIA (Petroleum Industry Act). What we want is that a level playing field be provided for everyone in the sector to encourage competition once the subsidy is removed,” said the president of the Independent Petroleum Marketers Association of Nigeria (IPMAN), Chinedu Okoronkwo, while expressing his organisation’s support for the oil subsidy removal.

In September last year, another umbrella body of oil marketers, Major Oil Marketers Association of Nigeria (MOMAN), threw its support behind the oil subsidy removal, noting that the full deregulation of the downstream sector and “transition to a fully competitive pricing oriented downstream sector” would make Nigeria Africa’s energy hub.

Uwa Osadiaye, a senior vice president and oil and gas analyst at FBNQuest, tells The Africa Report that the removal will be a good development in the industry especially for the oil marketers. He explains that “gasoline, even though the most consumed, is the only petroleum product still regulated. Total deregulation will permit competition and free market dynamics will prevail, a driver for growth. Initially, the premium derived by marketers is likely to…expand from a deregulation.”

Considering that one major reason for the opposition to the removal of the oil subsidy by the ordinary Nigerian is the compounding effects it will have on commodity prices, Uwa argues that unjustifiable price hikes will be prevented because of how critical oil is to the economy.

“Historically, marketers benefitted handsomely from the deregulation of AGO (diesel), so there is an argument in favour of a premium status quo. However, gasoline is more important to the economy. It is difficult to predict what the long-term implications will be but I expect regulatory oversight will limit aggressive pricing,” he added.

Beyond regulatory oversight to prevent unreasonable price hikes, however, a critical component of deregulation that attracts players is the viability of the product – i.e. the ability of the oil marketers to buy fuel at reasonable prices and make profits as much as competition and demand allow. The current pricing regime fixes the price and thus subsidises of what marketers would have made had they been allowed to sell at market prices. Subsidy removal will thus signal to oil marketers and investors that the government is serious about deregulation and then attract them.

“The downstream sub-industry has eagerly waited for the removal of oil subsidies. Capital inflow basically dried up over the last decade. As mentioned earlier, investment capital is attracted to any industry in which competition is unrestricted and regulation is fair, especially on product pricing. Therefore, I expect the removal will influence investment into the sector,” Uwa explains.

New refineries change the game

Oil subsidy removal is the first major step towards the deregulation of the downstream sector. Deregulation will be in full swing when some of the large private refineries – the 650,000BPD Dangote Refinery, BUA Group Refinery, Waltersmith Refinery and other modular refineries – begin to come on board later this year.

While most oil marketing modalities will largely remain unchanged as marketers will only move from NNPC to the private refiners as their offtake sources, the disappearance of fuel import related costs will have some effect on pricing.

From a pricing template that the Petroleum Product Pricing Regulatory Agency (PPPRA) used to suggest pump price increase in March 2021 (but later deleted after a public outcry), the share that the petrol landing costs (how much it costs to import a litre of refined oil to Nigeria) represents in the real petrol pump price can be determined.

The breakdown (per litre) of the landing costs (apart from the actual product cost) as shown in the template is as follows:

  • Average freight rate (N6.51);
  •  Lightering expenses (N4.81);
  • Nigerian Ports Authority charge (N2.49);
  • Nigerian Maritime Administration and Safety Agency charge (N0.23);
  • Jetty throughput charge (N1.61);
  • Storage charge (N2.58);
  • Financing (N2.17).

The N20.4 total represented 10.76% of the landing costs of refined petrol. Uwa explains that they have historically represented 10 to 15% of the landing costs. Distribution and retailers margins accounted for the extra N23 (per litre) in the petrol pump price.

Bottom line

While the disappearance of freight import costs may have some effect, most oil marketing modalities largely remain unchanged as marketers will only move from NNPC to the private refiners as their offtake sources.

Rather than force marketers to reduce prices, the government could facilitate healthy competition to deepen the market and invest in the nation’s transport infrastructure to lower distribution costs.

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