A Review of the Nigerian Energy Industry

Why kerosene’s price is high – marketers

Kerosene queue at an NNPC filling station• Say removal of subsidy from product may cause revolution
• Deny graft allegation against ministry, NNPC’s officials
• Corporation explains how crude oil proceeds are shared

17 February 2014, Lagos – AMID the controversy over the subsidy on kerosene, an insight into why the product is scarce and its price high wherever it is available has been offered by stakeholders.

The President of the Independent Marketers Association of Nigeria (IPMAN), Abdulkadir Aminu, disclosed that the inadequate importation and supply of kerosene into the country to meet the growing demand of the product accounted for its scarcity and high price against the official rate of N50 per litre.

Aminu also declared as “malicious and untrue” the allegation by ‘faceless’ oil marketers that IPMAN’s members induce officials of the Petroleum Ministry and the NNPC before they could be given allocations to lift petroleum products.

Besides, the NNPC has given a breakdown of the crude oil proceeds, royalty, cost of production, Petroleum Profit Tax (PPT), profit and what should go into the Federation Account.
The NNPC insisted that the Petroleum Development Company’s (NPDC) assignment of some oil assets was in line with the terms of the Joint Operating Agreement (JOA) with the International Oil Companies (IOCs) partners.

The IPMAN boss, who spoke with reporters in Abuja, equally advised the Federal Government to resist any pressure on it to remove subsidy on kerosene now until an alternative and cheaper energy source such as LPG was in place or risk a revolution that would follow the measure.

According to him, the shortage and high cost of kerosene in the country are because the country is still importing the 2003 seven million litres daily consumption template whereas demand has since soared due to population growth and industrial demand.

He said: “About seven to 10 million litres are supplied but our national consumption today is over 15 million litres daily. There is a shortfall in supply and therefore the law of demand and supply sets in and people think there is no subsidy. No, there is subsidy.”

Aminu also spoke on the allegation of bribery against officials of the Ministry of Petroleum and the NNPC, saying that the claim was untrue as those making it were not members of his association. He spoke on the efforts by his association to ensure that kerosene products reached every part of the country with the launch of “Kero-Direct” programme.

His words: “It’s a disgrace what they have done because at the end of the day, NNPC and the ministry will come out clean, more so that those guys are faceless and it’s unfortunate because I must know those who are campaigning for me. Because if such money is there, I deserve to have my own cut. That’s why I say secretary come, who are these faceless marketers? I need to know them.

“On Friday, I was in Lagos where I did ‘Kero-Direct’ launch to support the government; to support the minister; to support the NNPC; and to support the PPMC. We are doing everything possible. I think the problem with the system is that there is a certain gap that exists which is being filled because wherever vacuum exists, anything can fill it. And because there was nobody to fill the vacuum, now faceless marketers are filling it.

“We have done a lot and we thought it necessary to go to Lagos and we have injected more than 5,000 tonnes of kerosene in Lagos and its environs to cushion this effect. I was on Channels on Friday and I told them that this subsidy on kerosene for now is a necessary evil. You can never run a way from it because there is no where in the world, including America and Britain, where it is done. I travel all over the world; I have partners all over the world because I am a street marketer and I am one of the captains of the industry in this country. I am one of the major transporters in this country, so what else can somebody tell me about oil and gas?

“I said look in any nation if you want to replace something, there must be something in place. Therefore, what is required now is to start thinking of how to enhance this product reaching to the remote areas beyond even filling stations. I think this is the angle that Nigerians should have come in, not removal.

Now, we should be thinking of how to improve on the LPG that the minister has been talking about. LPG is the only ready-made product that can replace kerosene but this will take us three to five years. It’s a long time process. Now, we would have to also put more efforts in making sure that our LPG is there for the masses, which is far cheaper.

“Today in my commercial and NIPCO Plc, the largest oil terminal in this country, we have the largest LPG plant in this country and it’s the first most automated terminal in this country. Now, with that LPG, the price of gas cylinder (30kg) before was running into about N25,000 but now, we have brought it to about N11,000 and this only happens with the support of the current Minister of Petroleum Resources. She has been giving us that support. Therefore, the minister needs to put more efforts on LPG as against continued and endless subsidy on kerosene so that as the subsidy is being withdrawn from the market, the masses can get something in place.

“But if you remove subsidy on kerosene without any replacement, what are you looking for? You are looking for a revolution. You can’t be enjoying here and you go to your village and they can’t access anything to cook food and you ask them, don’t cut the trees because of deforestation. Again, you say the kerosene that is meant for them is not there, what do you expect..? This move by some people to cause this revolution is a combination of politics by some big fish around, including those who just lost their positions and so many factors.”

Reacting to the graft allegation against officials of the Ministry of Petroleum and the NNPC, the IPMAN president said: “I have read with serious concern the politically-motivated allegation of bribery against NNPC officials by faceless marketers who claim to be paying N25 per litre on top of the official price without any proof.

“It is quite intriguing that some mischievous individuals are hell-bent on turning the downstream petroleum industry into a political theatre without minding the negative impact of such a move on the Nigerian economy. It is now obvious that these enemies of peace in the industry having instigated all manner of public hearing in collusion with their allies to truncate the supply stability the populace have been enjoying with the aim of discrediting the efforts of the leadership of the petroleum industry have now resorted to a negative press war.

“The truth is that IPMAN controls 87 per cent of total retail outlet in the country with over 30,000 retail outlets. As a matter of fact, if the alleged practice were occurring in the industry as mentioned, the IPMAN members would have been aware of it. The fact that IPMAN is not aware of such demonstrates the hollowness of the allegation.

“It is instructive to note that NNPC and PPMC do not transact with any marketer without bulk purchase agreement. Also, we are aware that NNPC and PPMC have conducted a verification of retail outlets in the country and have since sanctioned some fake marketers and stopped them from lifting products across the 21 PPMC depots in the country. All legitimate marketers lift their products and sell at approved government price in line with the directive of the Minister of Petroleum, Mrs. Diezani Alison-Madueke, which is being implemented by the GMD, NNPC; MD, PPMC; and IPMAN president.

“In addition, the honourable minister of petroleum has constituted a committee to ensure product distribution across the country with a view to sustaining and enhancing product availability in all our retail outlets in the country. NNPC has succeeded in sustaining product availability for over three years without queues in Nigeria. The honorable minister of petroleum alongside the GMD, NNPC and MD, PPMC deserves commendation, not baseless condemnation.”

In a document responding to the memorandum submitted by the Central Bank of Nigeria (CBN) to the Senate Committee on Finance on non-remittance of oil revenues to the Federation Account made available to The Guardian at the weekend, the NNPC explained that based on Production Share Contract (PSC) agreement, IOCs do not pay PPT from their share of profit from oil as alleged by the apex bank.

According to NNPC, PSC profit on oil is shared between government and IOCs, adding that government’s share of profit from oil is paid into the Federation Account by the corporation.

The CBN alleged that NNPC took away blocks belonging to the Federal Government and gave them to itself using NPDC as a Special Purpose Vehicle (SPV) and thereafter transferred the operation to third parties/agents with limited experience in operating oil blocks.

The apex bank had alleged that one of the channels of revenue loss to the federation was from the unfavorable fiscal terms of PSC executed between NNPC and various IOCs.

The CBN further posited that it had been misled into believing that the passage of the Petroleum Industry Bill (PIB) was a pre-requisite for the amendment of the fiscal terms in the PSC.
But NNPC, in the document presented to the Senate, insisted that CBN revenue sharing framework did not conform to the Nigeria PSC model.

Faulting the CBN, the NNPC said in the document: “For deep offshore blocks, royalty and tax are a function of legislation and would therefore require legislation to amend any of the sections or clauses. NNPC is not the appropriate party to amend the law.

“Attempts have been made by various governments since 2000, which the CBN might not be aware of, to renegotiate the government’s take as regards the 1993 PSC. However, government is at liberty to use any legal instrument it chooses to amend the fiscal regime, consequently, government relied mostly on an omnibus method in the PIB to revise the regulations in the entire oil and gas industry rather than individual sections as there are other subtle but very important incentives or elements that also impact government’s take.”

The NNPC noted that the $20 realisable price trigger for a renegotiation of terms as provided for in the PSC only became effective in 2003/2004. “Prior to this time, efforts to amend the fiscal regime using the PIB had commenced. The key objective of this initiative is to transform and unbundle NNPC to make it more effective and most importantly address the fiscal imbalance in the 1993 PSC.”

It stated that the Ministry of Petroleum Resources and NNPC had also made a recommendation to the Federal Government in 2007 for a re-negotiation of terms of the PSC, which was approved by the then President Musa Yar’Adua.

It stressed that CBN’s knowledge of the Federal Government’s effort to amend the fiscal terms in the PSCs through the instrumentality of the law was limited as per the report submitted.
“It is instructive to note, however, that changing fiscal laws in a democratic regime has always proved very challenging because it requires the necessary legislative process and executive assent.”

On the issue regarding the model for revenue sharing of the proceeds based on the PSC, NNPC said that the CBN had taken advice from non-subject matter experts who did not fully understand the dynamics and operations of standard oil and gas arrangements such as the allocation of proceeds in a typical Nigerian PSC.

It noted that PPT deductions were removed in the Nigerian PSCs after which the profit was shared among the contractor and the concessionaire.

“However, the concessionaire profit share is also paid into the Federal Government account, while the PPT deductions are removed in the Nigerian PSCs after which the profit oil is shared among the contractor and the concessionaire. The concessionaire profit share is also paid into the Federal Government’s account”, it added.

According to the NNPC, the PPT is not paid from the IOCs (contractors) profit share as tax is paid on the contract area, adding that both the concessionaire and the contractor pay tax and then share whatever is left as profit.

“It is also very pertinent to state that most of the PSC fields currently producing are in water depths greater than 1,000 metres which attract zero per cent royalty. This is what the PIB or the re-negotiation is designed to address and consequently increase government’s take”, it said.

Dwelling on the NPDC’s acquisition of some IOCs’ assets, NNPC disclosed that the NPDC’s mandate was to grow its crude oil and condensate production to 250,000 barrels of oil equivalent by year 2015.

This ambitious growth plan, it stated, was expected to be achieved by a combination of asset acquisition and organic growth of NPDC’s existing assets.

It noted that the growth opportunity presented itself as directed by the Federal Government following the divestment by the IOC partners of some of their assets in the western Niger Delta arising from portfolio restructuring.

It stated: “The honourable minister is the only person empowered to grant licences or leases to explore, prospect and produce petroleum and approve the assignment of such interest by the licencee or lease holder to another party. In compliance with the provisions of the Petroleum Act therefore, NNPC sought and obtained the consent for the assignment of interest to NPDC.

“As you may be aware, the funding of the various joint ventures has continued to pose a challenge to the federation. Thus, in addition to the organic growth of NPDC’s assets, this assignment will also reduce the federation’s burden of cash call payment which for example was estimated at $950 million for the 2013 fiscal year. We also note that notwithstanding the assignment of NNPC’s interest to NPDC, the government will continue to receive royalties of about 20 per cent and Petroleum Profit Tax from these assets and other previous acreages owned by NPDC.”

It stated that the corporation was not in a position to take away blocks or allocate them to itself as it did not have such powers.
“There is a statutory procedure for the assignment of interest in blocks which was adhered to in the case of NNPC’s assignment of interest to NPDC. It is worthy to mention that NNPC followed the procedure as laid out in the Petroleum Act. NPDC acquired those blocks at a good and fair value and is in the process of concluding discussion and subsequently paying for the blocks as can be confirmed from Department of Petroleum Resources (DPR).”

It said that the high cost paid by the consortium of Nigerian and foreign partners for the 45 per cent private equity in the blocks amounted to capital flight and the burden was actually on the Federal Government as this acquisition cost was actually deductible under the provisions of the PPT.
*Mathias Okwe & Roseline Okere – The Guardian

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