A Review of the Nigerian Energy Industry

Oil slump gives Nigeria chance to end fuel subsidy

Fuel dispenser
Fuel dispenser

25 December 2014, Lagos – The tumbling oil prices that have slashed Nigeria’s revenue and roiled currency and stock market in Africa’s biggest economy may have a silver lining: an excuse for the government to scrap fuel subsidies that cost as much as $7 billion a year.

However, it is an opportunity President Goodluck Jonathan, concerned that such a move would provoke protests before his bid for re-election in February, may not seize, analysts have said.

“Politics often trumps prudence and there’s an entrenched social expectation for fuel to be subsidized,” an analyst at Johannesburg-based ETM Analytic, Gareth Brickman told Bloomberg.

“The last time subsidies were reduced there were widespread protests, and given how contentious the political environment is in Nigeria with the elections and on-going ethnic divisions, it is likely this will be the case again.”

President Jonathan’s attempt to end the subsidies in January 2012 sparked a week of strikes and protests, paralysing the economy and forcing the government to partially restore them.

While Nigeria is Africa’s biggest crude oil producer, which pumped 2.1 million barrels per day in November, its four ill-maintained state-owned refineries refine only 16 per cent of their capacity for 445,000 barrels per day. The subsidies discouraged private investors who obtained refining licenses from building plants because of concern that costs may not be recovered without market-determined fuel prices.

With the 45 per cent decline in oil prices this year, Nigeria’s oil unions, which ended a four-day strike on December 19 to press for industry reforms, are asking for lower fuel prices to reflect the decline in crude prices, adding to public expectation of cheaper gasoline. They also want state-owned refineries fixed and an end to corruption associated with fuel imports.

“The unions want lower fuel prices because past increases were based on the rise in oil prices,”, a spokesman for the Petroleum and Natural Gas Senior Staff of Nigeria, Emmanuel Ojugbana said. “So now that the price has fallen, we expect the government to also reciprocate.”

The “fuel subsidy is completely wiped out if prices fall below $70 a barrel,” energy analyst at Lagos-based Ecobank Research, Dolapo Oni said. “We’re there now.”

In the spending proposals sent to lawmakers on December 17, Jonathan plans to increase fuel subsidies nine per cent next year to N1.2 trillion.

While ending the subsidies now may be painless because of the low oil prices, there are risks for the government if they rebound and the costs are passed on to the consumer, according to analysts including Africa director at New York-based Eurasia Group, Philippe de Pontet.

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