Nigeria’s oil industry change, a whimsical flight of fancy

…Confusion reigns over govt’s direction
Chuks Isiwu & Oscarline Onwuemenyi 18 January 2015, Sweetcrude, Lagos -Nigeria’s oil and gas industry is caught in the throes of a vague and unspectacular “reform”, operating on the whimsical fancy of those charged with implementation. The industry is truly changing. There appears to be a lot of movement going on, albeit lacking any specific direction or template.
Group-Managing-Director-NNPC-Dr.-Ibe-Kachikwu-360x333

Dr. Kachikwu

Indeed, a careful analysis of the industry would reveal a house in disarray, lacking clarity and direction, like a bumbling giant who has lost his feet in the fast-moving arena of global energy price depreciation.
Many observers are of the opinion that Nigeria has lost dominant grip on her oil and gas business. After more than five decades since oil was first discovered in commercial quantities in Oloibiri, the country has remained a net importer of dollar-driven white petroleum products, instead of the other way round.
Even before the slump in crude oil prices, the level of profits in the country’s older Joint Venture agreements with the international oil companies had drastically reduced; the nation is mired in a subsidy morass; the system is blighted by an alarming increase in corruption and crude theft; even as it swims from one crisis of product shortage to another in the downstream sector.
That the nation continues to suffer adverse effects of the global oil slump, analysts say, reflects the inherent lack of an oil and gas master plan for the development of the industry.
They point to the absence of an overarching government policy or direction, for instance, as reason for the (on-going) fuel scarcity and the confusions surrounding it.
In the heat of the scarcity, government, as if acting under some kind of pressure, reduced the price of petrol from N87 per litre to N86 per litre at the Nigerian National Petroleum Corporation, NNPC, retail outlets and N86.50 for all other marketers.
The price increase did not come without controversy and disparate information from the NNPC and the Petroleum Products Pricing Regulatory Agency, PPPRA, over what the price template for petroleum products, and the relationship with importers should be like. Analysts said this conflict between the NNPC and the PPPRA signified obvious confusion in the system.
Many Nigerians are still lost on how the government arrived at how much reduction to carry out and are as well disturbed by the lack of clarity with regard to such price-related issues as subsidy and deregulation.
“Yes, we have seen a price reduction of 50 kobo. Where does this arrangement leave us? It will interest us to know whether government has done away with subsidy. Many believe the idea of subsidy funds not being reflected in the 2016 budget is an indication that subsidy has gone. If subsidy has gone, why are we still talking of PPPRA and its pricing template?” an analyst, who craved anonymity, said. “Where are we with deregulation? Are we looking at full deregulation or partial regulation? It does appear that the government is confused on these issues, but, it needs to come clear on them so that the populace would be better informed,” the source added.
He was obviously referring to claims by Minister of State for Petroleum and Group Managing Director of the NNPC, Dr. Emmanuel Ibe Kachikwu, to the effect that government was currently not subsidising petrol while President Muhammadu Buhari, who doubles as the Petroleum Minister, expects subsidy to come to an end before the end of this quarter.
That is the magnitude of the confusion emanating from government.
Pricing wars
In the last few weeks of 2015, NNPC officials had announced that the price of premium motor spirit, otherwise known as petrol, would be dropping to N85 per litre. The PPPRA responded swiftly with its template, which, according to the agency, showed that the proposed price regime was untenable.
Although the latest update on the PPPRA template was done on Friday, December 25, it showed that the Expected Open Market Price, EOMP, for petrol was N93.45 per litre as against the official old retail pump price of N87 per litre. With the new pump prices of N86 and N86.50, this indicates that the Federal Government was subsidising the commodity by N7.45 and N6.95 respectively for every litre consumed across the country.
According to the template, the EOMP comprises of the landing cost of N77.96 per litre of the product and the subtotal margins of N15.49 per litre. The landing cost is made up of trader’s margin, N1.47; lightering expenses, N4.07; Nigerian Ports Authority cost, N0.77; financing, N0.51; jetty through put charge, N0.8; storage charge, N3; and commodity plus freight charge, N67.34.
For the cost elements that make up the subtotal margins for each litre of petrol, the template showed that retailers cost was N4.6; transporters’, N2.99; dealers’, N1.75; bridging fund, N5.85; marine transport average, N0.15; and administrative charge, N0.15.
A combination of all the above figures showed that the EOMP of petrol is N93.45, against the latest retail pump prices (N86 and N86.50), leaving subsidies of N7.45 and N6.95 for every litre of PMS.
Minister of State for Petroleum, Dr. Emmanuel Ibe Kachikwu, who doubles as the Group Managing Director of the NNPC, had told journalists that the government was currently not paying subsidy on petrol. The current scenario has created an air of confusion and uncertainty for prospective investors targeting the crude oil refining sub-sector.
Price reduction as tokenism
Not surprisingly, the recent fuel price reduction by a mere 50 kobo has been panned by opposition groups as deceptive and mere tokenism which cannot justify the claim of subsidy removal by the Muhammadu Buhari-led administration.
In a statement by its National Publicity Secretary, Chief Olisa Metuh, the Peoples Democratic Party, PDP, said apart from its deceptive element, the reduction in the N87 per litre pump price to N86 and N86.50 per litre for the retail outlets of the NNPC and retail outlets of private business concerns respectively offered too little to cheer.
“After heightened expectations occasioned by the promise to review the N87 per litre pump price of petrol made by the administration amid crippling scarcity of the product during the Christmas season, the announcement of this tokenism has come as a disappointing anti-climax, considering that only in January 2015, the PDP federal government reduced the pump price from N97 to N87 per litre.
“That was done in the wake of the fall in the price of crude oil to between $42.65 and $50 per barrel. The PDP government then, in reaction to the development in the global oil market, revised its pricing template that brought down the pump price by N2.84 more than the N87 fixed as the pump price of petrol. The implication was that the federal government was still subsidising the N87 price by N2.84 per every litre of the product,” Metuh said.
The statement observed that the APC-controlled federal government, consequent upon stepping in the saddle on May 29 last year, considered the market and decided through a supplementary appropriation to pay N413 billion as subsidy to petroleum marketers. In announcing the new pump prices, the APC federal government claimed that the subsidy element has been removed.
“The question is; how much were we paying for subsidy when the pump price was N87? Has this marginal reduction now knocked off completely the huge subsidy paid at N87 per litre or should it not have only further reduced the size of the subsidy?
“The APC government therefore must explain what it is trying to hide. The government could not have earmarked and/or paid a whopping N413 billion in subsidy through its 2015 supplementary appropriation when petrol was selling at N87 per litre and now tells us that at N86 or N86.50 per litre, no subsidy will be paid.  Is it trying to make the previous government look dubious or what? This government must explain its suspicious position on the subsidy issue.  Nigerians can no longer put up with ambiguities and deception,” the PDP spokeman said.
“Nigerians must question the sincerity of this government with regards to the removal of subsidy; Nigerians should ask President Buhari to tell them in clear terms at what ceiling of crude oil price, was subsidy no longer necessary: at N87 or this new price regime?
“Similarly, when oil fell to $44 per barrel in January 2015, the current Minister of Information and Culture, Lai Mohammed, who was the spokesperson of the then opposition APC said; ‘When crude oil was selling at $100 per barrel, the landing cost of PMS without subsidy was N125 per litre. Now that the oil price has crashed to about $44 per barrel, landing cost without subsidy is about N65 per litre. The same goes for diesel which should not sell for more than N90 per litre.’
“Lai Mohammed had said further, ‘Early this year, Zambia slashed the price of petrol by 23 per cent while Tanzania reduced the pump price of the product by 16 per cent. In the United States, which until recently was importing crude oil from Nigeria, the price of fuel has fallen for 113 consecutive days as of January 16. Therefore, the 10.3 per cent price slash in Nigeria is too meager, too late,” Metuh further charged.
Subsidy or no subsidy?
The Federal Government has been twisting in the wind trying to justify it’s plan to remove subsidy on petroleum products.
Speaking last week during his first nationally televised media chat, President Muhammadu Buhari said the issue of fuel subsidy in the nation’s oil and gas industry would die a natural death as soon as the local refineries begin production to par.
According to Buhari, the price of crude oil has fallen so much it will soon eliminate the need for subsidies in Nigeria, although he did not say specifically that the costly scheme would be removed.
“By the end of the next quarter (this quarter) we will not be talking about subsidy. The cost of petrol is so low that we don’t have to subsidise it,” The President said,
Buhari told journalists in the televised panel interview late December, “We will not be talking about subsidy by the end of first quarter next year.
“I hope that our refineries will be working. We cannot do it overnight, but that is our priority now to get them working.”
Refineries
“Our priority now is to get our refineries working. By the time we finish what we are doing, 60 per cent of the allocation of crude oil will be used for local refining and 40 per cent would be used for crude oil swap”.
As at October last year, the nation’s four refineries in Kaduna, Port Harcourt and Warri were performing at zero level. They were subsequently shut down by the government for Turn Around Maintenance, TAM, and resumed operations as planned in December. According to Kachikwu, after he rounded off a recent tour of some of the refineries, the plants have attained a combined daily production of over 6.76 million litres of petrol per day.
A statement signed by the Group General Manager, Group Public Affairs Division, NNPC, Mr. Ohi Alegbe, said domestic petrol refining is projected to increase to over 10 million litres per day by the end of this month.
Kachikwu expects that at a certain point this year, the local refineries would account for 50 per cent of Nigeria’s daily fuel requirement.
But, given the history of the refineries, analysts believe the Kachikwu’s expectation is doubtful. In which case, rather than source 50 per cent of the nation’s fuel requirement locally, the nation would continue with massive fuel importation, at least for this year. If that happens, the nation would remain a net importer of petroleum products with attendant massive fuel subsidy.
Naira free fall
The Naira has been in free-fall against major foreign currencies for obvious reasons – dwindling foreign exchange earnings owing to the dropping price of crude oil and the debilitating effects of poor management of the economy by previous administrations.
Beyond the refineries, the local fuel supply chain would continue to be affected by the performance of the Naira against other foreign currencies since Nigeria still sources a large volume of its fuel from the international market.
A cross section of those we spoke with for this report opine that this is where the issue of government making an effort to arrest the free-fall of Naira and address the floundering economy comes in. However, since its inauguration, no action by this government appear to have any answer to these problems.
Definite, clear-eyed vision
Professor of Energy Law and President of the International Institute for Petroleum Energy Law and Policy, Niyi Ayoola-Daniels, who spoke with our correspondent in Abuja, believes that the present state of the global energy industry calls for a definite, clear-eyed vision and direction about the role of oil and gas production in the long-term sustainability of the Nigerian economy.
“These are hard times for Nigeria, and hard times call for hard-nosed re-examination and re-strategising on the Nigerian Gas Master Plan. Nigeria must be in a hurry now more than ever to work towards the diversification of our economy and stimulation of our import substitution strategy anchored on natural gas development and commercialisation,” he noted.
Ayoola-Daniels praised some of the changes happening at NNPC, but advised that the changes should not foreclose the urgent need to overhaul the entire petroleum sector using the yet-to-be passed Petroleum Industry Bill, PIB.
“President Buhari wants change in the oil and gas industry, but if change is going to happen in the oil and gas industry and indeed in Nigeria, the Petroleum Industry Bill must be passed latest within a year of his administration.
“The changes should go beyond shake-ups at the NNPC. Reorganising the way the NNPC works is good; however, it should not be considered an end to the challenges in our petroleum sector,” he said.
About the Author