NNPC’s N286bn fuel subsidy losses mirrors failed model
by DIPO OLADEHINDE
February 23, 2018 | 1:40 am| | | Start Conversation
The inability of the Nigerian National Petroleum Corporation (NNPC) to operate as a fully integrated oil company is taking a toll on the country and is a symbol of growing pains at the state-owned oil firm.
NNPC said on Tuesday it had spent $5.8 billion (N1.8 trillion) on fuel imports since October 2017, to combat a fuel shortage that has left many Nigerians queuing for hours at filling stations.
BusinessDay estimates that the oil firm has lost some N286 billion on the transaction as under-recovery, which is the difference between the landing cost of imported petrol (close to N171 per litre) and the subsidised retail price (N145 per litre).
Analysts say a normal and rational government would have cut its losses, end the subsidy and allow market forces dictate price, but not so in Nigeria, and especially, not a year preceding elections.
“There are lots of secrecy, nobody is even asking question surrounding 450,000 barrels NNPC gets daily. Despite doing so much under recovery, how come a loss-making organisation has not gone bankrupt?” Luqmon Agboola, head of energy and infrastructure at Sofidam Capital, said to BusinessDay.
Contrary to popular belief, it is the rich not the poor who disproportionally benefit from Nigeria’s fuel subsidy.
With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy.
“The oil majors concentrated in Lagos are still selling PMS at N145, but the moment you cross to other states you cannot get it at N145 again; the least you get it is N160,” Agboola said by phone.
The Nigeria Bureau of Statistic’s Premium Motor Spirit (petrol) price watch for January 2018 showed that on the average, Nigerians paid N190.9 per litre for the product as against the N145 government-regulated price and for which the government and the country as a whole is sustaining huge losses in subsidy payments.
While some consumers in states like Osun, Abia and Benue paid as high as N228.89, N227.5 and N223.33 per litre respectively, for the product in January, others such as Zamfara, Gombe and Kogi states were lucky to pay far lower prices of N159.12, N157.73 and N152.83 respectively for the product.
“As long as we keep the PMS price at the present level, we continue to have these intrinsic subsidies that NNPC continue to absorb. The only respite is that as crude prices drop, subsidy will most likely drop as well,” Jubril Kareem, Energy analyst at Ecobank research, said.
Nigeria’s fuel subsidy continues to crowd out other development spending. By comparison, in the 2018 proposed budget important ministries such as National primary health care agency had a total budget of N23 billion, Ministry of Education capital expenditure had a budget of N22 billion, while Universal Basic Education commission had a budget of N113 billion;
By virtue of its role as a state owned corporation, the NNPC sells on behalf of the Federation, it’s share of oil production with its joint venture partners. But this oil is bought at a subsidised cost in terms of foreign exchange.
Nigeria opened the investors and exporters foreign exchange window in April 2017, where dollar is exchanged around N360/$1.
The NNPC, as a state-owned enterprise however, is not compelled to follow the exchange rate of the I&E window throughout the period. Even in the Direct-Sale-Direct-Purchase (DSDP) arrangement, where the NNPC signed agreements with some oil companies to exchange around 300,000 barrels per day of crude for imported petrol and diesel, the NNPC has been allowed to operate at the CBN favourable exchange rate term of N305.
The federal government has been struggling to explain the current subsidy regime, all the time refraining from calling it subsidy. In December 2017 when the fresh round of fuel scarcity began, the Group Managing Director of the NNPC admitted that the landing cost of petrol at N171 per litre is now above the pump price of petrol at N145 per litre, which simply means that government is effectively having to pick up the difference in cost of importation of N26 per litre.
The Vice President Yemi Osinbajo in December sort to clarify the new “subsidy” regime by claiming that it was a cost borne by the NNPC and not the Federal Government. This left Nigerians wondering if the NNPC is now owned by a foreign government or the government had already sold its stakes in the corporation. Current records show NNPC is 100 percent owned by the Nigerian Government which also means that if it runs into a loss, it is the government that bears the brunt.
The Minister of Finance, Kemi Adeosun speaking to the media, after the federal executive council meeting on 31 January, said “technically” speaking, the federal government was not paying subsidies. However, like the Vice President, she also admitted that the price differential or ‘subsidy’ is appearing on NNPC books as ‘under-recovery.’
Group Managing Director of the NNPC, Maikanti Baru, said the NNPC imported 9.8 million metric tonnes of Premium Motor Spirit, PMS, in the period (October – till date) to tackle the scarcity.
“The solution is full deregulation of the down-stream sector where prices move alongside cost reflective importation cost and margins of the market,” Kareem of Ecobank research concluded.
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