Fuel, Let’s Talk Deregulation

30.06.2003

Deregulation

Last week, the Federal Government of Nigeria announced another increase the pump price of petroleum products. I strongly believe that the recent increase has no linkages with any subsidy as proclaimed but more to do with inefficiency, perfidy, and the superfluousity in government.

At the onset of the Obasanjo presidency, the usual long queues at the petrol stations were eliminated without much ado. Some of us assumed that the magic was brought about by the massive importation of petroleum products by the government because, at the time, our refineries could not even refine pure water. But I also presumed that this only was a stop gap measure to buy time while we restore the old glory of our refineries. I could not help but notice though that those who had been awarded the contract for the turn-around maintenance (TAM) were making huge donations to the ruling party as well as wining and dining with the powers that be.

It must be pointed out at this point that our refineries have a total installed capacity of 445, 000 barrels per day (bpd) i.e. Port Harcourt I – 35,000 bpd later expanded to 60,000 bpd; Warri – 125,000 bpd; Kaduna – 110, 000 bpd and Port Harcourt II – 150,000 bpd. Our domestic consumption is 30 million litres per day. The Federal Government now declares that our refineries can, at the present times, produce only 13 million litres per day leaving a deficit of 17 million litres, which we now import.

The Chairman of the Petroleum Pricing Regulatory Agency, Chief Rasheed Gbadamosi, announced to the organised private sector, OPS, in Lagos that the government has spent US$900 million (N11.4 billion) so far in fixing the refineries without appreciable results. I did point out earlier that donations were made to the ruling party? I hope Chief Gbadamosi is not confirming the USAID story that 50% of corruption in Nigeria is perpetrated at the presidency?

Even more worrisome is the inconsistent figures churned out by the government. In the aforementioned address to the OPS, Chief Gbadamosi, revealed that at the present rate of N128.00 to US$1.00, the landing cost of petrol is N28.64 per litre, NNPC pays N1.50 per litre for demurrage and financing He goes on to say that there is another N1.00 per litre for jetty depot, N7.36 per litre for distribution margins and N1.50 per litre for highway maintenance, which all adds up to the present pump price of N40.00 per litre.

Unknown to him, however, the Senior Special Assistant to the President on Petroleum, Engr. Funso Kupolokun, had announced N8.15 per litre for supply and distribution cost of NNPC, N5.40 per litre for marketers, transporters and dealers to share and 8 kobo per litre for the Petroleum Equalisation Fund. He also submitted the government spends US$1.2 billion yearly as subsidy on cost of crude oil for consumption.

On his own part, President Obasanjo said that the landing cost of petrol was N30.00 per litre and added an additional N6.00 per litre for the fuel to get to its final destination and then he concluded that the subsidy on fuel was a minimum of N12.00 per litre and added this to the previous pump price of N26.00 per litre to get N38.00 per litre. He also said that at instances when ‘we’ have to borrow to import then a provision should be made for interest payments which I presume to account for the additional N2.00 per litre because he then concluded that the minimum acceptable pump price is N40.00 per litre. He then sought for any justifications for a N12.00 per litre subsidy on 17 million litres of daily imports, which adds up to N250 billion annually (though N12.00 by 17 million litres by 365 days is N74.46 billion).

I noticed that this analytical anarchy in rationalising their costs only refers to importing with no allusion made to local production.

Now that the refineries are in a sorry state and we are still in a quagmire, the onus is on government to implement the deregulation of this epileptic sector of the economy.

Nigeria produces about two million barrels of crude oil per day depending on the prevailing OPEC quota and sold at the international market at pronounced OPEC prices, which was about US$28.00 per barrel at the time of writing this piece. However, the country allocates 300,000 bpd to NNPC for domestic refining and use. NNPC claims that it incurs huge losses as it tries to convert this allocation of crude oil to refined products and sold at the present pump price. Herein lies the origin of the subsidy theory, because the Federal Government now claims to provide the shortfall in costs to NNPC as subsidy. But the salient question remains – how much does it cost to produce one litre of petrol? The late and often missed Chief M. K. O. Abiola asked this question during the 1993 presidential debate. I asked the same question at the Oil and Gas Work Group of the Nigeria Economic Summit in 2001 that comprised the top echelon of the industry from the public and private sector. The President of the Nigeria Labour Congress, Comrade Adams Oshiomole also confirmed his inability to get the answer to this same question from NNPC over the years. NNPC will never provide the answer to this question to enable us do the simple mathematics of subsidy.

I heard from an expert in the industry that 1 barrel of crude oil should produce about 103 litres of fuel; therefore 300,000 barrels should produce about 30,900,000 litres of fuel (a little more than our domestic consumption requirement). If NNPC means well, it should give up this 300,000 barrels at the present costs that it gets the allocation from government in a transparent competitive bidding for private players and see if they will not offer refined products at cheaper pump prices.

The Federal Government should also be bold enough to immediately privatize the refineries and some of the fuel depots scattered across the country by selling them off to competent core investors. Fortunately, the Bureau for Public Enterprises had under Mallam Nasir El- Rufai performed above par in selecting competent investors for the privatisation programme. However, the Federal Government should retain ownership of some fuel depots to serve as strategic reserves during crisis periods.

The Federal Government must also energise the actualisation of the licenses awarded for the construction of private refineries. The government should consider offering tax holidays and other incentives to enable the licensees get their proposed private refineries off the drawing board. With more refineries across the country, the worn out and discredited tales of price disparity across geographical locations will be consigned to the dustbin of history.

Likewise, the Federal Government must as a matter of urgency, issue licenses for the construction of private fuel depots across the country.

On the vexed issue of smuggling, even as I do not see the economics behind the point that a negligible quantity of smuggled fuel can distract this whole country, we should not agree to admit that the people should be made to pay for the crass incompetence of our security agencies. Somebody should be made to do his job and protect our borders or leave for another who can do the job. After all, we never believed that there was a solution to the menace of banned, fake and expired drugs and consumable items until Dr. Dora Akunyili, that virtuous woman at NAFDAC, took charge of affairs.

In all these, however, we must accept the gory fact that four years have passed and the ‘petroleum monster’ abides, which explains our present predicament.

Unfortunately, the president has only two years to complete his agenda. Presidential historians will concur that from 2005 presidential politics for 2007 will commence and consume the nation in such a way that President Obasanjo will only be seen as a lame-duck president on his way out. Only his immediate presidential impedimenta will then take him seriously on issues of the state. Considering the enormous work still undone, I wish him all the luck he can muster because he may serve out this second term but he may not complete this serious agenda.

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