Why fuel subsidy should be urgently removed.

nnpc,fuel subsidy,removal,urgently
NTA VERSUS OIL AND GAS

By Dr. Obiaaraeri Nnaemeka Onyeka

  1. The NNPC according to their own records, wasted over $389m/N142billion (between 2016 to 2019) to conduct turn around maintenance programmes on the refineries, yet they are not working up to 15% capacity.

  2. The NNPC reported cumulative losses of over N280billion from operating the Refineries between 2016 to 2019. Huge wastes and losses that would have been avoided if the downstream oil and gas operations had been fully liberalized and the refineries privatized to capable private sector operators. Deep-pocketed and capable private sector operators, who would have utilized the great facilities and infrastructure advantages of the location of these old refineries to co-locate new refineries in a fully deregulated economy.

  3. Based on the average daily import figure of 60million liters of the PMS as reported by the NNPC (which is way above the actual and real daily consumption figure of 28million liters as reported by Dr Kachukwu Ibe and collaborated by the Global energy consumption reports of the US Energy Administration Agency), Nigeria squanders over $11.26billion/N3.4trillion annually importing the PMS. By the time you add the DPK and Gasoline Import volume figures, the amount will be in excess of $16billion/N4.8trillion squandered on import of the white petroleum products, that can easily be refined here if we deregulate to allow honest and capable investors into our market.

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  1. This annual wastage of scarce forex resources would have been avoided if we had adequate domestic refinery of the sweet crude. Most of the IOCs, Shell, Chevron and Total have refinery interests in South Africa and Angola. Shell and Chevron each has refinery interests in South Africa with capacities of 100,000 barrels of crude oil a day. Why are they not setting up refineries in Nigeria with a huge market and proximity to the crude oil that can easily reduce their cost overhead?

They are not setting up Crude Oil Refineries and Gas Collection plants in Nigeria because of the opacity, corruption and regimented natures of our product pricing in Nigeria.

  1. In 2018, according to the CBN reports, Nigeria sold crude oil worth over $37billion/N11.2trillion. Only N2.3trillion got into the Federation account from these proceeds to be distributed amongst the three tiers of government.
  2. Within that same 2018, Nigeria wasted over $16billion/N4.8trillion importing the refined white Petroleum products.

  3. This simply shows that we actually spent by far more monies importing and subsidizing the white petroleum products, than what we received into the federation accounts to run the economy from crude sales.

  4. Between 2006 to March 2019, Nigeria wasted over N10.8trillion on PMS import subsidies. Over N2trillion was wasted on PEF. Hundreds of billions have been wasted in fruitless TAMs on these waste drain pipes called refineries.

  5. Between 2016 to 2019, Nigeria wasted N118billion in failed Turn Around Maintenance of the refineries and N280billion in cumulative losses operating the same refineries under the NNPC. Avoidable wastes, if those refineries had long been privatized or concessioned to private sector operators.

OPPORTUNITIY COSTS AND WHAT WE WOULD HAVE DONE WITH THESE WASTED FUNDS?

  1. The number of monies wasted on subsidy (N10trillion between 2006-2018) would have been enough to build and equip 2,400 units of 1000 bed hospitals across the 774 LGAs in Nigeria (source: budgit)
  2. The amount would have been enough to build 500,000 New Houses for families through mortgage at N20m per house. (source: budgit)

  3. The amount would have been enough to add over 27,000 MW of solar-powered electricity to the national grid. (source: budgit)

  4. The amount would have been enough to educate and skill up 2,000,000 Nigerians with global best standard quality tertiary education and sought after skills. (source: budgit)

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  1. The over N900billon that was spent on subsidies between March 2019 to June 2019 would have been enough to cover the over 1.5million tons of domestic crude palm oil supply gap in Nigeria. That money would have been enough to cultivate 500,000 hectares of new palm plantation, set up 775 units of small scale crude palm oil refinery plants across Nigeria, each with a capacity to produce 2.6million litres per annum. Over 249,000 direct jobs and 200,000 indirect jobs would have been created in this sector while saving Nigeria the over $1.1billion we waste annually importing crude palm oil and vegetable oil. (source: SEFAPCOL)
  2. The over N400billion wasted on fruitless TAM on the refineries and the operational losses keeping it under the NNPC management from 2016 to 2019, would have been enough to cultivate and produce 1.9million tons of sesame seed commodity in Nassarawa, Niger, Taraba, Katsina and Jigawa states. This 1.9million tons of sesame seeds would have earned us over $1.87billion/N675billion in forex and created over 634,920 jobs across the land. (source: SEFAPCOL)

SUGGESTED SOLUTIONS ON HOW THE ANTICIPATED SAVINGS FROM TOTAL DEREGULATIONS OF THE DOWNSTREAM OIL AND GAS SECTOR CAN BE UTILIZED TO ENSURE THAT THE FUNDS ARE NOT LOOTED OR WASTED. BUT APPLIED TO PROVIDE PALLIATIVE FACILITIES AND INFRASTRUCTURE TO PROTECT THE VERY POOR NIGERIANS.

By totally deregulating the downstream oil and gas sector and removing all the consumption subsidies, we shall be saving the following amounts:

1.Average of N900billion real money worth that are wasted as subsidies payment (using the actual intrinsic value of the naira to the dollar exchange rate at the I & E window) annually.

2.Average of N158billion that are misappropriated through the PEF regime annually.

  1. Over $4.695billion/N1.69trillion, being excess 25million litres of the PMS, claimed to have been imported into Nigeria by the NNPC, (which actually represent ghost and smuggled import volumes in excess of our worst-case scenario daily PMS consumption volume of 35m litres max). Nigeria does not consume 60million litres of PMS a day. Our actual daily consumption volume ranges from 28m to 35 million litres.
  2. This cumulative savings of over N2.74trillion should be transferred to the Sovereign Wealth Investment Authority). The SWIA working with the WBG/NEITI will in turn set up the subsidies savings administration agency, ala like the PTDF, with offices in the 36 states of the federation to administer the funds transparently in the provision of the following palliative

  3. Provision of over 18,500 units of 36 seater mass transit buses (500 units for each state, and Abuja), each costing N28million, i.e. N518billion)

  4. To maintain and service these 18,500 units of brand new mass transit buses for 2 years at the cost N100,000 service and maintenance cost per month will gulp N44.4billion

  5. To fuel these 18,500 buses for 2 whole years at a most ambitious average daily fuel consumption of 150 litres at N200 per litre PMS price will gulp N405,150,000,000.00 (Four Hundred and Five Billion, One hundred and Fifty million naira only).

  6. To pay for the remuneration of 55,500 Nigerians that will be employed to drive and work in these 18,500 buses (One driver, one security agent and one attendant per Bus), will gulp N106,560,000,000 (One Hundred and Six Billion, Five Hundred and Sixty Million Naira only). This amount represents the recurrent cost of their remuneration at N80,000 per person, covering 24 months (2 years).

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  1. We shall spend N20.8billion to cover comprehensive insurance premium for the vehicles.
  2. If you add up the cost of providing this 18,500 units of 36 seater free mass transit buses for Nigerians across the 774 LGAs in Nigeria, it will come to N1,094,910,000,000 (One Trillion, Ninety-Four Billion, Nine Hundred and Ten Million Naira only).

  3. We will still have over N1,645,090,000,000.00/$5.39billion left in the Sovereign Wealth Funds that can be applied to do brand new rural roads that covers over 32,910 kilometres at N50m per kilometre using the Aggrebind road construction technology.

  4. These 18,500 units, 36 seater buses will be able to convey at least 5.3million Nigerians daily.

  5. Since the services of the mass transit buses will be free for 24 months or 2 years, we can use it to drive more inclusive taxation in the land. You can use its services with evidence of tax ID card.

Within these 24 months of free mass transit bus offering and full deregulation, many modular refineries would have come up to refine crude oil that will meet our local consumption needs and have extra for export.

By 2022, we shall have more than enough modular refineries refining all our local fuel demands and also help us to save on an annual basis, this N2.74trillion that will flow into the Federation account.

We shall also save the over $16billion we waste annually importing the white petroleum products.

It is our candid opinion that a continuation of petrol price regulation and subsidization of the white petroleum product creates safety nests for intractable forms of corruption within the country’s subsidy regime implied by price regulation, which deprives the nation of more funds needed for socio-economic development and also discourages investors, who generally prefer a deregulated industry, from investing in the downstream oil and gas sector especially in the area of refinery construction and operation.

We do not need to put import duties/tax on petroleum imports, we can stop the imports within 24 months if we do the right things as recommended above.