n4trn-subsidy:-domestic-refining-is-the-solution

TRAPPED in self-inflicted folly, Nigeria is on course to incur N4 trillion or more on petrol subsidy in 2022. The contradiction defies rationality: here is a leading producer of crude oil stubbornly bankrupting itself importing and subsidising refined petroleum products! The resultant fiscal hole is engendering poverty and social backlash. Persistently, it rightly instigates domestic stakeholders and the international community to recommend outright removal of petrol subsidies to save the economy from collapse. If Nigeria persists in importing refined petroleum products, there is no end in sight to the exorbitant costs of fuels.

The PUNCH remains steadfast in its long-canvassed position that while the subsidy in its present form is decidedly destructive and unsustainable, domestic self-sufficiency in refining is the only lasting solution to product availability, price stability and maximisation of the benefits of crude.

For the President, Major General Muhammadu Buhari (retd.), the dilemma is daunting. As renewed pressure to remove the subsidy mounts amid the country’s precarious finances, he is confronted with taking a decision, and no choice is without risk. The Nigerian National Petroleum Company reported paying N1.3 trillion subsidy for petrol January to May. It says Nigeria’s average daily consumption is 66.8 million litres. It shelled out N210.38billion in January, N219.78billion February; N245.77billion March; N271.59billion April, and N327.1billion May. An additional N27.23 billion was spent to “repair” its four comatose refineries. As global oil prices spike and the naira slides further against the US$, the figure is bound to ascend.

In comparison, the 2022 federal budget is N17.12 trillion. In the past five years, Nigeria made an average of $39 billion annually from selling crude oil, the Central Bank of Nigeria said. Back in 2011, the Goodluck Jonathan government frittered N2.7 trillion on petrol subsidies, triggering mass protests in 2012 that forced the government to backpedal on total subsidy removal.

Nigeria’s energy crisis is self-inflicted. At home, the subsidy thrives on opacity, corruption, abandonment of domestic refining, and a shutting out of the private sector in the downstream oil and gas sector. On the international front, Russia’s war on Ukraine has triggered a jump in prices. Rather than reap a windfall however, Nigeria’s indefensible reliance on importation is damaging its brittle economy.

The international oil companies have been divesting from Nigeria, citing weak infrastructure, among other reasons. The industry is also undermined by vandalism, and oil spills, of which 4,919 incidents were recorded between 2015 and March 2021. The country lost about $1 billion revenue due to oil theft in the first quarter of 2022, the industry regulator said.

Importing petroleum products is patently irrational. Nigeria is simply subsidising other economies by this reckless behaviour. Its four refineries with combined capacity to process 445,000 barrels of crude daily are comatose, guzzling funds and being a monopoly, forcing the country to rely on imports.

Resultantly, the economy is tottering. Businesses and households groan under the weight of exorbitant fuel prices, as the other refined fuels have been ‘deregulated.’ Factories are closing, job losses are rising. Tax revenues come short, and growth projections, estimated at 3.4 per cent by the International Monetary Fund in 2022, are being reviewed downward.

Next, the government is struggling to meet its basic financial obligations due to petrol subsidy payments. It borrows to pay salaries and finance capital expenditure, including through ‘Ways and Means’ (printing money). The national debt stock rose to N41.2 trillion in first quarter 2022. Many sub-national governments struggle to pay salaries. As oil prices remain high and the naira weak, the cost of imports and subsidies are bound to rise too.

The Bretton Woods institutions, other multilateral agencies, state governors and the organised private sector repeatedly and stridently advocate the removal of petrol subsidy. Curiously, they are less insistent on the imperative of immediately selling the loss-making refineries and launching an emergency national programme to establish privately owned refineries in record time. They should press for a total, immediate end to the government’s participation in the downstream. Undoubtedly, the current subsidy regime is unsustainable and fraudulent; but its removal in isolation without a programme of domestic refining, exit of the NNPC from refining and distribution and sale of the state-owned refineries is fraught. Indeed, it could trigger a worse economic and social crisis.

Subsidy is a symptom of the ‘disease,’ not the ailment. Without significant domestic refining, exit of the state from the wholesale and retail oil sub-sector, complete subsidy removal could trigger runaway inflation. The accompanying economic impact is better imagined. For a country already on tenterhooks, wracked by insecurity, joblessness, discontent and unprecedented division, the fallout could easily overwhelm the country.

The multilateral organisations and the OPS should rather strongly impress it upon the government to urgently promote private refineries and immediately sell the state refineries.  Shamefully, Nigeria is perhaps the only country without adequate domestic refining capacity among the world’s major crude oil producers. The United States government owns none of the country’s 139 refineries; but they produced 18.8 per cent of the world’s refining output in 2012, says London-based consultancy, Hydrocarbon-Technology.

But Nigeria’s leadership is hooked on ‘state capture.’ It must bite the privatisation bullet. Its only hope is the 650,000 bpd Dangote Refinery, whose commencement date has been shifted several times.

Certainly, domestic refining will firm up the naira; the total removal of petrol subsidy will precipitate economic recession. It should only be removed in phases accompanied by a vigorous programme to promote private refineries with incentives, privatisation, and creation of an investment-friendly environment.

Thereafter, any subsidy – if required — will go to the local economy. An instance: effective July 2021, the Australian parliament granted $1.8 billion in subsidies to sustain two major refiners – Viva Energy and Ampol. This was to maintain 1,250 jobs and create 1,750 new construction jobs. That is the appropriate way to provide subsidy.

The Nigerian state should also rebuild its security system to checkmate petrol smuggling across the porous borders. There is no alternative to domestic self-sufficiency in refining; that should be the urgent national priority.

By Tochi

Leave a Reply

Your email address will not be published.

%d bloggers like this: