REAL COST OF FUEL PRESENTLY IN NIGERIA, BUT ARE WE BEING DECEIVED BY THE GOVERNMENT!!! PLS READ AND COMMENT!!!!!

By Izielen Agbon Izielen Agbon

On December 10, 2011, if you stopped at the Mobil filling station on Old Aba Road in Port Harcourt , you would be able to buy a litre of petrol for 65 naira or $1.66 per gallon at an exchange rate of $1/N157 and 4 litres per gallon. This is the official price. The government claims that this price would have been subsidized at N73/litre and that the true price of a litre of petrol in Port Harcourt is N138/litre or $3.52 per gallon.

They are therefore determined to remove their subsidy and sell the gallon at $3.52. But, On December 10, 2011, if you stopped at the Mobil Gas station on E83rd St and Flatlands Avenue in Brooklyn, New York, USA, you would be a able to buy a gallon of petrol for $3.52/gallon. Both gallons of petrol would have been refined from Nigerian crude oil. The only difference would be that the gallon in New York was refined in a US North East refinery from Nigerian crude exported from the Qua Iboe Crude Terminal in Nigeria while the Port Harcourt gallon was either refined in Port Harcourt or imported. The idea that a gallon of petrol from Nigerian crude oil cost the same in New York as in Port Harcourt runs against basic economic logic. Hence, Nigerians suspect that there is something irrational and fishy about such pricing. What they would like to know is the exact cost of 1 litre of petrol in Nigeria .

We will answer this question in the simplest economic terms despite the attempts of the Nigerian government to muddle up the issue. What is the true cost of a litre of petrol in Nigeria ? The Nigerian government has earmarked 445000 barrel per day throughput for meeting domestic refinery products demands. These volumes are not for export. They are public goods reserved for internal consumption. We will limit our analysis to this volume of crude oil. At the refinery gate in Port Harcourt, the cost of a barrel of Qua Iboe crude oil is made up of the finding /development cost ($3.5/bbl) and a production/storage /transportation cost of $1.50 per barrel.

Thus, at $5 per barrel, we can get Nigerian Qua Iboe crude to the refining gates at Port Harcourt and Warri. One barrel is 42 gallons or 168 litres. The price of 1 barrel of petrol at the Depot gate is the sum of the cost of crude oil, the refining cost and the pipeline transportation cost. Refining costs are at $12.6 per barrel and pipeline distribution cost are $1.50 per barrel. The Distribution Margins (Retailers, Transporters, Dealers, Bridging Funds, Administrative charges etc) are N15.49/litre or $16.58 per barrel. The true cost of 1 litre of petrol at the Mobil filling station in Port Harcourt or anywhere else in Nigeria is therefore ($5 +$12.6+$1.5+$16.6) or $35.7 per barrel . This is equal to N33.36 per litre compared to the official price of N65 per litre. Prof. Tam David West is right. There is no petrol subsidy in Nigeria . Rather the current official prices are too high. Let us continue with some basic energy economics.

The government claims we are currently operating our refineries at 38.2% efficiency. When we refine a barrel of crude oil, we get more than just petrol. If we refine 1 barrel (42 gallons) of crude oil, we will get 45 gallons of petroleum products. The 45 gallons of petroleum products consist of 4 gallons of LPG, 19.5 gallons of Gasoline, 10 gallons of Diesel, 4 gallons of Jet Fuel/Kerosene, 2.5 gallons of Fuel Oil and 5 gallons of Bottoms. Thus, at 38.2% of refining capacity, we have about 170000 bbls of throughput refined for about 13.26 million litres of petrol, 6.8 million litres of diesel and 2.72 million litres of kerosene/jet fuel.

This is not enough to meet internal national demand. So, we send the remaining of our non-export crude oil volume (275000 barrels per day) to be refined abroad and import the petroleum product back into the country. We will just pay for shipping and refining. The Nigerian government exchanges the 275000 barrels per day with commodity traders (90000 barrels per day to Duke Oil, 60000 barrels per day to Trafigura (Puma Energy), 60000 barrels per day to Societe Ivoirienne de Raffinage (SIR) in Abidjan, Ivory Coast and 65000 barrels per days to unknown sources) in a swap deal. The landing cost of a litre of petrol is N123.32 and the distribution margins are N15.49 according to the government. The cost of a litre is therefore (N123.32+N15.49) or N138.81 . This is equivalent to $3.54 per gallon or $148.54 per barrel. In technical terms, one barrel of Nigerian crude oil has a volume yield of 6.6% of AGO, 20.7% of Gasoline, 9.5% of Kerosene/Jet fuel, 30.6% of Diesel, 32.6% of Fuel oil / Bottoms when it is refined.

Using a netback calculation method, we can easily calculate the true cost of a litre of imported petrol from swapped oil. The gross product revenue of a refined barrel of crude oil is the sum of the volume of each refined product multiplied by its price. Domestic prices are $174.48/barrel for AGO, $69.55/barrel for Gasoline (PMS or petrol), $172.22/barrel for Diesel Oil, $53.5/barrel for Kerosene and $129.68/barrel for Fuel Oil. Let us substitute the government imported PMS price of $148.54 per barrel for the domestic price of petrol/gasoline. Our gross product revenue per swapped barrel would be (174.48*0.066 +148.54*0.207+172.22*0.306+ 53.5*0.095+129.68*0.326) or $142.32 per barrel. We have to remove the international cost of a barrel of Nigerian crude oil ($107 per barrel) from this to get the net cost of imported swapped petroleum products to Nigerian consumers. The net cost of swapped petroleum products would therefore be $142.32 -$107 or $35.32 per barrel of swapped crude oil. This comes out to be a net of $36.86 per barrel of petrol or N34.45 per litre.

This is the true cost of a litre of imported swapped petrol and not the landing cost of N138 per litre claimed by the government. The pro-subsidy Nigerian government pretends the price of swapped crude oil is $0 per barrel (N0 per litre) while the resulting petroleum products is $148.54 per barrel (N138 per litre). The government therefore argues that the “subsidy” is N138.81-N65 or N73.81 per litre. But, if landing cost of the petroleum products is at international price ($148.54 per barrel), then the take-off price of the swapped crude oil should be at international price ($107 per barrel). This is basic economic logic outside the ideological prisms of the World Bank. The traders/petroleum products importers and the Nigerian government are charging Nigerians for the crude oil while they are getting it free.

So let us conclude this basic economic exercise. If the true price of 38.2% of our petrol supply from our local refinery is N33.36/litre and the remaining 61.8% has a true price of N34.45 per litre, then the average true price is (0.382*33.36+0.618*34.45) or N34.03 per litre. The official price is N65 per litre and the true price with government figures is about N34 per litre (even with our moribund refineries).

There is therefore no petrol subsidy. Rather, there is a high sales tax of 91.2% at current prices of N65 per litre. The labor leaders meeting the President should go with their economists. They should send economists and political scientists as representatives to the Senate Committee investigating the petroleum subsidy issue. There are many expert economists and political scientists in ASUU who will gladly represent the view of the majority. The labor leaders should not let anyone get away with the economic fallacy that the swapped oil is free while its refined products must be sold at international prices in the Nigerian domestic market.

The government should explain at what price the swapped crude oil was sold and where the money accruing from these sales have been kept. We have done this simple economic analysis of the Nigerian petroleum products market to show that there is no petrol subsidy what so ever. In the end, this debate on petrol subsidy and the attempt of the government to transfer wealth from the Nigerian masses to a petrol cabal will be decided in the streets. Nigerian workers, farmers, students, market women, youths, unemployed, NGO and civil society as a whole should prepare for a long harmattan season of protracted struggle. They should not just embark on 3 days strike/protests after which the government reduces the hiked petroleum prices by a few Nairas. They must embark upon in a sustainable struggle that will lead to fundamental changes. Let us remove our entire political subsidy from the government and end this petroleum products subsidy debate once and for all. It is time to bring the Arab Spring south.

Izielen Agbon Izielen Agbon writes from Dallas, Texas. izielenagbon@yahoo.com

He is former HOD , Petroleum Engineering Dept, former ASUU chairman, University of Ibadan, trained many operators in nation’s energy industry with pratical experience on our practices and policy focus in the last 20yrs

guys u need to say something!!!!!!!!!!!!!!!!!!!!!

hassymo5:

guys u need to say something!!!!!!!!!!!!!!!!!!!!!

What can we say that has not been said already? We should talk about how we have a deceptive Government in place? That should be obvious to any sensible person who saw GEJ unanimously 'endorsed' by those who have ruined Nigeria from one government to the next !! If that was not enough, Mr. President has not focused on one, even one, of his pre-election promises. Instead his immediate actions and policies after winning the elections have proven very unpopular, anti-people and , without doubt, anti-progress.

What is worth noting is that GEJ is only capable of abetting or ignoring the corruption of his numerous 'endorsers'. He cannot fight their interest which runs contrary to that of ordinary Nigerians. When subsidy is "removed", the losers will be ordinary Nigerians and the "independent" marketers who are running an elaborate scam in collusion with the NNPC.

No doubt GEJ benefitted from these "independent" marketers because several came on board under him. The FG , since 2009, gave itself the power to issue marketers licence . We all know that Nigerian Presidents all keep an unblinking eye on the Petroleum sector as a cash cow. Indeed OBJ even made himself petroleum minister while also President !!!!!! Anyone who thinks GEJ does not know what is going on is a fool. Nothing in the petroleum sector (including the scams) happen without the approval of the President of the day.

Gbawe on point again (as ever)
We've shouted ourselves hoarse about this subsidy thing.
Just a suggestion though: if GEJ and co are hell-bent on removing this subsidy,then let the subsidy on running government (i.e free food,fuel,security,travel and the like) be also remove.I'm guessing they are insulated from the suffering bycause of these perks they enjoy.Because no one is saying how much it takes to run government and its officials,which might be as significant as the "subsidy"they claim exists on fuel in terms of cost.
Just my two cents.

singing. . . .  . .  she na like dis we go dey dey? haaaaa, na like dis we go dey dey?

I weep for my country, when will my fellow country men rise up and fight for their rights.


We need to say ENOUGH is ENOUGH.

I never supported goodluck's presidency at all because of his antecendents as a deputy governor of Bayelsa, governor, vice president, and president with no tangible result to show for overseeing all these positions. As a matter of fact, I supported Buhari during the last election because I believe he’s the best person to tackle corruption head on. However, we should not allow political, religious, ethnic, sectional sentiments to cloud our judgement in supporting progressive policies that are meant to grow our economy. The man is there now, and he’s going to be there for another 4-8 years, therefore I might as well support his policies constructively for the progress of Nigeria. Some of the people canvassing for the removal of subsidy today are only doing so because of political, religious or sectional sentiment and not because they don’t believe in the benefits. Why don't we all analyse the subsidy removal from a cost benefit stand point and decide from that angle, rather than follow the media hype blindly.

I support the subsidy removal because of the expected accrued economic benefits. I believe keeping the subsidy for a very long time is recipe for disaster. I also believe the time to remove the subsidy was yesterday, waiting a little longer will continue to stagnate our economy in terms of expected accrued benefits including tax revenue, innovation, research and development, export, job creation, paid subsidy that could have gone to developing other area in the economy and other benefits. The subsidy removal holds its pros and cons. I believe the benefits outweigh the cost, and most importantly the costs are short term. We all have to understand, “no pain no gain”. We have to sacrifice today for tomorrow. Without the sacrifice of today, there may not be tomorrow or it may be too expensive.

We will answer this question in the simplest economic terms despite the attempts of the Nigerian government to muddle up the issue. What is the true cost of a litre of petrol in Nigeria? The Nigerian government has earmarked 445000 barrel per day throughput for meeting domestic refinery products demands. These volumes are not for export. They are public goods reserved for internal consumption. We will limit our analysis to this volume of crude oil. At the refinery gate in Port Harcourt, the cost of a barrel of Qua Iboe crude oil is made up of the finding /development cost ($3.5/bbl) and a production/storage /transportation cost of $1.50 per barrel

The author fails to acknowledge the true cost of developing a field, from exploration to production. The cost of developing dry holes, equipment malfunction, and those other risks you have to contend with when developing a field. The marginal cost of production for MNC such as Exxon Mobil in a country with reduced political and economic risk is between $12 – 20. I used Exxon in this context because they have the experience, technology, people and others to achieve that cost. To speculate $3.5/bbl in Nigeria clearly shows the author lack upstream economics knowledge or he’s purposely trying to prey on the collective intelligent of average gullible Nigerians.

Also, he fails to make clarification between what we currently have in place in terms of developed assets and who owns them, to what the government should have done in terms of investment (by owning their own field 100%). Socialism can be applied to government own producing ventures, but when you have other vested interest in the mix, different equation applies. Contracts to take specific product on a continuous basis after production have to be signed to secure funding for developing the asset. Sometimes upstream asset has to pledge as collaterals to secure funding. These dynamics sometimes determine where products go most of the time, even before the field gets developed. These reasons might affect expected supply to our local refinery if that decision were to be made today. The co-owners also have their agenda as well, which is to maximize profit. Would they want to sell at subpar price to our local refineries on the pretend of social /corporate responsibility or would they allow economic principles to take precedents. The author fails to mention these dynamics and other factors that play into developing an upstream asset.

What we all need to understand is that; once upstream assets are monetized, they are subjected to global prices, because that’s how they (owners) can maximize their profit as an investor. We should not in any way, make the mistake as a country of subjecting expected price of petrol, diesel or kerosene to how much it cost to produce Forcados or bonny light just because they are produce in our backyard, or because they are Nigerian products. That basis is a total misconception, warp economic practice and a disaster in the waiting.

correct the idea of fuel subsidy is a scam and I believe it is because the government wants to be deceptive about the real reasons for the price hikes.

I believe it is due to the devaluation of the Naira and if you noticed talk of fuel subsidy removal has gone hand in hand with devaluation of our currency.


All I can say, is that until we stand up and reclaim our country back form these criminals, we are in for continual and regular waves of impoverishment (a tool of mass oppression) until eventually we would be dirt poor and have living standards equivelent to the poorest nations in the world such as Afghanistan and Bangladesh.

Brace your self for the latest round of impoverishment!

GenBuhari:

correct the idea of fuel subsidy is a scam and I believe it is because the government wants to be deceptive about the real reasons for the price hikes.

I believe it is due to the devaluation of the Naira and if you noticed talk of fuel subsidy removal has gone hand in hand with devaluation of our currency.

I thought subsidy removal has been around for a while now. This was documented in the PIB about 2-3 years ago. Devaluation of our currency just happened recently. Can you please educate me on how subsidy removal impacts the devaluation of our currency?

@courage89
You are correct, the first government to talk of subsidy removal was IBB in 1986 , he was the first leader to start the mass impoverishment of the Nigerian masses. During Abacha's reign (1993- 1998), he rejected the policy of devaluation, and was honest by not calling price increases subsidy removal. Fuel price increases is an effective way for government to raise revenue (it could be viewed as a tax).
Abacha also showed what he was to use the revenue realised on - the PTF for example.

The term subsidy removal is wrong as it implies that the government subsidises fuel.
Devaluation of Naira effects almost all prices in Nigeria including fuel prices. If the Naira is devalued then the price of fuel in Naira need to be increased in order for the government to collect the same dollar revenue it was getting prior to the devaluation. The government is being deceptive by calling fuel price increases "subsidy removal" instead of what it really is a fuel price adjustment (increase) that is necessary as a result of devaluation. Iam guessing because they do not want Nigerians to associate devaluation with the price of fuel I dunno.

courage89:

I thought subsidy removal has been around for a while now. This was documented in the PIB about 2-3 years ago. Devaluation of our currency just happened recently. Can you please educate me on how subsidy removal impacts the devaluation of our currency?

courage89:




The author fails to acknowledge the true cost of developing a field, from exploration to production. The cost of developing dry holes, equipment malfunction, and those other risks you have to contend with when developing a field. The marginal cost of production for MNC such as Exxon Mobil in a country with reduced political and economic ri[b]sk is between $12 – 20[/b]. I used Exxon in this context because they have the experience, technology, people and others to achieve that cost. To speculate $3.5/bbl in Nigeria clearly shows the author lack upstream economics knowledge or he’s purposely trying to prey on the collective intelligent of average gullible Nigerians.

Also, he fails to make clarification between what we currently have in place in terms of developed assets and who owns them, to what the government should have done in terms of investment (by owning their own field 100%). Socialism can be applied to government own producing ventures, but when you have other vested interest in the mix, different equation applies. Contracts to take specific product on a continuous basis after production have to be signed to secure funding for developing the asset. Sometimes upstream asset has to pledge as collaterals to secure funding. These dynamics sometimes determine where products go most of the time, even before the field gets developed. These reasons might affect expected supply to our local refinery if that decision were to be made today. The co-owners also have their agenda as well, which is to maximize profit. Would they want to sell at subpar price to our local refineries on the pretend of social /corporate responsibility or would they allow economic principles to take precedents. The author fails to mention these dynamics and other factors that play into developing an upstream asset.

What we all need to understand is that; once upstream assets are monetized, t[b]hey are subjected to global prices[/b], because that’s how they (owners) can maximize their profit as an investor. We should not in any way, make the mistake as a country of subjecting expected price of petrol, diesel or kerosene to how much it cost to produce Forcados or bonny light just because they are produce in our backyard, or because they are Nigerian products. That basis is a total misconception, warp economic practice and a disaster in the waiting.

Nigerian crude per barrel cost is well below $5. For instance Agbami field development cost about $3.5 bn and recoverable deposit is about 1bn barrel, do the maths and see these sources
http://www.offshore-technology.com/projects/agbami/
http://www.gasandoil.com/news/africa/ee207d7b12c4523504df1ee7ed20c538
http://en.wikipedia.org/wiki/List_of_oil_fields


In addition for most oil fields, the Nigerian government through NAPIMS-NNPC pays 50 - 60 % of the development cost and so technically owns that percentage of oil output. The government through NNPC also owns NPDC whose output is 100% owned. I am sure the government can fin 450,000 barrels needed for local consumption and sell at prices it deemed fit depending on it's economic policies. There is no need to lie about a non existent subsidy

^^^ and the production/exploration costs are usually inflated so Nigerian govt pays more than the 50-60% stated.

Ovamboland:

Nigerian crude per barrel cost is well below $5. For instance Agbami field development cost about $3.5 bn and recoverable deposit is about 1bn barrel, do the maths and see these sources
http://www.offshore-technology.com/projects/agbami/
http://www.gasandoil.com/news/africa/ee207d7b12c4523504df1ee7ed20c538
http://en.wikipedia.org/wiki/List_of_oil_fields

Your method of calculating cost of operation is not accurate. Don’t forget that, that’s just the fixed cost excluding operating cost. And, because they say 1bln recoverable does not mean you’re actually going to get that amount.
Why is it that the Chinese don’t like to develop new oil block most of the time? Why is it that they’ll rather acquire developed field, and pay a premium for its acquisition? It’s because it can be very expensive to develop new field. Sometimes, companies get lucky because they’ve prepared themselves properly and they don’t see most of the inherent risk they’ve build in their model. That doesn’t mean it’s not there, or other developers can’t see it.
The author of this article fails to account for this aspect in his analysis.

Ovamboland:

In addition for most oil fields, the Nigerian government through NAPIMS-NNPC pays 50 - 60 % of the development cost and so technically owns that percentage of oil output. The government through NNPC also owns NPDC whose output is 100% owned. I am sure the government can fin 450,000 barrels needed for local consumption and sell at prices it deemed fit depending on it's economic policies. There is no need to lie about a non existent subsidy

Don’t forget that all these projects are project financed. Project finance is usually a highly leverage, stand alone financing requiring lower upfront cash from the partners including our own NNPC. If the project fails, no partners will be held liable to repay the loan. But, the stand alone financing model has a lot of built in default penalties, risk coverage that the partners have to abide by before they can get funding because of the inherent built in risk taking by the financiers. These risk coverage mitigation, economics backed by business plans most of the time dictates who buys the product, how and when. If we go against some of these coverage’s, by making decisions that affect Debt Service Coverage Ratio, or we forgot to make our cash calls. It can increase the risk of doing business in the country and can also increase our cost of raising financing from oversees.
Your argument implying that government covers 50-60% upfront cost is not accurate. Our upfront cost usually revolves around our prorated shares of the general down payment, share of escrow account funding and others.