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Fuel Subsidy 101 - Politics - Nairaland

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Nigeria’s Daily Fuel Subsidy Falls To N889.44m / Subsidy 101: Q &A On Subsidy. / FG Will Pay Fuel Subsidy For 40 Days – Alison Madueke (2) (3) (4)

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Fuel Subsidy 101 by nnamdibig(m): 3:20pm On May 05, 2015
NB; I promised a few days ago to write an easy to read and follow summary of the PwC forensic audit of NNPC’s account. However, I realized that it is a very technical report and to grasp the nitty-gritty of what is really going on, Nigerians have to have some basic understanding of the oil industry.
I believe knowledge is power, and Information is key, hence before I post my summary, I will attempt to take Nigerians through a refresher course on the petroleum sector; more like a pre-requisite to the main course. The purpose is to help you understand what is really going on, thus, you will be able to make informed decisions and not just “follow- follow” decisions.
Having said that, I am not an expert in the oil sector, and I am not speaking on behalf of anyone; so, please forgive me if I have made any error in my assertions.
This first part is titled subsidy 101, which will shed light on the concept of subsidy and the attendant scam there in. The second part is Crude oil value chain, which will explain the financial transactions and cash flow and remittances peculiar to the Nigerian Petroleum sector, and the Third part is titled " Alternatives to Fossil Fuel in Nigeria".
As you read, please have an open mind, as the intent of this post is to educate rather than agitate. Please enjoy.
• What is subsidy? Subsidy is a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
• Although subsidies can be important many are ‘perverse’. To be ‘perverse’, subsidies must exert effects that are demonstrably and significantly adverse both economically and environmentally. A subsidy rarely, if ever, starts perverse, but over time a legitimate efficacious subsidy can become perverse or illegitimate if it is not withdrawn after meeting its goal or as political goals change. Case in question is the Nigerian subsidy program which was first conceived in 1986 and was to run for only 6 months, but here we are today after 29 years.
• Investigators looking into the subsidy found importers were being paid for 59 million liters a day, while the country only consumes 35 million.
• Mismanagement and theft by fuel marketers and government officials cost $6.8 billion over three years -- about a quarter of Nigeria's annual budget.
• Nigeria spent 2.587 trillion Nigerian Naira ($16.46 billion) on the fuel subsidy in 2011, 900% more than the 245 billion naira in the budget. Which is equivalent to over half of the 2011 federal budget.
• The number of fuel importers rose from 5 in 2006 to 10 in 2007, 19 in 2008 and 140 in 2011. This decision taken by PPPRA was one of the biggest causes of fraud. Many firms only existed on paper and collected subsidies on fuel that never existed.
• In one example of mismanagement, the accountant-general's office made 128 subsidy payment transactions of 999 million naira each in the space of 24 hours between January 12-13 2009 -- equal to about $6.36 million almost every 10 minutes!!! yepa! Osanobua!!!!!
• Nigeria's petroleum is classified mostly as "light" and "sweet", as the oil is largely free of sulphur (Bonny Light). Nigeria is the largest producer of sweet oil in OPEC. The meaning of this is that Nigeria’s oil is amongst the best in the world!!!
• 15 fuel importers collected more than $300m two years ago without importing any fuel, while more than 100 oil marketers collected the same amount of money on several occasions.
• Natural gas reserves are well over 187 trillion ft³ {please note; 1 cubit foot = 28.3 Liters), the gas reserves are three times as substantial as the crude oil reserves. The meaning of this is that the gas we get no fit finish, in fact we are currently flaring it AKA we are wasting it and polluting the environment at the same time.
• The majority of Nigeria's natural gas is flared off and it is estimated that Nigeria loses 18.2 million US$ daily from the loss of the flared gas. Chai!! I don die!!!!! Diaris God o!!!!! Mind you, with 1 million dollars , the Federal Government can provide clean water for 100 communities in Bayelsa State. 1 million dollars can build 15 well-stocked cottage hospitals in Yobe State.
• Nigeria's total petroleum refining capacity is 445,000 barrels per day assuming that the 4 major oil refineries are running at 66% capacity. The Refineries are Warri, Port-Harcourt 1 and 2 and Kaduna. 1 barrel of crude oil is approximately 160 Liters.
• The 4 local refineries are currently operating at 21% or even less, of their capacities, this means they provide at most only 93,450 barrel/day. The Kaduna refinery has been shut down due the vandalisation and utter neglect.
• Nigerians consume an average of 294,000 barrel/day. So, if the refineries are working properly that means we can meet and exceed our demand for the products of crude oil, which includes petrol, kerosene and diesel.
• Since the locally refined Petrol does not meet the need of Nigerians, at least 200,550 barrels need to be imported.
• So, the government resorts to importation of refined products to make up for the deficit of 200,550 barrels. Individuals under the guise of government subsidies import these products.
• It will cost these importers about N115.74K per liter to get imported petrol to Apapa wharf.
• Because of the gross inefficiency experienced at Apapa terminal, an additional N6.25K per liter is incurred. Thus increasing the cost of petrol per liter to N121.99K.
• Instead of the petrol to be transferred directly from the ships to trucks, the petrol is first stored in depots, which charge N3.00k per liter. Remember Ifeanyi Ubah's Tank farm?!!!
• Other additional charges includes the following; An Administrative cost of 15kobo.There is a Bridging Fund of N3.95k.Then the dealers add their margin of N1.75k.The transporters add their own margin of N2.75k. Finally, the Petrol stations generally add their margin of N4.60k. See monumental inefficiency and waste!!!!.
• Thus, bringing the additional cost of petrol at petrol stations to about N140.00K per liter.
• Recall that the pump price of petrol is N65 per liter; this is where subsidy comes in. The Federal Government is the one paying the remaining N75.00.
• This N75.00k per liter is the subsidy we are talking about.
• The Petroleum Pricing Regulatory Agency (PPPRA) is the agency charged with the determination of the pricing of petroleum products. Odikwa very powerful people!! They can do and undo. They are supposed to be the ones in charge of regulating fuel prices and subsidy payments.
• The Department of Petroleum Resources (DPR) is the agency responsible for petroleum regulation in Nigeria. DPR has the statutory responsibility of ensuring compliance to petroleum laws, regulations and guidelines in the Oil and Gas Industry. They are like the feared "wole-wole's " (sanitory inspectors) of the old Western states of Nigeria.
• The difference between the PPPRA determined prices and the government-regulated price yields the amount of subsidy per liter that the government incurs.
• The problem is that the other countries surrounding Nigeria do not have subsidized fuel, thus a liter of petrol in Benin Republic, for example, is approximately N210.00. The PUMP PRICE OF petrol in Nigeria is N68.00K, thus, these oil thieves will divert the already subsidized oil from Nigeria to Benin and thereby making an insane amount of profit in the process; this is called oil bunkering or oil theft.
• That is one of the reasons why we have incessant fuel scarcity in Nigeria; oil meant for local consumption is being sold across our already porous border.
• The main dispute is over the total amount of subsidy that the government says it has paid out to importers of petroleum products.
• The problem is complicated by the different figures provided by different agencies of government including the PPPRA, NNPC and the Federal Ministry of Finance (FMOF).
• For instance, the PPPRA claims that the federal government has spent a whopping sum of N3.655 trillion on subsidy between 2006 and October 2011 including N1.54 trillion, during the 10 months of 2011 alone!
• In fact, while the budget for subsidy for 2011 is N245 billion, the Federal Ministry of Finance (FMOF) has stated that the government has paid N1.54trillion or about N1.3 trillion in excess of the budgeted amount as subsidy to importers between January and October 2011.
• At the same time, NNPC claims that the excess amount paid as subsidy is N192.5 billion which is a very far cry from the N1.3 trillion claimed by the FMOF. In fact, the Executive Director of PPPRA, Reginald Stanley, told the Senate Committee that the gross amount spent on fuel subsidy from 2006 to September 2011 stood at N3.655 trillion, which contradicted the N1.426 trillion submitted by the NNPC as subsidy on the products as at August 2011. He also debunked the alleged N450 billion kerosene subsidies owed the NNPC by the FG (Umoru, H. Vanguard, and December 4, 2011). My people see wash!!!!!!!!!!
• So, fellow Nigerians, I am submitting to you that this entire concept of Subsidy, although Noble initially, is a scam and has to be discontinued.
• Removing the existing fuel subsidy i.e. increasing the pump price of petroleum products, under the current situation will amount to a transfer of the cost of government inefficiency and the burden of official corruption to consumers of petroleum products. The masses will likely be the hardest hit because they have limited real income loss compensation mechanisms.
• I will recommend a stepwise approach i.e. gradual removal until it becomes zero over 2 years. Thus we will be saving about N3 trillion, which can be diverted to other sectors of the economy i.e. Agriculture, Sustainable energy, Human Capital Development etc. Another recommendation is that the Government must ensue that the comatose refineries are resuscitated and well maintained; this will minimize the amount of foreign exchange we expend on the importation of refined petroleum products.
The next part of this re-fresher is crude oil value chain.
~ Lanre Okunola


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