[i][i]Petrol Madness,


It has been disconcerting watching the melodrama that has been going on in the energy industry of Nigeria for the past weeks. First, the ever bad mannered capitalistic head of NNPC came out saying that his organization is about to go bankrupt because he is subsidizing the cost of providing Nigerians petrol at the gas pump. As if Nigerians would really be sad at the thought of a bankrupt NNPC which is by far one of the most corrupt and inefficient government corporation in Nigeria and indeed the world, he went ahead to suggest that price Nigerians pay at the pump should be upped to satisfy his desire to break even – excuse me!



To really show Nigerians that he is the one that control the price of petroleum after all, and that we have no right to enjoy the tremendous windfall from international crude oil price increase, Kupolakun pulled enough strings to make the moneybag controlled PPRA to hold a bogus meeting and start considering price increase. To add insult to injury, the PPRA, which has already been known for lacking any milk of kindness for the ever-suffering populace, came out with a bogus memorandum after the meting duly rejected the proposals of the moneybags like Oando and Zenon oil.



The truth about the matter is that the PPRA is controlled by moneybags that do not feel the real impact of petrol increases on the common citizen, as well as government functionaries that have stolen and are stealing enough to ensure they can open a fixed deposit that would finance their petrol purchase on exit from this ridiculous administration!



The real problem of Nigeria’s energy industry today is a lack of imagination on the part of the administration on one hand and the corruption and inefficiency of the NNPC itself. By NNPC, I mean the workers, engineers, moneybags and the likes of Kupolakun that control the organization. Not only has the NNPC failed to properly manage the existing refineries, they are yet to come up with ways to build new ones. For God sake, we can add additional capacity to existing refineries; in fact, it makes more sense to do so than to build new ones (talking as an expert in the oil industry).



Most importantly, the issue of subsidy needs to be ironed out with this administration once and for all. Anyone that says removing subsidy is part of the reform program is simply mad! Fuel subsidy has been the only benefit Nigerians get from having crude oil in their country and to remove it now is simply wicked. Most liberal economies subsidize various areas of their citizen’s life- in Europe; healthcare and social security is heavily subsidized, while in America their farmers are so subsidized some of them plant to destroy! In China, South America and other Far Eastern countries except Japan, who are major importers of petroleum products, all of them subsidize fuel consumption of their citizens. That is the only way they can guarantee cheaper goods for export to the West or competing favorably in the international scene while allowing their people some let up from the crazy crude oil prices.



Effectively, this makes Japan, United States and Europe (all developed economies) the only places on earth that pay international price of crude at the pump; moreover, why not? They are the ones that have the speculators that benefit from fear and capitalistic greed, so they can afford to pay these obscene prices for psychology! What concerns the pure old woman in the Nigerian village about the psychology of the market that has put kerosene (to prepare food to eat) beyond her reach in price? Simply put, it is none of her business! If truly market economics is at play, Nigeria has to be part of the market. Unfortunately, we are not! The market does not behave well or bad because of our action or inaction (perhaps, the only thing they react to in Nigeria is bad news of unrest that would disrupt their appetite for our unrefined crude) – we are basically a small player in a world filled with terror and fear! Moreover, the countries that pay these prices at the pump subsidize their citizens in other ways and have 24-100 times the per capita income of Nigeria! We would stupid to compete in the market they control!



Leaving petrol prices in Nigeria to the whims and caprices of international spot market rate is leaving Nigerians vulnerable to the speculators on Wall Street and Main Street. In fact, it is leaving us open to Osama Bin Laden and his fellow terrorists (and the every day madness going on in the Middle East) since every new video the mullah-in-chief produces usually spark up an increase in crude oil prices in the international commodity exchange. In actual fact, Nigerian government is exposing her citizens to undue security risk and making them vulnerable to terror by preaching the mundane gospel of liberalization of downstream sector.



To fully realize the potential of our country in the energy sector, there is need for wholesale reforms of the industry. One cannot guarantee proactively and efficiently the welfare of ones citizens by practicing brazen free market economics. There must be some stopgaps and genuine reforms to guarantee competition, eliminate monopolies like NNPC and truly deregulate. If government wants to deregulate the downstream, then the upstream have to be deregulated! There is no piece meal. Not that I am preaching upstream deregulation, all I am calling for is consistency! Moreover, if the government wants to regulate the upstream part of the oil sector lightly using Production Sharing Contracts and Joint venture Agreements, then the same should be said of the downstream. The obscene profits being declared by oil companies in Nigeria and around the world at the expense of our citizens in untenable and should be brought to an abrupt end.



In the last round of deregulation (or Soludoism), I wrote an article suggesting ways of cushioning the effect of international crude oil prices on our local markets, while guaranteeing the availability of the product, prevent inter-border smuggling and encourage the entry of local entrepreneurs to the business of refining and gasoline retailing. That article can be found on: . It is simple, the NNPC need to be commercialized and broken up into manageable parts, DPR need to take on regulatory function more seriously, local incentives for competition have to be introduced, the foreign majors have to be induced to refine in country and the market must be well managed to ensure efficiency and price stabilization! Besides, benchmarks that creates price band within which oil would be traded to local refiners for local consumption need to be determined in the budget and something similar to what the senate recently proposed should be included to ensure marketers could recover their cost from budgeted subsidies not from the common man!



There is no way around a sensible energy policy, what this administration is proposing, especially the likes of Kupolakun, Gbadamosi and Daukoru, is pure madness! Where are the presidents men by the way? Is this what we get for 35 billion dollars in foreign exchange? Moreover, for the so-called 18 billion dollars in excess revenue fund, what happened to that? Mr. President, is that what we get for debt relief? Mr. President, can you see poverty around you? May be Nigerians should start reconsidering this PDP government all over again – it appears to be a party for the highest bidder – reminds me of American Republicanism. In my opinion, 200 billion naira which equals little over 1.5 billion dollars as yearly subsidy for petroleum is not too much to draw down from the 18 billon dollars excess revenue fund that the ignoble governors and senators would spend in pepper soup joint anyway!

It is sad that these people keep lying through their teeth in this never ending subsidy.

You may take a look at the following article written by a former colleague and a former presidential aspirant.

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http://supanigeria.org/index.php?option=com_content&task=view&id=21&Itemid=35

PETROLEUM PRODUCTS PRICES AND SUBSIDIES IN NIGERIA. Email

The prices of petroleum products in Nigeria have been a source of contention and controversy. This paper proposes to clarify the actual total cost by adding the costs of all components in retail supply of Premium Motor Spirit (PMS aka Petrol or Gasoline) the most widely demanded and utilized petroleum product.

BACKGROUND

The prices of petroleum products in Nigeria have been a source of contention and controversy. This paper proposes to clarify the actual total cost by adding the costs of all components in retail supply of Premium Motor Spirit (PMS aka Petrol or Gasoline) the most widely demanded and utilized petroleum product. The cost components are finding, developing, producing, refining, distributing and marketing. The amount of subsidy on the retail price is then determined by the difference between the actual cost and the retail price.

The method adopted for this cost determination is similar to that used by the American Petroleum Institute (API) for the analysis of the actual total cost of gasoline (PMS) in the U.S. It splits the retail cost into the major components: cost of crude oil, the cost of refining and marketing and the sum of all taxes. This method is simple and accurate.

The most accurate industry data has been obtained from and confirmed independently for this effort by industry experts. The draft paper was also reviewed and endorsed by several other experts. The data and analysis herein are as at October, 2005. Exchange rate applied is N130/USD.

THE PETROL PROCESS

To purchase petrol in Nigeria, we typically drive to a Fuel Station. The fuel attendant pumps the requested quantity and payment is made in cash, electronically (Value card, Top card, etc.) or otherwise.

The Fuel station typically receives its supply from road tankers which have been loaded at an NNPC or other fuel depots. The NNPC depots receive their supply from local refineries through pipelines. Imported petroleum products are evacuated from ocean-going tankers to local depots which then supply to Fuel stations by road tankers.

Local refineries receive their feed Crude oil through pipelines from oil terminals. The Crude oil is produced by oil companies from wells in their OMLs (Oil Mining Lease). The Federal Government of Nigeria (FGN) is the senior partner in Joint Ventrure (JV) oil producing companies. The NNPC manages FGN investments in the JVs. Production Sharing Contracts (PSCs) are a different relationship from Joint Ventures. This determination is based on JV production which represents most of the Nigerian production. PSC production can be similarly treated.

COMPONENT COSTS

Crude oil is first discovered (Exploration), then the discovery is developed (Field Development) before it can be produced (Production Operations). It is then refined into petroleum products which are distributed and sold for utilization. The costs of Exploration, Field Development, Production Operations, Refining, Distribution and Marketing (Retail sales) are identified herein. The sum of all product cost components is the actual cost of the product.

EXPLORATION COSTS

Exploration costs typically include seismic acquisition and interpretation costs. Exploratory well costs can be included in development costs since the exploratory well can be easily converted to a development well. 3D Siesmic acquisition costs vary based on contractor, coverage, terrain, time, season, water depth, methods, commercial terms, special considerations, etc. Typical costs range from 20 – 70,000 USD/KM2. Interpretation costs range typically from 2-8,000 USD/KM2. We will use 50,000 USD/KM2 as estimated cost of 3D seismic acquisition and interpretation. For a 10 KM2 field with 20 Million barrels recovery; exploration costs can be estimated to be about: - 0.025 USD/Bbl. This is equivalent to, 0.02 N/Litre.

DEVELOPMENT COSTS

Opportunity development costs depend on field location, size, development philosophy and concept. Development cost will include capital costs of field facilities design, procurement, transportation, installation and commissioning. Cost of wells and pipelines to existing terminals are also included. It will typically vary from 2-5 USD/Bbl.

At the NAPE (National Association of Petroleum Explorationists) annual conference in 2005, offshore development costs was indicated as 5 USD/Bbl. However, historical data for completed projects offshore are closer to 3 USD/Bbl. Onshore development costs are also significantly lower than offshore costs. To averagely represent the entire JV operational environment scenarios (offshore and onshore) this paper will capture development cost as: - 4 USD/Bbl. This is equivalent to, 3.27 N/Litre.

OPERATION COSTS (OPEX)

Current (2005) production operation costs of major oil companies surveyed indicated a range of 1.5-4 USD/Bbl. This includes all overhead costs across relevant functions. This paper will capture OPEX as: - 3.0 USD/Bbl. This is equivalent to, 2.45 N/Litre.

Therefore, actual crude oil production cost to the Nigerian JV can then be estimated as:

(0.025 + 4.0 + 3.0) USD/Bbl = 7.025 USD/Bbl.

(0.02 + 3.27 + 2.45) N/Litre = 5.74 N/Litre.

Previous government (NNPC) estimates (1994 - ’98) yielded 5 USD/Bbl. The difference in these estimates can be attributed to rising oil industry service costs due to international market dynamics, inflation and/or to estimate basis differences.

For typical refinery yield of 95%; 5.74 N/Litre translates to – 6.04 N/Litre.

This compensates for volume losses inherent in the crude oil refining process.

REFINING COSTS

Installed refining capacity in Nigeria stands at 445,000 Barrels per day (BPD).

This is made up of:

1. Old Port Harcourt Refinery - 60,000 BPD

2. New Port Harcourt Refinery - 150,000 BPD

3. Warri Refinery - 125,000 BPD (Upgraded from 100)

4. Kaduna Refinery - 110,000 BPD (Two trains, 60+50)

Refining cost data from these refineries could not be obtained during our survey. Even when such data is available, they are very unreliable. According to the Nigerian Vice-President during an interview with Thisday newspaper in August 2005, "We have never got correct statistics from NNPC. They will never be able to tell you the correct thing. We have that problem with NNPC".

To estimate refining costs, we can rely on international industry data from similar refineries. Contemporary refining technology is of the Fluid Catalytic Cracking (FCC) process like most Nigerian refineries. This process requires fluidizing the solid catalyst and re-circulating it continuously from the reaction section of the cracker to the catalyst regeneration section and back to the reaction section.

Data published by the American Petroleum Institute (API) estimates Gross Refining and Distribution/Marketing Costs and Profits at $1.00 per Gallon in October 2005. Using a 50/50 split as established by historical U.S. cost trends, it can be clearly concluded that Refining costs and Profits, account for $0.50 per Gallon. This value includes the profits of the refineries.

The estimate can be used for this determination since it is from mostly FCC process based refineries just as most Nigerian refineries. Actual refining costs may be lower in Nigeria since labour costs are significantly lower in Nigeria. $0.50 per Gallon translates to $21/Bbl. We will capture refining costs as $21/Bbl. This is, 17.17 N/Litre.

DISTRIBUTION COSTS

Distribution costs in Nigeria are established by regulation. This is the cost margin allowed for Road Tankers that transport Petrol from the Depots to the Fuel Stations. As at Oct. 2005, it was, 2.42 N/Litre.

MARKETING COSTS

Marketing Costs in Nigeria are also established by regulation. This is the cost margin allowed for Oil marketing companies that operate Fuel Retail Stations. As at Oct. 2005, it was, 5.87 N/Litre.

TOTAL COST

The total cost can then be determined as the summation of all relevant cost components previously estimated viz., Exploration, Development, Production Operations, Refining, Distribution and Marketing.

Total Cost = (6.04 + 17.17 + 2.42 + 5.87) N/Litre.

= 31.50 N/Litre

Therefore, we can conclude that the Average cost of the Petrol dispensed at retail Fuel Stations in Nigeria is, 31.50 N/Litre.

CURRENT RETAIL PRICE

Current retail Price as established by regulation has been, N65/Liter since 2005. This regulated price is split to cost components in line with the following benchmarks;

56.71 - Depot Price.

2.42 - Transportation Margin.

1.15 - Dealer’s Margin.

4.72 - Marketing Company Margin.

65.00 Retail Price.

SUBSIDY

Subsidy can be determined as Actual Cost – Sale Price.

Consequently,

Subsidy = (31.50 – 65) N/Litre.
=-33.50N/Litre

CONCLUSION

We can confidently conclude that government makes a profit of 33.50 N/Litre on PMS (Petrol) at the current price of 65 N/Litre. This translates to a very high 106% profit per litre.

In addition the government benefits from royalties, taxes and fees which were not factored in this simplified analysis. When factored, the actual crude cost per barrel to government is significantly less and its profit correspondingly higher.

The claim of subsidies on petroleum products is clearly incorrect.

POST SCRIPT

This analysis has been deliberately simplified to ensure wider appeal and easy comprehension. A much more detailed and rigorous analysis will be inappropriate for the objective indicated. It will also come to the same conclusion and have only an added academic value.

For imported Petrol, this estimate will not apply.

Imported Petrol has unnecessary additional costs like;

1. International Crude Oil Sale Price and Profit Margins.

2. Transportation Costs of Products from source Country to Nigeria.

3. Port Charges, Taxes and Export duties at source Country.

4. Insurance costs for transportation.

5. Brokerage costs for agents.

To improve domestic supply and reduce cost, the following can be considered;

- Maximize existing local refining capacity utilization.

- Increase existing local refining capacity by building additional refineries.

- Improve JV crude oil development and production efficiency to reduce costs.

C SUPA 2006.

References;

> Offshore Engineering Operations Overview, JM Campbell and Company.

> Nigerian Association of Petroleum Explorationists (NAPE), 2005 Annual Conference Proceedings.

> API Statistics: U.S. Pump Price Update – Oct. 3, 2005, API Website.

> National Petroleum News, Vol. 96, No. 6, June 2004.

> Thisday Newspapers, August 22, 2005.

> Petroleum Marketing Monthly, June 2004, Energy Information Administration.

> Behind the bottom line, Energy Information Administration, June 2006.

SUPA Paper number: TP01-626.

what kind of post is this it is toooooo loooooooooooooooong for crying out loud.

insert your quote propertly next time else you would be prosecuted for plagiarism. you should have given the link as well. eg
http://www.nigeriansinamerica.com/articles/719/1/Why-Nigerians-Cannot-Pay-International-Prices-for-Oil.html

@azorjiu thanks, i even think the owner of thread and fisrt poster are brothers.lol i'll just go and read the article. so long brothers lol i'm just cracking my self up no mind me

whiteroses:

what kind of post is this it is toooooo loooooooooooooooong for crying out loud.

Important issues are not discussed properly with 1 or 2 lines of statements.

If the post is too long, hit the back button and read posts that are shorter and let those that are interested in the real issues read through.

I don't know if the articles will be a whole lot shorter on the original sites.

By the way, azorjiu was refering to quoting articles without referencing the owner.

@Afam take a chill pill, i said don't mind me i don't know anything about the article though im just having fun on my own

@Afam take a chill pill, i said don't mind me i don't know anything about the article though im just having fun on my own

Very educative and enlightening.

Scarcity is a direct result of price control. How come we have never experienced scarcity of sugar, salt, or garri?
In a free market, sometime the price goes up, sometimes it goes down, but the product is always available.

interesting

Quite educative. Afam's response also helped to 'water down' proper understanding of the issue.
It is only the Almighty God that can save us from the grip of these demons who parade themselves as leaders.[color=#000099][/color]