Subsidy on fuel may notch up to N3tr in 2022
Subsidy on fuel riding on oil price increases
By Jeph Ajobaju, Chief Copy Editor
Abuja says subsidy on fuel consumption, which currently costs N8.28 billion daily, will end in June 2022 but the word is also out that it may rise to N3 trillion by then if rising oil prices on the international market continues.
It is a zero-sum situation for Nigeria which depends on oil receipts and keeps on paying subsidy on domestic sale that depletes the treasury.
Pipeline and Product Marketing Company (PPMC) Managing Director, Isiyaku Abdullahi, disclosed at the 15th OTL Africa Downstream Week 2021 in Lagos that subsidy on Premium Motor Spirit (PMS) or petrol will rise to N3 trillion in 2022 if the current market realities persist.
PPMC is a subsidiary of the Nigerian National Petroleum Corporation (NNPC).
“At $80 crude oil, 60 million litres daily consumption and N411/$1 forex, PMS under-recovery per litre will be N138/litre. Daily PMS under-recovery will be N8.3bn. Annual PMS under-recovery will escalate to N3 trillion,” he said.
The rise in global oil prices to new highs has also increased subsidy paid by the federal government to N8.28 billion daily.
Subsidy, which the NNPC calls “value shortfall” or “under-recovery”, resurfaced in January as Abuja left pump price unchanged at between N162 and N165 per litre despite increase in oil prices.
However, both Finance Minister Zainab Ahmed and Minister of State for Petroleum Resources, Timipre Sylva, have argued that paying subsidy on fuel wastes funds.
Ahmed says it benefits the rich, not the poor. Sylva says it encourages fuel smuggling to neighbouring countries where the product sells at higher prices.
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World Bank Group President David Malpass last month in Washington repeated criticism against fossil fuel subsidies saying they encourage the overuse of fuels.
World Bank Country Director for Nigeria Shubham Chaudhuri echoed that view in Abuja, where he insisted that the country could channel subsidy on fuel to primary healthcare, basic education, and rural roads.
Abuja removed subsidy on fuel in March 2020 after reducing the pump price from N145 to N125 per litre following the crash in global oil prices.
The NNPC, the sole importer of petrol, bears the subsidy cost.
Isiyaku enthused that with the rehabilitation of refineries and the construction of condensate refineries as well as the Dangote Refinery, the domestic fuel market would transform from imports to a net exporter by 2024, per The PUNCH.
He said full deregulation of the downstream sector may accelerate switching to Compressed Natural Gas and Liquefied Petroleum Gas, subject to global energy prices in the near term.
According to him, the Petroleum Industry Act (PIA) presents a unique opportunity for investments across the value chain.
Major Oil Marketers Association of Nigeria (MOMAN) Chief Executive Officer, Clement Isong, said with the downstream sector headed for major changes, the NNPC should provide a level playing field, guard against the negative effects of a monopoly, and encourage private sector investment.
“The implementation of the PIA is now more critical than the law itself. Petroleum products pricing needs to be right. Eliminate pricing distortions and create a competitive market for the sale and distribution of petroleum products and natural gas,” he urged.
“Price competition will, over time, lead to innovation which should reduce logistics and distribution costs. The pricing strategy needs to take into consideration freight, landing costs, jetty throughput charges, storage costs, etc.”
World Bank against subsidy on fossil fuels
“This year, Nigeria is on track to spend N2.9tn on PMS subsidy, which is more than it spends on health,” Chaudhuri said at the 27th National Economic Summit last month in Abuja, per reporting by The PUNCH.
Finance Minister Zainab Ahmed disclosed at the event that the federal government has made provision for petrol subsidy only to the end of June next year.
“In our 2022 budget, we only factored in subsidy for the first half of the year; the second half of the year, we are looking at complete deregulation of the sector, saving foreign exchange and potentially earning more from the oil and gas industry,” she said.
However, Chaudhuri likened Nigeria to a malnourished person requiring urgent treatment, saying critical decisions must be made right away for Nigeria to develop.
Said he: “I think the urgency of doing something now is because the time is going in terms of retaining the hope of young Nigerians in the future and potential of Nigeria.
“The kinds of things that could be done right away – the petrol subsidy; yes, I hear that six months from now, perhaps with the PIA [Petroleum Industry Act] coming into effect, this will go away.
“But the fact is, can Nigeria even afford to wait for those six months? And there is a choice: N3 trillion to PMS subsidy which is depriving states of much-needed revenues to invest in basic services.”
PEAC wants fuel subsidy to end sooner
Presidential Economic Advisory Council Chairman, Doyin Salami, also reiterated at the summit his longstanding argument against fuel subsidy.
“With the PIA, essentially it makes illegal petrol subsidy and yes, there is a period where NNPC and the new regulatory agencies must calibrate themselves, but at the end of this period – and I think it is about six months, which explains why [Ahmed] has said for the first half of the year, there is provision.
“My view will be if we could get it done sooner than that, it will be excellent. It releases money. The key point is simply this: we are now, any which way, at the tail end of that conversation, except if we choose not to obey the law. My sense is we will obey the law and subsidy will be gone,” he said.
Subsidy encourages fossil fuel overuse, says World Bank
Malpass, the World Bank President, bared his mind at the Sixth Ministerial Meeting of the Coalition of Finance Ministers for Climate Action in Washington, which was published on the website of the bank.
His words: “Recent analysis by Bloomberg shows that G20 countries have funneled $3.3 trillion into fossil fuel subsidies since 2015.
“Fossil fuels tend to be subsidised both explicitly, and implicitly through tax exemptions. If the use of fossil fuels continues to be subsidised despite its impact on greenhouse gas emissions, it encourages individuals and firms to continue to overuse such fuels.
“The longer such subsidies remain in place, the more the economy adapts to their existence and the greater the political obstacles and economic disruptions caused by their removal.
“It’s critical for finance ministers everywhere to take a hard look at their fossil fuel subsidy regimes.”
Malpass canvassed appropriate carbon pricing and better linkage between climate commitments.
