A petrol station
1.0 introduction
In recent times, in the face of efforts by the NNPC and the relevant subsidiaries, the general public have been grappling with needless trauma of petroleum products scarcity and the attendant long queues at the retail pump stations. As the seventh largest crude oil producer and exporter of crude oil after Venezuela, it has remained paradoxical that the nation should be experiencing such.
Incidentally, economic activities in the country revolves around fuel supply as the predominant source of energy. Hence, the impact of fuel scarcity is felt by almost every citizen. The economic loss to the nation in times of scarcity are so enormous and impacts negatively on the gross national income in terms of productivity loss or unrealizable income.
It is in the light of the two parameters - productivity loss and unrealizable income, especially at a time of depressed national revenue occasioned by the downward swing in the international price of crude oil that this piece attempts a comprehensive look at issues around subsidy implementation in Nigeria ranging from the historical perspective to price regulation, comparison of the Nigeria’s performance with other OPEC nations, the role of the National Oil Corporation (NNPC), the opportunity cost of expending about N8 Trillion on subsidy from Jan. 2006 to Dec. 2014, the unsustainability of price regulation in Nigeria and way forward for seamless petroleum product supply in the Country.
1.1 Oil: energy source with multiplier sectoral effect on the economy
The crisis of petroleum product (PMS) scarcity in Nigeria with its attendant negative consequences on the economy is quite complex and multifaceted, largely due to the fact that almost all economic activities in the Country revolve around the oil and gas sector. This interrelationship is clearly illustrated below:
FIGURE 1: INTERACTION OF OIL WITH OTHER SECTORS OF THE ECONOMY
As illustrated in figure 1 above, it is evident that any disruption in crude oil production has negative impact on volume of crude oil for domestic refining and government revenues, this in turn erodes the amount of funds available to the three (3) tiers of government as well as supply of foreign currency to service the economy, of which the private players in the petroleum sector and indeed importers of goods and services heavily depend to provide goods and services for the Nigerian populace. In a nutshell, scarcity of petroleum products is inimical to the Nigerian economy, in the form of disruption to supply of energy, transportation and multiplier effect on prices of goods and services.
1.2 HISTORical background to PETROLEUM PRODUCTs PRICE REGULATION IN NIGERIA
Prior to the Petroleum Products Decree of 1969, petroleum products prices were determined by the market as exchange rates of the Naira were relatively stable. Subsequently, petroleum products prices were fixed by marketers in agreement with Government. The Country was divided into 26 Zones from distances between points of supply and the respective zones of distribution. In other words, prices were set differentially for each zone.
The challenge of petroleum products pricing and indeed subsidy started from the 1st of October 1973 when uniform pricing was introduced. This gave rise to reluctance of petroleum marketers to distribute products or expand facilities beyond the main supply sources in the southern part of the country leading to perennial scarcity in other areas. To resolve this challenge, the Petroleum Equalisation Fund (PEF) was established in 1975 to reimburse petroleum marketers for transportation of petroleum products from point of supply to all parts of the country.
While, the design of PEF arrangement appears a good initiative on paper, the reality has negated the achievement of the objective, as consumers from inner parts of the country hardly purchase products at government regulated prices inspite of the huge expenditures on settlement of bridging and equalization claims.
However, from 1986 following the introduction of the Structural Adjustment Programme and rapid devaluation of the Naira the pricing of petroleum products has been grossly problematic with continuous upward reviews and subsequent downward reviews to quench public protests and labour strikes to avoid disruption in the economy.
It is important to note that prior to 2004, the NNPC being the petroleum products supplier of last resort was allocated crude oil for domestic consumption of petroleum products at a fixed price of $22/barrel, but due to windfalls and high volatility in international crude oil prices and the reciprocal impact on petroleum products supply, the NNPC was mandated to pay export parity for the domestic crude oil allocations at International open market price.
This was followed with the establishment of the Petroleum Support Fund (PSF) to reimburse petroleum products suppliers including NNPC with the differential between the landing cost and government regulated ex-depot price.
The Petroleum Support Fund (PSF) commenced in January 2006 as an interventionist mechanism to mitigate against price volatility in the international market and unintended translation of same to a permanent feature in the Nigerian downstream petroleum sector. However, with the attendant huge financial burden on the economy, aided by the unmitigated leakages associated with subsidy implementation in spite of the alarming depression of the price of crude oil in the international market, it has become a scourge to government finances and the economy as a whole.
1.3 NATIONAL Demand FOR PMS
Updated data on petroleum products discharges from PPPRA indicate that the current daily National consumption of PMS is about 53 Million Liters, which equates to about 19.3 Billion Liters per annum. It is important to note that previously, the figure of 40 Million liters per day was used as the basis for daily National consumption of PMS by the PPPRA and indeed all other government agencies in the oil and gas sector.
Nevertheless, actual figures of total PMS supply (i.e. Imports and Refinery production) between 2013 and June 2015 from DPR indicates that an average of50 Million Liters per day is consumed, while OPEC in its annual statistic bulletin for 2015 reported that an average annual PMS demand of 45 Million Liters per day.
At the moment, given the controversy surrounding the exact National demand figure, there is the need to establish a valid benchmark for National PMS demand for proper planning and decision making as it affect the downstream petroleum sector.
1.3.1 power shortage and domestic demand for petroleum products
At the moment, Nigeria is said to be generating 3,500 megawatts into the power grid, while, Nigerian businesses and households generate an additional2500 megawatts from diesel and petrol generators. Also, about 20% of the national daily consumption of PMS for running of petrol generators (Source: Nigerian Oil and Gas Conference 2015).
Furthermore, the Community Research and Development Center (CREDC) estimates that Nigerians spend over N796 Billion annually on diesel and PMS for the purpose of running power generating sets. Of this amount, about N256 Billion is expended on PMS alone.
Assuming the current retail pump price of PMS at N87 per liter, we can estimate that the average volume of PMS consumed by petrol generator sets in Nigeria is about 8 Million liters per day. This represents about 15 – 20% of the National consumption.
Chart 1: electricity access by opec countries as at 2013
SOURCE: iea world energy outlook 2015 electricity database
As illustrated in chart 1 above, Nigeria has the highest number of people living without electricity among OPEC countries. Also, the National electrification rate of Nigeria is less than 50% compared to most OPEC member countries which have an average National electrification rate of 99% excluding Angola which is 30%.
1.4 nnpc/ppmc petroleum products supplier of last resort
NNPC/PPMC besides its other business objectives, also plays the role of the supplier of last resort as well as a stabilizing force in petroleum products supply to the domestic market.
NNPC/PPMC is allocated 445,000 barrels of crude oil per day for the purpose of supplying the domestic market with refined products. This volume of crude oil is based on the combined installed capacity of the Nation’s refineries, with estimated gross PMS yield of about 19 Million liters per day of petroleum products, while the gap between the domestic refinery production and estimated National consumption is expected to be bridged through imports by NNPC and other marketers approved by the PPPRA.
However, due to experienced delays in Turn Around Maintenance (TAM), pipeline vandalism and lack of feed stock (Crude oil supply), the refineries have experienced long periods of downtime leading to accelerated degradation of plants and equipments, hence, the refineries could not operate at full capacity. Consequently, this created a supply gap in meeting the national products consumption requirement as Nigeria became a huge net importer of refined products as depicted in the charts below:
Chart 2: Daily PMS demand and production for opec countries as at 2014 (in million liters)
SOURCE: OPEC ANNUAL STATISTICS BULLETTIN 2015
Chart 3: % OF DAILY PMS PRODUCTION TO NATIONAL DEMAND FOR OPEC COUNTRIES AS AT 2014
SOURCE: OPEC ANNUAL STATISTICS BULLETTIN 2015
As illustrated in chart 2 and 3 above, Nigeria has the highest deficit as net importer of PMS among OPEC nations followed by the UAE, while the highest net exporter of PMS is Ecuador.
Given the necessity to address this core issue, NNPC/PPMC then commenced petroleum products importation on the basis of open account through tender from reliable Oil Trading companies. However, NNPC/PPMC started witnessing default in deliveries when most of the contracted companies defaulted in performance, especially around the winter months, citing reasons of high cost of products and vessels’ freights for non-performance. This resulted in severe fuel scarcity especially in 2009/2010 with its attendant negative consequences on the Nigerian economy.
Therefore, in order to mitigate such vulnerability in price and shortages in products availability and guarantee steady supply to the market, NNPC/PPMC entered into Offshore Processing Arrangements and Crude Exchange Agreements (SWAP) where 210,000 barrels/day of domestic crude oil is allocated to the contracted operators.
Incidentally, the latest policy direction of Direct Sale Direct Purchase (DSDP) by implication reverts NNPC supply model to open account products supply mechanism, while the limitations of the model based on institutional memory will hopefully be addressed.
1.5 involvement of major/independent marketers
Major and Independent marketers like NNPC are expected to fulfil their PPPRA allocated volumes through direct importation of petroleum products to close the supply gap as earlier highlighted.
Obviously, these are business people whose utmost objective is to maximise profit. Therefore, it is expected that all financial risks must be taken into account prior to fulfilling their obligation to supply in accordance with their PPPRA allocated volume.
Over the years, this inclination has often been expressed in the form of meeting supply obligations only when market conditions are favourable to profit. This practice in itself creates disruptions in the market, such as the PMS supply glut experienced in most of 2013, scarcity in early 2014 and the current crisis which started in early 2015.
It is important to note that the root cause of marketer’s unwillingness to supply their quota of petroleum products at this material time is borne out of crisis of confidence in sustainability of subsidy implementation. In the belief of marketers , the crisis of confidence is compounded by the delays in payment of subsidy to marketers and insufficient releases of FOREX in the economy by CBN causing marketers to source FOREX at Interbank rates, leading to higher costs to finance importation of petroleum products. This is further exacerbated by differential between FOREX rate associated with PPPRA pricing template and current market realities, such as when the Naira losses significant value between the time of petroleum product importation and subsidy payment.
Incidentally, as government is battling with settlement of legacy subsidy obligations, the independent marketer (IPMAN) will equally be agitating for settlement of bridging and equalization claims from PEF aside unending demand for review of operator’s margins on PPPRA pricing template even in the face of widely acknowledged double dip practices associated with implementation of cash-based subsidy regime in Nigeria. Here lies the complexity and unsustainability of implementing smooth price regulation regime.
2.0 status of STORAGE AND LOGISTICs facilities IN NIGERIAN DOWNSTREAM SECTOR
2.1 NNPC Downstream Logistics Facilities
NNPC/PPMC has over 5,000 KM of pipeline network connected to the three (3) national refineries with installed capacity of 445,000 barrel/day, 21 storage depots with 2.2 Billion Liters product capacity (PMS: 1.5 Billion Liters), 21 pump stations, 7 jetties and 8 LPG butanization plants.
The jetties at Atlas Cove, Apapa, Okrika, Calabar and Warri are very critical to the successful operation of PPMC coastal movement of vessels to convey petroleum products to the designated coastal depots.
However, the poor state of the jetties consistently hampers the evacuation and movement of bulk petroleum products by marine vessels. This is mainly as a result of the shallow draft of the jetties, which only allows for the reception of vessels with limited capacity. Furthermore, the bureaucracy in government agencies granting clearances to discharge petroleum products at the jetties is a major bottleneck in the smooth supply and distribution of petroleum products, not to mention the financial impact the delays cause the industry in form of aggravated demurrage and high freight rates.
NNPC’s storage depots suffer under capacity utilization, because majority of the connecting pipeline network are unavailable due to age of the pipelines and incessant vandalism. Although, significant progress was recently recorded in curbing the activities of vandals, specifically along pipeline segments of system 2B following the deployment of the Nigerian Armed Forces to secure the pipelines, however, due to insufficiency of logistics and the difficult terrain (creeks and swampy areas) of some pipeline segments, the vandals continued to perpetrate their criminal activities leading to total shutdown of pumping operations sometimes across the Corporation’s critical supply and distribution network with attendant negative consequences on the country.
The challenge has over the years resulted in NNPC/PPMC relying heavily on 3rd party storage facility owners to facilitate bulk distribution of petroleum products on its behalf on throughput basis at huge cost often attributed as part of loss by NNPC.
Nonetheless, even if the current Nation’s refineries were well maintained and operated at full capacity it is still inadequate as the combined installed refining capacity has stagnated at 445,000 barrels per day since 1980 when population was about 68 Million. Population has more than doubled since then to about 178 Million as often quoted by policy analysts, this divergence between population growth and refining capacity is depicted in the chart 4 below:
CHART 4: COMPARISON OF REFINING CAPACITY AND POPULATION FOR OPEC COUNTRIES
SOURCE: OPEC ANNUAL STATISTICS BULLETTIN 2015
From the chart 4 above, there is clearly an urgent need to increase the Nation’s domestic refining capacity as Nigeria has the lowest refining capacity per capita with 445,000 barrels/day to 178 Million people, while, Saudi Arabia has almost 3 Million barrels/day to only 31 Million people.
2.1.1 opportunity cost of domestic refining capacity expansion versus expenditure on cash-based subsidy regime
The table below depicts both actual and estimated costs of constructing brand new refineries with installed capacities ranging from 40,000 to over 600,000 barrels/day, with a view to deriving the number of brand new refineries and additional domestic refining capacity that could be achieved with the sum of N8 Trillion being the total amount expended on petroleum subsidies from 2006 to 2014.
S/N
Name
Capacity
Cost ($)
Cost (N)
Remark
1
Pakistan State Oil Islamabad
40,000BPD
$600M (Est.)
Final cost TBD after feasibility studies
N119.34B (with N8 Trillion, 67 refineries of 40,000 B/d could be constructed with combined capacity of 2.7 MB/d)
· Expected to be fully commissioned in 2016/2017
2
Ugandan Petroleum Refinery
60,000BPD
$2.5B (Est.)
Final cost TBD after feasibility studies
N497.3B (with N8 Trillion, 16 refineries of 60,000 B/d could be constructed with combined capacity of 960,000 B/d)
· Construction will start in 2015
· By 2017 production will start with 30,000BPD
· Full production of 60,000BPD starts in 2019
3
BYCO Oil Petroleum Ltd. Pakistan
120,000BPD
Above $750m as at 2012
N149.18B (with N8 Trillion, 53 refineries of 120,000 B/d could be constructed with combined capacity of 6.4 MB/d)
· Commissioned in 2014
· First stage of production is 50,000BPD as at 2014
· Next Phase is 90,000BPD
· Final stage is 120,000
4
Dangote Refinery Complex
650,000BPD
$11B (Est.)
N2.2TR (with N8 Trillion, 4 refineries of 650,000 B/d could be constructed with combined capacity of 2.6 MB/d)
· Expected to come on stream by end of 2016
· Includes a fertilizer plant
5
Jamnagar Refinery (Owned By Reliance Industries)
668,000BPD
$6B
N1.2TR (with N8 Trillion, 6 refineries of 668,000 B/d could be constructed with combined capacity of 4.5 MB/d)
· Commissioned in 1999
· built within 36 months
CBN Exchange Rate as at 30TH NovemBER 2015 - $1= N198.9
The table above illustrating the various cost of building brand new refineries reveals the opportunity cost in terms of possible domestic refining capacity expansion lost by Nigeria in favour of cash-based subsidy regime implementation, aside the derivative incomes from petrochemical industries and employment opportunities for a host of unemployed Nigerians
2.2 private sector owned downstream logistics facilities
Private sector participation and investment in the downstream sector has thrived over the years. This is largely attributable to the enactment of the local content act in the Country.
There are over 70 tank farms scattered along the Nigerian coast with over 2 Billion liters product capacity (PMS: over 1 Billion liters), over 7,000 filling stations and 28,000 trucks.
Remarkably, the nation has adequate and operational infrastructure in the downstream sector, however, the integrity of the public facilities are constantly being compromised by vandals, poor maintenance due to a host of reasons ranging from poor planning to constraints of fund. On the other hand, the private sector facilities in the downstream sector are suffering from under capacity utilization arising from financial constraints to maximally operate the asset in supporting the economy.
KOMOLAFE, Group General Manager, Special Duties, Nigerian National Petroleum Corporation wrote from Abuja
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