Why FG May Remove Petrol, Kerosene Subsidies

The Federal Government may have concluded plans to stop subsidising the consumption of petroleum products in the country, especially petrol and kerosene following increasingly dwindling revenue.

The Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, gave the clearest hint yet of the planned removal of subsidies on both products by the Federal Government on Tuesday at the ongoing Nigerian Oil and Gas Conference in Abuja.

She said that the subsidies being paid to the marketers by the Federal Government on imported Premium Motor Spirit and kerosene were no longer sustainable, prompting analysts to say the days of the petrol and kerosene subsidy regime might soon be over.

Alison-Madueke stated that the reform already being implemented in the power sector should be taken to the downstream oil subsector, stressing that the negative impact of continued regulation of the sector outweighed the positive impact.

She said, “The continued regulation of the downstream sector has its positive and negative impacts on the economy. But the negative effect is more than the positive. The subsidy policy cannot be sustained any longer.

“This is because the subsidy payment is not benefiting the poor it is targeting; rather, it is benefiting the rich. The industry needs to move to next level by increasing revenue and curbing oil theft and pipeline vandalism.

“Without belabouring the point, we are all aware that the government has to deregulate the downstream sector. Continuing regulation, we all are aware, has negative effects. It is basically unsustainable, it discourages investment, and principally, it benefits the rich, not the masses in the society that we intend to reach in the first place.

“This means that deregulation is the only way in which capital investment can be encouraged. It can give employment opportunities. At the same time, we are all aware that in a democratic polity, there has to be a balance between different policies and directives of government and the needs and desires of the people of Nigeria at all times.”

If the subsidies on both products are removed, the consumers will be paying a minimum of N144.66 for a litre of petrol against the official regulated price of N97.

The N144.66 is the landing cost of the product and the distribution margins as contained in the pricing template prepared by the Petroleum Products Pricing Regulatory Agency for the month of March.

For kerosene, consumers will have to pay N154.36 per litre, which comprises the landing cost of N138.87 and distribution margins of N15.49, instead of the official pump price of N50.

This is the first time in recent times that a top official will provide an insight into government’s thinking on the subject of subsidy removal though there have been official denials that nothing like that is in the offing.

Only last Thursday, the Forum of Commissioners of Finance of the 36 states of the federation passed a resolution for the removal of fuel subsidy.

The Chairman of the forum, Mr. Timothy Odaah, told journalists shortly after this month’s Federation Account Allocation Committee’s meeting that the resolution was passed following irregularities observed in the fuel subsidy regime.

The Federal Government has a budget of N971.1bn for petrol subsidy payment this year, same as in 2013.

The Speaker of the House of Representatives, Mr. Aminu Tambuwal, had claimed last month that available records indicated that the Federal Government spent over N1tn on kerosene subsidy between 2010 and 2013.

Alison-Madueke’s comment came as the government’s revenue base has been shrinking with massive crude oil theft and vandalism of products’ pipeline reducing the country’s export earnings.

The Excess Crude Account, in which extra income made from the sale of crude oil in the international market and above the budget benchmark is saved, has been depleted from $8.65bn at the end of 2012 to $2.11bn at the beginning of this month although the Minister of Finance, Dr. Ngozi Okonjo-Iweala, claimed on Sunday that it had risen to $3.45bn.

The nation’s external reserves have continued to drop from last year’s peak of $48.85bn recorded in May to $38.65bn on March 14, 2014, according to the latest data on the website of the Central Bank of Nigeria.

Although the Nigerian National Petroleum Corporation had given an assurance that it had enough stock of imported petroleum products in strategic reserves that would last for months, Alison-Madueke wondered why the current scarcity of petrol had continued unabated.

She blamed the situation on sabotage, diversion, hoarding, panic buying and rumours of imminent pump price increase.

Alison-Madueke also outlined the challenges confronting the government in the oil sector to include perennial oil theft, pipeline vandalism and non-passage of the Petroleum Industry Bill.

She said, “The PIB is still with the National Assembly and we hope that it will be passed very soon. However, we have been confronted with the menace of pipeline vandalism for decades and it has become much more prevalent in the last few years.

“In 2013 alone, all the major crude oil pipelines were severely damaged and vandalised at different points in time. The Bonny-Escravos line from the refinery was not spared either. Needless to say pipeline vandalism and sabotage created significant losses for the country.

“These include direct and indirect costs for the provision of security, crude oil and petroleum products losses, environmental degradation and associated remediation cost.”

In spite of the challenges, the minister said “stable 2.3 million barrels per day production of crude oil were achieved in 2013.”

She explained that the industry had the capacity to boost oil production to three million barrels per day and gas production from 6.3 trillion standard cubic feet per day to 8.1 trillion standard cubic feet per day.

The Managing Director, Nigerian National Petroleum Corporation, Mr. Andrew Yakubu, said the country’s oil and gas industry was put under siege by pipeline vandalism in 2013.

“It is imperative that we secure gas pipelines in the country because whenever they are vandalised, between 200,000bpd and 300,000bpd are shut in; that was what we experienced in 2013,” he added.