Examine fuel subsidy claims closely

By Afam Nkemdiche   |   06 August 2015   |   11:53 pm  

fuel scarcityA SENIOR colleague, Dr. Jerry Nwankwo, and I had been discussing an ongoing project when the distinguished environmental chemist popped an unexpected question: “Afam, what’s your opinion on fuel subsidy?” he asked pointedly. By slow degrees it came to me that my answer had been at best, generic; with the sheer volumes of monies (trillions of naira per year) involved in the so-called petroleum products subsidy, everyone instinctively knew there is something sinister about it. But unfortunately no individual or group of individuals has written or spoken in specific terms about the fuel subsidy scandal.

Why subsidise petroleum products in the first place? Nigerian National Petroleum Corporation (NNPC) and other organisations, which import petroleum products into Nigeria claim that because of both Federal Government’s partial regulation of the domestic market and the continued devaluation of the naira, landing costs now exceed approved selling prices. Government must pay out huge subsidies to importers to give the latter elbowroom for some returns on their huge financial outlays; else Nigeria would altogether be starved of petroleum products. So the fuel subsidy argument runs. These costs components, except the cost of products, could readily be verified. For petroleum products, however, multiple regimes of pricing apply, depending on products’ specifications.

A petroleum oil refinery’s basic products are: gasoline; kerosene; diesel; fuel (black) oil; and liquefied petroleum gas (LPG). Kerosene, diesel fuel oil and LPG are the least tasking to produce; they are derived at the primary stages of the refining process, they are thus referred to as straight-run-products. Gasoline on the other hand presents production challenges. Its production processes and systems make up approximately one half of the cost of a petroleum oil refining plant. But for the associated products it would not have been feasible to arrive at a commercially acceptable price for gasoline. Its production cost is written off on other petroleum products; consequently the prices of petroleum products are essentially determined by the specifications on gasoline.

Petroleum products’ specifications are fixed by geographical locations. A major operational challenge in temperate zones is starting up engines in sub-zero temperatures. Therefore gasoline targeted at such zones must readily vaporize profusely in sub-zero temperature; such high-vapour-pressure gasoline cost much more than low-vapour-pressure gasoline. This is what accounts for the multiple regimes of pricing for petroleum products.

Department of Petroleum Resources (DPR), the industry regulator, says all imported petroleum products to Nigeria conform to specifications for the tropical zones. This means a relatively cheaper regime of pricing should apply in computing the landing costs of imported petroleum products into Nigeria. But is that the extant practice? Indeed, does anyone, DPR, NNPC, Petroleum Products Pricing Regulatory Agency (PPPRA), Ministry of Petroleum Resources, Nigeria Customs, the Central Bank, etc, know the regime of pricing that applies in generating the landing costs of imported petroleum products? Point is, we ought to know because if, as I am inclined to believe, the higher pricing regime has been operative, then the nation’s coffers would be the better for it: all importers of petroleum products into Nigeria would necessarily have to refund the billions of Nigeria they had been paid by default.

Between the late 1980s and the early 1990s both DPR and NNPC had respectively held that Nigeria’s daily consumption of gasoline stood at 3,000,000 litres. Today, about 25-odd years after, selfsame organisations tell us Nigeria’s daily consumption of gasoline stands at 40,000,000 litres! Hard to take in. Which organisations conducted the surveys that produced the extant statistics?

We urgently need to go over the fuel-subsidy computations with a fine toothcomb.
• Afam Nkemdiche is a consulting engineer in Abuja.



  • emmanuel kalu

    That is why, the pricing template needs to be public and methods also. in the grand scheme of things, the whole process needs to be ended and we allow the market forces to determine the price, with strong and enforced regulations. our govt needs to be focus and investing in increasing local refining and even export of the product.

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