NNPC, petrol subsidy and the economy

By Editorial Board   |   10 September 2015   |   3:25 am  

NNPC-24-1-15-CERTAINLY, the attempt by the Nigerian National Petroleum Corporation (NNPC) and some of its partner international oil companies (IOCs) to shift blame for the poor performance of the four government refineries and non-establishment of new ones from their camp to the partial (essentially petrol) subsidy regime was unconvincing. The expected absurd result of the canvassed removal of subsidy offered justification for its retention in the existing circumstances and pointed elsewhere for the “Way Forward to Sustainable Development in Nigeria.”

In their addresses at the conference of the National Association of Energy Correspondents the other day, the oil companies among other things posed as do-gooders and preached the enthronement of transparency in the operations of the oil and gas sector to help grow government revenue. That standpoint was rather self-serving as in reality, the NNPC and its joint venture operators in the upstream petroleum subsector have yet to display transparency with regard to the exact revenue due to government. They do not disclose well-head crude oil output volumes or allow verification of export volumes at export terminals. They are known to inflate oil production costs in collusion with foreign oil service companies. Is petrol subsidy responsible for such underhand practices, which were conveniently left unaddressed? Surely, in that way, the NNPC and the IOCs poached much needed government revenue. That malpractice should stop.

In the downstream subsector, the House of Representatives Ad-hoc Committee on subsidy in 2012 exposed how the NNPC, oil marketers affiliated to the IOCs, local oil marketers and fly-by-night elements grossly inflated subsidy claims and payments to the detriment of the federal treasury. Up till date, the exact volumes of refined petroleum products imported and consumed are undisclosed in order to facilitate continued swindling of government revenue that should otherwise be productively invested. It remains unexplained how subsidy payment, which takes care of full cost recovery including normal margins for oil sector operators so as to pave the way for smooth operations, could be the cause of the hideous corruption (which accounted for high component of subsidy in the federal budget), the non-functioning of domestic refineries, the decay of NNPC depots along with the inter-connecting distribution pipelines and the refusal of the IOCs to set up export refineries for domestic processing of part of their crude production. The pledge by the new NNPC helmsman to reform the existing refineries to boost product supply even when petrol subsidy subsists, settles where culpable negligence of duty lies.

NNPC and its co-preachers at the conference also did reveal that the poor (the generality of Nigerians is poor) may not be the cost of petrol in a deregulated regime and would require to switch to compressed natural gas (CNG) as cheap vehicular fuel. The ramifications of high cost fuel in industrial production, public transportation of persons, industrial goods and agricultural produce can best be imagined. How will the poor cope between the time deregulation is implemented and availability of CNG? Who will build the CNG plants and at what cost? Who will consume the refined products of the promised additional oil refineries after deregulation? How will the heralded economic diversification take place? The fruits of deregulation of the downstream subsector appear to be hardship galore rather than the long desired national economic prosperity. The world over, cheap energy aids competitive industrial production and job creation contrary to the NNPC/IOCs’ prescription of high cost energy in Nigeria. In the circumstances the place of petrol subsidy is assured.

The lesson in the foregoing is that fuel prices in the country are excessive. A cursory look into history brings home that stark fact. When the Structural Adjustment Programme was adopted in 1986, the benchmark Brent crude oil price averaged US$14.43/barrel. The current world crude oil price of about $48/barrel is only thrice its 1986 level while the highest average monthly price of $133.90/barrel in July 2008 was nine times the 1986 price. On the other hand, petrol pump price rose from the 20 kobo per litre fixed in 1982 to 39.5k/litre in 1986. The recent petrol pump prices of N87/litre and N97/litre represent 220 times and 245 times the 1986 level respectively. The highly disproportionate rise in petrol pump price relative to the increase in crude oil price evidences CBN’s artificial naira exchange rate in the face of excessive government fiscal deficits owing to the inappropriate withholding of Federation Account (FA) dollar allocations over the years. Note very importantly that the skewed petrol price, which does not contain any element of taxation, still attracts subsidy amid insistent demands for further currency devaluation. Such is the mark of unrelieved excessive fiscal deficits. And they lead to economic perdition as the deregulation sought by the NNPC/IOCs prognosticates.

Therefore, the Federal Government should steer the economy from the precipice by turning the excessively high fuel prices to advantage. What is needed is to evolve a market-determined realistic naira exchange rate under the managed float system (MFS). Upon the adoption of the MFS, government should simultaneously freeze for a short period of time the present very high but generally accepted prices of all refined petroleum products. Under the MFS, the artificial CBN naira exchange rate that is prone to persistent depreciation will firm up. Gradual (and well-grounded expectation of future) appreciation will restore confidence in the domestic currency.

Accumulation of forex in domiciliary accounts and foreign bank accounts (these will be voluntarily and steadily repatriated) will be converted to naira funds. The existing external reserves (which should revert wholly to the Federal Government), FA earnings from crude oil exports, routine remittances by Nigerians in the Diaspora together with genuine foreign direct investment inflows (foreign portfolio investment should be shunned) far outstrip and continue to exceed the forex need for imports of goods and services thereby swelling the FG-owned external reserves. Part of the external reserves may be appropriated from time to time to finance critical projects such as the national gas and power transmission grids and other infrastructural projects, which foreign investors are unlikely to undertake for obvious economic reasons.

With time, the frozen fuel prices will result in cost-over-recovery levels and supernormal margins that should be taxed to boost government revenue. The oil sector operators cease to be drainers of public revenue and become part collectors of tax for government. Subsequent negotiated fuel prices will clip the supernormal margins leading to cheaper and cheaper energy costs. Energy consumption is not a waste but an indicator of the intensity of economic activity. National economic goal should be efficient harnessing and full productive use domestically of the available oil and gas resources in the not-too-distant future. In the meantime, the implementation of the MFS will give rise to conducive economic conditions and facilitate investment of the abundant but idle domestic bank lending capacity thereby providing the foundation for a thriving diversified economy. That, indeed, is the way forward to sustainable development and national prosperity.

  • emmanuel kalu

    Is this writer arguing for change in policy for the forex or for fuel subsidy. because his argument is missing on both side. The only thing that would change our fuel situation is the complete deregulation of the market. let market forces determine the supply and demand, there by fixing the price. a deregulated market would allow for private investment in refineries and end the importation of fuel. anything short of that would continue to breed massive corruption.

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