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Published On: Mon, Jul 15th, 2019

Fuel importation and fraudulent subsidy, will Nigeria exit it?

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By Jide Ojo

“In 2011, when I was the CBN governor, Nigeria made $16bn from petroleum sales, and we spent $8bn importing petroleum and spent another $8.2bn subsidising the product…and I asked, ‘Is this sustainable?’”

– Emir of Kano, Muhammadu Sanusi II during the third national treasury workshop in Kano on June 26, 2019.

In 1988 the military junta of General Ibrahim Babangida embarked on the importation of refined petroleum products while the country’s four refineries underwent the required Turn Around Maintenance. Because the cost of the imported products would be higher, the administration decided to introduce subsidy in order to make the products affordable to Nigerians. The entire package of fuel importation and subsidy was to last for six months. Incidentally, what should have been a temporary measure has become a permanent feature of our economic life.  Thirty one years after its introduction, Nigeria still shamelessly imports refined petroleum products while the corruption-ridden subsidy regime continues.

Successive administrations, both military and civilians, promised and failed to make Nigeria self-sufficient in domestic refined petroleum products. Former President Olusegun Obasanjo’s administration in 2002 approved 18 Licensed to Establish popularly known in industrial parlance as LTEs but only one of them has come on stream with just 1,000 barrels per day capacity. The refinery is operated by the Niger Delta Petroleum Resources which produces only automotive gas oil, better known as diesel.

There was a news report in the Vanguard newspaper of August 28, 2015 that President Muhammadu Buhari in June 2015 licensed 65 Nigerian companies to construct modular refineries. The companies were reportedly selected from about 285 applications that were screened for the purpose. Modular refineries are mini-refineries with capacities ranging from 1,000 to 10,000 barrels per day,  which can be assembled and separated easily for enhanced performance and efficiency. How many of these MRs have been constructed?

To the best of my knowledge, out of the whole lot of LTEs, only Aliko Dangote has braved the odds to commence construction of a  650,000 barrels per day crude oil refinery  which is expected to commence production latest by 2022, according to an August 10, 2018 report in Reuters.  Even Obasanjo sold off two out of the comatose refineries in Kaduna, Warri and Port Harcourt, only for the administration of President Umaru Yar’Adua to be forced to rescind that decision due to pressure mounted by some Nigerians. Since then, despite the millions of dollars pumped into their Turn Around Maintenance, none of the local refineries is working optimally.

Many of the entrepreneurs licensed to build refineries have refused to do so because of the guided deregulation policy of the petroleum sector. They are afraid that should they build, they are not guaranteed of cost recovery as government policy has put a cap on the amount they could sell the products not minding if they are going to be operating at a loss. This is what has happened to Nigeria’s electricity sector where government has forced Distribution Companies better known as DISCOs not to charge cost recovery tariff while at the same time defaulting in payment of the subsidy. Lack of full implementation of the   Multi-Year Tariff Order, which is a tariff model meant to reduce commercial losses and leads to cost recovery in the Nigerian Electricity Supply Industry, is at the centre of why privatisation has not worked in resolving Nigeria’s electricity challenge.

Before the recent call for subsidy removal by the Emir of Kano, the Managing Director, International Monetary Fund, Christine Lagarde, had called on the Federal Government to remove fuel subsidy. Addressing a press conference on Thursday, April 11, 2019 at the joint annual spring meetings with the World Bank in Washington DC, the IMF boss said with the low revenue mobilisation that existed in Nigeria in terms of tax to Gross Domestic Product, it was important for the country to remove fuel subsidy. Largarde said by so doing, the country would be able to move funds into improving health, education, and infrastructure

Indeed, Nigeria is postponing the evil day by not fully deregulating the petroleum sector. Running the economy on imported refined petroleum products and paying over a trillion naira in subsidy annually are not sustainable. The subsidy regime has been grossly abused with many false and unverified claims being made by some petroleum importers. There have been insinuations that because this subsidy is the honey pot of some oil cartels operating within and outside of the shores of Nigeria, that is why there has not been the political will from the Federal Government to ensure local self-sufficiency  in refined petroleum products.

According to a Premium Times report of December 26, 2018, Nigeria incurred N623.17bn on petroleum products supply under-recovery cost between January and November 2018. It is also not true that there are no longer subsidy payments.  On May 30, 2019, the Senate flayed the payment of N11tn to oil marketers as subsidy in the last six years, stressing that the development, if not halted, could kill the nation’s economy. The upper chamber took the decision while considering the report of its Committee on the Downstream Petroleum Sector. The Chairman of the committee, Kabir Marafa, had while presenting the report, told his colleagues that Nigeria spent over N11tn to pay outstanding subsidy claims in the last six years. The development came just as the upper chamber also approved the payment of additional N129bn subsidy claims to 67 petroleum marketers.

With this done and subsidy removed, the resources being used to pay for subsidy can then be applied to provide social infrastructure. Follow me on Twitter @jideojong

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