Unending petrol subsidy profligacy – Punch

Seven years after an exposé on the petrol subsidy bazaar shook the country to its foundation, Nigeria still persists in the unjustifiable profligacy at the expense of its economic wellbeing. An ingrained folly, the incumbent regime – just like its predecessors – has been bitten by the bug of extravagant subsidy spending. In the past four years, the Major General Muhammadu Buhari (retd) regime has frittered away N1.5 trillion on subsidies, going by the Nigerian National Petroleum Corporation data crunched by a national newspaper. With the state-owned refineries grossly underperforming, Africa’s largest oil producer is set to continue in its crippling addiction to imports in the years ahead.

For now, there seems to be no immediate way out of the unsustainable habit. In 2020, the Federal Government made a budgetary provision of N450 billion for petrol subsidy. The Petroleum Products Pricing Regulatory Agency has a more realistic figure of N750.8 billion for the same year. According to the NNPC data, it was only in 2016 that the regime did not pay for subsidies, apparently because crude oil prices averaged $43 per barrel that year. Conversely, Nigeria parted with N219.3 billion in 2015; N144.5 billion in 2017 and N730.8 billion in 2018. This trend might have worsened but for the border closure in August.

This reflected in the first seven months of 2019. As of July, it had expended N383 billion, which is N78 billion higher than the N305 billion provision in the 2019 budget. Out of its 15-country list, Nigeria is the only Organisation of Petroleum Exporting Countries member that imports refined petroleum products, said Maikanti Baru, former NNPC group managing director. This is unthinkable and indefensible. It is on top of the huge amount spent in buying products, which oil industry experts estimate at $11 billion annually.

For decades, it has recklessly done so, primarily because the four public refineries in the country are in a shambles. Early this year, the daily output from the 445,000 barrels per day capacity utilisation of the refineries was estimated at 5.55 per cent by the NNPC. The outcome was the resort to imports, sometimes from countries far less endowed than Nigeria in crude oil production.

On this score, the worst-case scenario came up in 2011. That year, Nigeria wasted N2.57 trillion on subsidies, although the National Assembly approved only N245 billion for that. That 900 per cent excess spending triggered a countrywide outrage on the rot in the downstream sector of Nigeria’s oil industry.

That moment of sober reflection has, however, not translated to concrete initiatives to stem the haemorrhage. Instead, the Buhari regime papers over the cracks and indulges in imports and subsidy payments to keep up the façade. For the past few years, it is only the NNPC that imports petroleum products, locking out the marketers. The corporation turns round to pay itself for “under-recovery,” which is just another name for subsidy.

Undoubtedly, the colossal subsidy spending is draining life out of the economy. The Minister of Works and Housing, Babatunde Fashola, has just warned that the regime owes contractors N306 billion on road projects around the country. Social services, electricity and infrastructure, are in peril because government is short of income. As against the N1.5 trillion on petrol subsidies in 2015 to 2019, N624 billion was allocated to defence, N415 billion to agriculture, N277 billion for education and N251 billion for health (capital spending). The result is that the regime shelled out N943 billion on education, health and agriculture in the past four years, far less than the payouts on subsidies.

The main issue is the inability to reform and refine crude oil locally. Noticing that the refineries are moribund, the government has issued many licences to private sector operators in remediation. In May, it said that 43 operators were licensed to refine locally. But nothing significant has happened. Surprisingly, in 2007, government reversed itself after it initially privatised two of the refineries to the Bluestar Consortium. Since that monumental fit of misjudgement and despite opaque turnaround maintenance being trumpeted, the situation remains appalling.

Without a change of strategy, the economy might not rebound in terms of infrastructure renewal or social spending on education and health. As this newspaper has repeatedly canvassed, the regime should end its obduracy and implement reforms, which Buhari vociferously proposed during his first term electioneering. Then, he had promised to break up the NNPC into two separate entities, one of which was to be a holding company. Indeed, his former minister of state, Ibe Kachikwu, initiated an elaborate restructuring that unbundled the NNPC into seven divisions and 20 subsidiaries in March 2016. That promising idea petered out, indicating that the regime is obstinately statist.

In line with global best practices in the oil industry, it ought to follow a new path. Singapore, with 20,000 bpd crude production, is a refining hub in South-East Asia because it offers a crude oil refining capacity of 1.5 million bpd, with a majority of this capacity coming from just three refineries, says the Swedish Trade and Invest Council. Simply, private operators drive this.

Known for its statist bent, Saudi Arabia has started the liberalisation of its oil industry after it sold a 1.5 per cent stake in Saudi Aramco – the state-owned oil company – on December 11. That initial public offering, deemed to be the largest ever in the world, gave Aramco a valuation of $1.7 trillion, but topped the $2 trillion mark in just three days of trading. Therefore, it is imprudent of the Buhari regime to keep holding on to the loss-making refineries. They should be privatised quickly and the NNPC unbundled with government holding non-controlling shares. This will empower private operators to run the entities profitably.

At the same time, the era of imports will end. Without that, by the time the delayed 650,000 bpd Dangote Refinery comes on stream – and other medium and large refiners take off – the four refineries in Warri, Port Harcourt and Kaduna will turn out to be worthless.