Rising Oil Prices will Test FG’s Ability to Pay Increasing Petrol Subsidy

Kachikwu says price fluctuations pushing Nigeria to think homewards
Chineme Okafor in Houston Texas

Recent increases in the global prices of crude oil to an average of $45 per barrel could become some sort of test on Nigeria’s ability to cover for the differential in the open market price of imported refined petrol and the regulated domestic pump prices of the product.

According to industry experts, based on the revised pricing template for petrol which the Petroleum Products Pricing Regulatory Agency (PPPRA) released recently and in which subsidy on petrol has increased to over N12  per litre that the government would have to find a way to cope with the payments if the conditions remained constant for more than five months.
Based on PPPRA’s template, the government now pays to oil marketers N12.88 and N12.62 for every litre of petrol brought into the country.

The subsidy payment is the differentials in the current expected open market prices of N99.38 and N98.62 per litre, and government regulated pump prices of N86 and N86.50 per litre for respective importations of the Nigerian National Petroleum Corporation (NNPC) and independent oil marketers.

But at a 45 million daily national petrol consumption rate, the government will be paying an average of N579.6 million every day to oil marketers (N12.88 multiplied by 45 million).
It would have to however make the payments through a N100 billion which was saved as over-recovery from marketers when the prices of oil was quite low earlier in the year.

This N100 billion which the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had confirmed was saved over time can only cover for an average of 173 days, which is a minimum of five months after which the government will have to look for other means to pay subsidy if the market fundamentals still remain on this level.

The PPPRA, which will review the pricing template by the end of the second quarter had also indicated that the government, did not make budgetary provisions for new subsidy payments.
Meanwhile, Kachikwu has said the fluctuations in oil prices was making Nigeria think inwards and make the most of her local content law to cut production costs.

Kachikwu said when he opened the Nigerian pavilion at the ongoing 2016 Offshore Technology Conference (OTC) in Houston Texas that the country was making the most of its local content policy which has seen it build more in-country capacity to do jobs that would have driven costs in the industry higher than they are now.

“There is need for us to look inwards and see how we can optimise cost; reduce the cost of production so that we can remain afloat.

“You cannot reduce the cost of production if you do not have Nigerian expertise in development of procurement materials,” said Kachikwu who was represented by NNPC’s Group Executive Director, Gas and Power, Mr. Seidu Muhammad.
He further stated: “With the capacity building that is today going on with fabrication of so many equipment that we need in the oil and gas industry, you can be sure that of course, Nigeria is going in the right path.

“Although, so many things are happening with the oil and gas industry, particularly with the dwindling prices of crude oil.”
Similarly, the Chairman of the Petroleum Technology Association of Nigeria (PETAN), Bank Anthony Okoroafor, disclosed that the association in partnership with the NNPC was mulling up measures to certify the competencies of companies that execute projects in the country’s petroleum industry.

Okoroafor also called for the deployment of over $500 million that has accrued to the Nigerian Content Fund (NCF) for upgrade of the industry’s in-country capacity.
“PETAN as an association has been coming up with costs effective strategies to survive to be able to deliver quality services to the industry even in midst of low prices.

“PETAN has also introduced seal of quality and competence because the industry cannot move forward without this seal. During this period of low price, the association does not want people to be making mistakes on the job side,” he said.

He added: “Our objective is to ensure that we leverage on proven Nigerian companies in terms of services. We are not asking for patronage, we want Nigerian companies that have proven their competencies to be given jobs to do.”

Okoroafor said it was time for the deployment of the over $500 million that has accrued to the NCF for capacity upgrade, saying: “That is how Korean companies were built.
“We don’t know why the fund is not used for the benefit of the indigenous operators because this fund belongs to us. There is nothing wrong if the Nigeria Content Development Monitoring Board (NCDMB) decides to empower companies with $20 million each with low interest rate to empower their capacities,” he explained.