Oil Importation Error: Absurdity of Nigeria’s Lack of Refining Capacity

Last week’s disruption in fuel supply and the attendant return of queues in Lagos and Abuja was another wake-up call on the need to focus on policies that will build local refining capacity, end the flawed subsidy arrangement and remove the pressure on foreign exchange earnings, reports Festus Akanbi

Within a spate of one week, a chain of developments in the petroleum sector succeeded in raising tension in the polity as attention shifted away from other pressing issues to the biting effects of disruption in the supply of fuel in some parts of the country.

First was the spike in the prices of crude oil at the international market, which hit $95 last week, amid Nigeria’s declining capacity to meet its production quotas. The second issue is the fear that the rising prices of crude oil will bring more trouble for the Nigerian government, which recently postponed the implementation of the removal of fuel subsidies.

The third issue was the disruption in the supply of petroleum products as a result of an importation error and the attendant scarcity, hoarding and the unilateral increase in the pump price of petrol by some oil marketers cashing in on the panic buying of some members of the public.

Losing Out on All Fronts

As the issues continue to unfold, economists who spoke with THISDAY lamented the unfavourable position Nigeria has found itself. It is argued that whichever direction one wants to look at the situation, the country is losing out on all fronts.

Nigeria’s production quota is 1.610 million bpd, but industry sources said current production figures hover around a 1.400million bpd.

Oil demand has held steady while supplies have been hit by production shortfalls from the Organisation of the Petroleum Exporting Countries and its allies (OPEC+). Also lending support to prices has been a perfect storm of myriad geopolitical tensions and politically-related supply outages.

Goldman Sachs analysts last week revised their oil price forecast. They’re now calling for global benchmark Brent crude to climb to $96 a barrel this year and $105 next year before markets rebalance in 2023.

Fuel Supply Disruption

Unfortunately, while some oil-producing nations are counting their gains of the current rise in prices of crude oil, it is not so in Nigeria as higher crude oil price means the Nigerian government will pay a higher subsidy to cushion the effect of the rise in cost. It also increases the temptation of fuel marketers to raise the prices of their products unilaterally, and those who couldn’t do that may resort to the importation of cheap products.

Following the supply of a wrong specification of petrol in some parts of the country, and its subsequent removal in compliance with a government order, long queues have once more returned to petrol stations in Abuja, parts of Lagos, and some other states. It was a hell of a week for commuters who had to spend hours and days at fuelling stations, a reminder of the sorry state of the nation’s fuel supply management of the previous administrations.

Economic analysts who spoke with our correspondents in separate interviews, however, believed the current fuel scarcity would soon disappear by the time the Nigerian National Petroleum Corporation (NNPC) can rid the nation of the contaminated fuel in circulation.

Paying for Lack of Refining Capacity

They however insist that the greatest problem which Nigerians should worry about is the lack of refining capacity, which compels Nigeria to rely on imported petrol for local consumption. This development is the same factor robbing Nigeria of the gains of the current spike in prices of crude oil.

This was the main reason why the federal government insisted that it would not be excited about the rising prices of crude oil in the international market as long as the fuel subsidy regime remained in Nigeria’s domestic market.

The Director-General of the Budget Office of the Federation, Mr Ben Akabueze, who said this, lamented that the decision to retain fuel subsidy in the 2022 budget would compel the federal government to borrow an additional N1 trillion to offset its cost while the state and local governments in the country would suffer an estimated loss of N1.5 trillion in revenue.

Speaking during a webinar that was organised by the Financial Institutions Training Centre (FITC), under its National Economic Development Outlook Series 2022 with the theme, “Rebooting the Economy: The Path to Sustainable Growth, Akabueze said, “Regrettably, for those of us on the fiscal side, the expectation of high oil price does not excite us as long as this subsidy regime remains because the crude oil price is the biggest factor in the price of refined oil products. Above the price of $63 per barrel the impact on us fiscally will be negative with this subsidy regime. Higher dollar revenue will strengthen the external sector but the impact on government revenue is negative.”

Subsidy Arrangement Unsustainable

The contentious issue of fuel subsidy wouldn’t have arisen if Nigeria can refine all its needed petroleum products as dependence on imported fuel has continued to put serious pressure on Nigeria’s foreign exchange account at the expense of other productive sectors of the economy.

These were the views of the Managing Director, Chief Economist, Africa and the Middle East, Global Research of Standard Chartered Bank, Razia Khan, Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf and Managing Director, SD&D Capital Management Limited, Mr Idakolo Gbolade.

Khan said that despite the rise in the country’s OPEC + production ceiling, the absence of much spare capacity has constrained Nigeria’s ability to raise production, pointing out that near-term, potential gains from the more favourable oil price environment are missed.

She argued that Nigeria is suffering from a lack of political power to end the fuel subsidy regime.

She said, “Of much greater seriousness however is the failure to act even sooner on fuel subsidies, as well as the nature of the subsidy itself, with a capped price. This means that any rise in oil prices has the potential to add to budgetary stress in Nigeria, detracting from any rise in fiscal revenue.

“There is no theoretical limit on the cost of the subsidy, given its design. The persistence of the fuel subsidy may also be one of the factors impeding the adoption of an FX regime that would do more to enable growth in Nigeria. The cost of the subsidy is therefore much more substantial than the direct budget outlay alone would imply.”

On his part, Yusuf, who was also a former director-general of the Lagos Chamber of Commerce and Industry, explained that the surge in crude oil price represents a mixed blessing for Nigeria.

He said the surge would impact positively on our foreign exchange earnings and government revenue, warning, however, that the reverse foreign exchange flows on account of massive importation of petroleum products would considerably dampen the expected positive outcomes from the spike in oil price.

Losing out from Oil Windfall

“Nigeria is perhaps the only oil-producing country that has not positioned its economy to take full advantage of the uptrend in crude oil price. We are stuck with an oil economy where refineries have practically collapsed for over years. It has been very difficult to attract private capital into the petroleum downstream sector because of the policy and regulatory regime.”

According to him, the way forward is to accelerate the process of ensuring domestic refining of petroleum products.

“Steps should be urgently taken to entrench reforms in the oil and gas sector to attract more private capital. There should also be an acceleration of reforms in the foreign exchange market to unlock opportunities for foreign capital inflows into the economy,” he submitted.

Gbolade believed the rising crude oil price is supposed to be a blessing for Nigeria if we had reached self-sufficiency in refining capacity, lamenting however that because we have not attained sufficiency in local refining capacity we are bound to obey the rules of the cost of importation of refined petroleum product at the attendant cost of crude in the international market.

On how to address the problem, Gbolade said, “The major way to solve the problem is to first fix the major challenges affecting crude output in Nigeria from the perspective of NNPC and other oil majors and implement, to a large extent the PIA (Petroleum Industry Act) already passed into law.

“The second major and immediate step is to ensure self-sufficiency in local refining both from government-owned and private refineries like Dangote refinery to bring down the cost of refined petroleum products and also eradicate the corruption associated with the subsidy regime.”