Subsidy is Gone! Long Live Fuel Subsidy

•With current market price, petrol should sell at N720/Litre

•Landing cost hits N651.75/Litre, Tinubu under pressure to return subsidy

•President, NNPC, IPMAN declare no plan to increase fuel price

•Presents graphic illustration indicating Nigeria’s petrol cheapest in West Africa

•Kenya restores subsidy to curb rates volatility

•MAN calls for govt intervention to stabilise market

Deji Elumoye, Emmanuel Addeh in Abuja and Peter Uzoho in Lagos

From his inaugural speech on May 29th, 2023, where President Bola Tinubu announced the removal of subsidy on petroleum products, development in the oil and gas market where the landing cost of per litre of petrol has risen above the current pump price as well as the government’s decision to jettison market forces in adjusting petrol prices suggests that subsidy on petrol may gradually be finding its way back into the system. 

Precisely, the landing cost of petrol has risen to N651.75/per litre, far higher than the N617 per litre the Nigerian National Petroleum Company Limited (NNPC) had pegged the product, documents obtained by THISDAY yesterday revealed.

The development has put Tinubu under intense pressure to rethink his decision to remove subsidy on petrol.

A breakdown of the landing cost of petrol showed that while product cost, as of yesterday, was N627.82 per litre, finance cost was N11.61, and operations/administrative cost N12.32, bringing the total landing cost to N651.75 per litre. With the current market price, it means that petrol ought to sell at over N720 per litre.

Just days ago, marketers were pushing to increase a litre cost of petrol at the pump from N617 to N720 on the basis that naira had continued to slide against the dollar. therefore, the current pump price had become unsustainable.

However, sources among marketers said Government is living in denial of the challenge it is facing with regards to the subsidy issue and the near daily depreciation of the naira against the dollar. Maintaining that  no company would spend its resources to import products,  and then turn around to sell it below the landing  price

Notwithstanding the high cost of petrol importation,  and with labour threatening to embark on strike without notice if the government approved another price increase, the president, yesterday, announced that his administration was not contemplating any increase in the price of the product.

The announcement was a glaring signal that the Tinubu government might have effectively jettisoned the market forces, which NNPC had said would be the determining factor in the pricing of petrol following the removal of subsidy on the product on May 29.

NNPC also refuted any plan to raise fuel prices, despite stakeholders’ alarm about the effect of the increasingly volatile FX market.

Special Adviser to the President on Media and Publicity, Ajuri Ngelale, addressed newsmen yesterday at State House, Abuja, after meeting with the president on the issues.

Ngelale said the president assured Nigerians that there would be, “no increase in prices at this time and that Mr. President is convinced based on information before him that we can maintain current pricing without reversing our deregulation policy by swiftly cleaning up existing inefficiencies within the midstream and downstream petroleum sector.”

On its part, NNPC wrote on its Twitter/X Handle: “Dear esteemed customers, we at NNPC Retail value your patronage, and we do not have the intention to increase our PMS pump prices as widely speculated.

“Please buy the best quality products at the most affordable prices at our NNPC retail stations nationwide.”

But Nigeria’s volatile foreign exchange market continued to worsen the effect of the recent petrol subsidy removal by the federal government on the citizenry, with prices expected to rise markedly in the coming weeks.

At the official Investors and Exporters’ (I&E) FX window, the naira, which started off with an opening rate of N785/$1, closed at N774/$1. The volume traded yesterday on the I&E window was $95.79 million, compared to $160.22 million turnover recorded the previous day. This indicated a 40.29 per cent decline in turnover.

The parallel market, which had seen increased volatility in recent times, however, appreciated yesterday by N10 to close at N940/$1, compared to the previous day’s closing rate of N950/$1. With this, the gap between the parallel market and the I & E window yesterday reduced from N206 to N169 to a dollar.

As the exchange rate continues to depreciate, the governors are getting more naira cash, which they are using mount pressure on the forex market.

Nigeria Labour Congress (NLC) had on Monday stated that its members would commence a nationwide strike without any formal notice if the federal government approved another increase in the pump price of petrol without conclusion of ongoing negotiations. The warning came after oil marketers disclosed that the price of petrol might rise to between N680/litre and N720/litre in the coming weeks should the dollar continue to trade around N950 to a dollar at the parallel market. The last time the price of petrol was increased from N520 per litre to N617 per litre, Group Chief Executive Officer of the NNPC, Mele Kyari, had said market forces and the exchange rate were responsible for the increase.

Kyari had said, “What I know is that the market forces will regulate the market; prices will go down sometimes, sometimes it will go up, but there will be stability of supply. I am also assuring Nigerians that this is the best way to go forward so that we can adjust prices.”

Reacting to the president’s statement that there won’t be further petrol price increase at the moment, Chief Executive of Cowry Assets Limited, Mr. Johnson Chukwu, said it “simply means that subsidy is coming back. It simply means that the market forces that are supposed to be deciding the prices of petrol have been suspended.”

Chukwu explained on a national television, “If we are suspending market forces, that means that the pains we have gone through to eliminate subsidy has actually been for nothing. I think what the government needs to do is to address the reasons why we are seeing such jump in petrol prices, which is actually the issue of exchange rate.

“You cannot allow two variables to move at the same time. The appropriate thing would have been if the government was able to handle exchange rate, then we would be dealing with global market movement in the prices of petroleum products, and then we would have been dealing with marginal increment and marginal decrease in the price of petrol.”

Meanwhile, Kenya yesterday reinstated what the country termed small subsidy to stabilise retail fuel prices for the next 30 days. The country’s energy regulator disclosed the reversal of the government policy following public anger over the high cost of living.

But in Nigeria, in their various reactions to the ongoing situation, stakeholders, including marketers and manufacturers, although cautious about calling for a return to a subsidy regime, noted that the subsidy removal policy was not well thought-out, especially considering the handling of the fallout of the decision.

However, Tinubu allayed the fears of Nigerians about possible increase in the price of petrol, saying his administration is not contemplating any such move. Ngelale, who disclosed this to newsmen at State House, Abuja, after meeting with the president, said Tinubu assured Nigerians that nothing like that was being contemplated.

According to Ngelale, “This morning, I have the privilege of sitting down with His Excellency, President Bola Tinubu, as we discussed the current unfolding situation in the country as it relates to fuel supply and demand.

“The official position is that there is no increase in prices at this time and Mr. President is convinced based on information before him that we can maintain current pricing without reversing our deregulation policy by swiftly cleaning up existing inefficiencies within the midstream and downstream Petroleum sector.”

The media adviser also said the president expressed concern about the strike threat issued by NLC, which he described as premature.

Ngelale stated, “The president wishes, first, to state that it is incumbent upon all stakeholders in the country to hold their peace. We have heard very recently from the organised labour movement in the country with respect to their most recent threat.

“We believe that the threat was premature and that there is a need on all sides to ensure that fact finding and diligence are done on what the current state of the downstream and midstream petroleum industry is before any threats or conclusions are arrived at or issued.”

He said the president intended to ensure that no single individual or organisation dominated the sector.

Ngelale said the government would address the inefficiencies in the midstream and downstream petroleum value chain so that price would be stabilised.

He presented a chart to try to prove that the cost of petrol was still cheaper in Nigeria than other West African countries.

Ngelale said, “Mr. President wishes to assure Nigerians following the announcement by the NNPC Limited just yesterday that there will be no increase in the pump price of premium motor spirit anywhere in the country.

“We repeat; the president affirms that there will be no increase in the pump price of premium motor spirit.

“We also wish to affirm that the president is determined to maintain competitive tension within all sub-sectors of the petroleum industry. He is determined to ensure that our policy drawn up as well as policy implemented follow the cue that there will not be any single entity dominating the market.

“The market has been deregulated. It has been liberalised and we are moving forward in that direction without looking back.

“The president also wishes to affirm that there are presently inefficiencies within the midstream and downstream petroleum sub-sectors that once very swiftly addressed and cleaned up will ensure that we can maintain prices where they are without having to resort to a reversal of this administration’s deregulation policy in the petroleum industry.

“I wish at this juncture to also provide a set of graphics, which the president has authorised me to share with Nigerians that otherwise would be confidential. These are graphics supplied to Mr. President by the NNPCL.”

Ngelale explained, in his analysis of the illustrations, “In the graphics, what you will find is the present cost of refined premium motor spirit at the pump in each of the West African nations that neighbour us and I’ll just name some, for example, even as I know, you will be showing your audiences the graphics, which the president has graciously approved for public release today.

“Senegal at pump price today of N1,273 equivalent per litre, Guinea at N1,075 per litre, Côte d’ Ivore at N1,048 per litre equivalent in their currency, Mali N1,113 per litre, Central African Republic N1,414 per litre, Nigeria is presently averaging between N568 and N630 per litre.”

He maintained, “We are presently the cheapest, most affordable purchasing state in the West African sub-region by some distance. There is no country that is below N700 per litre.

“So, this is the backdrop we have seen that at the inception of our deregulation policy as of June 1, as Mr. President took office, we have seen PMS consumption in the country drop immediately from 67 million litres per day consumption, down to 46 million litres per day consumption. The impact is evident.

“What it also does mean, though, is that we are not at the end of the tunnel. There is still a bit of darkness to travel through to get toward the light. And we are pleading with Nigerians to, please, be patient with us.

“And as we promised from the beginning, we will be open with Nigerians, we will be transparent with them. And we are ready to show you exactly what it is that our nation is facing with respect to the illiquidity in the market in terms of foreign exchange, as a result of what is now known to have been a gross mismanagement of the Central Bank of Nigeria over the course of several years preceding this time.”

Kenya Reinstates Subsidy

Kenya returned a small subsidy to stabilise retail fuel prices for the next 30 days, the energy regulator said late on Monday, in a reversal of government policy following public anger over the high cost of living.

On coming to office last September, President William Ruto had removed fuel and maize flour subsidies put in place by his predecessor, saying he prefers subsidising production rather than consumption. The move was also aimed at cutting government spending, as the government sought to get a handle on debt repayments that had forced it to deny market speculation about a possible default, Reuters reported.

But the subsidy cuts as well as recent tax hikes increased living costs and contributed to violent anti-government protests in recent months.

The energy regulator said the maximum retail price of a litre of petrol would remain constant at 194.68 shillings ($1.35), shielding consumers from an increase of 7.33 shillings, which the government will shoulder through a price stabilisation fund.

Retail fuel prices are set in the middle of each month. The government also applied small subsidies on kerosene and diesel, the regulator said.

The move did not amount to a reinstatement of the subsidies, since the regulator was using the petroleum development levy to stabilise prices, rather than asking for exchequer support, said Daniel Kiptoo, director general of the regulatory agency for the sector.

Kiptoo stated, “We are basically giving to Kenyans the money that we have collected over the past couple of months,” he told Reuters, referring to the levy, which is charged at the rate of 5.40 shillings per litre of fuel.

Fuel prices shot up when Ruto removed the subsidies. They spiked again in July after the government pushed through parliament a contentious law that doubled the fuel tax.

The protests organised in response to the law were called off last month after the opposition and Ruto agreed to talks to resolve their differences, the second such attempt this year.

But Nigeria’s situation is made worse by the fact that it does not refine its fuels locally. With rundown refineries, Nigeria has been importing almost all its refined products from Europe and Asia.

Oil Marketers, Others React

National President of Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN), Dr Billy Gillis-Harry, in a chat with THISDAY, described the federal government’s current approach to the fuel situation as “half-baked”.

However, former Chairman of Major Oil Marketers Association of Nigeria (MOMAN) and Managing Director of 11Plc, Mr. Tunji Oyebanji, warned that considering the country’s depleted foreign reserves, any attempt by Nigeria to return to the subsidy regime would plunge the country’s economy into very dire straits.

Gillis-Harry said his association had for the last two years insisted that Nigeria should have a focused roadmap that will determine when subsidy removal and deregulation of the petroleum downstream sector would take effect.

He stated, “What that would have helped us to do was to be prepared for all of the issues that would come up, because you do not just wake up and bring out a policy based on some armchair economic projections of how the country would run, knowing full well that we are not producing enough power to power anything.

“Our industries depend on fossil fuel. Premium Motor Spirit (PMS) is the power that powers all our engines of growth, even in the smallest sense, our happiness and our serious businesses.”

The oil retailer noted that taking the above into consideration, there should have been serious preparation for the aftermath. He stressed that as it were, there was nothing to show that that much input went into taking the decision before it was taken.

Gillis-Harry stated, “So when you wanted to embark on fuel subsidy removal, you needed to have worked out a process on what should happen. So, for the simple reason that those in-depth thoughts were not reached, according to PETROAN’s propositions, we are where we are today.”

Admitting that spending N7 trillion, which the government was borrowing, in subsidy was undoubtedly not sustainable, the PETROAN boss argued that the government needed to have even worked out what the money could do for Nigeria before announcing the end of subsidy.

“Coincidentally, today, the aftereffect of the removal of fuel subsidy is coming on-board because these things are not done well. So, we need to get back to the drawing board,” he said.

Gillis-Harry advised that the government should not work in isolation, noting that since policies are made for Nigerians, there should be a meeting of all the stakeholders before decisions can be reached.

According to him, “MOMAN, DAPPMAN, PETROAN, NMDPRA, NNPC, NARTO, FCCPC, and the presidency should have a meeting of minds, including the Nigeria Labour Congress because of their protection of the employees across the nation.

“So, these are things that need to be done, and it’s not late to get back to that drawing board and work it out. Meetings that are being held today as far as my understanding is concerned, are half-baked and the requisite results will not be reached unless the subject is properly and holistically resolved.”

The reactions came a day after oil marketers under the umbrella of the Natural Oil and Gas Suppliers Association of Nigeria (NOGASA), said the foreign exchange crisis in Nigeria and the recent implementation of a 7.5 per cent Value Added Tax (VAT) on Automotive Gas Oil (AGO), popularly called diesel, had pushed up the cost of the commodity to between N900 and N950/litre in many states.

The marketers explained that their inability to access foreign exchange, particularly dollars, was impeding their ability to import diesel.

National President, NOGASA, Benneth Korie, who spoke in Abuja, said the cost of diesel was around N650/litre before the federal government introduced a 7.5 per cent VAT on the commodity.

Although, he declined to speculate on how much the product would sell in the coming weeks, he noted that petrol, diesel and even gas prices would rise further on the back of uncurbed rising value of the dollar to the naira.

Korie stated, “Diesel price is now approaching N900 to N950/litre, depending on where you are buying it from. Before the introduction of VAT on diesel by the FIRS, diesel was around N650/litre.

“This increase in price is also due to the scarcity of the dollars. The government has to intervene in this dollar situation. All bank CEOs, CBN and others must meet to address this dollar issue. The way it is going, it will destroy a lot of things for us if it is not controlled.”

Former Chairman of Major Oil Marketers Association of Nigeria (MOMAN) and Managing Director of 11Plc, Oyebanji, however, warned that it would be dangerous to return to the subsidy regime. He attributed the hike in petrol prices and the resurfacing of scarcity in the country to a multiplicity of factors, including foreign exchange problems, the effect of international price of crude oil on refined products, as well as Nigeria’s dependence on imported petroleum products.

Oyebanji said, “We all know why we all decided that deregulation was best for the economy. Part of the problem we have now is because of where subsidy took us. So if we decide to go back to subsidy, then we have to be very wary of the implications. At least, we have been reading about where our foreign reserve is at the moment.

“So when you have situations like that, the potential problem you will be dealing with will become a child’s play compared to what is happening now. As they are speculating that our foreign exchange reserve is much lesser than what we think it is, then, the naira is gone.

“While we are easing the pain on the people by saying we will go back to subsidy; we are postponing the evil day for greater problem in future. And there may be no remedy for that by that time. At least, one of the remedies now is removing fuel subsidy.”

Oyebanji said the challenge now was to find a way to manage the foreign exchange to stop it from driving up the cost of fuel. Specifically, he stated that the CBN must take some drastic actions to stem the foreign exchange problem, arguing that it is not demand and supply that is driving foreign exchange up.

Oyebanji maintained, “I think some people are just speculating and causing this problem. People will just take their salary, convert it to dollars and just keep it. So until your refineries are working and you are refining locally, it will reduce importation, then the only way out is to try and control your foreign exchange rate so that it doesn’t lead to increasing prices every day.

“If you take money from somebody and you have agreed to pay him back at the exchange rate of 750/$, and that’s what you used for your calculation, but now, you cannot find dollar at N750, you have to look for dollar at N900, you know you have made a very big loss and with that, your ability to continue the business has been impacted.”

In his intervention, National President of Independent Petroleum Marketers Association of Nigeria (IPMAN), Chinedu Okonkwo, absolved his members of involvement in speculations about a hike in petrol pump price, saying IPMAN members have not even started importing the product.

“We are really saddened by these speculators who are making things to be very hard for us because by the time they hear, people will begin to adjust even the price of garri. This is not helping,” Okonkwo explained.

He stated that the independent marketers, as distinct from the major marketers, were still getting their products from NNPC, which has not announced any price increase.

Okonkwo stated, “I want to state here that we are not making any effort to increase price. We are still getting our product from the NNPC majorly and they have come up clearly that they are not intending to increase price.”

Okonkwo explained that Compressed Natural Gas (CNG) would be a good alternative to expensive petrol, expressing the view that many of its members’ stations were already putting facilities in place.

Director General, Manufacturers Association of Nigeria (MAN),  Segun Ajayi-Kadir, who appeared on Arise Television, THISDAY’s broadcast arm, alongside Okonkwo, also said it was not in the best interest of Nigeria to continue to pay subsidy on petrol.

While stressing that it was reassuring that marketers were not hinting on increasing prices, Ajayi-Kadir noted that prices will continue to adjust in a deregulated market.

He said, “So I believe that government needs to be attentive to the signals and to ensure that the price does not escalate beyond the reach of the average Nigerian that has already suffered. It is affecting commercial activities and affecting the cost of logistics. It is also leading to escalation in price.

“So I think all these issues need to put us on notice that it is important to watch very closely and take all necessary steps to see that, first, this mitigates the possibility of escalation and ensure that we quickly ramp up domestic production, because I think, ultimately, that remains one of the major areas where you will be able to moderate the price of PMS.”