Analysis: How The FG Is Now Funding Petrol Subsidy

by Ohepo Ohepo

Based on available data, the Nigerian National Petroleum Company Limited (NNPC Ltd) on behalf of the Federal Government appears to be spending N17.72 billion every day on fuel subsidies.

Vanguard discovered that the funding plan, which is still cloaked in mystery, is carried out by NNPC through direct cost recovery and the sale of oil.

According to a Lagos-based executive of a significant petroleum marketing company, the N17.7 billion subsidy cost is the difference between the effective wholesale price to petroleum marketers and the landing cost of imported petroleum products.

According to Farouk Ahmed, the Chief Executive of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), the country imports all of the gasoline it uses, with an estimated 44.3 million litres consumed per day.

Based on the prevailing average deport price and currency rate, the FG, via NNPC, might be losing almost N531 billion each month or not making enough money.

The monthly reports from the Federation Account Allocation Committee, or FAAC, now show this.

Due to rising product prices, the ultimate distributable amount is still much larger than the pre-May 30, 2023 levels even after the NNPC deducts this shortfall from its payments to the Federation Account.

In his inaugural speech on May 29, 2023, President Bola Ahmed Tinubu declared the end of petrol subsidies. His statement caused the lowest limit of the petrol pump price to rise instantly, from N185 per litre to N480 per litre. The maximum was approximately N560.

Two months later, the pump price increased to much beyond N600 per litre, with independent and large merchants selling at N627 per litre while NNPC Retail in Abuja dispensed at N617. In certain places, the top limit was close to N680.

Since then, rates at independent stations and major marketers have skyrocketed to N660–N680 per litre, while NNPC-owned stations and affiliates have continued to operate at the N617 per litre rate. In several Federation states, the highest limit has been raised to N750.

Cloaked in secrecy data

Vanguard’s attempts to obtain official data from the Finance Ministry regarding the prices of petrol imports were met with resistance, and in contrast to what was previously the norm, the regular FAAC breakdown of NNPC’s remittances has been withdrawn from public communications.

Additionally, NNPC refused to provide its data on petroleum imports, citing its current status as a private business as an exemption from the requirement to disclose its trading information to the public.

Petroleum marketers have maintained that the current landing price is more than N1,000 a litre, which means the government is making up the difference, in contrast to the FG’s stance.

They claim that the currency rate—which has caused the Naira to drop by about 200 percent since the pronouncement on May 29, 2023—is the primary factor influencing costs.

The excitement around the passing of the Petroleum Industry Act 2021, which allowed for the deregulation of the petroleum industry’s downstream sector, was tempered by the lack of foreign exchange, and NNPC Limited continues to be the only importer of the commodity.

It was anticipated that the Act would bring about a free market era in the downstream industry, enabling marketers to import goods and sell them at competitive pricing.

Views of marketers

Speaking to Vanguard, Chief Chinedu Ukadike, the immediate past PR officer of the Independent Petroleum Marketers Association of Nigeria (IPMAN), stated that the depreciation of the Naira in respect to the US dollar is a major factor contributing to the increase in petrol prices.

While the price of crude oil has been relatively steady over the past year, Ukadike noted that the Naira has continued to weaken in relation to the US dollar since President Tinubu decided to float the currency.

He clarified that it is hard for anyone to argue that there hasn’t been a major rise in the price of petrol between last year, when the subsidy was eliminated, and now, when the exchange rate is N1,600/dollar.

He clarified: “It is very difficult for anyone to say for sure the true cost of importing PMS into the country because NNPC is the lone importer of PMS in this country. It is obvious from basic maths that the price could not have been the same when a dollar was worth N750 and it is now worth N1,600. This indicates that the cost per litre is more than N1,000.

Therefore, the price in the local market is determined by foreign exchange, and if the forex rate has grown, the landing price of petroleum goods has inevitably climbed by the same amount. The mechanism by which they manage to keep the price of PMS constant is beyond me.
He said that although the ex-depot price is now shown on the NNPC portal at N566.7 per litre, independent marketers are unable to load at NNPC depots and are instead forced to rely on private depots that NNPC supplies at a cost of N630 per litre.

Speaking to Vanguard as well, a prominent marketer attributed the large discrepancy between the actual market price of petrol and the pump pricing to fluctuations in foreign exchange rates.
The marketer, who wished to remain anonymous, stated that the government is undoubtedly subsidising petrol at the present price.

The marketer states, “The dollar to Naira exchange rate determines the landing cost.” If you purchase something at N1,600, for example, the pricing will be different from N800 if you have US dollars. It thus depends on the situation. NNPC has been told by the government not to change the price.

For everyone else, however, the cost of purchasing a vessel and transporting it from the mother ship to the port will range from $400,000 to $600,000, contingent on the destination. It will cost approximately $400,000 to get to Lagos, but $600,000 to travel to the east. It so cost roughly $30 per tonne. Therefore, the amount is much different if you calculate this at N1,600/$. And it explains why the pump price at NNPC stores is different from the rest of us.

“You also need to be aware that NIMASA and NPA will charge you in dollars once your vessel arrives at the port. It all comes down to $10 per tonne. The money that is hidden from view in the banks. Either you purchase from the black market or you choose not to do business.

Therefore, it indicates that the government has stepped in if NNPC has kept selling at the previous price. which, he said, I will not refer to as subsidies.

Expert in oil and gas administration, Mr. Henry Adigun, backed the marketers’ claims by claiming that the government is subsidising gas at a cost of more than N400 per litre.

The simplest method to determine the true cost of petrol, according to Adigun, “is to look at the price of diesel as both products were of the same value.”

He voiced his displeasure with NNPC Limited’s refusal to share data, noting that the business is still publicly owned and supported by Nigerians.

He noted that NNPC is now less transparent than it was a few years ago and said that, like under President Muhammadu Buhari’s administration, NNPC is probably using the earnings from the sale of crude oil to pay for the subsidies.

Commentaries from analysts

Financial experts’ opinions diverge with FG’s about the presence of subsidy payments.
They contend that it is evident that not only has the subsidy regime been reinstated, but that the amount allocated to fuel subsidies may actually be more than it was previously.

Additionally, they think that the government may have chosen to foot the bill for the subsidies out of concern for the possible political and social fallout from charging consumers the full price of imported gas.

However, they also voiced concern over what they perceived to be a blatant disregard for the 2024 Appropriations Act’s prohibition on funding subsidies.
Why FG was compelled to return to subsidies—Expert

“It is quite clear that petrol subsidies have been back for some time considering: a) that the product is imported; b) that there is a substantial import component in the product’s price; and c) the naira exchange rate has been devalued at least twice, first to around N760 and then to N1,500 per USD,” said Tunde Abidoye, Head, Equity Research, FBN Securities Limited, in an interview with Vanguard regarding the subsidy controversy.

Industry specialists will inform you that the product’s landing cost already exceeds the pump price at this time. Also, by comparing the price of petrol to that of other deregulated fuels like diesel and kerosene, we can quickly ascertain the true cost reflective pricing of petrol.

As of January 2024, the average cost of household paraffin was N1,329.5, per the most recent NBS statistics. During the same period, the average price of diesel was N1,153. It is impossible for the true market price of petrol to be significantly less than the prices of these two other petroleum products. As a result, it is evident that PMS prices are supported.

Nigerians deserve transparency from NNPC. Head of Highcap Securities
“There might be a merit in the claim by NNPCL that being a private company although a publicly sponsored enterprise, it is not under any obligation to publicly disclose its corporate information,” responded David Adonri, Executive Vice Chairman at Highcap Securities Limited.

But it continues to be a subject of intense public attention, necessitating a high degree of openness. If it has nothing to hide, it should provide the public with the information they need.Arithmetic-wise, the depreciation of the Naira and NNPCL’s ongoing imports of petroleum products indicate that a subsidy at the current pump price is likely. Subsidies may only end when petroleum products are manufactured locally and offered by private refiners for sale at open market rates.

Release financial statements to make things more understandable. — Kurfi

Mallam Garba Kurfi, Chief Executive Officer of ATP Securities & Funds Limited, stated in his statement: “We have no doubts regarding the existence of subsidies in the petroleum sector.” What is the current diesel price? Fuel subsidies are undeniable, particularly when weighed against the over N1,300 per litre cost of diesel. When their financial statement is released, as a publicly traded firm, everything will become more apparent.

The cost of petrol has once again included subsidies – Olayinka

Tajudeen Olayinka, CEO and analyst at Wyoming Capital and Partners, also reacted, saying that she thought “every discerning individual should know that subsidy is back.” after the exchange rate hasn’t returned to its previous level after subsequent adjustments to petrol prices were made, subsidies have once again found their way back into the price of petrol nationwide. In my opinion, the government purposefully stopped removing subsidies further in order to give the administration time to handle all of the socioeconomic consequences of doing away with subsidies and implementing economic reforms.

Information withholding erodes public trust, according to Egbomeade

Clifford Egbomeade, a communications specialist and economic analyst, responded by saying: “Transparency is crucial to guaranteeing public trust and accountability, especially in a sector as important as oil and gas.” Withholding information concerning gasoline distribution costs and subsidies has the potential to erode public trust and cast doubt on the motivations behind such acts.

He stated that it is difficult to determine the current state of affairs with certainty due to NNPC’s lack of transparency regarding the existence of petrol subsidies. However, it is conceivable that some kind of subsidy still exists, albeit possibly hidden by the lack of disclosure, given Nigeria’s history of subsidising fuel prices to stable local markets and help consumers.

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