Subsidize crude oil for production of petrol not consumption – Experts charge FG

Oredola Adeola

The Federal Government has been advised by industry experts to subsidize crude oil that would be available for local production of petroleum products, instead of subsidy targeted towards consumption. The experts made this known during subsidy workshop organised by Major Oil Marketers Association of Nigeria (MOMAN) for media practitioners in Lagos on Monday.

The workshop came on the sideline of the Federal Government’s recent withdrawal of plan to suspend payment of subsidy on Petroleum Motor Spirit(PMS) popularly known as petrol.

Dr. Biodun Adedipe, founder and Chief Consultant of B. Adedipe Associates Limited (BAA Consult), a commentator on Government fiscal operations and economic policies, who spoke on the topic, “Economics of Subsidy and the Pathway to Achieving Industry Reforms in the Petroleum Downstream Industry”, revealed that subsidy as an economic phenomenon has been perpetually misused in Nigeria to service human consumption instead of being used to correct market failure and to provide support for weak economic agents.

He said that it was wrong for Nigeria to retain subsidy payment on any product in the petroleum downstream sector which according to him, should be a left for a perfectly competitive market. He added that subsidy if ever needed should be placed on crude oil to encourage local refining of the petroleum product.

The renowned economist said, “State Owned Enterprises(SOE) such as NNPC are inefficient in resource allocation. The Corporation through its agencies PPPRA and now the Nigerian Midstream and Downstream Petroleum Regulatory Authority(NMDPRA) has been promoting anomaly through petroleum industry pricing templates.

“Historically, Nigeria has been faced with the challenge of how to connect the non-oil economy with the oil economy. This challenge was created overtime by the then established marketing boards specifically focused on how to administratively share and distribute the country’s commonwealth.

“Over the years, the organised private sector has evidently proven to play a critical role in the allocation of the country’s resources. The private sector particularly accounts for over 90 percent of the country’s Gross Domestic Product (GDP).

“Add up 100 percent of the annual budgets of the three tiers of the government. it is often times less than 10 percent of our GDP, which means that the value of our economic activities is typically on the private sector. This is why the entire business activities in the oil and gas sector should be exclusively operated by the private sector.

“Nigeria has been faced with fiscal and monetary challenges over many years for servicing inefficiency in the name of subsidy. Data has proven that there is need to take a departure from administratively fixing of rate and prices to market determined and driven allocation of resources.

“In a perfect competitive market, every agents playing in that sector would have access to same information. Government’s participation in the market is responsible for the arbitrage caused by information asymmetry (a situation where information is not flowing freely among stakeholders)

“Subsidy is a direct tax , or tax rebate either given to individual(Consumption) and Firms(Production). The most effective subsidy across every developed economy is focused on production not consumption.

“It is designed to correct market failure. Fundamentally the essence of subsidy is to provide support for a weak economic phenomenon.

“Subsidy targeted on production will ensure common good. It will work to align private and social costs with the benefits and bridge social balancing.

“The economic benefits of subsidy should outweigh the cost. It is therefore an aberration to continue to pay subsidy because it would continue to encourage smuggling to other West African country.

“If the money spent on subsidy is devoted on infrastructure renewal, Nigeria would have become the manufacturing hub of the continent. Subsidy resources can be spent on developing the dry port, inland water ways, roads, railways and power.

“Nigeria is recording financial losses because we have refused to fix the country’s refineries. The refineries can’t work, for as long as we keep devoting resources to inefficient subsidy payment.

“If the inefficiencies are not addressed and we go ahead to remove subsidy, within space of time, it will resurface because the real issue has not been.

He however called for the scrapping of the PPPRA’s price template which encourages demurrage on oil vessels in the port. Petroleum Equalization Funds, that take

According to him, investors demand more transparency in the constituent elements of pricing mechanism. He said, “Nobody knows how NNPC arrives at the landing cost of petroleum products. The market is opaque, none of the players in the market understands how the prices are determined.

Dr. Adedipe affirmed that a competitive market system will remove opacity, it will boost the country’s ranking as a friendly business environment for investors. He said, “ a steady business environment will drive investors into the country.”

Alhaji Rabiu Bello, Chief Executive Officer,  Dankiri Commodities Ltd, who was a former Chief Operating Officer/Group Executive Director, Upstream Business Unit at the Nigeria National Petroleum Corporation NNPC , while speaking on the topic: “Challenges of Equitable Refining, Importation, Supply and Distribution of Premium Motor Spirit in Nigeria,” stated that inefficiency in the downstream sector will continue to cost the country over N264 billion annually spent on wasteful maintenance of the four local refineries, petroleum product pipelines and depots belonging to the Nigerian National Petroleum Company Limited (NNPC).

According to him, for as long as we continue to allow NNPC and its agencies to manage the oil and gas industry assets, we will be wasting so much money annually.

“What we need within the next 18 months of extending subsidy payment is for the government to enshrine efficiency, transparency and competition within the petroleum industry.

“We also need a shift in the way we structure subsidy provision targeting subsidy on production and refining of crude oil locally.

“Nigeria spent between N11 billion and N12 billion on refineries every month as well as N12 billion spent on pipelines across the country. It is wasteful venture for the country to continue to spend on facilities that has been left unmaintained and inactive for years.

“You can’t be competitive if you keep importing the petroleum products. We need to fix our local refineries and create sustainable way of making the product available and affordable.

He also said that the petroleum pipeline and depots should be privatised for serious private players to manage. This, according to him, will address supply issues and reduce reliance on trucking of petroleum products across the country.

He said, “The pipelines should be sold to private investors, and more investment should be encouraged for installation of pipelines for the supply of petroleum products across the country. This is the best practices as trucking of the petroleum products should not be more than 100 km.

The former NNPC scribe said this effort will reduce cost , promote distribution efficiency and save lives and properties.