fbpx

Why Nigerians should anticipate increase in petrol’s pump price despite assurances from NNPC


We need your support to produce excellent journalism at all times.

BRENT, Nigeria’s crude oil equivalent, crossed the 60 dollar per barrel mark in February for the first time since the outbreak of the coronavirus last year. This means more revenue for the nation’s economy but also a possible hike in petrol pump price in the country.

Timipre Sylva, minister of state for petroleum resources, at the official inauguration of the Nigerian Upstream Cost Optimisation Programme (NUCOP) in Abuja recently, said Nigerians should prepare for an increase in the pump price of petrol despite the new fortunes of crude oil in the global oil market.

“Since we are optimising everything, the Nigerian National Petroleum Company, NNPC, needs to also think about the optimisation of product cost because as we all know, oil prices are at 60 dollars per barrel.

“As desirable as this is, it has serious consequences as well on product prices. Today the NNPC is taking a big hit from this as we all know that there is no provision in the budget for subsidy payments,” he said.

In March 2020, the Petroleum Products Pricing Regulatory Agency, PPPRA, announced the removal of subsidy on petrol, stating that the prevailing market dynamics would regulate the pump price of petrol.

Data obtained from the Central Bank of Nigeria (CBN) show that the country’s external reserves gained 700 million dollars from the rebound in global oil prices as the reserves increased from 35.37 billion dollars on December 31, 2020, to 36.43 billion dollars in February.

This means that Nigeria could generate more revenue than its intended target of 2 trillion naira, as the current Brent crude price of 63.5 dollars per barrel (as of 10.01 on February 19) has overshot the 40 dollars per barrel benchmark of the 2021 budget.

However, the minister’s comments raised concerns on why Nigerians should bear the pains of an expected hike in the petrol pump price despite the steady recovery of international crude oil prices.

READ ALSONNPC in precarious situation as investments could turn into losses – Report

In a tweet on Thursday morning, NNPC’s group general manager, public affairs division, Kennie Obateru, discounted rumours that an upward review of petrol price would occur in February.

“NNPC has not increased its ex-depot price. I am certain that NNPC is not likely to increase its ex-depot price in February,” Obateru stated.

He added that the NNPC had a stock of petrol that could last over 40 days, and allayed fears of an impending scarcity of the product.

With the petrol pump price currently hovering between 165 to 170 naira per litre across the country, The ICIR examines the circumstances likely to lead to an imminent hike in petrol price in confirmation of the minister’s assertion.

Hidden ‘under-recovery’ charges re-surfaces

Nigeria spent 1.09 trillion naira to import petrol within the first six months of 2020, indicating a 42 percent increase when compared to 766.06 billion naira that was spent on the product in 2019, according to data from the National Bureau of Statistics, NBS.

Advertisement

Subsidy payments were initially made directly to petrol importers until President Muhammadu Buhari, in 2015, directed the NNPC to take charge of petrol imports in a bid to absorb the difference between the landing costs and the price at the pump.

The removal of subsidy payments announced by the federal government in April 2020 showed the subsidy payments that were previously deducted from the remittances of the Federation Account Allocation Committee, FAAC, by National Petroleum Investment Management Services, NAPIMS, a subsidiary of the NNPC.

The PPPRA sets the depot price based on a template, and marketers are allowed to fix prices at the pump to balance the oil market modalities.

Data obtained from the Petroleum Product Marketing Company, PPMC, a subsidiary of the NNPC, show that the current landing cost of the importation of petrol is estimated at 180 naira per litre, which is 15 naira higher than the pump price at 165 naira.

In a bid to maintain the current price at 165 naira per litre, the NNPC pays at least 15 naira per litre to sustain supply. Given that the country consumes 57.2 million litres per day, according to the NBS mid-2020 data, the NNPC pays at least 858 million naira each day on subsidy.

The Nigerian government resorts to subsidy payments since its refineries do not have the capacity to refine crude oil.

On Thursday, the West Texas Intermediate (WTI) for March traded above 60 dollars per barrel while the Brent settled at 63 dollars per barrel as crude benchmarks added over 12 percent since the beginning of February.

Data from NBS reveal that 1.003 trillion naira was spent on petrol imports for the first quarter of 2020, as against 190.78 billion naira which was spent in the corresponding quarter in 2019.

About 87.08 billion naira was spent on petrol imports in the second quarter as against 575.28 billion naira in the same quarter in 2019. However, the total petrol imports account for 2.16 percent of the total import into the country for the second quarter of 2020.

READ ALSONNPC seeks $1 billion to refurbish Port Harcourt Refinery which posted losses 5 years in a row

Nigeria’s expensive crude oil production 

Nigeria is ranked as one of the major oil-producing countries with the highest cost of crude oil production in the world which, according to the group managing director of the NNPC Mele Kyari, was unsustainable. Kyari said to produce a barrel of crude oil costs the country 17 dollars, which was one of the highest rates in the world.

In Saudi Arabia, it costs an average of 8.38 dollars to produce a barrel of crude oil, while Iran spends 9.08 dollars on the production of a barrel of crude. On the other hand, Iraq spends 10.57 dollars to produce the same quanitity.

The World Bank had projected that Brent crude oil would be sold at an average of 41 dollars per barrel during the second half of 2020 and 50 dollars per barrel during 2021, stating that unless the price of crude oil production was reduced it would be difficult to maximise revenue to be generated from its  sale.

At the Central Bank of Nigeria, CBN, Round Table discussion in Abuja in March 2020, Kyari had said that high oil production costs for countries such as Nigeria might put the country out of business if the oil price dropped below 30 dollars per barrel.

Advertisement

“In a production environment like Saudi Arabia, it is about 5 dollars (to produce) a barrel. You cannot do it here. The best of our production system is at about 15 to 17 dollars to a barrel.

“And beyond that also, there is competition because people are producing at a lower cost than you are, which depresses the potential of coming out of the impact of coronavirus for a long while,” he said.

Nigeria’s break-even crude oil price is 133 dollars, ranked as the highest in the world, based on its high refining costs, according to Fitch Ratings. The implication is that when the global price of crude oil drops below Nigeria’s projected benchmark, the country would generate losses for barrels of crude oil it produces.

An oil-exporting country’s fiscal break-even oil price is the minimum price per barrel for a country to meet its expected spending needs while balancing its budget.

Broken Refineries, Expanded Bills

Between 1976 and 1989, the federal government, through the NNPC, built three refineries in Port Harcourt, Warri and Kaduna. The Port Harcourt refinery was built by Shell and BP in 1965 before it was bought over by the NNPC.

The nation’s major refineries, which are subsidiaries of the NNPC, include Kaduna Refining and Petrochemicals, KRPC; Warri Refining & Petrochemicals Company, WRPC; and Port Harcourt Refining Company, PHRC, Limited.

According to a 2020 report published by the Nigeria Natural Resource Charter,(NNRC), the NNPC spent 396.33 million dollars between 2013 and 2017 to carry out repair works under the Turn Around Maintenance, TAM, scheme on the three refineries which contribute little to the nation’s economy.

Within the same period, the sum of 36 billion dollars was spent on importation of petroleum products, which is sufficient to build four brand new refineries of similar capacity with the 650,000 barrels per day.

The records show that the three refineries reported a combined loss of 154.4 billion naira, with Kaduna refinery posting zero revenue for the 2018 financial year. This was despite the huge investments by the NNPC to renovate the refineries.

In April 2020, the refineries were shut down pending rehabilitation as the NNPC awarded the contracts for repairs and upgrades at the various refineries.

In 2019, the refineries lost some 167 billion naira and only Warri refinery processed crude oil. In April 2020, they were all shut pending rehabilitation.

Nigeria’s four refineries have a combined capacity of 445,000 barrels per day.

OPEC and a Russia led oil-producing nations formed an alliance tagged as OPEC+ which had agreed to cut down inventories and remove 1.2 million barrels per day of crude oil from global markets in a bid to raise oil prices.

Advertisement

With Nigeria’s pressured revenue, petrol subsidy is not sustainable. This is also largely because Africa’s biggest economy cannot refine its crude, which analysts say is unfortunate.

Comments

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More