How FG Funds Petrol Subsidy Through Crude Oil Sales Proceeds

There are indications that the Federal Government through the Nigerian National Petroleum Company Limited (NNPC Ltd) is now spending N17.72 billion daily to fund subsidy on petrol.

Though still shrouded in secrecy, the funding strategy, Vanguard learnt, is consummated by way of crude sales and direct cost recovery by NNPC.

An executive of a major petroleum marketing company in Lagos told Vanguard that the N17.7 billion subsidy cost represents the difference between landing cost of imported petroleum products and effective wholesale price to petroleum marketers.

Nigeria imports all the petrol it consumes and according to the Chief Executive, Nigerian Midstream and Downstream Petroleum Regulatory Authority, NMDPRA, Farouk Ahmed, daily petrol consumption in the country is around 44.3 million litres.

At current average deport price and exchange rate, the FG through NNPC may be incurring about N531 billion losses or revenue shortfall monthly.

This has now been reflected in the monthly Federation Account Allocation Committee, FAAC, reports.

The NNPC also deducts this shortfall from its remittances to the Federation Account, but the final distributable balance remains significantly higher than the pre-May 30, 2023 figures due to higher product prices.

President Bola Ahmed Tinubu had on 29th May, 2023, inauguration address declared that subsidies on petrol had ended. His declaration immediately led to a hike in the pump price of fuel to N480 per litre lower limit from N185 per litre. The upper limit was around N560.

Two months later, pump price moved again to over N600 per litre with NNPC Retail dispensing at N617 per litre in Abuja while independents and major marketers sold at N627 per litre. The upper limit in some locations hovered around N680.

Since then, while NNPC-owned stations and affiliates have maintained the N617 per litre rate, prices at the independents and major marketers have soared to N660-N680 per litre. In some states of the Federation the upper limit has gone up to N750.

Data clothed in secrecy

Vanguard’s efforts to get Finance Ministry’s official data on petrol import prices were rebuffed while the regular FAAC breakdown of remittances by NNPC has been removed from public communications contrary to the practice a year ago.

Also NNPC declined to release its information on petroleum imports saying that it is now running as a private company, and therefore not obligated to making its trading information public.

Contrary to the position of the FG, petroleum marketers have insisted that the current landing price is above N1,000 per litre, meaning the government was paying the difference.

According to them, the major cost determinant is the exchange rate which had seen the Naira depreciate by almost 200 per cent since the May 29, 2023 declaration.

NNPC Limited remains sole importer of the product as scarcity of foreign exchange killed the euphoria that greeted the passage of the Petroleum Industry Act 2021 that provided for deregulation of the downstream sector of the petroleum industry.

The Act was expected to usher in an era of free market in the downstream sector, where marketers will be able to import and sell at competitive prices.

Marketers’ views
Speaking to Vanguard, the immediate past public relations officer of the Independent Petroleum Marketers Association of Nigeria, IPMAN, Chief Chinedu Ukadike, said the rise in petrol price is largely driven by the low value of the Naira to the Dollar.

Ukadike pointed out that while crude oil price has remained largely stable in the past one year, the Naira has continued to tumble against the dollar following the decision of President Tinubu to float the currency.

He explained that it is impossible for anyone to claim that the price of petrol has not changed significantly from when the exchange rate was N750/dollar when the subsidy was removed last year to now when the rate has moved to N1,600/dollar.

He explained: “Because NNPC is the sole importer of PMS in this country, it is very difficult for anyone to say for sure the actual cost of importing PMS into the country. Simple mathematics will tell you that the price cannot be the same when a dollar was exchanged for N750 and now that it is N1,600 to a dollar. What this means is that the price is above N1,000 per litre.

“So, the foreign exchange determines the price at the local market and if forex rate has increased, invariably, the landing price of petroleum products has also increased by same magnitude. I don’t know the magic through which they continue to sustain the price of PMS at the same level.”
He disclosed that while NNPC’s portal currently displays that ex-depot price was N566.7 per litre, independent marketers are not able to load at NNPC depots and have had to depend on private depots supplied by NNPC at the cost of N630 per litre.

Also speaking to Vanguard, a major marketer blamed foreign exchange rate for the huge gap existing between the actual market cost of petrol and the pump prices.
The marketer who didn’t wish to be named said government is certainly subsidising petrol at the current rate.

According to the marketer, “The landing cost is determined by the rate of the dollar to Naira. If you have US Dollar at N800, the price will be different if you’re buying at N1,600 for instance. So, it depends on the context. The government has told NNPC: don’t move the price.

“But for the rest of us, if you buy a vessel and you bring that vessel from the mother vessel to the port, it will cost you between $400,000 to $600,000 depending on where you are taking it to. If you are coming to Lagos it will cost about $400,000 but if you’re going to the east, it will cost $600,000. So, it cost about $30 per ton. So, if you are calculating this at N1,600/$ the amount is significantly different. And that informs the difference in pump price at NNPC outlets and the rest of us.

“You must also know that when your vessel gets to the port, NIMASA and NPA charge you in dollars. Everything amounts to $10 per ton. That dollar you cannot see in the banks. It is either you buy from the parallel market or you don’t operate.

“So, if NNPC has continued to sell at the old price, it means that the government has intervened. Which I will not call subsidies”, he explained.

Backing the positions of the marketers, oil and gas governance expert, Mr. Henry Adigun said government is paying over N400 per litre as subsidy.

Adigun explained that the easiest way to know the actual price of petrol “is to look at the price of diesel as both products were of the same value”.

He expressed dissatisfaction over non-release of data by NNPC Limited, adding the company remains publicly-owned and funded by the Nigerian people.

He pointed out that NNPC has become more opaque than it was a few years ago, adding that NNPC is likely paying for the subsidies with proceeds of crude oil sales as it did during the President Muhammadu Buhari’s government.

Analysts’ comments
Views across financial experts contradict FG’s position on existence of subsidy payment.
According to them, it is obvious that not only has subsidy regime returned, perhaps the amount spent on fuel subsidy is now far more than ever before.

They also believe that government may have decided to carry the subsidy burden for fear of a likely political and social backlash of transmitting the full cost of imported petrol onto the consumers.

But they also expressed worry over what they see as clear violation of the 2024 Appropriation Act which did not provide for subsidy funding.
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Why FG was forced back to subsidy– Expert

Speaking to Vanguard on the subsidy controversy, Tunde Abidoye, Head, Equity Research, FBN Securities Limited, stated: “It is quite clear that petrol subsidies have been back for some time considering: a) that the product is imported; b) 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 N1,500per USD.

“Industry experts will tell you that the landing cost of the product is already above the current pump price. Also, we can easily determine the real cost reflective price of petrol by bench-marking its price with those of other deregulated fuels like diesel( and kerosene.

“According to the last NBS report, the average price of household kerosene was N1,329.5 as at January 2024. Diesel prices averaged N1,153 due in the same period. The real market price of petrol cannot be substantially lower than prices observed for these two other petroleum products. Consequently, it is clear that PMS prices are being subsidized.”

NNPC owes Nigerians transparency — Highcap Securities boss
Reacting, David Adonri, Executive Vice Chairman at Highcap Securities Limited, said: “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.

“However, it remains an entity with very substantial public interest which demands a high level of transparency. It ought to feed the public with necessary information if it does not have anything to hide.
“From the perspective of arithmetic, depreciation of the Naira and continued importation of petroleum products by NNPCL points in the direction of subsidy at current pump price. It is only when petroleum products are produced locally and sold at open market prices by private refiners that subsidy may no longer arise.”

Publish financial statement to bring everything clearer — Kurfi

In his comment, Mallam Garba Kurfi, Chief Executive Offer at ATP Securities & Funds Limited, said: “We are not having any doubt about subsidy existence in petroleum sector. What is the price of diesel now? There is no doubt about fuel subsidy especially when you compared it with the price of diesel which is about N1,300’per litre. As a public company, their financial statement will bring everything clearer when published.”

Subsidy has crept back into the price of petrol — Olayinka

Reacting as well, Tajudeen Olayinka , Analyst/ CEO, Wyoming Capital and Partners, said: “I believe every discerning individual should know that subsidy is back. So far exchange rate is no longer at the level we had it the last time further adjustment was made to petrol prices, it follows therefore that subsidy has crept back into the current price of petrol across the country. I believe government deliberately put further removal of subsidy on pause, to enable the administration address all the socio-economic costs associated with subsidy removal and economic reforms.”

Withholding information undermines public confidence — Egbomeade

In his response, Clifford Egbomeade, Communications experts /economy commentator, said: “Transparency is essential in ensuring public trust and accountability, particularly in a sector as vital as oil and gas. Withholding information on subsidies and fuel distribution costs can undermine public confidence and raise questions about the motives behind such actions.”

Regarding the existence of subsidies on petrol, he said: “The lack of transparency from NNPC makes it challenging to ascertain the current situation definitively. However, given Nigeria’s history of subsidizing fuel prices to stabilise domestic markets and support consumers, it is plausible that some form of subsidy still exists, albeit potentially obscured by the lack of disclosure.”