The recurring experience of the pervasive social stress that comes with fuel shortages seems to have become an abiding motif in the tapestry of our social and economic life, despite our nation’s benevolent endowment with substantial crude oil revenue.
Instructively, however, there is the popular local adage that you do not wash your hands with spittle when you are standing by the riverside; similarly, it is inexplicable that so much social agony can be caused by our “inability” to adequately refine the surplus crude oil endowment in our backyard into petrol and other derivatives. In this event, the traditionalists amongst us may readily conclude that anyone with such an unusual predicament must have been “jazzed” by an unforgiving enemy! “Dis no be ordinary eye”! they would say. Yet, successive governments have inexplicably appeared helpless and shamelessly condoned this odious aberration for so long.
The unwillingness or inability to establish efficient domestic refineries and related industrial plants, has clearly led to a loss of thousands of job opportunities. Sadly, in addition to higher pump prices, imported fuel and other crude oil derivatives currently consume about 40 percent of our total foreign exchange earnings and also account for the lion’s share of the loan portfolio of commercial banks.
Worse still, the present fragile imports supply chain often precipitates fuel shortages, which in turn instigates unauthorised price hikes, hoarding, and other such commercial malpractices, which further distorts fuel supplies and economic activities nationwide. Ultimately, desperate motorists could remain trapped for several hours in long winding queues just to buy fuel. The economic cost of the man hours lost and the health implications for such drivers have never been carefully computed, but the results of such investigations will clearly be very disturbing. What is however undeniable, is that, conversely, liberal access to reasonably priced fuel supply clearly has immense economic, social and health benefits that will contribute to a better quality of life for more Nigerians.
Evidently, the establishment of new domestic refineries would clearly diminish or completely eliminate incidents of fuel scarcity and the attendant stressful and economically wasteful queues at petrol stations; yet, unexpectedly, past administrations had never shown serious interest in adding to the four old refineries in Warri, Port Harcourt and Kaduna. Regrettably, despite the hundreds of millions of dollars voted annually for Turn Around Maintenance, these refineries have rarely produced up to 20 per cent of total national requirement in recent years, yet, inexplicably, the privatisation of the Port Harcourt and Kaduna refineries by former President Olusegun Obasanjo was later reversed for being inappropriate by the late President Umaru Yar’Adua. Sadly, however, production output remained intermittent and grossly inadequate. Instructively, some industry experts suggest that more new refineries could have been established with the billions of dollars expended on the obviously, unprofitable TAMs.
Indeed, soon after President Buhari’s inauguration, the Nigerian National Petroleum Corporation management raised hopes that the ailing refineries have spurted back into action. The new NNPC helmsman, Ibe Kachikwu, who is, incidentally, now also the Minister of State, Ministry of Petroleum Resources, has indicated that the corporation will rehabilitate and expand the existing refineries, all which are presently operating well below 30 per cent of installed capacity. Indeed, early in September this year, Kachikwu had happily reported that the TAM of the two Port Harcourt refineries was completed at a total cost of $10million by local engineers instead of the $297million earlier quoted by foreign companies. Kachikwu therefore assured Nigerians that the government would ensure that the other refineries would also be rehabilitated so that their installed optimum capacity of about 400,000 barrels/day could be achieved, even though, such a capacity would still fall significantly short of current market demand.
Notwithstanding, the minister has ruled out any plan to sell off the refineries for now, but, has suggested however, that government may participate in establishing joint venture refineries. However, until that happens, Kachikwu concluded that “I will import as much as I need and, I will try and refine as much as I can… I certainly will hope that someday, in my tenure, we would stop importing. But, it is not going to happen on a 100 per cent basis unless you build new refineries.”
The NNPC boss had also earlier noted that the existing refineries needed to attain a minimum output of 60 per cent installed capacity for them to be profitable. Regrettably, however, as of October/November 2015, production in all four refineries is presently probably below five per cent. Consequently, the minister has warned that any refinery that does “not attain the required minimum output of 60 per cent capacity after completion of the ongoing TAM, by the December deadline, may be sold, because such refineries would be grossly unprofitable to run”, and the NNPC would require about $500m to fix these refineries next year.
It is unlikely that private sector marketers would happily proceed to fill their fuel import quotas and relieve the NNPC of intense supply pressure if critical issues relating to prompt settlement of subsidy claims are not fully resolved, especially when marketers allegedly pay high double digit interest rates to banks for delayed payments on loans incurred to finance their fuel imports. In this event, sadly, fuel queues and the attendant economic wastage and social agony may not totally disappear anytime soon, particularly when the earliest private refinery is scheduled for inauguration two years or so from now!
Incidentally, with the present market price of crude oil hovering between $45 and $50/barrel, the current landed cost of petrol according to the PPPRA template is about N98/litre (and this includes N11/litre subsidy). Thus, if government summons the courage to increase fuel price to N100/litre to consolidate its weak revenue base, this price would eliminate subsidy and provide an opportunity to charge a N2/litre sales tax instead.
Regrettably, the obviously favourable price regime can only be sustained if crude price does not rise above the $45-50/barrel price benchmark.
Ironically, if crude oil price remains consistently, however, below $40/barrel, the gates will be thrown open for liberal fuel importation and unfettered deregulation as the domestic pump price would have fallen below the current N87/litre subsidised price, if the naira exchange rate remains unchanged at N200/$. Nonetheless, crude oil price below $40/barrel will, however, create severe revenue challenges for all levels of government and this may propel the call for further naira devaluation to swell monthly naira allocations to the three tiers of government. The downside of this call is that another significant devaluation will again push up the domestic pump price of fuel and attract wide condemnation of the present administration, and a fresh call for fuel subsidy.
In reality, removal of subsidy will only become sustainable with a stronger naira exchange rate, which will be made possible if the CBN stops substituting naira allocations for dollar denominated revenue.