Mixtape of the Month

Mpmania Mix 39

Mpmania Mix 39

How to exit oil subsidy in Nigeria – By Chinedu Onyeizu

The debate on the propriety or otherwise of removing oil subsidy from budgetary allocations in Nigeria continues to generate a lot of commentary from among Nigerians and interested observers of happenings in the country in recent times with no consensus on how best to address the issue without jeopardizing the cost of existence of the citizenry.

For the segment of the society that favours oil subsidy removal the argument has been that the nation’s economy will be better off with its removal in the sense that the huge amount of money expended on the policy could be re-routed to address critical areas of the economy such as infrastructural development initiatives among others.

Those who are against fuel subsidy removal hinge there disagreement on the resultant price hike that will follow such a decision with multiplier effect of economic hardship. In a sense the two groups in the avalanche of opinion on the oil subsidy matter have kept the argument alive but there is the urgent need to critically weigh the benefits and disadvantages of these arguments and arrive at a workable solution that will serve the interest of the Nigerian economy and that of her burgeoning populations better

Nigeria unarguably has the largest volume of petroleum resources in West Africa and second to Libya in Africa. With over 38 billion barrels of crude oil in reserves, the country is well positioned to leverage this natural resource to better the lot of its citizenry. Currently the country produces nearly 2.3 million barrels of oil per day and the fraction of her total production that comes from onshore or offshore locations, the Federal Government owned national petroleum co-operation (NNPC) owns 60% equity. 

Aside holding the largest natural gas reserve in Africa and ranking the world’s fourth largest exporter of Liquefied Natural Gas in 2015, Nigeria’s crude is considered one of the purest because it has low sulfur content. Nigeria as at the last count is the most populous country in Africa with an estimated 190.9 million populations and therefore she stands a better chance of being a hub of choice to petroleum related businesses in Africa than any other country in the continent.

 Investment in Nigeria’s downstream industry could be a highly profitable venture since liquid fuel for domestic use is still being imported from foreign refineries despite the country’s enormous oil reserves. The refineries that were installed at capacities capable of meeting the needs of the whole of West Africa (445,000 bopd barrels of oil per day) have gone moribund as a result of endemic corruption under successive governments in the country.

In addition to corruption, the obvious lack of political will to initiate radical reforms in the sector has continued to plague growth opportunities in the industry. The refineries operate way below capacity due to pipeline vandalism and operational failures and yet the country budgets huge sums of money annually to subsidize importation of fuel in order to meet her 280,000 bopd local demand requirements.  

It is on record that between 2006 to 2018, Nigeria had spent nearly N10 trillion on subsidies, an amount the government could re-allocate to other productive sectors of the economy for faster development of the country. 

In the past, many energy policy experts have advised the government to deregulate the downstream sector and abruptly end fuel subsidy payments. In my view, it is a good policy recommendation but instead of rolling out the policy as an executive decision, it will be more constructive or palliative if it is rolled out as a strategic goal of a road map. A road map for the systematic whining down of subsidy payment and eventual deregulation of the petroleum downstream industry would be more purposeful. 

The country can achieve this by enabling local refineries and simultaneously cutting down equivalent import capacity. In other words, if we currently subsidize the importation of 50 million tons daily consumption of liquid fuel for example, with collaboration of NNPC and the Federal Government, at least 5 local refineries can be incentivized to start operation within 2 years to replace 5 million tons through put to use modular refineries. This method will translate to 10% reduction in estimated subsidy payment. If the country start investment in building local refining capacity, within a reasonable time frame, Nigeria could become liquid energy independent much sooner than later. 

To further elucidate on this proposition, the ministry of petroleum in collaboration with NNPC could initiate a 10-year Domestic Crude Refining and Distribution Plan (DCRDP) that will accelerate investment in Modular, Small and Large scale refineries.

This policy will recommend co-location of refineries at the operational base of oil producing companies – IOC’s and NOC’s. The intent is to speed up time to value by guaranteeing access to feedstock – crude oil from terminal gathering tanks of the producing companies are piped to the refineries and more importantly, enable them to leverage existing crude evacuation and exportation facilities at their locations. 

The beauty of this policy recommendation is the fact that it will be a win-win situation for all the stakeholders. For instance, NNPC is able to sell some of her crude oil to private refineries at source and save cost of shipping to foreign refineries.

On the other hand, the new refineries benefit a huge cost saving by sharing ship berthing and evacuation facilities of the host producing companies. This model was tested using a system dynamics framework at Massachusetts Institute of Technology (MIT) and the results were mind blowing. The result suggests that Nigeria could potentially become a global hub for petroleum refining businesses if the model is well implemented by the government. 

 To put things in perspective, Mobil and Shell producing companies could be co-located with modular /small/large scale refinery players in Eket and Forcadoes respectively. Since NNPC owns 60% of all produced crude oil in onshore and shallow offshore Nigeria, they could be allocating a percentage of their daily production to the refineries based on their refining capacities and then use exiting export facilities in their location to evacuate refined products from Forcadoes or Eket to tank farms located in the country’s shore lines.

If this liquid energy sufficiency model is adopted and expanded, Nigeria will not only become independent on liquid energy, she will open up new frontiers for business in the marine industry – to ship refined products and create new pipeline construction jobs. Other benefits include growth in GDP and revamp of the economy through additional businesses that will spring up in the value chain.

Thus, Nigeria can become a global force in the petroleum industry if she adopts a strategic roadmap towards solving her liquid fuel independence and subsidy payment challenges. Existing facilities at operational bases of producing oil and gas companies in the country can be leveraged to speed up time to liquid fuel independence. In the end millions of jobs that were hitherto expatriated to overseas refineries will return back to Nigeria and more importantly the country will gradually exit needless huge spending in oil subsidies.

Engr. Chinedu Onyeizu was a former APC Senatorial Aspirant for Abia South in the last election. 

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