The NNPCL decided to wind down its Direct Sale Direct Purchase (DSDP) contracts after the recent 300% PMS price increase.
All the fuel subsidy claimed from 2020-2023 had originated from PMS imported under DSDP contracts. Last year, the Abdulkadir Sa’ad Abdullahi ad-hoc committee of the House of Representatives investigated the DSDP program. The NNPCL told the ad-hoc committee that 738,759,194 barrels (bbls) of crude oil was lifted under the DSDP program during the 2016-2021 period. However, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) claimed it was 733,260,525 bbls while those of the Nigerian Midstream Downstream Petroleum Regulatory Authority (NMDPRA) and the Nigerian Navy (NN) claimed the total crude oil lifted during the period was 732,319,016 bbls and 989,562,195 bbls respectively. These inconsistencies in the DSDP data from different government agencies suggested that all was not well with the program and the fuel subsidy regime. The fuel subsidy regime has always been controversial. In March 2022, the Minister of State for Petroleum Resources, Timipre Sylva, said “ if anyone is looking at a criminal enterprise, look no further than the fuel subsidy.” Was there any fuel subsidy under the DSDP program? Was the fuel subsidy regime a criminal enterprise? We will answer these questions in the simplest economic terms.
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Under the DSDP program, NNPC delivered monthly crude oil lifting on Free on Board (FOB) basis to suppliers (consortia companies) who shall in return, delivered petroleum products of Nigerian standard specification to NNPC on Delivered at Place (DAP) basis, at designated safe port (s) in Nigeria. The petroleum products delivered was equivalent in value to the crude oil received from NNPC subject to the general terms and conditions as advised to suppliers (consortia companies) subsequently via Term Sheet (TS). There were 16 suppliers (consortia companies) or DSDP partners during the 2021-2023 period. Each DSDP partner was a consortium of indigenous marketers and a foreign trader/firm. The DSDP partners made their profit from the difference between revenue obtained from the sale of petroleum products in the world market and the cost of the crude oil. The NNPC did not pay the suppliers (consortia companies) any money, but recovered the cost of the crude oil by selling the delivered petroleum products to Nigerian distributors/marketers (offtaker companies) who then sold the petroleum products to consumers in Nigeria.
The program began in 2016 and was managed by the Crude Oil marketing Department (COMD) of the NNPC. In 2016, 66.77 million barrels (bbls) of crude oil was exported under DSDP. This increased to 72.83 million bbls, 94.05 million bbls, 104.48 million bbls and 110.46 million bbls in 2017, 2018, 2019 and 2020 respectively. The NNPC claimed N99 bn, N141.6 bn, N720.3 bn and N578.1 bn, and N133.7 bn as fuel subsidy expenditures in 2016, 2017, 2018, 2019, and 2020 respectively. The DSDP program claimed 97.4% of the fuel subsidy expenditures of N508 bn ($1.602 bn) in 2019. It claimed 100% of the fuel subsidy expenditures of N0.134 bn ($0.371 bn), N1430 bn ($3.575 bn), N4390 bn ($10.209 bn), and N3360 bn ($7.29 bn) in 2020, 2021, 2022 and the first half of 2023 respectively.
We will begin our analysis of the DSDP program by examining what happened to one barrel (I bbl) of domestic allocated crude oil when it was lifted under the DSDP program just before the no subsidy policy. The world price for 1 bbl of crude was about $76.41. The NNPCL nominated one of is DSDP partners as an off-taker (FOB) who then shipped our bbl of crude oil to be refined in a foreign refinery. When our 1 barrel (42 gallons) of crude oil is refined, there are 45 gallons of petroleum products. The 45 gallons of petroleum products consist of 4 gallons of LPG, 19.5 gallons of PMS (petrol), 10 gallons of Diesel, 4 gallons of Jet Fuel/Kerosene, and 7.5 gallons of Fuel Oil/Bottoms. One barrel of light Nigerian crude oil has a volume yield of 8.89% of LPG, 43.33% of PMS (petrol), 22.22% of Diesel, 8.89% of Kerosene/Jet fuel, and 16.67% of Fuel oil / Bottoms when it is refined. The Rotterdam Netherlands prices ($/bbl) of LPG, PMS (petrol), Diesel, Jet Fuel/Kerosene and Fuel Oil/Bottoms were $129.58/bbl, $307.80/bbl, $256.45/bbl, $85.50/bbl, and $323.86/bbl respectively during this period.
We can use a netback calculation method to determine the expected revenue obtained by the DSDP partner if the petroleum products were sold in Netherlands. The gross product revenue of a refined barrel of crude oil is the sum of the volume yield (fraction) of each refined product multiplied by its price. Therefore the expected gross revenue of the DSDP partner would have been (129.58*0.0889 + 307.80*0.4333 + 256.45*0.2222 + 85.50*0.0889 + 323.86*0.1667) or $263.43. The expected take of the DSDP partner would be ($263.43 – $76.41) or $187.05. The expected profits of the DSDP partner would have depended on the the difference between its expected take ($187.05) and the cost of loading the crude oil, taxes, shipping the crude oil to the foreign refinery, refining the crude oil, loading petroleum products of equal value to the crude, taxes, shipping the petroleum products to NNPCL at the designated Nigerian port, offloading the petroleum products, and more taxes etc. The NNPCL take would be $76.41 or equivalent in value ($76.41) to the I bbl of crude oil received from NNPCL.
The DSDP partner delivered petroleum products (PMS, Diesel, and Jet Fuel) of Nigerian standard specification to NNPCL on Delivered at Place (DAP) basis, at designated safe port (s) in Nigeria. NNPCL sold the petroleum products to distributors/marketers at domestic landing cost prices. An additional expense of about $6.34/bbl was incurred as distribution margins by the distributors/marketers. NNPC can claim fuel subsidy when there is a loss or under-recovery. NNPC defined under-recovery as the difference between the total cost (landing cost + distribution margins) and the government regulated PMS price at the pump. This difference is multiplied by the volume of PMS imported to determine the fuel subsidy claims. No fuel subsidy is claimed if the the total cost (landing cost + distribution margins) is equal or less than the PPPRA regulated PMS price at the pump. NEITI published the monthly volumes of domestic allocated crude oil exported and PMS received under the DSDP program in 2019 and 2020. The National Bureau Statistics published the average monthly PMS prices per litre during 2019 and 2020. The sum of the products of the monthly volumes and prices will gives us the annual revenue generated from the sales of the imported DSDP PMS in the Nigerian market. Therefore, we can examine the DSDP program in 2019 and 2020 to determine if there was any subsidy.
In 2019, 107.24 million bbls of domestic allocated crude were exported. Almost all the crude volume (104.48 million bbls or 97.4%) was lifted by suppliers (consortia companies) or DSDP partners. Table 1 shows DSDP data for 2019. The total PMS import volume received by NNPC was 107.24 million bbls with a value of $7.012 billion. This was approximately the value of the crude given to DSDP partners for refining since 97.4% of the volume was under the DSDP program. The 107.24 million bbls of PMS was sold in the Nigerian market for $7.083 billion. This gives a profit of $71.944 million for the DSDP program in 2019. There was no subsidy. Yet, NNPC collected $1.602 billion as fuel subsidy for 2019.
Table 1: 2019-Direct Sale Direct Purchase
In 2020, all the crude volume (184.74 million bbls or 100%) was lifted by suppliers (consortia companies) or DSDP partners. The cost of the crude oil was $6.169 billion. Table 2 shows DSDP data for 2020. The total PMS import volume received by NNPC was 13.793 MT with a value of $6.035 billion. The 13.793 MT of PMS was sold in the Nigerian market for $6.660. This gives a profit of $490.572 million for the DSDP program in 2020. There was no subsidy. Yet, NNPC collected $370.4695 million as subsidy for 2020.
Table 1: 2020-Direct Sale Direct Purchase
We have shown that there was no subsidy under the DSDP program in 2019 and 2020. The same was true of the DSDP program from 2016 to 2023. The fuel subsidy claimed under the DSDP program from 2016 to 2023 were all false. The recent policy to increase PMS prices in order to remove the corruption called “fuel subsidy” is wrong and misdirected. It will harm the poor and remove no corruption. The fuel subsidy regime was an official criminal enterprise. The 2012 Farouk Lawan committee subsidy investigations identified many companies and individuals who delivered no petroleum products and made false claims of $6.8 billion. Very few of them faced any consequences. There are often no consequences in Nigeria when the rich and powerful loot the public treasury with impunity. Nevertheless, there is a need for the government to do a detailed audit of the 2016-2023 DSDP program and the false subsidy claims made under it. Our recommendations to the Nigerian grassroots and youth is simple. We are citizens of a neoliberal IMF induced crime scene. It is our duty to hold our leaders and government accountable. It is our duty to fight for our interests. Freedom comes by struggle.
Izielen Agbon
Twitter:@izielenagbon
June 6, 2023.
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