REVIEW OF THE REPORT OF THE TECHNICAL COMMITTEE ON PMS PRICING

By Dr. Izielen Agbon

  1. INTRODUCTION
    The report of the Technical Committee on PMS Pricing is the result of the current meetings
    between the Federal Government and the organized Labour Unions. The report focused on the
    PPRA PMS price Template as the basis for the determination of the price of PMS in the Nigerian
    PMS market. Recommendations aimed at encouraging private sector participation in the market
    and enhancing communications amongst the Federal Government, regulators, market operators,
    organized labour unions and other stakeholders are made. Massive campaigns on the benefits of
    deregulations and specific projects targeted at Nigerians are also recommended. The report
    captured the viewpoints of stakeholders such as producers, sellers, IMF, and the Federal
    Government. The report was submitted in the last meeting between organized Labour unions
    and the Federal Government. The labour unions requested for an opportunity to review the
    report.
    The review of the report of the Technical Committee on PMS Pricing is to ensure that the report
    captures the viewpoint of PMS consumers, labour unions, and the general Nigerian masses. The
    viewpoint of these Nigerian citizens, as buyers’ stakeholders at the gasoline pumps, centers on
    their sustainable economic self-development. The price of PMS and other fuels play a significant
    part in their sustainable economic self-development. Buyer stakeholders are concerned about
    the wellbeing of the PMS market, the profits of producers/sellers’ stakeholders, the net revenue
    to the Federal government and the sustainable economic benefits to themselves as citizens,
    workers, farmers, and PMS consumers.
    There are two basic methods for determining PMS prices. These are the import parity pricing
    method and the production cost pricing method. The report of the Technical Committee on PMS
    Pricing focuses on the PPPRA PMS template which is based on the import parity pricing method.
    The import parity pricing method assumes that all input prices should be equivalent to
    international import prices. There should be no barriers between the international and domestic
    PMS markets. Basically, this implies that the production and refining of crude oil are done
    overseas and the PMS imported into Nigeria. The production cost pricing method assumes that
    the PMS prices is based on the cost of crude oil production and refining in the domestic market.
    This method implies that the crude oil is produced and refined in the country.
    The two methods above are examined in detail in this review. A template is built for each method
    and current data are used as examples to evaluate their economic viability. The review concludes
    that the production cost pricing method is the best method for PMS pricing in Nigeria. The
    production cost pricing method shows that current PMS prices in the Nigerian PMS market are
    viable. There is no justification for an increase in PMS prices. The production cost pricing method
    is the most flexible method and allows the government to manage the national PMS market in
    the interest of the sustainable economic development of the nation. Furthermore, it encourages
    the industrialization of the nation and break Nigeria from its colonial past of producing raw
    materials and importing refined goods.
    Finally, the review recommends the urgent revitalization of our old refineries and their operation
    under private sector commercial management as prerequisite to increasing PMS prices. The
    review further recommends the use of the production cost pricing for PMS from the 445000-bpd
    domestic allocation and the Direct Sale Direct Purchase program.
  2. BACKGROUND
    Nigeria has proven oil reserves of 36.89 billion barrels in 2019. Crude oil production (OPEC
    allocation limit) was 1.7374 million barrel per day (bpd). Crude oil export was 1.65 million bpd.
    Domestic allocation of crude oil to meet national petroleum product demand is 445000 bpd.
    Refining capacity is 451000 bpd. Nigeria has four refineries (Port Harcourt I (PHRC I), Port
    Harcourt II (PHRC II), Warri (WRPC), Kaduna (KRPC), and the Niger Delta Petroleum Resources
    (NPDR) refinery at Ogbele, Ahoada, in the Rivers state). PHRC I have a refining capacity of 60000
    bpd while the PHRC II has a capacity of 150000 bpd. The KRPC and WRPC have refining capacities
    of 110000 bpd and 125000 bpd respectively. The NPDR expanded its refining capacity to 6000
    bpd in January 2020.1 The Federal Government has issued permits for 623000 bpd refining
    capacity to numerous private interests. These include the Dangote Refinery (650000 bpd), NDPR
    refinery expansion (10000 bpd), BPD OPAC refinery (7000 bpd), Walter Smith Refining and
    Petrochemical Limited (5000 bpd) and the Edo refinery (1000 bpd). The Dangote Refinery will
    have a crude oil distillation unit (650,000 bpd), a urea plant (3.0 million ton per year) and a
    polypropylene plant (3.6 million ton per year). It will produce 10.4 million tons (Mt) of gasoline,
    4.6Mt of diesel, 4Mt of jet fuel, 0.69Mt of polypropylene, 0.24Mt of propane, 32,000 tons of
    sulphur, and 0.5Mt of carbon black. In a general refining process, the following petroleum
    products are produced from a barrel of crude oil. (i) Liquefied Petroleum Gas (LPG) (ii) Premium
    Motor Spirit (Gasoline) (iii) Aviation fuel (iv) Kerosene (v) Automotive Gas Oil (AGO) or Diesel (vi)
    Lubricating oils (vii) Waxes (viii) High/low Pour Fuel oil (Fuel oil) (ix) Bitumen/ Asphalt (x)
    Miscellaneous Products.2
    In 2019, Nigeria’s demand for petroleum products (2019) was 355000 bpd of PMS, 23000 bpd of
    Kerosine, 89000 bpd of Distillates and 3000 bpd of Residuals plus others. Despite all its refining
    capacities, Nigeria produced only 2000 bpd of PMS, 1000 bpd of Kerosine, 2000 bpd of Distillate
    and 2000 bpd of Residuals.3 The four government owned refineries (PHRC I and II, Kaduna and
    Warri) were shut down for rehabilitation. Thus, Nigeria imports nearly all its petroleum products
    requirements.
    PMS SUPPLY CHAIN
    Figure 1 shows the PMS supply chain. Domestic oil or crude oil produced locally is transported
    via pipelines to the refinery. The refinery output or petroleum products are transported by
    pipelines, tankers, and barges to storage facilities. The petroleum products are then transported
    by tankers to petrol stations. The price of a petroleum product is PR = T + C + R + D, where T —
    taxes; C — the cost of the crude oil at the Refinery gate; R — the refining cost of the petroleum
    3
    product; D — the cost of transportation and pump sales of the product. The cost of the crude oil
    at the refinery gate is the crude oil domestic production cost and its transportation cost to the
    refinery. If the nation cannot meet its domestic petroleum products demand with its domestic
    oil production (insufficient or no oil production), additional crude oil is imported for refining. In
    this case, the cost of the crude oil at the refinery gate (C) is the sum of the crude oil domestic
    production cost, the foreign crude oil importation cost and transportation cost to the refinery
    gate. If the nation has no oil production and refineries, the required petroleum products are
    imported. In this case, the price of a petroleum product is the sum of the foreign petroleum
    product importation cost and its domestic transportation and pump sales cost. The case of a
    nation having enough proven oil reserves to meet its needs and no functional refineries is
    exceedingly rare. Nigeria is the only OPEC nation that exports all its crude oil and imports all its
    petroleum products requirements.
    Fig. 1: PMS supply chain
    The importation of PMS into Nigeria is managed by two government entities: the Nigerian
    National Petroleum Corporation (NNPC) and the Petroleum Products Pricing Regulatory Agency
    (PPPRA). The NNPC runs a Direct Sale of Crude Oil and Direct Purchase of Petroleum Product
    (DSDP) program to ensure sustained product supply in the country. NNPC delivers “monthly
    crude oil lifting on Free on Board (FOB) basis to supplier who shall in return, delivers 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 is equivalent in value to the
    Crude Oil received from NNPC subject to the general terms and conditions as would be advised
    to successful companies subsequently via Term Sheet (TS)”4
    . The PPPRA was established in 2003
    to determine the pricing policy of petroleum products. Other objectives include the creation of
    firm linkages with key segments of the Nigerian society to ensure the widest possible
    understanding and support for its decisions.
    EXCHANGE RATES AND PMS PRICES
    Prior to 2003, the Federal Government determined the prices of petroleum products. In the early
    1980’s, the cost of domestic crude at the refinery gate was set at 80% of the prevailing
    international market price. The 20% reduction in price was aimed at capturing the comparative
    advantage of Nigeria as a crude oil producing country. The comparative advantage of a nation is
    4
    its economic ability to produce a particular good or service at a lower opportunity cost than its
    trading partners. This is determined by the resources of a nation – capital, land, labour, and raw
    material. The nation can sell goods and services at a lower price than its competitors. OPEC
    nations are endowed with large reserves of oil and gas. They have a comparative economic
    advantage with respect to the production of crude oil and petroleum products. In the mid 1980’s,
    the IMF introduced structural adjustment programs (SAP) as conditions for loans to developing
    nations. SAP policies encompassed reductions in government spending and employment, higher
    interest rates, currency devaluation, lower real wages, sale of government enterprises, reduced
    tariffs, and liberalization of foreign investment regulations5
    . In Nigeria, this translated into the
    Second Tier Foreign Exchange Market (SFEM) policy of 1986 6
    . The resulting devaluation of the
    Naira forced PMS prices to be increased many times during the 1986-1993 period. The exchange
    rate ($/Naira) is a key driver of PMS prices.
    Figure 2 shows the official exchange rate (Naira/$) and PMS Prices (N/Litre). In 1986-1986, the
    official exchange rate increased from N0.894/$ to N2.02/$ and PMS prices were increased from
    N0.2/litre to N0.395/litre. The PMS price remained stable until 1990 when it increased to
    N0.6/litre in response to rising exchange rates (N7.39/$ in 1990). By 1998, the exchange rate was
    N21.89/$ and PMS prices had increased to N11/litre. After 1999, PMS prices were influenced by
    the rising exchange rates and the Federal Government decision to impose import parity prices
    on PMS in response to pressure from the IMF. Naira devaluation increased rapidly after 2002
    until the official exchange rates reached N380/$ in 2021. Current PMS prices are N162.4/litre.
    Fig. 2: Nigeria: Exchange Rate and PMS Prices 1978-2020
    FUEL SUBSIDY
    In 1994, under the Petroleum (Special) Trust Fund (Amendment) Decree No.25, 1994, the cost
    PMS was set at N11/litre. The production cost of PMS, using a production cost pricing method,
    was N5.68/litre. Crude oil production cost made up 43.37% (N2.35) of this amount. The
    Marketers’ Allowance made up 22.88% (N1.30), Excise Duty & VAT was 5.81% (N0.33) and NNPC
    Cost/Margin was 29.93% (N1.70). All funds received from the sale of petroleum products less the
    approved production cost was put in the PTF.7 There was no fuel subsidy. In the early 2000’s, the
    IMF developed an import parity pricing model for fuel consumption in developing nations.8 The
    5
    IMF argued that petroleum product prices were heavily regulated. Domestic petroleum product
    prices were below international prices, and this implied foregone revenue. The foregone revenue
    constitutes a hidden subsidy for its citizen. The solution was to pass international prices into the
    domestic market and increase fuel prices. They therefore recommended the imposition of
    international import prices on the domestic petroleum product market and the removal of fuel
    subsidies.
    In 2001, the Federal Government informed IMF staff that it has “made major strides in gaining
    public support for the deregulation of the downstream petroleum sector and the associated
    removal of petroleum subsidy”.9 The following year (2002), the IMF Staff stated, “Progress on
    structural reforms has been mixed. On the positive side, on January 1, 2002, the authorities
    adjusted the maximum retail price of gasoline above import parity and began charging the NNPC
    US$18 per barrel for crude oil used for domestic consumption, compared with a charge of US$9.5
    in 2001”10. In response to the resistance of Nigerian consumers to the increase in PMS prices, the
    IMF recommended specific measures to protect consumption by the poor. 11 The IMF import
    parity fuel price consists of three components. The first component is the opportunity cost of
    getting the fuel to the consumers. This is the cost of importing the fuel into the country and
    transporting it to the consumers. This cost is viewed as revenue foregone by consuming the fuel
    domestically rather than exporting it. It did not matter if the domestic crude oil was produced at
    a cost far below its export price and refined in the country. The second component was the
    environmental cost associated with the fuel consumption. The third component was a
    consumption tax aimed at raising revenue. The fuel subsidy was the difference between the PMS
    import parity price and the actual price of the fuel.
    The IMF economic premise that the import-parity pricing model should govern petroleum
    products sales in Nigeria and other oil-producing nation is incorrect. It discourages selfsufficiency in refining and petroleum products supply to meet national demand. This pricing
    model make Nigeria lose a lot of added value to the economy because we export raw materials
    and import finished goods. The model does not recognize the concept of comparative advantage
    for oil and gas producers/exporters. It does not capture the negative effects of eliminating the
    barriers between the international and domestic markets with respect to long term sustainable
    economic development. The import parity model is only applied to developing nations who are
    asked to impose them as part of the conditionalities of IMF loans. It does not apply to developed
    nations where fuel subsidies express themselves as post tax depletion allowances, tax breaks and
    liberal regulation enforcement. There are about 159 nations subsiding energy today. “Yet, in
    absolute terms, the top three subsidizers across the world are the United States (US$ 502 billion),
    China (US $279 billion) and Russia (US$ 116 billion)”12
    . OPEC does not accept the IMF import
    parity model. “OPEC is of the opinion that the benchmark price to be used in the case of energy
    resource well-endowed countries should be the cost of production. Consequently, OPEC could
    not associate itself with the above estimation of fossil fuel related consumption subsidies.”13
    COMPARISON OF PMS PRICES
    PMS prices in Nigeria are often compared to prices in other nations to justify the imposition of
    higher prices under the import parity model. Usually, these nations are either neighbouring crude
    6
    oil importers or industrialized nations. Comparison of PMS prices should be done with oil
    producing developing nations with similar sustainable development goals/problems as Nigeria.
    Figure 3 shows PMS prices in OPEC nation from 1991 to 2016. In general, PMS prices in Nigeria
    were higher than PMS prices in Iran, Algeria, Kuwait, and Saudi Arabia prior to 2016.
    Fig. 3: Selected OPEC Nations: PMS Prices 1991-2016
    Table I shows the data of OPEC nations. Current PMS prices as of February 8, 2021 showed Nigeria
    had higher prices than Algeria, Angola, Iran, Kuwait, Libya and Venezuela. Nigeria has practically
    the largest population and a small GDP per capita. The advanced nations have high GDP per
    capita and their consumers have a greater capacity to purchase PMS. For instance, although USA
    has a population of 326.6 million, its GDP per capita is $62997.
    Table 1: OPEC Nations: General Data
    *PMS prices are obtained from GlobalPetrolprices.com
    Feb. 8, 2021
    OPEC Members
    Country Population
    (million)
    Land Area
    (1000 sq.km)
    GDP per
    capita ($)
    PMS Price
    ($/Litre)
    Algeria 42.58 2,382 4,186 0.344
    Angola 29.25 1248 3390 0.245
    Congo 5.4 342 1,882 0.970
    Ecuador 17.02 284 6,094 0.464
    Equatorial Guinea 1.31 28 8,263
    Gabon 1.97 268 8,751 1.112
    Iran 82.01 1,648 5,104 0.062
    Iraq 38.12 438 5,571 0.516
    Kuwait 4.62 18 30,661 0.347
    Libya 6.56 1,760 7,574 0.110
    Nigeria 202.99 924 2,056 0.420
    Saudi Arabia 33.41 2,150 23,418 0.467
    United Arab Emirates 10.14 84 40,859 0.490
    Venezuela 31.84 916 3,093 0.020
    Non-OPEC
    USA 326.6 9834.2 62,997 0.735
    7
    The PMS prices of advanced nation has a high tax component. For instance, taxes account for
    22% of the retail price of gasoline in the USA. Apart from this, the historical CPI in USA is quite
    different from that of Nigeria. Figure 4 shows the CPI historical data of both nations using
    2010=100. Nigeria exhibits higher inflationary trends and lower purchasing power.
    Fig. 4: CPI: Nigeria and USA
    PMS PRICES AND POVERTY
    Nigeria has a population of 206 million with 52% living in urban areas and 48% in rural areas. In
    2019, the National Bureau of Statistics estimated that 82.9 million people (about 40.1 % of the
    population) live in poverty. This number excludes the State of Borno. A poor person was defined
    as a person living on N377 per day or N137430 per year. 14 At a parallel market exchange rate of
    N460/$1, a person living on $0.82/day in Nigeria is considered poor. How does each of these 83
    million poor Nigerians survive on less than N377/day?. They spend 56.6% (about N214/day) on
    food, 11.4% (N43/day) on transport and fuel, 12.2% (N46/day) on health and education, 12.6%
    (N48/day) on rent, household goods and clothing and the rest 7.2% (N26/day) on services, water,
    and others. Figure 5 shows the consumption expenditure pattern in Nigeria in 2019.
    Fig. 5: Consumption Expenditure Pattern in Nigeria, 2019.
    8
    The 83 million poor Nigerians and their children only use road and marine transportation to go
    to their offices, schools, markets, and farms. They do not use railway or airplanes. There are
    195000 km of road network in Nigeria. Rural roads make up 68% of the road network while state
    and federal roads make up 16% each. Only 55% of the road are surfaced. Most of the roads are
    poorly maintained and are in poor shape. Poor Nigerians use these roads daily, traveling by
    public/private transport, buses, tricycles, motorcycles etc. All the daily mobile transportation
    done by 83 million poor Nigerians is PMS dependent. A PMS price hike therefore affects the price
    of transport and all commodities transported by road.
    In 2015, President Buhari said, “When people ask you to remove subsidy ask them to define it.
    Who is subsidizing who? Let me make it clear. The people are gleefully saying ‘remove subsidy’.
    They want petrol to cost N500 per litre. If you are working and subsidy is removed, you can’t
    control transport, you can’t control market women, the cost of food, the cost of transport. If you
    are earning N20,000 per day and you are living in Lagos or Ibadan, the cost of transport to work
    and back, the cost of food. You cannot control the market women they have to pay what
    transporters charge them. If there is need for removing subsidy, I will study it. With my
    experience, I will see what I can do. But I’m thinking more than half the population of Nigeria
    virtually cannot afford to live. Where will they get the money to go work? How can they feed
    their families? How can they pay rent?”.
    15 PMS has an inelastic demand in Nigeria. Large changes
    in prices lead to small changes in demand. There are very few alternatives to road transport in
    the movement of goods and persons. Walking is not a viable economic option.
    The Federal Government argues that any suffering and pain by the poor is a temporary condition
    imposed on the nation by market forces of supply and demand in the petroleum product market.
    The poor will benefit when the fuel price is low and only suffer when the fuel price is high. But
    the Federal Government is wrong. The Minister of State for Petroleum Timipre Sylva, explained,
    “In March, when we announced the deregulation, the prices were low, so, we brought down the
    price of petrol. The unfortunate thing is that when we brought down the price of petrol, nobody
    reacted in the marketplace. The prices were the same. Nobody reduced their prices because price
    of petrol had reduced. Even bus fares, taxi fares were the same. It did not go down when we
    reduced the pump price of petrol. We thought that those people in the market; the transport
    drivers and transport owners would reduce their price. But nobody reduced their prices. But
    anytime there is even a kobo increase in the pump price of product, you see that people will
    increase their prices triple fold and four-fold.” 16 In the real world, PMS import parity induced
    prices are sticky downwards, and free market supply-demand equilibrium prices do not exist.
    Poverty level rise when the price of basic commodities like PMS are increased.
    When the Federal government increases the PMS price by 11.7%, the prices of transportation
    increase by more than 50% and the price of food goes up by almost 100%. The price of a bag of
    rice has gone up from N22000 to N30000 since the last fuel price hike was announced. The price
    of health, education, rent and all other services also increased as transportation increased.
    Household goods and clothing cost more. Small businesses that depended on gasoline generators
    have collapsed due to high energy costs. Yet the daily disposable income of N377 remain
    constant. According to the IMF, the impact of increasing domestic fuel prices on the welfare of
    9
    households arises through two channels. First, households face the direct impact of higher prices
    for fuels consumed for cooking, heating, lighting, and personal transport. Second, an indirect
    impact is felt through higher prices for other goods and services consumed by households as
    higher fuel costs are reflected in increased production costs and consumer prices. Therefore, the
    IMF advised that governments should implement targeted mitigating measures to mitigate the
    impact of energy price increases on the poor. In the past, such mitigating measures, like the
    Subsidy Reinvestment and Empowerment Program (SURE-P), have failed due to mismanagement
    and corruption.
    SMUGGLING NIGERIAN PMS TO NEIGHBORING NATIONS.
    The IMF and the Federal Government argue that low fuel prices in Nigeria have encouraged
    smuggling across the border to the neighboring nations of Niger Chad, Cameroon, Togo, and
    Benin.17 An input output volume balance of petroleum products in the region shows that this
    argument is false. For example, Niger’s Zinder refinery has a 20000 barrels per day (bpd) capacity.
    In 2015, the country produced 15280 bpd of petroleum products and imported 3799 bpd for an
    input volume of 19079 bpd. The country consumed 14000 bpd and exported 5422 bpd into Mali,
    Burkina Faso, and Nigeria for an output volume of 19422 bpd. Niger therefore had a net output
    of 343 bpd. Nigeria plans to officially import PMS from Niger when the Zinder refinery throughput
    is increased to 80000 bpd. Chad produced 0 bpd of petroleum products and imported 2285 bpd
    for an input volume of 2285 bpd. It consumed 2300 bpd and exported 143 bpd for an output
    volume of 2443 bpd. It had a net output of 158 bpd. Cameroon produced 39080 bpd of petroleum
    products and imported 14090 bpd for an input volume of 53170 bpd. It consumed 45000 bpd
    and exported 8545 bpd for an output volume of 53545 bpd. It had a net output of 375 bpd. Togo
    produced 0 bpd of petroleum products and imported 13100 bpd for an input volume of 13100
    bpd. It consumed 15000 bpd and exported 0 bpd for an output volume of 15000 bpd. It had a net
    output of 1900 bpd.
    Benin produced 0 bpd of petroleum products and imported 38040 bpd for an input volume of
    38040 bpd. It consumed 38000 bpd and exported 1514 bpd for an output volume of 39514 bpd.
    It had a net output of 1474 bpd. The total net output of surrounding nations in the region is
    4250 bpd. In 2015, Nigeria produced 35010 bpd of petroleum products and imported 322400
    bpd for an input volume of 327332 bpd. Let us assume that the net regional output of 4250 bpd
    was smuggled across the Nigerian borders, this makes up only 1.3% of net input volume which
    does not justify a fuel price increase. However, Nigeria consumed 325000 bpd and exported
    2332 bpd for an output volume of 258410 bpd in 2015. There was therefore an estimated net
    output of 68922 bpd which was never imported into the country. This analysis captures some of
    the subsidy corruption in Nigeria as PMS import figures get inflated to mask the theft of public
    funds.18
    FUEL SUBSIDY AND CORRUPTION
    Most Nigerian consumers feel the high fuel bill is due corruption practices and not high fuel
    demand. For example, in October 2019, Nigeria was reported to have consumed 57.2 million
    litres per day (359777 bpd) of PMS. This was so outrageous that the Federal Government set up
    the automated Downstream Operations and Financial Monitoring Centre (DOFMC) through the
    10
    NNPC to help determine the actual national PMS daily consumption. In February 2020, DPR put
    the national demand at 38.2 million litres per day (240270 bpd). It seemsthat the volume of PMS
    imported for election years 2011, 2015 and 2019 were grossly inflated. These corrupt practices
    were revealed by the 2012 Farouk Lawan House of Representative Ad-Hoc Committee
    investigation and report. The committee found deliberate neglect for record keeping, payments
    for billions of litres that were never supplied, and more than $6.8 billion refunds due to the
    Treasury.19 The Federal Government set up the Aigboje Aig-Imoukhuede committee in response
    to a bribery allegation against Hon. Lawan. The Aigboje Aig-Imoukhuede committee indicted 25
    companies and identified an over payment of $2.5 billion. The committee questioned the
    legitimacy of an additional $1.5 billion worth of transactions.20,21
    PMS PRICES AND SUSTAINABLE ECONOMIC DEVELOPMENT
    Sustainable economic development expressed as readily available adequately priced petroleum
    product is the stakeholders’ viewpoint of many Nigerian consumers. This viewpoint is often
    ignored in favor of the profits of other stakeholders (producers, dealers, sellers, marketers,
    distributors, retailers, transporters etc.). The Economic-Recovery-Growth-Plan-2017-2020
    (ERGP) had outlined new initiatives which included revamping local refineries to reduce
    petroleum product imports by 60 percent by 2018. Some of the major objectives of the plan were
    to “boost local refining for self-sufficiency, reduce petroleum product imports by 60 per cent by
    2018, become a net exporter by 2020, save foreign exchange and prevent reversion to the fuel
    subsidy regime.”22 None of these objectives were achieved. Currently, all the refineries in the
    nation are shut down. The attempt to find a qualified firm to undertake repairs in 2021 is in
    progress. The Medium-Term National Development Plan: 2021-2025 and Agenda 2030 are under
    preparation. It is not clear if the goal of achieving self-sufficiency in local refining will be included
    in these plans.
  3. FUEL SUBSIDY REMOVAL IMPLEMENTATION STRATEGIES
    The IMF works very closely with the Nigerian authorities. According to the IMF, in their Joint
    World Bank-IMF Work Program,” The IMF and World Bank staffs collaborate closely in their work
    on Nigeria. Bank staff participates in IMF missions, while the Bank’s analysis and advice to the
    government in key structural reform areas informs Fund surveillance. Bank and IMF staffs
    collaborated on assistance related to the Petroleum Industry Bill, financial sector deepening, and
    public financial management reform.”
    23 The IMF devised the import parity pricing model with
    the aim of removing implicit petroleum product subsidies. These energy subsidies were
    opportunity loss that could free up government revenue for alternative investments. The benefits
    of comparative advantage were identified as opportunity loss or implicit subsidies. All the
    benefits of low petroleum product prices for the poor masses in developing nations were swept
    aside. Low petroleum product prices were declared to favor the rich. Although the rich in
    developing nations were an insignificant numerical minority, they were accused of using up all
    the cheap petroleum products in non-productive activities. Very few IMF studies captured the
    realities of the poor in the developing nations.
    The IMF developed implementation strategies for the subsidy removal or petroleum products
    price hikes. These strategies were then discussed with government authorities who were
    11
    encouraged to pursue them as conditions for loans and other IMF support. Under Article IV of
    the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every
    year. A staff team visits the country, collects economic and financial information, and discusses
    with officials the country’s economic developments and policies. On return to headquarters, the
    staff prepares a report, which forms the basis for discussion by the Executive Board. At the
    conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the
    views of Executive Directors, and this summary is transmitted to the country’s authorities.
    The IMF subsidy removal strategies included:24
  4. “Develop a comprehensive reform plan.
  5. Develop a comprehensive communications strategy.
  6. Undertake a gradual and sequenced reform.
  7. Implement targeted measures to protect lower-income groups.
  8. Implement measures to reform the energy sector—State Owned Enterprises (SOEs) in
    particular—and support energy-intensive sectors.
  9. Depoliticize energy pricing.”
    Subsidy reforms increased not only petroleum products prices but the prices of many other
    commodities. The increased prices reduced the disposable income of most consumers. The
    masses of petroleum product consumers were opposed to it. The implementation of these
    strategies was thought to be necessary to persuade the masses to act against their interest. The
    IMF staff concluded that “A number of reasons make the subsidy issue so knotty. First, it is
    difficult to convey to the public the rationale for products to be sold at their opportunity cost and
    not their cost of production. Second, in many cases, the subsidy is implicit, absorbed in the
    revenue of the state oil company, and thus the subsidy costs are not well understood by the
    population. Third, on the side of the government, the subsidy costs, although potentially high,
    are usually affordable.”
    25 Subsidy reforms met with resistance because the masses could see no
    concrete benefits in increased petroleum products prices. A study of energy subsidy reforms in
    Nigeria concluded that “Although the government campaigned vigorously for the removal of the
    subsidies, the measure was still highly controversial when it went into effect. The backlash has
    been predicted. The public communication campaign lasted only six months, and there was no
    broad popular consultation.” 26
    Despite assurances from the IMF, subsidy removal has not reduced poverty in Nigeria after
  10. The IMF wrote “…With growth concentrated in the pro-poor, labor-intensive agriculture
    and trade sectors, the disappointing outcomes in unemployment and poverty reduction are
    somewhat puzzling.”27 There was nothing puzzling about the relationship between increasing
    energy costs and increasing poverty in a mono economy oil exporting developing nation. The
    IMF subsidy removal implementation strategies were then fine-tuned to accommodate the
    needs of the poor. Nations carrying out subsidy removal reforms were reminded that “welltargeted measures to mitigate the impact of energy price increases on the poor are critical for
    building public support for subsidy reforms. “
    28 In Nigeria the targeted measures were
    incorporated into a Subsidy Reinvestment and Empowerment Program.
    12
    The SURE programme included:
  11. Urban mass transit—Increasing mass transit availability by facilitating the procurement of
    diesel run vehicles (subsidized loans, reduced import tariffs, etc.) to established
    operators. In the first step of this program, the government intended to import 1600
    buses within months.
  12. Maternal and child health services—Expanding the conditional cash transfer program for
    pregnant women in rural areas; and upgrading facilities at clinics.
  13. Public works—Providing temporary employment to youth and women from the poorest
    populations in environmental projects and maintaining education and health facilities.
  14. Vocational training—Establishing vocational training centers across the country to help
    tackle the problem of youth unemployment.
    The FGN put the disbursement of its share of SURE-P under the Christopher Kolade Committee.
    The Kolade Committee was to ensure that SURE-P federal programs such as maternal child
    health, public works, mass transit, east-West Road, Roads & bridges, railway and secretariat
    services were successfully executed. The Kolade committee began work with a lot of fanfare.
    However, it was not long before the contradictions in the sharing formula intensified the
    disagreement amongst the ruling stakeholders. The State Governments opposed the direct
    deduction of subsidy funds from State budgetary allocations at source. They accused the FGN of
    giving SURE-P contracts to only the supporters and cronies of the Presidency. The FGN accused
    the State Governments of giving their share of SURE-P funds to the political friends of the
    individual state governors through the State Implementation Committee (SIC). The FGN paid the
    petrol cabal the sum of N1.3 trillion in 2012. When the Presidency requested an additional
    N161.6 billion for subsidy payment in 2012, the state governors protested vigorously. They took
    the FGN to Court. The relationships between the FGN and the State Governments became
    increasingly antagonistic in 2012-13. The Subsidy Reinvestment and Empowerment Programs in
    the Agriculture, Education, Health, ICT, Petroleum, Power, Water Supply, Road and Rail
    transportation sectors, as well as Public Works and Youth Employment programs did not lead to
    the transformation of public infrastructure in Nigeria, nor the gainful employment of millions of
    Nigerians. The government failed to establish credibility for its promise that the proceeds from
    the removal of the subsidy will be used for the benefit of the broad population. The situation
    remains the same today.
  15. PPPRA PRICING TEMPLATE
    The report of the Technical Committee on PMS Pricing focused on the PPPRA PMS price Template
    as the basis for the determination of the price of PMS in the Nigerian PMS market. The import
    parity pricing model governs the pricing of Nigerian fuel prices and forms the basis of the PPPRA
    PMS price template. Table 2 shows the PPPRA price template for February 2016. The import
    parity price is the Expected Open Market Price (EOMP). The EOMP is the sum of the benchmark
    landing cost, the distribution margins, and the Taxes. The opportunity cost is the sum of the
    benchmark landing cost and the distribution margins. The Benchmark Landing Cost is made up
    of the cost + freight, trader’s margin, lightering expenses, NPA, Financing, Jetty Depot Thru’put
    Charge, and Storage Charge. The Cost + Freight is made up of the Free On-Board Price (FOB) as
    quoted in the Rotterdam Barge spot market and NWE-WAF freight rate and reported by Platt.
    13
    The FOB NWE assessment is based on FOB Amsterdam. All bids and offers from other locations
    in NWE, (i.e., Belgium: Antwerp and Netherlands: Amsterdam) are normalized back to
    Amsterdam. The FOB NWE cargo assessment reflects cargoes of 34,000 mt plus/minus 10%
    operational tolerance with other cargo sizes also considered for assessment purposes but
    normalized back to the reference cargo size. The Distribution Margins is made up of the Retailers
    Margins, the Transporters Margins, and the Dealers Margins, Bridging Fund, Marine Transport
    Average and the Admin Charge. There are no environmental costs or consumption taxes imposed
    on PMS prices in Nigeria. The fuel subsidy is assumed to be the difference between the EOMP
    and the actual PMS price.
    The Cost + Freight (FOB) is based on the Platts FOB Rotterdam Barge. It is influenced by NWE
    demand and supply of PMS and the N/$ exchange rate. The Freight rate based on the average
    clean tanker rate of transporting 30000 tons of PMS cargo from NWE to WAF. The new Platts CIF
    West Africa assessment is to be calculated as a freight net-forward from the FOB Northwest
    European assessment, using a basket of two Worldscale flat rates; Amsterdam-Lome and
    Amsterdam-Lagos. Until this is done, the WAF market is derived with a worldscale premium
    against the NWE-USGC or UKC-USAC. Unfortunately, the transatlantic routes were volatile in
    2020 as shown in Figure 6. This volatility was transferred into Nigeria. Figure 7 shows the WS for
    NWE-USEC from 2014 to 2018 when rates were more stable.
    Table 2: PPPRA Template, February 2016.
    14
    Fig. 6: CPI: UKC-WAF Premium over Transatlantic Route
    Fig. 7: Clean Tanker Spot Freight Rates for selected routes. 2014-2018.
    There is a positive relationship between the price of crude oil and the Cost + Freight price under
    the PMS import parity pricing model. The higher the crude oil price, the higher the Cost + Freight
    cost, the landing cost, and the final PMS price. Since all our PMS requirements in Nigeria is
    imported, the higher the N/$ exchange rate, the higher the final PMS price. Higher PMS prices
    lead to higher business energy cost, higher transportation costs, higher agricultural input costs,
    higher residential electric costs, lower productivity, less savings, and lower economic growth. The
    logical conclusion of this template from a sustainable development point of view is the
    importation of all refined petroleum products because it does not accommodate domestic crude
    oil production and refining. Furthermore, it allows the instabilities in the crude oil and petroleum
    products spot markets, Freight rates, BOP fluctuations, exchange rates increases and currency
    devaluation to be transferred quickly into the national economy. A PMS pricing template using
    the PMS import parity pricing model is not sustainable on the long run. A price smoothing facility
    such the Petroleum Products Prices Stabilization Fund has limited impact because of corruption
    and mismanagement as shown by the House Ad Hoc Committee on the Management of the
    Subsidy Scheme.
    29
    It is better to impose Naira payment on all costsin the template at the Interbank foreign exchange
    market (IFEM) rate rather than the NAFEX import and Export (I&E) window rate. The IFEM rate is
    more stable. The PPPRA price template does not capture the interests of consumers. An
    15
    automatic pricing system would still be dependent of external instabilities caused by spot market
    import prices and exchange rates. Consumers are not only interest in having reliable supply and
    adequate volumes, but they also require reasonable prices that do not disrupt the management
    of their merger household incomes. In the long run, future PMS price hikes can only be controlled
    by building more refineries and making the nation self-sufficient in PMS production.
  16. METHODS OF PMS PRICE DETERMINATION
    There are two basic methods for determining PMS prices. These are the import parity pricing
    method and the production cost pricing method. The report of the Technical Committee on PMS
    Pricing focuses only on the PPPRA PMS template which is based on the import parity pricing
    method. The import PMS parity pricing method assumes that all prices should be equivalent to
    international import prices. There should be no barriers between the international and domestic
    PMS market. Basically, this implies that the production and refining of crude oil are done overseas
    and the PMS imported into Nigeria. Given the import parity pricing method, a foreign investor
    will prefer to import Nigerian crude and export petroleum products into Nigeria rather than
    produce and refine crude oil in Nigeria. The production cost pricing method assumes that the
    PMS prices is based on the cost of domestic crude oil production and refining in the domestic
    market. This method implies that the crude oil is produced and refined in the country. The two
    methods above are examined in detail and a template is built for each of them.
    IMPORT PARITY PRICING METHOD
    In his opening speech for FESTAC in 1977, Lt. General Olusegun Obasanjo said, “When we made
    our first contact with the merchant adventurers from Western Europe, most of our shores
    became trading posts where primary products were exchanged for processed goods. I would like
    to suggest that the modifications and complications of modern economic organization and
    exchange apart, our uneven relationship with Europe and now including North America remain
    basically unchanged. We continue to be trading post which supply primary products in exchange
    for processed goods. The existence of import substitution does not detract from this fact. The
    trading posts are run and maintained by our citizens. These can be grouped into four (a)
    intellectual (b) commercial (c) bureaucratic (d) Technical. The activities of these agents constitute
    impediment to Black African development.”.
    30 Nothing signifies our existence as a trading post
    today more than our export of crude oil and import of all our PMS needs.
    The import parity pricing method assumes that the crude oil is produced and refined abroad. The
    PMS is then imported into Nigeria. The petroleum products are imported and transported by
    pipelines, tankers, and barges to domestic storage facilities. The petroleum products are then
    transported by tankers to domestic petrol stations. Table 3 shows Africa’s petroleum products
    imports by destination (2014-2018). Nigeria imported 442000 bpd of petroleum products in 2018
    and was responsible for 21.78% of all PMS imports into Africa. PMS prices per barrel in Nigeria
    was 23055 naira in 2018.
    The price of the petroleum product is PR = T + C + R + D, where T — taxes; C — the cost of the
    crude oil at the foreign Refinery gate; R — the refining cost of the petroleum product at the
    foreign refinery and the cost of importation the PMS into Nigeria; D —domestic cost of storage,
    16
    transportation, and pump sales of the imported PMS. The cost of the PMS at the foreign refinery
    gate is the crude oil foreign production cost and its transportation cost to the refinery.
    Figure 8 shows the supply chain for the PMS import parity pricing method.
    Fig. 8: Imported PMS supply chain.
    Table 3: Africa: Petroleum Products Imports by Destination (1000 bpd)
    Table 4 shows the template for the PMS import parity pricing method. Although crude oil is
    produced in Nigeria, the PMS import parity pricing method presumes that all crude oil and PMS
    are produced abroad and imported into the country. The method imposes import prices on all
    the PMS. The Benchmark landing cost becomes C+R and the Distribution margins is equal to D.
    All the data from the above example are estimated from current averages in the crude oil and
    PMS markets. At current crude oil prices of $60.77 per barrel for Nigeria’s Bonny Light crude, the
    cost & freight is estimated to be $620.62 $/MT. The landing cost is $678.5/MT. The Distribution
    margins are reasonable estimates. They total $70.6/MT. Distribution margins are usually fixed by
    the PPPRA. There are no taxes (pipeline maintenance, new refineries, railway, and TAM). The
    total cost is $749.16/MT. Given an IFEM rate of N381/$, the PMS retail price is N212.85/litre.
    Africa : Petroleum Products Imports by Destination(1000 bpd)
    2014 2015 2016 2017 2018
    Algeria 55.3 83.2 73.3 74.5 17.2
    Angola 99.1 134.5 75.8 70.6 99.5
    Congo 0.8 1.1 1.4 1.6 1.7
    Egypt 185.8 367.2 351.3 318.2 283.8
    Equatorial Guinea 7.3 7.6 6.4 6.5 3.9
    Gabon 5.6 5.7 6.1 6.2 7.7
    Libya 113.9 106.2 107.9 130.9 136.8
    Morocco 163.2 161 276.9 285.7 294.2
    Nigeria 438.7 441 423.4 391.7 442
    Tunisia 67.6 81.3 74.6 82.5 88.7
    Others 515.6 528.1 530.7 539.7 562
    Africa 1,652.70 1,917.00 1,927.70 1,907.90 1,937.60
    17
    This would have been N226.26/litre at the (I&E) window exchange rate of N405/$. Figure 9 shows
    the estimated PMS prices at different crude oil prices (N381/$1 exchange rate and constant
    distribution margins). The PMS import parity prices increase from N158.11 at crude oil prices of
    $30/bbl to N371.58 at crude oil prices of $150/bbl.
    The economic evaluation of the Import Parity Pricing method is done with the aid of netback
    calculation. A barrel of Bonny light crude oil has a yield of PMS (32.16%), AGO (Diesel) (24.59%),
    Kerosine (17.69%) and Fuel oil + Bottoms (25.56%). The PMS import parity price is N212.85/litre
    or $0.559/litre at an exchange rate of N381/$. The prices of Diesel, Kerosine and Fuel oil are
    $0.568/litre, 0.894/litre and $0.465/litre respectively.
    31
    Table 4: PMS Import Parity Pricing Template.
    PMS Import Parity Pricing Method
    Cost Elements $/MT
    C + F (Platts PMS price) 620.62
    Trader’s Margin 0.73
    Lightering Expenses (SVH) 16.42
    Insurance 0.50
    NPA 7.88
    NIMASA Charge 0.76
    Financing (SVH) 4.40
    Jetty Depot Thru’ Put Charge 5.33
    Wholesale 13.34
    Storage Charge 8.54
    Landing Cost 678.534
    Distribution Margins:
    Retailers 20.50
    Transporters 12.88
    Dealers 7.81
    Bridging Fund 24.87
    Marine Transport Average (MTA) 0.50
    Admin Charge 4.07
    Subtotal Margins 70.63
    Pipeline Maintenance Tax 0
    New Refinery Tax 0
    Railway Tax 0
    TAM Tax 0
    Subtotal Taxes 0
    Total Cost 749.16
    ** Ex-Depot (for collection)
    ** Under/Over Recovery
    Retail Price (N/litre) 212.85
    1341
    381
    18
    Fig. 9: Estimated PMS prices at different crude oil prices (N381/$1 exchange rate).
    Table 5: Netback Calculation: PMS Import Parity Pricing Method.
    The netback calculation is [(0.321688.83) + (0.245990.31) + (0.1769142.15) + (0.255673.94)]
    or $94.82. This implies that if Nigeria sells a barrel of crude oil at $60.77 and imports what that
    barrel of crude oil would have produced if it were refined in Nigeria, it will cost Nigeria $94.82.
    Nigeria would therefore have suffered a loss of $34.05. From a sustainable development point of
    view, it is better to refine the crude oil in Nigeria than to sell crude oil at $60.77/bbl and buy the
    refined output products at $94.82/bbl. The sustainable development of an oil producing nation
    is enhanced with the domestic processing of crude oil into refined products which can then be
    exported. It does not make economic sense to compare the cost of an imported barrel of PMS
    ($88.83/bbl) with the cost of a barrel of crude oil ($60.77) and declare the difference of $28.06
    as a subsidy or opportunity loss which can only be recovered if prices are kept at import levels. If
    a PMS price is fixed by PPPRA, a subsidy can only be said to exist after a netback calculation shows
    a return less than the cost of the crude oil. The comparison of the PPPRA fixed PMS prices to the
    Imported PMS price to get an over recovery or under recovery subsidy does not make much
    economic sense.
    Currently, Nigeria’s major refineries are shut down for rehabilitation. The NNPC runs a DSDP
    programme with the participation of private companies (suppliers). In 2019, the DSDP
    programme involved 15 trading companies and refiners including BP, Total, Vitol, Gunvor,
    Trafigura, Mercuria and Mocoh, along with domestic companies such as Sahara Energy and
    Netback Calculation
    Product % (yield) $/Litre
    2021
    $/bbl
    (2021)
    Netback
    ($/bbl)
    PMS 0.3216 0.559 88.83 28.57
    AGO (Diesel) 0.2459 0.568 90.31 22.21
    Kerosine 0.1769 0.894 142.15 25.15
    Fuel Oil (+ Bottoms) 0.2556 0.465 73.94 18.90
    94.82
    Cost of Crude Oil 60.77
    19
    NNPC’s trading venture Duke Oil. In the 2021 – 2022 DSDP ITT, the agreement states that the
    petroleum products to be delivered by the supplier shall be equivalent in value to the Crude Oil
    received from NNPC. A barrel (42 gallons) of crude oil produces 45 gallons of petroleum products.
    The 45 gallons of petroleum products consist of 4 gallons of LPG, 19.5 gallons of Gasoline, 10
    gallons of Diesel, 4 gallons of Jet Fuel/Kerosene, 2.5 gallons of Fuel Oil and 5 gallons of Bottoms.
    The petroleum products from a barrel of crude oil are often worth far more than the value of the
    crude oil itself as we have shown with the netback calculation above. The DSDP programme is
    therefore equivalent to NNPC selling the crude oil as raw material and importing the refined
    products at a loss. This is quite different from taking your crude oil abroad, paying for it to be
    refined and selling the petroleum products in different markets including the Nigerian petroleum
    product market.
    PRODUCTION COST PRICING METHOD
    The production cost pricing method assumes domestic production of crude oil and refining.
    Figure 10 shows the domestic PMS supply chain. The crude oil is produced and refined in Nigeria.
    The petroleum products are transported by pipelines, tankers, and barges to domestic storage
    facilities. The petroleum products are then transported by tankers to domestic petrol stations. A
    domestic allocation of 445000 bpd is used by the NNPC to meet local demand. The price of a
    petroleum product is PR = T + C + R + D, where T — taxes; C — the cost of the crude oil at the
    Refinery gate; R — the refining cost of the petroleum product; D — the cost of transportation
    and pump sales of the product. The cost of the crude oil at the refinery gate is the crude oil
    domestic production cost and its transportation cost to the refinery. The Unit Operating Cost
    (UOC) is used as an average crude oil production cost.
    Fig. 10: Domestic PMS supply chain.
    USA
    The production cost pricing model is still used in USA for the determination of fuel prices. In
    December 2020, crude oil cost made up 49% of the PMS prices, refining cost make up 10%,
    distribution and marketing make up 19% and taxes make up the remaining 22% as shown in
    Figure 11. There are many types of taxes at the Federal, State, and municipal levels. Federal taxes
    20
    include excise taxes and an underground storage leakage charge. Excise taxes are also imposed
    at state levels. There is no VAT and Sales tax is paid. Many other types of taxes are levied at the
    State level. Fuel subsidies are given by government in the production stage as tax allowances
    such as the Percentage Depletion Allowance, Domestic Manufacturing Tax Deduction, the
    Foreign Tax Credit and Expensing Intangible Drilling Costs.
    Fig. 11: Production Cost Pricing Method. USA.
    COMPARISON OF RUSSIA, USA AND SAUDI ARABIA COST STRUCTURES
    Saudi Arabia, USA and Russia are the three largest oil producing nations in the world. They all use
    the production cost pricing method to determine their PMS prices. However, the structures of
    these PMS prices in 2018 were different. Table 6 shows the different structures of PMS prices in
    Russia, USA, and Saudi Arabia in 2018. The major determinant of PMS prices in Russia in 2018
    was taxes. Taxes made up 62.9% of the PMS price. The cost of crude oil production was the major
    determinant in the USA making up 59.4% of the total PMS price. In Saudi Arabia, refining was
    expensive. It made up 43% of the PMS price. The different structures reflected the different level
    of development in each country, their unique resources, their development strategies, and the
    nature of their domestic energy markets. Although the final PMS prices were similar, the cost
    structures of the PMS prices were different. The cost structures reflected the conditions in each
    of the different national PMS market. The production cost pricing methods is flexible. This
    enables the development of the optimal cost structure that fit any oil producing PMS market.32
    Table 6: Structure of PMS prices in Russia, USA and Saudi Arabia.
    Structure of Gasoline Prices in Russia, USA and Saudi Arabia, 2018, %
    Source Russia USA
    Saudi
    Arabia
    Gross Taxes 62.90 18.30 7.20
    Cost of Oil Production 7.40 59.40 25.50
    Sales and Distribution Costs 19.60 7.00 20.00
    Refining Costs 5.10 13.30 43.00
    Gas Station Profit 5.00 2.00 4.30
    100.00 100.00 100.00
    21
    NIGERIA
    In the past, Nigeria used the production cost pricing method to determine the prices of petroleum
    products. In 1994, under the Petroleum (Special) Trust Fund (Amendment) Decree No.25, 1994,
    the cost PMS was set at N11/litre. The real cost of PMS using a production cost-pricing model
    was N5.68/litre as shown in Table 7. The cost of crude oil made up 43.37% (N2.35) of this
    amount. The Marketers’ Allowance made up 22.88% (N1.30), Excise Duty & VAT was 5.81%
    (N0.33) and NNPC Cost/Margin was 29.93% (N1.70). All funds received from the sale of
    petroleum products less the approved production cost was put in the PTF. There was no fuel
    subsidy.
    Table 7: Petroleum (special) Trust Fund, Decree No. 25, 1994.
    Decree No. 25, 1994
    Petroleum (special) Trust Fund
    All monies received from the sale of petroleum products less the approved production cost per
    litre which for the time being, is as follows:33
    Petroleum (Special) Trust Fund 1994 – Decree
    No.25
    Production Cost per Litre N/Litre
    Cost of Crude Oil 2.35
    Excise duty and VAT 0.33
    Marketers’ Allowance 1.3
    NNPC Cost and Margin 1.7
    Total 5.68
    PMS price 11
    PTF 5.32
    In 2011, President Buhari explained the production cost pricing method and the PMS price thus:
    “The Nigerian oil industry was developed with Nigerian capital. Most of the experts are Nigerians,
    if you go to the fields. It is Nigerian capital; it is Nigerian oil. What I understand that Nigeria should
    charge Nigerians is the cost of 1 barrel at the wellhead and then the cost of transportation to the
    refinery, the cost of refining it and its cost at the pump. If anybody says he is subsidizing anything,
    he is a fraud. So, all these people talking about subsidy, who is subsidizing who?”
  17. In 2016, the
    Unit Operating Cost (UOC) or the average cost of producing a barrel of oil in Nigeria was
    $28.99/bbl as shown in Figure 12. There is a current sustained effort by NNPC under its TAPE
    policy to reduce its UOC to $10/bbl and achieve a contracting cycle of 6 months. NNPC just
    launched a Nigerian Upstream Cost Optimisation Programme (NUCOP) on February 9, 2021.
    Currently, the average producing cost per bbl is below $30/bbl for Joint ventures and below
    $20/bbl for Production Sharing Contract (PSC). 35 A production cost of $22/bbl was used in the
    production cost pricing method example.
    22
    Fig. 12: Production Cost in selected countries, 2016.
    Table 8 shows the template for the production cost pricing method. The cost of crude oil
    production was $22/bbl or $188.55/MT. Refining cost were estimated at $77.93/MT. The PMS at
    the refinery gate was $287.892/MT. The Distribution margins were estimated at $109.84/MT.
    The VAT (7.5%) and NCBMD (1%) taxes were incorporated into the analysis. There were no other
    taxes (pipeline maintenance, new refineries, railway, and turn around maintenance). The total
    cost was $468/MT. Therefore, the PMS price was N133.1/litre.
    This would have been N141.49/litre at the (I&E) window exchange rate of N405/$. Given that
    the cost of crude oil production is not dramatically affected by rising crude oil prices, the impact
    of crude oil prices from $30/bbl to $150/bbl on the cost of production is non-linear. In general, a
    declining crude oil price encourages cost cutting efficiency and a reduction of UOC as is the case
    in Nigeria and other producing nations today. The economic evaluation of the production cost
    pricing method is done with the aid of netback calculation as shown in Table 9. A barrel of Bonny
    light crude oil has a yield of PMS (32.16%), AGO (Diesel) (24.59%), Kerosine (17.69%) and Fuel oil
  • Bottoms (25.56%). The production cost price is N133.1/litre or $0.349/litre at an exchange rate
    of N381/$. The prices of Diesel, Kerosine and Fuel oil are $0.568/litre, 0.894/litre and $0.465/litre
    respectively (globalpetrolprices.com).
    The netback calculation is [(0.321955.55) + (0.245990.31) + (0.1769142.15) + (0.255673.94)]
    or $84.12. This implies that if Nigeria produces a barrel of crude oil and refines it, the resulting
    petroleum products can be sold for $84.12. Nigeria would therefore make a profit of $23.35.
    From a sustainable development point of view, it is better to refine the crude oil in Nigeria than
    for a profit of $23.25/bbl than to sell crude oil at $60.77/bbl and buy the refined output products
    at $94.82/bbl for a loss of $34.05/bbl.
    From a sustainable development point of view, it is better to produce and refine the crude oil in
    Nigeria than to sell the crude oil. The sustainable development of an oil producing nation is
    enhanced with the domestic processing of crude oil into refined products which can then be
    exported. It does not make economic sense to compare the production cost PMS price of
    $0.349/litre to PMS cost of $0.738/litre in the USA and declare a subsidy.
    23
    Table 8: Production Cost Pricing Template.
    Table 9: Netback Calculation: Production Cost Pricing Method.
    Production Cost Pricing Model
    Cost Elements $/MT
    Cost of Producing a barrel of crude oil 185.55
    Refining cost 77.93
    Headquarters overheads 9.02
    NPA charges 2.45
    Depreciation cost 5.53
    Financial charges 7.42
    PMS Refinery Gate Cost 287.892
    Distribution Margins:
    Retailers 20.50
    Transporters 12.88
    Storage Charge 16.54
    Bridging Fund 24.87
    Admin Charge 4.07
    Wholesalers (Marketers) Margins 30.99
    Subtotal Distribution Margins 109.84
    Producer Margins (10%) 39.77
    Taxes
    VAT (7.5%) 32.81
    NCBMD (1%) 4.38
    Pipeline Security & Maintenance Tax 0.00
    New Refinery Tax 0.00
    TAM Tax 0.00
    Subtotal Taxes 0.00
    Total Cost 468.50
    Retail Price 468.50
    Retail Price (N/litre) 133.109
    1341
    381
    Netback Calculation
    Product % (yeild) $/Litre 2021 $/bbl
    (2021)
    Netback
    ($/bbl)
    PMS 0.3216 0.349 55.55 17.87
    AGO (Diesel) 0.2459 0.568 90.31 22.21
    Kerosine 0.1769 0.894 142.15 25.15
    Fuel Oil (+ Bottoms) 0.2556 0.465 73.94 18.90
    84.12
    Cost of Crude Oil 60.77
    24
    At PMS prices of $0.349/litre, the domestic production and refining of our crude oil is cost
    effective. An increase in PMS prices increases the profit margins. Such increases can be reflected
    as taxes (pipeline maintenance, new refineries, railway, and TAM). Post Tax subsidies can be
    given as depletion allowances and development tax breaks. The production cost pricing method
    is flexible enough to accommodate the price structure necessary for our sustainable economic
    development.
    At current PMS prices of N162.4/litre or $0.426/litre, a netback calculation of petroleum products
    from I bbl of crude oil would be [(0.321967.73) + (0.245990.31) + (0.1769142.15) + (0.255673.94)] or $88.03. This gives a profit of $27.26/bbl. Current PMS prices are cost effective.
    There is no need for a price increase.
  1. CONCLUSIONS
    a) A review of the report of the Technical Committee on PMS Pricing was carried out.
    b) The review captured the viewpoint of PMS consumers, labour unions, and the general
    Nigerian masses. This had been overlooked in the report which focused on the PPPRA pricing
    template. Most of the arguments in favor of raising PMS prices were found to be
    questionable.
    c) The import parity pricing method and the production cost pricing method were examined in
    detail. Templates were developed for both methods.
    d) Using current data, the import parity pricing method was found to generate a loss because it
    encouraged the exportation of crude oil and the importation of PMS. The production cost
    pricing method was found to generate a profit because it added value by encouraging
    domestic crude oil production and refining.
    e) The production cost pricing method and template are recommended to be used for
    determining PMS prices in Nigeria. The method/template ensures that PMS pricing is not only
    profitable to market sellers/marketers etc. but also beneficial to PMS consumers.
    f) The production cost pricing method shows that current PMS price of N162.4 in the Nigerian
    PMS market is economical. Petroleum products from a $60.77/bbl crude oil generate $88.03
    worth of petroleum products for a net profit of $27.26/bbl. There is no need for a PMS price
    increase.
  2. RECOMMENDATIONS
    a) The goals of the energy sector must be aligned with the objectives of sustainable
    economic development of the masses of Nigeria.
    b) Update and implement the energy objectives in the Economic-Recovery-Growth-Plan2017-2020 (ERGP).
    25
    c) Increase local refining capacity for national self-sufficiency. Build more refineries and
    put them under independent private sector management.
    d) Reduce petroleum product imports by 60% by 2023.
    e) Become a net petroleum products exporter by 2025.
    f) Use the production cost pricing method/template for the determination of PMS prices
    especially with regards to the domestic allocation of 445000 bpd.
    g) Complete the rehabilitation of the refineries and put them under autonomous private
    operational management. Do more regular TAM.
    h) The Federal Government should sell shares of more than 50% ownership of all publicly
    owned refineries to the Nigerian public.
    i) Consider generating funds with new refineries, Pipeline Maintenance, Railway, and TAM
    taxes under the production cost pricing method/template. This will help fix pipelines,
    railways, and refineries. This will allow automatic adjustments to PMS prices.
    j) Improve data management. Adopt more transparency and allow greater access to data.
    k) Create Special courts/prosecutors to handle corruption cases arising the petroleum
    products programmes. All found guilty must be punished.
    l) Use the IFEM exchange rate for all petroleum products related activities rather than the
    Import and Export (I&E) rate (NAFEX window).
  3. REFERENCES
  4. EIA Nigeria Country Analysis June 25, 2020
  5. Uduebo M.A.:” Determining the Price of Petroleum Products in Nigeria and the Issue of
    price Subsidy.”, CBN Economic & Financial Review, Vol. 32 No. l: 17 • 33, 1994
  6. 2020 OPEC Annual Statistical Bulletin
  7. Invitation to tender (“ITT”) for the 2021-2022 Direct Sale of Crude oil and Direct
    Purchase of Petroleum Product (DSDP)
  8. Jason Oringer and Carol Welch: “Structural Adjustment Programs”, Institute for Policy
    Studies, Washington, April 1998
  9. Nigeria: Experience with Structural Adjustment, Occasional Paper No. 148, IMF, 1997
  10. Petroleum (special) Trust Fund, Decree No. 25, 1994
  11. Gupta Sanjeev, Benedict Clements, Kevin Fletcher and Gabriela Inchauste: “Issues in
    Domestic Petroleum Pricing in Oil Producing Countries”, IMF Working Paper 02/140 ,
    2002.
    26
  12. IMF Country Report No. 01/131: “Nigeria: 2001 Article IV Consultation – Staff Report; Staff
    Statement; and Public Information Notice on the Executive Board Discussion”, August
    2001.
  13. IMF Country Report No. 03/3: “Nigeria: 2002 Article IV Consultation – Staff Report; Staff
    Statement; and Public Information Notice on the Executive Board Discussion”, January
    2003.
  14. Hossain, Shahabuddin Mosherraf: “Taxation and Pricing of Petroleum Products in
    Developing Countries: A framework for Analysis with Application to Nigeria.” IMF Working
    Paper 03/42, 2003,
  15. David Lipton: “Energy Subsidy Reform: The Way Forward” Presentation, IMF, March 27,
  16. https://www.imf.org/external/mmedia/view.aspx?vid=2259938875001
  17. OPEC/IEA/OPEC/OECD/WB Joint Report, June 2010
  18. National Bureau of Statistics – 2019 Poverty and Inequality in Nigeria – Executive
    Summary
  19. Premium Times, July 22, 2015
  20. The Vanguard News, September 10, 2020.
  21. Montfort Mlachila, Edgardo Ruggiero, and David Corvino: “Unintended Consequences:
    Spillovers from Nigeria’s Fuel Pricing Policies to its Neighbors”. IMF WP/15/17, 2016
  22. Priscilla Atansah, Masoomeh Khandan, Todd Moss, Anit Mukherjee, and Jennifer
    Richmond:” When Do Subsidy Reforms Stick? Lessons from Iran, Nigeria, and India.”,
    CGD Policy Paper 111 November 2017.
  23. House of Representatives, “Report of the Ad-Hoc Committee to Verify and Determine
    the Actual Subsidy Requirements and Monitor the Implementation of The Subsidy
    Regime in Nigeria.”
  24. The Presidential Committee on verification and Reconciliation of Fuel Subsidy Payments,
    Nov. 2012.
  25. Ngozi Okonjo-Iweala: “Fighting Corruption is Dangerous”, MIT press, 2018.
  26. The Economic-Recovery-Growth-Plan-2017-2020 (ERGP)
  27. IMF Country Report No. 13/116: “Nigeria: 2012 Article IV Consultation – Press Release; Staff
    Report; Staff Statement by the Alternative Executive Director for Nigeria”, Feb. 2013.
  28. David Coady, Ian Parry and Baoping Shang:” Energy Price Reform: A Guide for Policymakers.”,
    CESIFO Working Paper No.6342, 2017
  29. Trevor Alleyne et al: “Energy Subsidy Reform in Sub-Saharan Africa: Experiences and
    Lessons.”, IMF 13/02, 2013
  30. Trevor Alleyne et al: “Energy Subsidy Reform in Sub-Saharan Africa: Experiences and
    Lessons”., IMF African Department paper 13/02, April 2013.
  31. IMF Country Report: “Nigeria: IMF Staff Report for 2012 Article IV Consultation.” Jan
    2013.
  32. David Coady, Valentina Flamini, and Louis Sears:” The Unequal Benefits of Fuel Subsidies
    Revisited: Evidence for Developing Countries”, IMF Working Paper WP/15/250 Nov.
    2015
  33. Peter I. Ozo-Eson:, “Pricing of Petroleum Products in Nigeria.”, Research Report, African
    Centre for Leadership, Strategy & development, Centre LSD Book Series No. 7.
    27
  34. Lt. General Olusegun Obasanjo, Opening Speech, FESTAC, 1977.
  35. Globalpetrolprices.com.
  36. Provornayaa I.V., Filimonovaa I.V., Nemova V.Yu, Komarovaa A.V., Dzyuba Y.A.:, “Features
    of the petroleum products pricing in Russia, in the USA, and Saudi Arabia” , Energy
    Reports, Volume 6, Supplement 6, November 2020, Pages 514-522
  37. Petroleum (special) Trust Fund, Decree No. 25, 1994.
  38. Pulse.ng, July 22, 2015
  39. Businessamlive.com Feb.10,2021
    Dr. Izielen Agbon.
    Feb 18, 2021

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