PETROLEUM PRODUCTS DEREGULATION
Transcript of PETROLEUM PRODUCTS DEREGULATION
Sustainable Solution to Nigeria Petroleum Product Supply
PETROLEUM PRODUCTS DEREGULATION
SUBSIDY - WHAT IS IT & WHY DOES IT MATTER?
Dr Ekpen Omonbude Economic Adviser (Natural Resources), Commonwealth Secretariat, London
Dr. Adeoye Adefulu
BARRISTERS, SOLICITORS & NOTARIES PUBLIC
ODUJINRIN ADEFULU &ESTD. 1972
Infographics by:
HOW NIGERIA’S PETROLEUM PRODUCT NEEDS ARE MET TODAY
Petroleum Exchange &
Offshore Processing
Agreements
- SWAPS
- OPAs
Indigenous Refinery Capacity
- NDEP 1000bpd Refining Topping Plant in Ogbelle
producing 88,000 litres of diesel daily
The SUBSIDY
Arrangement
Importation thru’
Indigenous
Companies (300+)
Four inefficient Nigerian refineries with a 445,000b/d
name plate processing capacity (NNPC)
Nigeria’s Daily Petroleum (“White’)
Product Requirements
PMS (Petrol) – 32 million litres
DPK (Kerosene) – 8 miliion litres
AGO (Diesel) – 12 million litres
x
Private Enterprise with 99% availability and efficiency
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Source: adapted from NNPC data
KEY ISSUES3
This Paper Seeks To Examine 3 Key Issues Around
The Petroleum Products Subsidy Question
Does the Petroleum Products
Subsidy Exist?
What Distortions Occur Where
Subsidy is Retained?
What is the best strategy for deregulating
the sector?
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An important way to understand the subsidy is to understand what
goes into the formation of a price for petrol at the pump in terms of
fundamental questions
What is the cost of the feedstock?
There is a price associated to
the barrel of oil that will be fed
into the refining process.
What is the cost of refining this
feedstock?
What are the storage and
transportation costs? What are the distribution costs?
What are the margins? There is a price to pay for such things as cost
of debt and cost of equity and other costs linked to
the reward for the risk taken for this venture
What are the taxes involved? There is
a price to pay for the impact of the use
of these refined petroleum products
(PMS in this case), ranging from
negative impacts on the highways,
environmental pollution, import duties,
VAT and other excise duties etc.
DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
It is on this basis that pump prices the world over are determined.
Every price template across the globe applies a variation of the above
fundamentals or the other.
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
• What determines petroleum product cost
under importation model?
Cost of product, cost of shipping to
Nigeria are determined by market forces
Cost of storage, transportation
and distribution must be
determined by market forces
(and are)
Margins must be recovered to
stay profitable
•Therefore, Nigerian PMS current model (under importation model is):
Cost and freight
Trader’s Margin Lightering Expenses
NPAFinancing
FX differential & interest costsJetty Costs
Storage Charge
Distribution Margins
Taxes
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Source: based on PPPRA pricing template
DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Based on what
we import:
• Nigeria must compensate importers
/marketers for:
• Landing costs + distribution
margins + elevated cost of
financing due to irregular
payments + FX charges
• If these costs and margins exceed
the Government’s (regulated) “target”
end user
price, then the difference is a subsidy
• Expected open market price (as of Dec
2014): NGN 97.90
• Expected open market price (as of 22
May 2015): NGN 132.97
If we did not
import:
• Nigeria must compensate for:
• Expected open market price
• Feedstock cost (there is a price to
pay for the barrel of crude oil. IT IS
NOT FREE, CONTRARY TO CURRENT
MISGUIDED ASSERTIONS)
• Pipeline & other transportation cost
• Storage costs
• Refining margins
• Distribution margins
• Based on $50/barrel oil: NGN 91.99
• Based on $64.90: NGN 110.65
• Based on $100: NGN 154.59
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
The key argument of the existence
of subsidies is that product prices should be determined by
the cost of production of crude oil in the country
those who do not believe in
In view of the fact that Nigerian refinery
capacity is well below the level required
to fully supply the market, this argument
cannot stand as the price of imported
products are determined internationally
Even where local refinery capacity exists,
by pegging petroleum products pricing to
the cost of crude oil production, the nation
loses out on the value that may be gained
from the sale of the product at the higher
international price. The cost of this loss is
the inability to use the lost funds to meet
other needs– schools, hospitals, roads.
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0
20
40
60
80
100
120
140
160
2006 2007 2008 2009 2010 2011May
0
5
10
15
20
25
30
35
40
45
50
Co
nsu
mp
tio
n(M
illi
on
litr
es
/ d
ay
)
Pri
ce (
Na
ira
/lit
re)
Consumption PMS Landing Cost + margins Regulated PMS Pump Price PMS Platts Prices $/bbl
Subsidy Levels
PMS PRICE vs CONSUMPTION ANALYSIS
WHAT HAS LED TO SPIKED CONSUMPTION GROWTH?
PMS PRICE/CONSUMPTION ANALYSIS
Annual Outstanding HHK Subsidy Annual Approved Subsidy PMS Cumulative Subsidy
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0
200
400
600
800
1,000
1,200
1,400
2006 2007 2008 2009 2010 2011 Est
Cu
mu
lati
ve
Su
bsi
dy
(N
’M)
An
nu
al S
ub
sid
y (
N’M
)
261 279
648
422
622
1,057
243
228
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Reasons: Illegal Cross-border
supply, Massive Fraud
(60% not supplied)
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ISSUE 1
Source: Ministry of Petroleum Resources, "Information on Subsidy", November 2011
PPPRA “PMS” SUBSIDY CALCULATION
High crude price increases subsidy.
For oil producing Nigeria, this
simply erodes our revenue
0
20
40
60
80
100
120
140
Feb. ’09 Dec. ’10 Apr. ’11 Dec. ’14 Jan. ’15
0
20
40
60
80
100
120
140
160
Feb. ’09 Dec. ’10 Apr. ’11 Dec. ’14 Jan. ’15
High landing cost in Nigeria due to:
- Inadequate port facilities for large
number of marketers
- Systemic inefficiencies,
- Overt rent-seeking & gaming
- Collusion between fraudulent marketers
and some regulatory entities
- No sanction for non-performance,
Opaque pricing & inherently costly
2-months Crude Price Average ($/bbl)
Landing Cost (=N=/Litre)
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Almost zero subsidyThe window of opportunity for Government to remove subsidy
Lower Oil Price = Lower Revenue to Nigeria = Reduce income for budget =
Further devaluation of Naira.Increase Landing Cost & Financing
Cost
Exchange Rate
ISSUE 1Issue 1: Does the Petroleum Products Subsidy Exist?
The Factors Impacting Subsidy Claims & The Inherent Problems
Adapted from a variety of sources
DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
• One of the systems designed to adjust for the lack of refinery capacity is the
crude oil swaps arrangement which exchanges crude oil for petroleum
products
• The swaps system requires an accurate calculation of the refining yields
which may be obtained from each barrel of crude as well as ensuring that all
the yields are returned to Nigeria
This can be very complex. Depending on the complexity of the refining
process, the refining yields could produce product from naptha through
gasoline and LPG to petrochemicals
The true value of the yields is only known after a thorough assay of the
crude and the refining process has taken place
Therefore any arrangement that involves the exchange of crude oil for
petroleum products that do not correspond exactly with the product
yields based on an assay or based on a refining process is inaccurate. It
could result in an under-valuation or over-valuation of the crude oil
• Serious concerns on both fronts, with NEITI suggesting Nigeria may be
losing billions of dollars annually
• The system :
is opaque and discretionary in determining the relevant yields
requires strong contract administration
provides corruption gateways
The Problem with SWAPS
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Cost Element N82.41Distributions Margin N15.49Taxes 0
Based on what we imported in December 2014
Avg brent price at $62.34/bbl
N97.90
Retail price
N97
Fuel Subsidy
Expected Open
Market Price
N0.90
Scenario:
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Cost Element N117.48Distributions Margin N15.49Taxes 0
Based on what we import in May 2015
Avg brent price at $64.90/bbl
N132.97
Retail price
N87
Fuel Subsidy
Expected Open
Market Price
N45.97
Scenario:
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Cost Element N142.04Distributions Margin N15.49Taxes 0
Based on imported fuel at
Avg brent price at $80/bbl
N157.53
Retail price
N87
Fuel Subsidy
Expected Open
Market Price
N70.53
Scenario:
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Cost Element N174.57Distributions Margin N15.49Taxes 0
Based on imported fuel at
Avg brent price at $100/bbl
N190.06
Retail price
N87
Fuel Subsidy
Expected Open
Market Price
N103.06
Scenario:
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Cost Element N91.55Distributions Margin N15.49Taxes 0
If we didn’t import based on
Avg brent price at as at Dec. 2014$62.34/bbl
N107.44
Retail price
N87
Fuel Subsidy
Expected Open
Market Price
N20.44
Scenario:
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Cost Element N95.16Distributions Margin N15.49Taxes 0
If we didn’t import based on
Avg brent price at as at May. 2015$64.09/bbl
N110.65
Retail price
N87
Fuel Subsidy
Expected Open
Market Price
N23.65
Scenario:
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DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST?
ISSUE 1
Cost Element N139.10Distributions Margin N15.49Taxes 0
If we didn’t import based on
Avg brent price at $100/bbl
N154.59
Retail price
N87
Fuel Subsidy
Expected Open
Market Price
N67.59
Scenario:
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Petroleum products subsidy is an inefficient way of targeting
benefits for the poor
- Propensity to seek rent from
government inefficiency at play
- Created incentive for smuggling
- Diminishes competitiveness
- Discourages investment in
all sectors (especially the
midstream & downstream)
- It has not worked in Nigeria
ISSUE 2DISTORTIONS CAUSED BY FUEL SUBSIDY
Resource costs
Cost of time it takes to verify claims
Creation of corruption gateways
In order to reduce leakages, government would need to spend significant amounts in
building the resource base to properly monitor and verify subsidy claims. The time it
takes to undergo such processes also imposes additional costs on both Government,
importers and financial institutions. Finally, the process of monitoring and
verification provides avenues for corruption of government officials and value
leakages.
Every Naira spent on subsidizing petroleum products is not invested in necessary
infrastructure
Subsidy funds may be better utilized in building schools, hospitals and a world class
road network
Subsidies disproportionately cater to the lifestyles of the rich
Top richest 20% receive 20 times more subsidy than bottom poorest 20% for PMS
The cost of transferring subsidies to the bottom poorest is US$33 for every dollar
actually transferred
Incentivises waste
The presence of subsidies encourages inefficient use of energy – use of multiple cars
and use of vehicles as opposed to other means of transportation
With the significant difference in petroleum prices in neighbouring countries, there is a
strong incentive to smuggle petroleum products thereby transferring benefits meant for
Nigerians to foreigners, smugglers and corrupt officials
•
Opportunity Costs
Costs associated with verification of subsidy claims
Subsidy for the rich & the middle class?
Smuggling
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ISSUE 2DISTORTIONS CAUSED BY FUEL SUBSIDYSmuggling is an inevitable consequence of petroleum subsidies because it has an economic incentive. The
prices for gasoline in Benin, Togo, Ghana, Cameroon, Ivory Coast, Sierra Leone, Liberia and Burkina Faso
make Nigerian PMS an attractive prospect for smuggling across the border.
Gasoline Prices US$/litre (May 2015), Selected Countries
$0.00 $0.50 $1.00 $1.50 $2.00
Norway
UK
Burkina Faso
Ivory Coast
Cameroon
Sierra Leone
Benin
Liberia
Togo
Niger
USA
Chad
Ghana
Azerbaijan
Russia
Indonesia
Malaysia
UAE
Nigeria
Qatar
Venezuela
$2.50
$0.29/litre smuggling incentive
$0.45/litre smuggling incentive
$0.51/litre smuggling incentive
$0.76/litre smuggling incentive
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Source: http://www.globalpetrolprices.com
Factors to Consider
SUBSIDY
Arrangement
SWAPS &
OPAs
Existing
Govt
Refineries
Nigeria IndependentProcessing Plafform /
Refinery
Exposure to Govt
In-Efficiency
Cost Plus to Govt
Value Add (Tax Revenue)
Loss/Abuse/Corruption
Enabler to Economic Diversification & Growth in Value Chain
Employment Generation
Fiscal & Budget Sustainability
Transparent & Accountable
Is this a Sustainable Option NONot in med -
long termNo- If NNPC Operated.
Yes, Should be replicated
Cancel
(now or Phased)
Subsidy
Improve
& Audit for short term use
Transparency
NIGERIA’S PETROLEUM PRODUCT SUPPLY OPTIONS - ASSESSMENT
SUGGESTED ACTION TO TAKE
Privatise /Sell off
Use this to place product processing capacity across the country
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ISSUE 3Issue 3: What is the best strategy for deregulating the sector?
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PROPOSITION
STOP PMS, DPK & AGO subsidy
De-regulate but introduce a transparent and credible Automatic Pricing
Mechanism
Re-structure current supply/demand framework with a combination of:
(i) Large international product suppliers with refinery & logistic
platforms
(ii) A select group of credible indigenous marketers (based on clear
transparent criteria)
This would guarantee Nigeria a more cost effective and transparent
system
Re-structure the SWAPs and OPAs to remove opaqueness
Pass competition regulations under the Petroleum Act to combat opportunistic
pricing and anti-competitive practices post de-regulation
Privatise the existing Nigerian refineries
Enable the planned Nigeria refinery projects (e.g. the Dangote Refinery
projects)
Encourage small indigenous operators to adopt the development of topping
plants to aid product processing across the company (adopt the NDEP Topping
plant model)
Significantly improve the Infrastructure to improve the supply, transport and
storage platforms to ensure it is adequate for needs and removes bottlenecks
Primary proposal is based on a
de-regulated pricing framework
In the Short Term:
In the Medium Term:
ISSUE 3Issue 3: What is the best strategy for deregulating the sector?
ISSUE 3HOW BEST TO CUSHION THE EFFECT
OF CRUDE OIL PRICE RISES
Given that there is currently in the price calculation
(which is in itself a subsidy), the other feasible approach to take would
be to
or
no tax element
adjust the bridging fund component of the price template during
price fluctuations to either reduce the end user price when oil prices are
high increase the end user price to achieve international parity when
oil prices drop aggressively redirect the funds earmarked for
maintaining petroleum subsidies towards real social inclusion
(healthcare, education, infrastructure).
Tax
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Issue 3: What is the best strategy for deregulating the sector?