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:
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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