Fuel Subsidy Returns as Landing Cost Hits N145

petrol
  • Fuel Subsidy Returns as Landing Cost Hits N145

The Federal Government has resorted to subsidy regime following an increase in the landing cost of Premium Motor Spirit, also known as petrol.

This is coming about eight months after the Muhammadu Buhari-led regime stopped the fuel subsidy, which was costing the government millions of naira being paid monthly to oil marketers importing the product then.

Investigation on Friday showed that the Nigerian National Petroleum Corporation, now responsible for about 90 per cent of the importation of the product, is currently bearing the latest subsidy cost on behalf of the government.

The Federal Government had on May 11, 2016 announced a new petrol price band of N135 to N145 per litre, a move that signalled the end of fuel subsidy.

The Petroleum Products Pricing Regulatory Agency explained then that the rise in crude oil price and prevailing high cost of importation had brought back subsidy.

The PPPRA, in its pricing template released following the introduction of a new price band, put the landing cost and total cost of petrol at N122.03 and N140.40 per litre, respectively.

The cost of the product and the freight rate, which are the elements mostly affected by crude oil price and exchange rate, were put at $534 per metric tonne of petrol or N111.30 per litre, using an exchange rate of N280/dollar.

Global oil benchmark, Brent crude, which was trading around $41 per barrel when the petrol price was increased, stood at $55.64 per barrel as of 5.15pm on Friday.

Crude oil price accounts for about 80 per cent of the final cost of fuel, the PPPRA said, in its framework for petroleum products supply, distribution and pricing.

Our correspondent gathered that the cost of petrol stood at $560 per metric tonne or N127.36 per litre plus N7 per litre for freight as of Friday.

The addition of the cost of product with freight charge and other cost elements in the PPPRA template result in a landing cost of N145.09 per litre (using the official exchange rate of N305/dollar) or N222.33 per litre (using the parallel market rate of N490/dollar).

The NNPC, in its latest monthly report, said it remained the major importer of petroleum products, especially the PMS, in spite of liberalisation of petroleum products and government’s intervention meant to ease marketers’ access to foreign exchange.

In the past, marketers were importing 70 per cent of the products while the NNPC was importing 30 per cent, being the supplier of last resort.

Most of the marketers have yet to resume importation of petrol and continued to rely on supply from the NNPC, which sells to them at N131 per litre.

An ex-top executive of the PPPRA, who spoke with our correspondent on condition of anonymity, said, “If the landing cost is more and somebody is bringing the product in and others are not, it means definitely that person, who is bringing it, is running at a loss somehow. So, if you now call that subsidy, it is okay.

“The NNPC is definitely subsidising the product; it is a loss to them also because they get the money from somewhere.”

The Head of Energy, Ecobank Capital, Mr. Dolapo Oni, said, “I believe there is a subsidy, but it is not the subsidy being paid to marketers. It is the NNPC taking a loss so that marketers can sell at N145. That’s a fair system right now because it is better than paying marketers at the same time.

“But it is not sustainable because oil price could keep on going higher and the cost to the NNPC will increase. So, potentially, we expect a fuel price increase at some point. But to what extent, we don’t know. The ideal thing will be to raise the price.”

Asked if the NNPC was subsidising the product being imported, the Group General Manager, Group Public Affairs Division, NNPC, Mr. Ndu Ughamadu, could not comment on it, saying only the PPPRA was in the position to give information about the landing cost of petrol.

Last week, oil marketers under the aegis of the Independent Petroleum Products Importers said they owed some Nigerian banks over $1bn used for the importation of petroleum products, with accumulated interest of N160bn.

According to them, they are unable to pay because the sums they owe the banks form part of what they are in turn owed by the government.

The marketers said the government’s debt arose from the petrol subsidy scheme whereby the Federal Government entered into a contract with the IPPI, mandating its members to import and supply petrol to the market on condition that it would pay to the body the difference between the landing cost and pump price as fixed by the government, provided that the landing cost was higher than the selling price.

It said, “When the selling price of petrol was increased from N97 to N145 per litre in May 2016, it was based on an exchange rate of N285/$1, resulting in a 45 per cent increase. On June 20, 2016, the naira was devalued from N285/$1 to N305/$1, which is an increase of seven per cent, but the fixed pump selling price of petrol has not been increased. This means that petrol must be subsidised.”

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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