In May of 2019, the Senate Committee on the downstream Petroleum sector disclosed that Nigeria had spent over ₦11trn as payment for outstanding subsidy claims from 2013 to 2019. Following the adoption of the report of its Committee on Petroleum Downstream on the Promissory Note Programme and a Bond Issuance for Oil Marketers Outstanding Claims, the committee had also approved the payment of ₦129bn as outstanding subsidy claims to 67 petroleum marketers.
In its 2019 financial and operational, NNPC’s reports showed subsidy payments of ₦752bn. Interestingly, this represents 72.3% of oil dividends valued at ₦1.04 trillion in the same year. The subsidy obligation, which is classified as under-recovery and an additional cost incurred by subsidizing fuel price, was not approved by the National Assembly in the 2017 Appropriation Act.
In June of 2020, after changing its pricing method to eliminate subsidies, the “under-recovery” bill outlined in the monthly statement of the NNPC had shown a record of a ₦5.34bn ($14 million) fuel cost. In his response to this development, NNPC spokesman Kennie Obateru had told Reuters that the costs represented temporary payments to marketers who purchase imported fuel and then sell it on, for stocks they held when the subsidy was removed and would be spread over six months. Obateru said, “since the subsidy removal started with a reduction in pump price, marketers have to be paid the differential of the (government) verified stock they held.”
Intriguingly, ‘fuel subsidy’ payments remain a recurring issue in Nigeria’s oil and gas sector. Although replaced with “under-recovery”, the unbalanced subsidy system has done little to address the intrinsically associated issues or create the illusion that Nigeria’s fuel subsidy problem has been eradicated. This begs the question: Are there vested interests perpetuating a bleeding-out of the nation’s much-needed revenue through subsidy payments?
Subsidy Payments 2010 – 2019
Fuel subsidies come at great costs
The Petroleum Products Pricing Regulatory Agency (PPPRA) is tasked with calculating the difference that government pays between domestic fuel pump price and the international fuel price, after determining landing and distribution costs, etc. However, while the goal is to strengthen industrial growth and expand domestic consumption, fuel subsidies have had some adverse effects on Nigeria’s economy. They not only distort the market, but they also reduce the distribution of resources, encourage smuggling activities, hinder investment plans in the oil and gas sector, lead to environmental consequences, and promote corruption.
Fuel subsidies not only tend to repress the commercialization and development of the oil sector but there are also concerns about how it may hamper Nigeria’s economic efforts; leading to a consensus that the subsidy system needs to be adequately reformed. There is a long-run relationship between fuel subsidy and economic development in Nigeria and possibly the direction of consequences. These issues seek an answer to the question; is Nigeria’s oil industry innately unprofitable?
Are subsidy payments sustainable in the long run?
The negative consequences of subsidy payments coupled with the fact that they often do not achieve the objectives they are set for have led to calls to eliminate or reform these subsidies. The fall in international oil prices, the decline in oil revenue from NNPC’s subsidiaries and refineries, and the high prices of refined fuel have all led to the sad realization that these subsidy payments may not sustainable for Nigeria.
For instance, subsidies in 2016 were ₦24bn (5.93% of GDP) with GDP of ₦404.65bn, increased to ₦145bn (38.5% of GDP) with a GDP of ₦375.75bn in 2017 and rose significantly to ₦1.1trn in 2018 with a GDP of ₦397.19bn which economic experts attributed to the rising oil price, falling exchange rate and increasing demand. This and many other issues have led to demands by Nigerians to reassess the fuel subsidy issue.
Given the debate generated by the call for the reform of the fuel subsidy system, there had been attempts at examining how these fuel subsidies impact the economy. An industry expert, with a work history in the oil and gas sector, has implied that the impacts should be assessed based on the economic, social, and environmental implications.
“Subsidy payments divert economic resources from priority sectors such as health, education, and infrastructure. This, in turn, impacts the welfare and income level of poor households, especially as subsidies are targeted at protecting them from international oil price shocks,” he said.
PPPRA’s spokesperson, Mr. Apollo Kimchi, was not available to comment on the issue.
This story was produced under the NAREP Oil and Gas Media Fellowship of the Premium Times Centre for Investigative Journalism.