nigerian economics fuel subsidy 33

8/3/2019 Nigerian Economics Fuel Subsidy 33

1/16

Straplan

Whats New?

Nigerian Economics

Dec 2011

December 2011.

Fiscal Policy Update. Fuel Subsidy A Catch-22 Situation.


2/16

Straplan

It is a capital mistake to theorize before one has data. Insensibly one

begins to twist facts to suit theories, instead of theories to fit facts.

- Arthur Conan Do le Sherlock Holmes

Dec 2011


3/16

Straplan

The removal of subsidy as planned by the federal government has its pros and cons. In this report

we have attempted to bring insight into the dynamics of the issue in contention i.e. the Petroleum

Support Fund (PSF).

In this report, our insight covers the rationale behind the PSF, the expected pump price (if subsidy

is removed) as well as key considerations for pricing. We shed light on the demand and supplydynamics for information and the readers contribution to the affairs of the Nigerian nation.

Please have a good read.

Executive Summary

Dec 2011

This report has been prepared to serve a broad range of potential clients, basically, individuals and organizations

interested in the dynamics of the Nigerian economy. The Nigerian Economics series is a complimentary publication

of Straplan, which seeks to bring insight into trends in the Nigerian economy, markets and industries.

Our mission is to provide direction for our clients planning, decision-making, and stakeholder consultation with

creative and insightful information. Straplans reports target both international and local investors, corporate and

public institutions, business students and teachers, foundations, interest groups, policy-makers, quasi-

governmental institutions and media companies. For more information. See Contacts Page.

Straplan provides advisory services in research, strategy, trainings, and stakeholder consultation.

Regards


4/16

Straplan

When the PSF was created in 2006, as

part of the recommendations of the

The Petroleum Support Fund

70

80

$/bbl Crude Oil Price

The Petroleum Support Fund (the PSF), AKA the Intervention Fund, or subsidy,

The administration of the Fund started in 2006 by the government to stabilize the domestic

price of petroleum products against fluctuations in the international price of crude oil and

exchange rate variations.

The Fund is to support the purchase of petroleum products imported into the country at anyprice above N65/litre.

Dec 2011

etro eum ro ucts r c ng egu atory

Committee in 2003, oil prices had only

peaked at $80/bbl in 30 years.

Since then, oil prices had peaked at

$147/bbl, and prices reflect that this is

the age of high oil prices.

The PSF is funded by the three tiers of

government and provided for in the

federal governments annual budget.

10

20

30

40

50

60

7-Jan-00

16-Apr-00

25-Jul-00

2-Nov-00

10-Feb-01

21-May-01

29-Aug-01

7-Dec-01

17-Mar-02

25-Jun-02

3-Oct-02

11-Jan-03

21-Apr-03

30-Jul-03

7-Nov-03

15-Feb-04

25-May-04

2-Sep-04

11-Dec-04

21-Mar-05

29-Jun-05

7-Oct-05

15-Jan-06

25-Apr-06

3-Aug-06

11-Nov-06


5/16

Straplan

The FG plans to exclude provisions for the annual deductions in support of petrol (premium

motor spirit PMS) consumption from its medium term (2012-2014) fiscal strategy, starting

with the 2012 budget.

The removal of subsidy means the pump price of petrol would no more be stable but rise and

fall in line with the vagaries of the international market price of crude oil. This would continueuntil Nigeria can locally refine at least 80% of its petrol consumption.

Expected Market Price ex-Subsidy

158.76 152.12

180

N/Litre Expected Market Price of PMS

Up from N65 to what?

Domestic price of petrol to reflect

international prices

Dec 2011

128.4133.44

. .146.1

147.21

149.2

142.13 138.71

63.6771.71 74.4

79.11

93.05102.84

95.71

106.5398.75 101.21

107.91

60

80

100

120

140

160

January

February

March

April

May

June

July

August

September

October

November

2011 2009

Source: PPPRA, Straplan Research

If oil price is pegged at N65,

average subsidy/litre increases or

drops in line with the

international price of crude oil.

Nigerians would have bought

PMS at N63/litre PMS in January2009, and N158.7/litre in March

2011 based on the landing cost of

fuel.

* Expected Market Price of PMS = Landing Cost + Distribution Margins


6/16

Straplan

Currently, the level of subsidy (mainly PMS) has been on the rise due to high international

price of crude oil, growing consumption (influenced by population and development), as well

as exchange rate differentials.

Crude oil plays a pivotal role in Nigerias economic structure as government revenue, subsidylevels, and prices of imported refined products all mirror its price direction.

170

PMS Price (less subsidy) vs Crude Oil Price 2011PMS Price (less subsidy) vs Crude Oil 2008/9

The international price of crude oil plays a pivotal role in Nigerias fiscal structure

Expected Market Price ex-Subsidy

Dec 2011

90

100

110

120

130

140

150

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Bonny Light (monthly ave $/bbl) Expected Pump Price of PMS N/ltr

40

60

80

100

120

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Expected Pump Price of PMS (N/Ltr) Bonny light (monthly ave $/bbl)

Source: PPPRA, EIA, Straplan Research


7/16

Straplan

The government pays so much for each litre of petrol bought in Nigeria, even when smuggled

out to neighbouring countries by arbitrageurs

On the premise that government is the biggest spender in the economy, two thoughts

occurred to us:

Perhaps government is the largest buyer of petrol and as such responsible for the rising

demand

We wonder if the government had factored in the increase in cost of fuel and implications on

its recurrent budget as from 2012.

Rising Subsidy Levels

Dec 2011

21.8523.8

47.63

35.52

0

10

20

30

40

50

2006 2007 2008 2009

0

200

400

600

800

1000

1200

1400

1600

2006 2007 2008 2009 2010 2011

Subsidy PMS Share of Imports



8/16

Straplan

The Nigerian government pays for the consumption of petroleum products above its budget

for capital expenditure in the country. This invariably means that the consumption of

petroleum products takes priority over Nigerias capital project (basically infrastructure).

Given the vulnerability of Nigerias fiscal structure which is reliant on oil prices, supporting

consumption of same product appears to have put Nigeria in a catch-22 situation.

If petroleum prices rise further, the level of subsidy would continue to rise. On the other hand,

if petroleum prices decline (expected due to weakening demand in Euro Area and America),

Nigerias revenue would drop and subsidy would further weaken the countrys treasury.

Is the subsidy level sustainable?

Dec 2011

47%37%

56%

32% 35%

115%

0

500

1,000

1,500

2,000

2006 2007 2008 2009 2010 2011

Subsidy vs Capital Expenditure

Capital Expenditure Subsidy level/Cap Ex

18.8%

17.5%

29.8%

20.0%18.1%

43.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006 2007 2008 2009 2010 2011

Subsidy vs Recurrent Expenditure

Recurrent Expenditure % of Recurrent Expenditure

Source: Straplan Research


9/16

StraplanConsumption Pattern

Local ProductionImports

Local refineries

WRPC

KRPC

NNPC

Importers

Demand continues to rise while supply is import-dependent

45

Average Daily Consumption of PMS

Rising demand levels call for a review of the scheme, to reassess what drives the real demand

for petroleum products, especially PMS. It is believed that demand is lost to rent seeking and

diversion (smuggling)

Reports show that new-car imports soared in the year (which we believe is politically induced),

and we expect a corresponding increase in demand for fuel.

As such fuel subsidy would continue to benefit those who mostly consume the product, who

usually are within the middle and high-income groups.

Dec 2011

PPMC

Depots

Marketing Companies

Dealers / Petrol Stations

Consumers

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010


Random, independent

importation


10/16

StraplanSupply

The three refineries are set up to produce about 445,000 barrels of refined petroleum

products daily.

It would cost between $2billion-$5billion to set up a 250,000barrels/day refinery (depending

on the complexity of the refinery). This means that the present subsidy level can build two

250,000barrels/day refineries and augment current local output.

At full capacity utilization, the refineries can only provide about 55% of the current level of

PMS consumption (i.e. 22million litres).

Dec 2011

Refineries Year Commissioned Installed Output Capacity(*bpd)

1 Port Harcourt Refining Company (PHRC Old) 1965 60,000

2 Port Harcourt Refining Company (PHRC New) 1989 150,000

3 Warri Refining & Petrochemical Company (WRPC) 1978 125,000 (up from 10,000)

4 Kaduna Refining & Petrochemical Company (KRPC) 1980 110,000 (up from 100,000)

, .


11/16

Straplan

The best that a Nigerian refinery (WRPC) has worked in the last four years is at 43% of its

capacity. Combined capacity is below 25%.

It costs about $5 to produce a barrel of oil (159 litres) locally, however, over 80% of

consumption is imported at higher costs.

There is an obvious need for more refineries, although we gathered that the federal

government is planning to set up three refineries in Lagos, Kogi, and Bayelsa states.

43.01% 43.36%45%

50%

Capacity Utilization of the refineries

95%

120%Contributions of local refineries are insignificant

Supply

Dec 2011

0%

19.56% 20.02% 20.46%

24.87%

17.84%

9.08% 9.17%

0%

38.52%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2007 2008 2009 2010

KRPC PHRC WRPC

87% 87%

5%13%

6%13%

0%

20%

40%

60%

80%

2007 2008 2009 2010

Imports Local Production

Source: NNPC, Straplan Research


12/16

Straplan

Nigeria is always vulnerable to crisis in these countries because of our dependence on oil.

We expect oil prices to decline from current levels, ceteris paribus, in view of weakening

demand for oil that would follow the crisis in Europe and America.

Trade Partners

32%USA

Crude Oil Exports Destination 2010

Netherlands

Some Sources of Importation

Dec 2011

11%

8%

7%

5%

4%

4%

4%

4%

4%

3%

India

Equitorial Guinea

Brazil

Spain

France

Canada

Italy

South Africa

Cote D'ivoire

Netherlands

India

France

United Kingdom

Sweden

SpainIsrael Estonia

Belgium

Source: NNPC


13/16

Straplan

Government needs to ensure public trust in the reform agenda through broadcommunication, and implementation of compensatory social policies. Groups that are

severely affected by subsidy reforms including but not restricted to the poor need to be

compensated.

Last Word

An important condition for successful subsidy reform is the credibility of the governments

commitment to compensate vulnerable groups for fuel price increases, and, more generally, to

use the freed public funds in a beneficial way. G-20 Report 2010

Dec 2011

We expect

phased removal of subsidy based on a sustainable, transparent and accountable plan on

provision of basic infrastructure to serve as cushion.

Nigerians to reduce consumption and change lifestyle

Use more public transport Pool cars amongst yourselves

Reduction in car importation

Increase in demand for buses


14/16

StraplanWhat We Do

Information &

Data Gathering

(Database)

Analysis,

Modelling &

Valuation

Preparation of

Research Reports

Dissemination of

Information

Policy updates

Economy

Financial Markets

Sectors/Industries

Ratios

Forecasting

Valuations

Models

Electronic

Internet

Telephone

Publications

Weekly Reports

Annual Reports

Quarterly Reports

Monthly Reports

Dec 2011

. Research . Strategy . Trainings . Stakeholder Consultation

Companies

Performance Metrics

Industry Drivers

Demand and Supply

Dynamics

Media Industry-Specific

Reports

Our Advisory Services Include


15/16

Straplan

Ajibola Alfred

Straplan Research

All comments, suggestions and enquiries should kindly be sent to:

Contact Details

Dec 2011

, papa ane,

Dolphin Estate, Ikoyi,Lagos.

e : +

or+234 808 311 3785

.

[email protected]


16/16

StraplanDisclaimer

Dec 2011

Disclaimer

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the information, estimates

and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Straplan or any of its

employees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of the

information contained in this report as it is based on secondary information. All information and opinions set forth in this document constitute the

analyst(s) position as at the date of the report and may not necessarily be so after the report date as they are subject to change without notice.

This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without

the written consent of Straplan Research. The report is available primarily electronically.

nigerian economics fuel subsidy 33

Documents