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Russia, Nigeria PMS subsidies and Petroleum Industry Act

By Patrick Dele Cole
26 May 2022   |   2:56 am
By Russia is one the highest suppliers of Naphtha (a critical gasoline blending feedstock) to European refiners and blenders. Naphtha represents about 30% of the components that make up gasoline and Russia supplies about 20% of the world Naphtha consumption.

By Russia is one the highest suppliers of Naphtha (a critical gasoline blending feedstock) to European refiners and blenders. Naphtha represents about 30% of the components that make up gasoline and Russia supplies about 20% of the world Naphtha consumption. In Europe, Belgium and the Netherlands are the most dependent on Russian Naphtha with Belgium importing over 50% of its Naphtha requirements from Russia. This is important as most of the gasoline delivered to Nigeria is produced in the ARA (Antwerp, Rotterdam and Amsterdam) region.
Russia has the largest reserves of natural gas followed by Iran and Qatar. Together, the three countries account for around 50% of the world’s natural gas reserves. Russia is also the largest exporter of natural gas in the world and supplies about 45% of the EU’s entire gas demand and has no easy substitute should supply be disrupted. Indeed, over the years Russia has developed physical distribution infrastructure/network (pipelines) supplying the European market. Over thirty countries in the world directly import Russia’s natural gas with countries such as Belarus, Norway, and Serbia each importing about 99% of their natural gas from Russia.

Should the Russian Federation decide to halt sale to its western neighbours finding an alternative would and cannot be immediate nor cheap. Indeed, a solution could be to import LNG via cargos from other markets and then degasify the product once procured but this would take much more time (other major producers being the U.S, Qatar and Nigeria) and financial resources.

Another alternative could be to switch to renewable energy, however this solution is not immediate. Renewable energy takes time to roll out. It is possible to replace naplita with other for more expensive products such as ethanol whose largest producer is the US.

Av. Gasoline Price $1,085.00/ton
Nigerian Gasoline $482.00/ton
 Disparity = Subsidy $603.00/ton

The Nigerian government introduced subsidy in 1970 to make fuel cheaper and available to all Nigerians, currently the price of gasoline in the country stands at N165/l (39 cents/l) as opposed to the worldwide average of an estimated $1/l.
Over time it has become quite clear that maintaining subsidy on gasoline is not sustainable, costing the nation on average $7-10 billion a year in revenue. Although this reality is quite glaring, the government has been unsuccessful in removing subsidy on gasoline due to strong opposition from the general masses to a reform by the nation.

Removal of subsidy will increase the costs to the citizens who are already battling heavy inflation, low salaries and FX unavailability. However it is a necessity because it will enable the country focus its resources on more pertinent issues such as developing infrastructure, improving education, creating employment and other areas that will accelerate economic growth. This may be so but for how long? There is nothing in the Federal Government agenda aimed at strengthening the Naira and improving exports to earn more foreign exchange.

The weight of the subsidy on oil producing areas is stupendous. The 13% derivation does not cover even half the subsidy. In short the oil producing areas been the brunt of the subsidy yet the areas are the poorest in all development aspect. There is no other product that carries this large a subsidy weight in Nigeria.

The key objective of the Petroleum Industry Act is to overhaul and transform the Nigerian oil gas industry. The oil and gas industry has a significant impact on the Nigeria’s economy. Though the industry contributes less than 10% to the country’s gross domestic product, it contributes about 90% of the foreign exchange earnings and 60% of total income. Consequently, any adverse change in the industry will have a big and long-term impact on government finances.

The recently passed PIA 2021 seeks to transform the Nigeria oil and gas Industry given the myriads of challenges it seeks to address: – encourage investments, improved focus on midstream operations, improved funding for Joint Venture operations, environmental remediation and abandonment, and transfer of effective control to host communities in terms of project selection, execution, and ownership. Some of the Key provisions in the bill are thus:

Dual Regulators for the oil and gas industry – The Commission and the Authority.
Voluntary conversion of existing oil prospecting or mining contracts in exchange for significant relinquishment of up to 60% of acreages.
Effective acreage management through relinquishment, deep rights and drill or drop concepts.
PIB Funds – Frontier Exploration Fund (30% of Profit oil and gas of NNPC Ltd), Midstream and Downstream. Gas Infrastructure Fund (0.5% of wholesale price of petroleum products sold in Nigeria and natural gas produced and sold in Nigeria), Environmental Remediation Fund (will be based on size of operations), Decommissioning/ Abandonment Fund (as determined in the field development plan and periodic appraisal of the costs required) and Host Community Trust Fund (3% of annual operating expenditure in prior year).
Incorporation of NNPC Limited with Ministry of Finance Incorporated and Ministry of Petroleum Incorporated as shareholders.
To be continued tomorrow
Dr. Cole (OFR) is Nigeria’s former Ambassador to Brazil.