PETROLEUM PRODUCTS DEREGULATION

Transcription

1 PETROLEUM PRODUCTS DEREGULATION SUBSIDY - WHAT IS IT & WHY DOES IT MATTER? Sustainable Solution to Nigeria Petroleum Product Supply Dr. Adeoye Adefulu Dr Ekpen Omonbude Economic Adviser (Natural Resources), Commonwealth Secretariat, London Infographics by: ODUJINRIN & ADEFULU BARRISTERS, SOLICITORS & NOTARIES PUBLIC ESTD. 1972

2 HOW NIGERIA S PETROLEUM PRODUCT NEEDS ARE MET TODAY Four inefficient Nigerian refineries with a 445,000b/d name plate processing capacity (NNPC) x Nigeria s Daily Petroleum ( White ) Product Requirements PMS (Petrol) 32 million litres DPK (Kerosene) 8 miliion litres AGO (Diesel) 12 million litres Petroleum Exchange & Offshore Processing Agreements - SWAPS - OPAs The SUBSIDY Arrangement Importation thru Indigenous Companies (300+) Indigenous Refinery Capacity - NDEP 1000bpd Refining Topping Plant in Ogbelle producing 88,000 litres of diesel daily Private Enterprise with 99% availability and efficiency Source: adapted from NNPC data 1

3 KEY ISSUES 3This Paper Seeks To Examine 3 Key Issues Around The Petroleum Products Subsidy Question 1 2 Does the Petroleum Products Subsidy Exist? What Distortions Occur Where Subsidy is Retained? 3 What is the best strategy for deregulating the sector? 2

4 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? 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? 4 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. 5 What are the distribution costs? 6 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 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. 3

5 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? What determines petroleum product cost under importation model? 1 2 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) 3 Margins must be recovered to stay profitable Therefore, Nigerian PMS current model (under importation model is): Cost and freight Trader s Margin Lightering Expenses NPA Financing FX differential & interest costs Jetty Costs Storage Charge Distribution Margins Taxes Source: based on PPPRA pricing template 4

6 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Nigeria must compensate importers /marketers for: Landing costs + distribution margins + elevated cost of financing due to irregular payments + FX charges Based on what we import: 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 Expected open market price (as of 22 May 2015): NGN If we did not import: Nigeria must compensate for: 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 Expected open market price Based on $50/barrel oil: NGN Based on $64.90: NGN Based on $100: NGN

7 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? The key argument of those who do not believe in the existence of subsidies is that product prices should be determined by the cost of production of crude oil in the country In view of the fact that Nigerian refinery capacity is well below the level required to fully supply the market, this argument cannot stand as the price of imported products are determined internationally Even where local refinery capacity exists, by pegging petroleum products pricing to the cost of crude oil production, the nation loses out on the value that may be gained from the sale of the product at the higher international price. The cost of this loss is the inability to use the lost funds to meet other needs schools, hospitals, roads. 6

8 PMS PRICE vs CONSUMPTION ANALYSIS WHAT HAS LED TO SPIKED CONSUMPTION GROWTH? PMS PRICE/CONSUMPTION ANALYSIS Price (Naira/litre) Subsidy Levels Consumption (Million litres / day) May 0 Consumption PMS Landing Cost + margins Regulated PMS Pump Price PMS Platts Prices $/bbl 1,400 4,000 1, ,500 Reasons: Illegal Cross-border supply, Massive Fraud (60% not supplied) Annual Subsidy (N M) 1, ,057 3,000 2,500 2,000 1,500 1,000 Cumulative Subsidy (N M) Est 0 Annual Outstanding HHK Subsidy Annual Approved Subsidy PMS Cumulative Subsidy Source: Ministry of Petroleum Resources, "Information on Subsidy", November

9 Issue 1: Does the Petroleum Products Subsidy Exist? ISSUE 1 PPPRA PMS SUBSIDY CALCULATION 140 The Factors Impacting Subsidy Claims & The Inherent Problems 2-months Crude Price Average ($/bbl) High crude price increases subsidy. For oil producing Nigeria, this simply erodes our revenue Feb. 09 Dec. 10 Apr. 11 Dec. 14 Jan Landing Cost (=N=/Litre) Feb. 09 Dec. 10 Apr. 11 Dec. 14 Jan. 15 High landing cost in Nigeria due to: - Inadequate port facilities for large number of marketers - Systemic inefficiencies, - Overt rent-seeking & gaming - Collusion between fraudulent marketers and some regulatory entities - No sanction for non-performance, Opaque pricing & inherently costly Lower Oil Price = Lower Revenue to Nigeria = Reduce income for budget = Further devaluation of Naira. Increase Landing Cost & Financing Cost Almost zero subsidy The window of opportunity for Government to remove subsidy Exchange Rate Adapted from a variety of sources 8

10 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? The Problem with SWAPS One of the systems designed to adjust for the lack of refinery capacity is the crude oil swaps arrangement which exchanges crude oil for petroleum products The swaps system requires an accurate calculation of the refining yields which may be obtained from each barrel of crude as well as ensuring that all the yields are returned to Nigeria This can be very complex. Depending on the complexity of the refining process, the refining yields could produce product from naptha through gasoline and LPG to petrochemicals The true value of the yields is only known after a thorough assay of the crude and the refining process has taken place Therefore any arrangement that involves the exchange of crude oil for petroleum products that do not correspond exactly with the product yields based on an assay or based on a refining process is inaccurate. It could result in an under-valuation or over-valuation of the crude oil Serious concerns on both fronts, with NEITI suggesting Nigeria may be losing billions of dollars annually The system : is opaque and discretionary in determining the relevant yields requires strong contract administration provides corruption gateways 9

11 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Scenario: Based on what we imported in December 2014 Avg brent price at $62.34/bbl Cost Element N82.41 Distributions Margin N15.49 Taxes 0 Expected Open Market Price N97.90 Retail price N97 Fuel Subsidy N

12 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Scenario: Based on what we import in May 2015 Avg brent price at $64.90/bbl Cost Element N Distributions Margin N15.49 Taxes 0 Expected Open Market Price N Retail price N87 Fuel Subsidy N

13 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Scenario: Based on imported fuel at Avg brent price at $80/bbl Cost Element N Distributions Margin N15.49 Taxes 0 Expected Open Market Price N Retail price N87 Fuel Subsidy N

14 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Scenario: Based on imported fuel at Avg brent price at $100/bbl Cost Element N Distributions Margin N15.49 Taxes 0 Expected Open Market Price N Retail price N87 Fuel Subsidy N

15 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Scenario: If we didn t import based on Avg brent price at $62.34/bbl as at Dec Cost Element N91.55 Distributions Margin N15.49 Taxes 0 Expected Open Market Price N Retail price N87 Fuel Subsidy N

16 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Scenario: If we didn t import based on Avg brent price at $64.09/bbl as at May Cost Element N95.16 Distributions Margin N15.49 Taxes 0 Expected Open Market Price N Retail price N87 Fuel Subsidy N

17 DOES THE PETROLEUM PRODUCTS SUBSIDY EXIST? Scenario: If we didn t import based on Avg brent price at $100/bbl Cost Element N Distributions Margin N15.49 Taxes 0 Expected Open Market Price N Retail price N87 Fuel Subsidy N

18 Petroleum products subsidy is an inefficient way of targeting benefits for the poor - It has not worked in Nigeria - Propensity to seek rent from government inefficiency at play - Created incentive for smuggling - Diminishes competitiveness - Discourages investment in all sectors (especially the midstream & downstream)

19 ISSUE 2 DISTORTIONS CAUSED BY FUEL SUBSIDY Costs associated with verification of subsidy claims Resource costs Cost of time it takes to verify claims Creation of corruption gateways In order to reduce leakages, government would need to spend significant amounts in building the resource base to properly monitor and verify subsidy claims. The time it takes to undergo such processes also imposes additional costs on both Government, importers and financial institutions. Finally, the process of monitoring and verification provides avenues for corruption of government officials and value leakages. Opportunity Costs Every Naira spent on subsidizing petroleum products is not invested in necessary infrastructure Subsidy funds may be better utilized in building schools, hospitals and a world class road network Subsidy for the rich & the middle class? Subsidies disproportionately cater to the lifestyles of the rich Top richest 20% receive 20 times more subsidy than bottom poorest 20% for PMS The cost of transferring subsidies to the bottom poorest is US$33 for every dollar actually transferred Incentivises waste The presence of subsidies encourages inefficient use of energy use of multiple cars and use of vehicles as opposed to other means of transportation Smuggling With the significant difference in petroleum prices in neighbouring countries, there is a strong incentive to smuggle petroleum products thereby transferring benefits meant for Nigerians to foreigners, smugglers and corrupt officials 18

20 ISSUE 2 DISTORTIONS CAUSED BY FUEL SUBSIDY Smuggling is an inevitable consequence of petroleum subsidies because it has an economic incentive. The prices for gasoline in Benin, Togo, Ghana, Cameroon, Ivory Coast, Sierra Leone, Liberia and Burkina Faso make Nigerian PMS an attractive prospect for smuggling across the border. Gasoline Prices US$/litre (May 2015), Selected Countries Venezuela Qatar Nigeria UAE Malaysia Indonesia $0.29/litre smuggling incentive Russia Azerbaijan Ghana Chad $0.45/litre smuggling incentive USA Niger $0.51/litre smuggling incentive Togo Liberia Benin Sierra Leone Cameroon $0.76/litre smuggling incentive Ivory Coast Burkina Faso UK Norway $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 Source: 19

21 ISSUE 3 Issue 3: What is the best strategy for deregulating the sector? NIGERIA S PETROLEUM PRODUCT SUPPLY OPTIONS - ASSESSMENT SUGGESTED ACTION TO TAKE Privatise /Sell off Improve Transparency & Audit for short term use Cancel Subsidy (now or Phased) Use this to place product processing capacity across the country Factors to Consider SUBSIDY Arrangement SWAPS & OPAs Existing Govt Refineries Nigeria Independent Processing Plafform / Refinery Exposure to Govt In-Efficiency Cost Plus to Govt Value Add (Tax Revenue) Loss/Abuse/Corruption Enabler to Economic Diversification & Growth in Value Chain Employment Generation Fiscal & Budget Sustainability Transparent & Accountable Is this a Sustainable Option NO Not in med - long term No- If NNPC Operated. Yes, Should be replicated 20

22 ISSUE 3 PROPOSITION Issue 3: What is the best strategy for deregulating the sector? Primary proposal is based on a de-regulated pricing framework In the Short Term: STOP PMS, DPK & AGO subsidy De-regulate but introduce a transparent and credible Automatic Pricing Mechanism Re-structure current supply/demand framework with a combination of: (i) Large international product suppliers with refinery & logistic (ii) platforms A select group of credible indigenous marketers (based on clear transparent criteria) This would guarantee Nigeria a more cost effective and transparent system Re-structure the SWAPs and OPAs to remove opaqueness Pass competition regulations under the Petroleum Act to combat opportunistic pricing and anti-competitive practices post de-regulation In the Medium Term: Privatise the existing Nigerian refineries Enable the planned Nigeria refinery projects (e.g. the Dangote Refinery projects) Encourage small indigenous operators to adopt the development of topping plants to aid product processing across the company (adopt the NDEP Topping plant model) Significantly improve the Infrastructure to improve the supply, transport and storage platforms to ensure it is adequate for needs and removes bottlenecks 21

23 ISSUE 3 HOW BEST TO CUSHION THE EFFECT OF CRUDE OIL PRICE RISES Issue 3: What is the best strategy for deregulating the sector? Tax Given that there is currently no tax element in the price calculation (which is in itself a subsidy), the other feasible approach to take would be to adjust the bridging fund component of the price template during price fluctuations to either reduce the end user price when oil prices are high or increase the end user price to achieve international parity when oil prices drop aggressively redirect the funds earmarked for maintaining petroleum subsidies towards real social inclusion (healthcare, education, infrastructure). 22

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