Nigerian oil firms hope for life without subsidies

Oil marketing companies in Nigeria are already planning for life without subsidies on petroleum products after the outrage felt by the nation in the wake of the strangulating standoff between the companies and the Federal Government.

The more than three weeks long oil sector strike hit homes and businesses, bringing the economy to its knees and now there are indications the incoming government of president-elect Muhamadu Buhari will most certainly set aside the subsidy regime which has grown to become one of the largest government welfare programmes in the world and the most wasteful.

“We are preparing for a new life. It is now clear that the subsidy regime is unsustainable under the circumstance and signals we get from the incoming administration are that the subsidies will go”, according to the chief executive of a leading oil marketing firm who asked not to be named.

According to Olufemi Olawore, the executive secretary of the Major Oil Marketers Association of Nigeria (MOMAN), who anticipates a change in policy regarding the subsidies, oil firms operating in Nigeria will be better off without subsidies.

Olawore said the removal of subsidies will pave the way for the much needed investment in the sector and create a better competitive environment among the players, hinting at era he says will witness significant growth.

It is not only the oil firms that are anticipating the removal of subsidies.

In 2012, the Federal Government spent N2 trillion on fuel subsidy and also spent N1.29 trillion in 2013 and 2014.

Professor Adeola Adenikinju of the Department of Energy Economics, University of Ibadan, said the removal of petrol subsidy would bring a lot of benefits to both the larger economy and the oil sector in particular given that the firms will now be compelled to invest in refineries and pipeline infrastructure to take advantage of the huge market in the sub-region.

According to the university teacher, “It is cheaper to refine at home and if this happens, companies will be better able to plan their cash flows and on the long term it is good for the country”.

Nigeria pumps about 2 million barrels of oil a day and is Africa’s leading producer. But it imports more than two-thirds of its domestic fuel requirements because of the poor state of its four ageing refineries.

Private investment in refining has been stymied by the artificially low pump price of petrol, with the government subsidies at the cost of billions of dollars a year.

The subsidy, which in the past has soaked up about a quarter of the federal budget, is notoriously inefficient and has been the target of alleged multibillion-dollar fraud, according to a string of officially sponsored audits and parliamentary investigations.

Mr. Buhari, a former military ruler, made stamping out such fraud the centrepiece of his campaign and some of the marketers fear he will drag his heels before settling arrears.

“The real issue here is that the marketers see this as a way of blackmailing the incoming government. A lot of them are associated with those leaving power and after Friday they will have no hold,” a senior adviser to Mr. Buhari told the Financial Times.

He said the incoming administration was talking to the oil majors about bringing in cargos as a short-term remedy after the handover, but he said there was a limit to how far they could lock in deals before formally taking office. The crisis would be a “distraction” from day one, he added, but it would also allow the new government to review the subsidy regime and consider deregulating the market as a long-term solution.

“The challenges present an opportunity to break the mould and do things differently,” he said.
The recent standoff arose after oil firms laid a claim of N291.7 billion on the government in unpaid arrears, insisting that of this amount N160.54 billion represents claims for foreign exchange and interest rate losses.
Finance minister Ngozi Okonjo-Iweala has by a letter dated May 25, 2015 and seen by BusinessDay, tactically accepted the possibility that the government will have to pay the oil companies more than it had said was owed.
The minister has accordingly, referred the dispute to a committee made up of the CBN, DMO, PPRA with the sole purpose of giving the CBN the chance to validate claims by the oil companies.
According to the minister, “The amount validated from the exercise involving the CBN will be accepted by government as part of the outstanding claims due for payment under the petroleum subsidy scheme.”