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Whats New?
Nigerian Economics
Dec 2011
December 2011.
Fiscal Policy Update. Fuel Subsidy A Catch-22 Situation.
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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
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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
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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
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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
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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
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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
Source: PPPRA, Straplan Research
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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
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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
Source: PPPRA, Straplan Research
Random, independent
importation
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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)
, .
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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
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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
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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
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Dec 2011
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Straplan Research
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Contact Details
Dec 2011
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Dec 2011
Disclaimer
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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
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