Re: USA Africa Dialogue Series - On the Matter of FG finally scrapping fuel subsidy and reducing (?) petrol price to N85/litre from Jan 1, 2016

Ikhide "Towncrier" Ikheloa:

You mean that you read - then re-read - that essay in question, and came to your conclusion that "Bola Tinubu (and I) were adamantly against subsidy removal?"

Please, my People, is that what you read, or what is the matter with this Ikhide sef?

In fact, if you read my Nagging Questions 2 and 3 properly, you see that I show deep skepticism about the existence of subsidy in the first instance ("inflated subsidy",  "no subsidy"):

QUOTE

2. If not, is there a refund possible, particularly from those subsidy collectors who illegally used their HHK allocation as asphalt cutback for road construction? Or will we just allow the manipulators of the system get away with impunity, when they have been identified so publicly, and make the Nigerian masses to suffer the consequences of inflated subsidy now being removed?

 

3. With PMS price previously set at N65 per liter and HHK at N50 per liter, should we have, as an oil-producing nation, despite being forced by refining incompetence (or sabotage?) to import products, been subtracting these figures from international prices of N141 and N148.98 respectively, or should we not be comparing them with the much less local prices as given for example in Table 6 - between N35 per liter to N65 per liter by some estimates, with the concomitant argument that there is in fact no subsidy? Can we come to some agreement on these figures, as part of the confidence-building measures?

UNQUOTE

More importantly, you believe that my "analysis at the time....was quite influential in forcing young men and women to hit the streets and apparently fight for what they did not understand?"  You have NEVER told me that I was that influential, and no young man or woman I met has EVER told me that my essay caused them to "hit the streets?"

You are so hyperbolic and ventilative, Ikhide.

In another essay that I presented in 2003, titled "On Fuel Scarcity, Politics and NNPC", this is what I wrote:

QUOTE

http://www.dawodu.com/aluko35.htm

The Funny Business at NNPC

The Nigerian National Petroleum Corporation NNPC is the government-owned giant that controls Nigeria's oil industry, and is in charge of the four Nigerian refineries. Somehow it is backed by some inscrutable law to buy 0.445 million barrels per day of domestic crude - which is exactly how much all the refineries would refine at full capacity. This privilege is irrespective of the actual capacity used up by the refineries. It has another privilege - to buy at a discounted rate of $18 per barrel, no matter the international price of crude. A third privilege puts icing on the cake: to sell what it does not use up at the refineries at the prevailing WORLD MARKET PRICE!

I think that you get the picture: Suppose the fraction of the amount of the domestic crude that NNPC does not refine is y. If it had refined this amount and sold it at a domestic price of N26 per liter, it would have earned $ 38 crude/0.4 refined * 26 refined/127 exchange or $ 19.4 per barrel of crude refined. [0.4 million barrels of crude approximately equals 38 million liters of refined product; control refined price of N26 per liter is assumed.] If the current international market crude price is for example $28 per barrel, NNPC will make a cool profit of 0.445y(28 - 19.4) million dollars or $3.83y million for itself if the government does not ask for that profit back. At $1 to just N127 (for example), that translates to N486y million per day. Over a 364 day per year period, at half-capacity, NNPC would make N88.5 billion profit without the technical hassles and dangers of refining, thereby making the NNPC accountants happy.

This profit to NNPC "improves" as NNPC gets lazier (y increases), the Naira weakens (N127 becomes N130 becomes N150 to the dollar), and/or the cost of oil in the international market escalates ($28 becomes $35 becomes $40 per barrel). What would a "normal" person do in NNPC's shoes?

Thus by not refining a fraction y of its domestic crude, and being allowed to sell it at the prevailing international market, NNPC makes a direct gain of N486 y million per day on crude sales, but the nation takes an overall HUGE LOSS of N1,582y million on a daily basis (N290 billion per year for half-capacity all year round), a loss which increases with increasing non-refining. [All the assumptions that go into these calculations should be remembered.]

Thereby inefficiency is rewarded in one sense, but the whole nation suffers as a result.

There you go! No wonder the NNPC was recently accused by the Revenue Mobilisation and Fiscal Allocation Commission (RMFAC) of "missing" N300 billion due to inappropriate accounting for crude oil sales!

So what is to be done?

Whether we like it or not, one of these days, we will still have to bite the bullet: provided we continue to import 40-60% of our needed fuel, we will have to pay the economic price of the refined fuel - whatever the international market conditions of the moment demands. It does not matter how much our crude costs per barrel, or how much of it we have welling up from our land: provided we import so much refined fuel, we will have to pay, sometimes through our noses, the added-value cost of refining.

We need to reduce our own dependence on crude oil by fostering mass transportation (reliable rail and bus services) within and between our major cities. That means huge public/private partnership investments on rail and road infrastructure. Innovative uses for our abundant natural gas for transportation and domestic fuel uses are also called for.

 

A tighter leash must be put on the current operations of NNPC, many of which are a carry-over from military days when NNPC was a secret cash-cow for the "over-lords." Certainly, its inefficiency in the refining business should not be rewarded as described above. Either it buys its domestic crude at international market prices (not a reasonable option, I admit), or preferably it is prevented from selling its unused oil in the world market. Otherwise, it will continue to use the eye-popping profits from its operations to have the choicest real estate in Abuja; give its workers the greatest salaries; have its executives travel the world style in swankiest style; and operate secret accounts around the world that it gets defensive over when questions are asked.

 

We must set loose the chemical engineers and mechanical engineers of our country to do the Turn-Around Maintenance (TAM) of our refineries that we routinely contract to foreign companies, so that they all can operate optimally. Operating a refinery is not rocket-science. The same modus operandi of tasking our indigenous engineers to solve our iron-and-steel problem, the cement problem, the pulp-and-paper problem and other problems should be adopted.

 

An economic analysis should be done once and for all - focusing on Port Harcourt, Maiduguri, Sokoto, Ilorin and Lagos for example as cardinal points of the country - to determine whether it is more economical to pipe/otherwise transport crude or refined oil to these parts.

 

Subsidies due to regional cost differentials must not be to EQUALIZE absolute costs, but to possibly equalize percentage contributions to the differentials due to transportation and other costs.

 

I envisage that about eight to ten private mini- to midi-refineries - of the order of 10-30,000 barrels per day strategically located around the country, with the realistic optimum of 75% - 90% capacity utilization of ALL the refineries will fulfill all of our national needs for the foreseeable future. The licensing process of private refineries should be simplified, and the cost barrier to entry significantly lowered.

UNQUOTE

In yet another essay that I wrote in 2003, and updated in 2007, I asked incredulously "NNPC and Mr. President: Where is Our Subsidy?" 

QUOTE

http://www.nigerianmuse.com/20070623112118zg/sections/essays/from-the-archives-nnpc-and-mr-president-where-is-our-subsidy/

In fact, NNPC is in the black by anywhere from N27 billion to N52 billion, which operating profit can even be substantially increased if certain charges taken as presented in Tables 1 and 2 are substantially reduced.  The savings can then be passed to the Nigerian citizenry, to REDUCE the pump price of fuel by a total of N25 – N100 billion per annum (reducing old pump price by N2 – 7 per liter) and still make NNPC have enough "profit" as a public enterprise should.

This is why I find it incredible that the NLC is contemplating agreeing to a N28 or even N30 per liter pump price for petrol from N26, when in fact it should be negotiating for a DECREASE to N24 or even to N21. 

UNQUOTE

I must admit that this essay was quotely widely in the Nigerian press at that time, with a current Governor even taking me up PRIVATELY on the matter, but after some banter, he pulled back.

So, Ikhide, my position has ALWAYS been skepticism about the TRUE EXISTENCE of subsidy, but that if that ghost should be removed - because government is actually PAYING something -  then the politics and the economics of it must be considered.

And there you have it.

Bolaji Aluko

On Sat, Dec 26, 2015 at 6:51 PM, Ikhide <xokigbo@yahoo.com> wrote:

"In finally removing subsidy, the move must be properly explained to The People.  The Wailing Wailers must NOT be allowed by subterfuge to turn The People against The Government under the political guise of protecting The People against Subsidy Removal - as we had in January 2012."

- Bolaji Aluko

Bolaji,

Many thanks for sharing yet another round of data that supports your new position that removal of subsidy is good for Nigerians. How does this now square with all your "analysis" in 2012 when you and Bola Tinubu were adamantly against subsidy removal? Your analysis at the time (see link below) was quite influential in forcing young men and women to hit the streets and apparently fight for what they did not understand:

http://www.gamji.com/aluko/aluko220.htm

Bolaji, please go to the archives on this forum and re-read your contributions. You have changed your tune, and it is your right. But then, you would think that those who have suddenly changed their minds because it is the expedient thing to do, would apologize to those they fooled, and explain rationally why they are now bleating a different tune.  There is virtue in changing one's mind. But those who purport to lead must be seen to be credible and trustworthy, must wield their influence responsibly because many people are listening. Indeed, it is the case that many young people died because they truly believed (what now turns out to be) the nonsense that the APC was bleating just to make Mr. Jonathan look bad. Today, those of us who refuse to drink the Koolaid du jour are bullied with reams of arrogance and condescension as if that will fix the situation that the APC created. Many of us are being called Wailing Wailers and GEJites. Interesting, because the archives will show that there is no one more vociferous in condemnation of GEJ on this forum than myself.   

I was also fooled by Tinubu et al. I admit it. I was used by the same characters who now want subsidy removed. I feel silly, like Boxer of Animal Farm. They convinced me to shed my dignity and dance and  sing in protest against subsidy removal and against Goodluck Jonathan before the World Bank in DC! It is these same folks that are trotting out new reasons why we should remove fuel subsidy, because Tinubu now says so. I live far away from the hell that youths go through in Nigeria. When they protest, I join them. Don't lie to me!

Integrity and credibility are essential tools in any fight. Our leaders have lost all those. I would never go to war with these folks again, they have lost credibility and integrity before me. Fool me once...

ps.

My analysis of your stand and those of many prominent APC intellectuals also applies to your baffling wink at the atrocious handling of the Kanu case by Aso Rock. You and Tinubu and the others would have had yourselves arrested on his account in those days... We all live to learn!

- Ikhide

On Dec 26, 2015, at 9:00 AM, Mobolaji Aluko <alukome@gmail.com> wrote:

My People:

If the report of the FG finally scrapping fuel subsidy and reducing (?)  petrol price to N85/litre from Jan 1, 2016 is correct, then Minister of State for Petroleum, Dr. Emmanuel Ibe Kachikwu is moving in the right direction here, as he inspects more closely some of the arbitrariness in the Pricing Template that is used to determine the so-called "Fuel Subsidy" that we have been allegedly paying......

May his tribe increase....

Please come with me....

In the PMS Pricing Template posted below by PPPRA for Christmas Day 2015,  the expected Expected Open Market Price (OMP)  for PMS  based on thirteen cost items is N93.45 per liter.  With the Retail Price fixed at N87 per liter, that requires a so-called subsidy of N6.45 nper liter.  Let us put that at N6.5 per liter.  To be more aggresive and fix the price at N85 means a subsidy removal of N8.5 per liter.

Let us stay with N6.5 per liter subsidy removal for now, meaning an OMP of N87 per liter.

That means that if on average EVERY cost element were reduced in price by N0.50 per liter, the OMP would come to N87 per liter.  More realistically, if we leave three of the cost elements (#5, 14 and 15)  in place, reduce two of them (#4, 6) by N0.25 per liter, two of them (#2, 12)  by N0.5 per liter, four of them (#3, 7, 10, 11) by N0.75 per liter, one of them (#13)  by N1.0, and one of them (#1) by N1.25 per liter and impose a Highway Maintenance Tax of N0.25 per liter (instead of building new toll gates, which require new capital costs without assurance of recovery), then we can still maintain the OPM at N87, and thereby completely eliminate so-called "subsidy". After all, some of those charges are somewhat arbitrary - some are even government-imposed (eg NPA cargo charges)  - and are subject to negotiations.

These are examples of the "price modulations" that Kachikwu must be talking about

In finally removing subsidy, the move must be properly explained to The People.  The Wailing Wailers must NOT be allowed by subterfuge to turn The People against The Government under the political guise of protecting The People against Subsidy Removal - as we had in January 2012.

And there you have it.

Bolajij Aluko

_______________________________________________________________

http://pppra.gov.ng/pricing-template-pms-2/

Pricing Template – PMS

Posted on December 25, 2015 by pppra in Pricing Templates // 0 Comments

PPPRA PRODUCT PRICING TEMPLATE -PMS
Based on Average Platts' Prices for 24th December, 2015
Average Exchange Rate of the NGN =N= to US$ for 24th December, 2015
					PMS
	Cost Elements:					$/MT	Naira/Litre
1	C + F					458.41	67.34
2	Trader's Margin					10.00	1.47
3	Lightering Expenses (SVH)					27.72	4.07
4	NPA					5.25	0.77
5	Financing (SVH)					3.44	0.51
6	Jetty Depot Thru' Put Charge					5.45	0.80
7	Storage Charge					20.42	3.00
8	Landing Cost					530.69	77.96
9	Distribution Margins:
10	Retailers					31.31	4.60
11	Transporters					20.35	2.99
12	Dealers					11.91	1.75
13	Bridging Fund					39.82	5.85
14	Marine Transport Average (MTA)					1.02	0.15
15	Admin Charge					1.02	0.15
16	Subtotal Margins					105.44	15.49
17	Highway Maintenance					0.00	0.00
18	Government Tax			–		0.00	0.00
19	Import Tax			–		0.00	0.00
20	Fuel Tax			–		0.00	0.00
21	Subtotal Taxes					0.00	0.00
22	Total Cost					636.13	93.45
23	**  Ex-Depot (for collection)					528.64	77.66
24	**  Under/Over Recovery					43.91	6.45
25	Retail Price					592.22	87.00
Expected Open Market Price (OMP) (Naira/litre) is Landing cost +Margins								93.45
* C+F price is Offshore Nigeria
Conversion Rate (MT to Litres):				1341
Exchange Rate (N to $):				197.00
*  Official Ex Depot is exclusive of Bridging Fund, Marine Transport Average (MTA) & Admin. Charge
* *Ex Depot includes Bridging Fund, Marine Transport Average (MTA) & Admin. Charge
Data is as at 24/12/15

            

______________________________________________________________

DESCRIPTION OF COMPONENTS ON THE PRICING TEMPLATE With Effect from February 2009

1. PRODUCT COST ($/MT)
This is the monthly moving average cost of products cost as quoted on Platts Oil gram. The reference spot market is North West Europe (NWE).

2. FREIGHT ($/MT)
This is the average clean tanker freight rate (World Scale (WS) 100) as quoted on Platts. It is the Cost of transporting 30, 000mt (30kt) of product from NWE to West Africa (WAF). Trader's margin of $10/MT is also factored into the Freight cost.

3. LIGHTERING EXPENSES ($/MT)
STS/Local Freight charge is the cost incurred on the transshipment of imported petroleum products from the mother vessel into daughter vessel to allow for the onward movement of the vessel into the Jetty. This charge includes receipt losses of 0.3% in the process of products movement from the high sea to the Jetty and then to the depot. The mother vessels expenses are based on the allowable 10 days demurrage exposure at the rate of $28,000 per day.

The Lightering Expenses also includes the Shuttle vessel's chartering rates from Offshore Lagos to Lagos and Port Harcourt which currently stands at N2.00 per litre and N2.50 per litre respectively. Transshipment (STS) process is as a result of peculiar draught situation and inadequate berthing facilities at the Ports.

4. NIGERIA PORT AUTHORITY (NPA) CHARGE ($/MT
It is the cargo dues (harbor handling charge) charged by the NPA for use of Port facilities. The charge includes VAT and Agency expenses.

Currently, NPA charge attracts $10.50/MT on the pricing template.

5. FINANCING
It refers to stock finance (cost of fund) for the imported product. It includes the cargo financing based on the International London Inter bank Offered Rates (LIBOR) rates+5% premium for 30 days (for Annual Libor rate of 2.07%, LIBOR cost would be 7.07%). Also included in the Finance cost is the inertest charge on the subsidy element being awaited for an allowable 60 days period at Nigerian Inter Bank Offered Rate (NIBOR) rate of 22%.

6. JETTY DEPOT THRU PUT
This is the tariff paid for use of facilities at the Jetty by the marketers to move products to the storage depots. The value is currently N0.80/litre.

7. STORAGE CHARGE
Storage Margin is for depot operations covering storage charges and other services rendered by the depot owners. The charge is currently N3.00/litre.

8. LANDING COST
It is the cost of imported products delivered into the Jetty depots. It is made up of components highlighted above (1, 2, 3, 4, 5, 6 and 7).

9. DISTRIBUTION MARGINS
These include Retailers (N4.60 per litre), Transporters margins (N2.99 per litre), Dealers margin (N1.75 per litre), Bridging Fund (plus Marine Transport Average) (N6.00 per litre) and Administrative charge (N0.15 per litre). This amounts to N15.49 per liter on the template. The overhead cost and other running costs have been considered in the determination of these margins.

10. TAXES
These include highway maintenance, government, import and fuel taxes. It has the overall objectives of revenue generation, social infrastructure investment and servicing and efficient fuel usage. Presently, all these attract zero taxes.

11. RETAIL PRICE
This is the expected pump price of petroleum product at retail outlet. It is made up of landing cost of imported product plus reasonable distribution margins.

_______________________________________________________________________

http://elombah.com/index.php/reports/3653-fg-to-scrap-fuel-subsidy-reduce-petrol-price-to-n85-litre-from-jan-1

FG to scrap fuel subsidy, reduce petrol price to N85/litre from Jan 1

The Federal Government would on January 1 next year reduce the pump price of the Premium Motor Spirit (PMS) to N85 per litre, reports PR Nigeria.

The Minister of State for Petroleum, Dr. Emmanuel Ibe Kachikwu [image above] broke the news to journalists in the Port Harcourt Refinery Company (PHRC), where he spent Christmas inspecting the plant.

Asked when the Federal Government would release the new price template of the Petroleum Product Pricing Regulation Agency (PPPRA), he said that he approved the new price for the agency on Thursday.

Pressed to reveal when the new price will become effective, Kachikwu, who is also the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC) said "like I said, we have done a modulation calculation and it is showing us below N87. I imagine that if PPPRA publishes it today, it will become effective immediately. But the 1st of January that is when we are looking at."

According to him, the new price is below the current N87 per litre and it would now convince Nigerians that the pricing modulation that the Federal Government promised to embark on a few days ago was not a trick.

He noted that following government's analysis and research, it has been realized that the country can fluctuate the fuel market in accordance with the crude oil market fundamentals.

Justifying government's reasons for scrapping the Petroleum Support Fund otherwise known as oil subsidy, Kachikwu explained that government can no longer afford to subsidize the product following the fraud that has attended its operation.

He added that it has become clear that government earnings are dipping on daily basis.

His words: "It is out; I signed off on it yesterday (Thursday). I imagined that in the next couple of days the marketers would get advice on that. The nice thing about the PPPRA, where I signed up on it yesterday is that the price will be far below N87.

So for the first time people will understand that the pricing modulation I was talking about is not a gimmick. It is for real. We have gone to find out how we will be able fluctuate this market to reflect what the reality of crude market is. The objective is that one, we cannot afford to continue to subsidize.

We can't even understand where those subsidies were going to. There are a lot of fraud elements in it so we need to cut that of.

The second is the earning capacity of the Federal Government is deteriorating by the day with lower prices of crude and come out more."

He submitted that from the application market realities for the pricing modulation, government has discovered that petrol would sell for either N85 or N86 per litre.

The minister recalled that it was from this axiom that President Muhammadu Buhari announced that the price of petrol remains N87 at the moment.

Kachikwu said: "But in applying that where we landed when we did the analysis for the very first time was about N85 or N86 so it is below N87.

And maybe the first price that will come will reflect it. That was why Mr. President said that prices will be N87 for now. And that is what we have in mind."

On the security of the pipelines, he said that government had tried stopping the menace with military intervention to no avail before it engaged some private contractors who had worked with the majors for the crude pipeline management.

According to him, the private contractors have taken over Atlas Cove, Mosimi and they would be extending the surveillance to Ilorin between yesterday and today.

They will also look at the Port Harcourt and Aba axis, he stressed.

The minister said that government is now beginning to have a clue of how to tackle pipeline insecurity, adding that it is far more expensive to convey petroleum and products through pipelines than trucking them by road.

He said from the briefing he got from the inspection of the refineries, they are close to re-opening.

"In the next one week, we are ready to see products out of here", he disclosed.

Kachikwu said that a lot of the rehabilitation of the refinery was being done with intensive manual labour of the staff since paucity of fund affected the holistic change that is required in the factory.

He said that the refinery is now aging so one fault comes up after the other even after repair but that would stop when government repairs the plant holistically early next year.

According to him, about 5.5 million litres daily of PMS is expected from the refinery in the next few days. Other products to come from the plants, said Kachikwu "are AGO, Kero and others. Where we love to be is to have half of the consumption of this country at the refineries at the minimum, which is about 20million litres. But where we are with the sleepless night I have had in the last few weeks any molecule is significant.

Kaduna will still be doing 2.3million. Let's start from there. And that is doing 60 per cent performance. This is still an assumption. I will like to see them getting closer to 80 or 90. By the time they time they do that we will be getting 11 to 12million litres out of this place."

_______________________________________________________________________

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