Wednesday, December 24, 2014

‘Oil Price Slump Gives Nigeria Chance to End $7b Fuel Subsidy’
Our Reporter
Nigerian Nation

Tumbling oil prices that have slashed Nigeria’s revenue and roiled currency and stock markets in  the economy, may have a silver lining: an excuse for the government to scrap fuel subsidies that cost as much as $7 billion (about N1.3trillion) a year.

It’s an opportunity President Goodluck Jonathan, concerned that such a move would provoke protests before his bid for re-election in February, 2015 may not seize, analysts have said..

“Politics often trumps prudence and there’s an entrenched social expectation for fuel to be subsidised,” Gareth Brickman an analyst at Johannesburg-based ETM Analytic said, in an e-mailed response to questions.

“The last time subsidies were reduced, there were widespread protests, and given how contentious the political environment is in Nigeria with the elections and on-going ethnic divisions, it is likely this will be the case again.”

Nigeria relies on refined fuel imports to meet more than 70 per cent of domestic needs and refunded importers as much as a third of the cost of supply in the past year ending in October, according to the Ministry of Petroleum Resources. This ensured the price of gasoline was capped at N97 ($0.54) per liter. Jonathan’s attempt to end the subsidies in January 2012, sparked a week of strikes and protests, paralyzing the economy and forcing the government to partially restore them.

A 2012 parliamentary probe recommended that 70 gasoline importers, including the state oil company Nigerian National Petroleum Corp., refund N1.1 trillion ($6 billion) in illegal fuel-subsidy payments, alleging “endemic corruption.”

While Nigeria is Africa’s biggest crude oil producer, which pumped 2.1 million barrels per day in November, its four ill-maintained state-owned refineries refine only 16 per cent of their capacity for 445,000 barrels per day.

The subsidies discouraged private investors who obtained refining licenses from building plants because of concern that costs may not be recovered without market-determined fuel prices, according to Oni of Ecobank Research.

With the 45 per cent decline in oil prices this year, Nigeria’s oil unions, which ended a four-day strike on December 19 to press for industry reforms, are asking for lower fuel prices to reflect the decline in crude prices, adding to public expectation of cheaper gasoline. They also want state-owned refineries fixed and an end to corruption associated with fuel imports.

Spokesman for the Petroleum and Natural Gas Senior Staff of Nigeria (PENGASSAN),  Emmanuel Ojugbana,  said: “The unions want lower fuel prices because past increases were based on the rise in oil prices. So now that the price has fallen, we expect the government to also reciprocate.”

The “fuel subsidy is completely wiped out if prices fall below $70 a barrel,” Dolapo Oni, energy analyst at Lagos-based Ecobank Research. “We’re there now.”

In the spending proposals sent to lawmakers last week, Jonathan plans to increase fuel subsidies nine per cent next year to 1.2 trillion naira.

While announcing 2015 budget proposals Dec. 17, Finance Minister and Coordinating Minister for the Economy, Dr. (Mrs) Ngozi Okonjo-Iweala said    government estimates indicate “that the break-even crude oil price” that equals Nigeria’s pump price without a “subsidy hovers around $60 per barrel.

“It’s only when our crude oil price for Bonny Light falls below this level that we can now talk about the issue of bringing down any pump price.”

While ending the subsidies now may be painless because of the low oil prices, there are risks for the government if they rebound and the costs are passed on to the consumer, according to analysts including Philippe de Pontet, Africa director at New York-based Eurasia Group.

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