Subsidies on Petroleum products have long been a Pandora’s Box in Nigeria. It is a wonderful source of corruption, Greed, Happiness and a reflection of the Inability of the Africa to Optimize Its God Given resources. The existence of Fuel subsidies is a source of reoccurring debates, while the removal or Nonpayment of same subsidies raises ,Flashpoints, Scarcity, Protests and increased hardships on the Populace, which is quite amazing for something which some say does not exist. Today we examine aspects of Fuel subsidy and try to develop new and easy means of understanding It.As you might Note we have implied that Subsidy exists and also is been exploited By the players in the downstream Petroleum sector to Garner Illicit gains and Impoverish the Rest of the Country.

Our First Point of contact is the Recent calculations by Former Minister of Petroleum professor David Tam west in which He implied that The subsidy on petrol is a Farce. Many believed him and share the same opinion, but we Critically examined the Figures he used and realized he used an unreal Crude production Cost of $5 per barrel and an exchange rate of 160 N/$ .We find such assumptions spurious and thus we consider the Rest of the Calculations a Flight from reality to The land of Fantasy.

Our Second Point is asking such Questions as, How much Does It cost to Produce a Liter of Petrol (Premium Motor Spirit)in Nigeria, This question should be directed of course to the usual suspect ,The NNPC, but of course we expect No answers from them, The Management of the Orient refinery and the Proposed Dangote Refinery would have Adequate data to provide an answer, but then again their response is not Forthcoming. We are left with Figures from OPEC Monthly oil reports, which would be supplemented with Figures from The Petroleum Products Price regulation Agency(PPPRA),Customs and Ministry Of Finance.

Time to get our Hands and Brains dirty,Subsidy is the amount paid by Government that enables Nigerians to But Petrol below the Open market Rate,Fuel subsidy payments in Nigeria is influenced by 3 major factors, Crude Oil prices, The Exchange rate and Consumption. Subsidy for most intents and Purposes is funded from the Federation Account through the NNPC domestic crude Allocation and thus talk of Federal Budgetary allocation is Slightly misplaced.

The PPPRA templates Gives us a List of Components of PMS cost, (Cost + Freight) being the largest. The Gasoline (Petrol) Price per Metric Ton being the most important, and is largely determined by Factors beyond our Control. The freight is the amount charged for Transporting a Metric ton of PMS from a refinery (Mostly Europe or Eastern US seaboard to Nigeria).We do not know the exact freight costs used by the PPPRA to Know if it is competitive and this Omission might lead to exploitation as every $10 per metric Ton in Freight Costs would lead to a 1.3 naira increase in PMS cost per Liter.

Another Component of the PPPRA template, the traders margin is also another point of worry as we do not know what exactly it is, is it the Profit of the Trader who sells the Gasoline to us or who brokers the Deal and why is it a set figure ($10), despite fluctuations in Crude oil prices.Do we have a trading desk in our National Oil Company, NNPC .Traders Margin yields 100 Million dollars per annul for the trader, chai,what a Lucky trader.The PPPRA say the Traders Margin is Factored Into Freight Costs yet It appears as a Separate Component from Cost and Freight, weird ehhh……,Lucky trader.

Lightering expenses
According to the PPPRA,Local Freight charge is the cost incurred on the trans-shipment 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. But does Lightering costs have to be more than 3% of Petrol Prices ,is that what obtains in other countries and can the PPPRA and NNPC prove such.
Moving to Other Aspects like the Storage charge , Jetty Charge and financing, there is not much data on those and we cannot ascertain the accuracy or Otherwise of such Figures.

Now that the Petrol has landed, it cannot be sold to us without the Tanker drivers, distributors -Filling stations like Oando, Forte Oil,Total , Ugo and sonns, etc. The retailers Take about 3.5% percent profit , which we consider ok , as cost of business(No ,we don’t own any Petroleum Stocks).

The transport 3 naira per Liter, which is approximately 100,000 naira per 33,000 tanker of fuel, here our problems begin as there is another cost of bridging, we ask bridging what exactly?What is the cost of transporting a 33,000 liter tanker of Fuel from Lagos -Maiduguri, or Port Harcourt to Maiduguri, we could ask some tanker drivers or look into our Military accounts to See how much they spend in tackling the Boko haram Insurgency.
What is the Difference between Bridging and Transport Cost, and how much does it cost to Transport a Tanker of Deregulated Diesel from Lagos to Maiduguri and do Bridging Costs apply to diesel. 33,000 Liter Tanker of Diesel is approximately 25 Tons, a Truckload of Cement of 500 Bags has the same weight, yet Dangote, Lafarge and Other cement Manufacturers Charge between 100(minimum)-200(maximum) per bag of Cement for Delivery Nationwide, this translates to 50000 -100,000(maximum) per 25 Metric Tons or 1.50K to 3 naira per liter , which leaves the question where are we Bridging the Fuel to, Libya perhaps, and is the Transport Cost borne by Retailers and distributors Free money as we also pay them to “Bridge” Petrol. This is Very Important as we consume 13 Billion liters of petrol annually with a Bridging Cost of 5.80 per liter which yields 75 Billion in bridging expenses. The Free money part might be accurate as the Minister of Finance Ngozi iweala recently said that Fuel marketers are in a Risk free Business.

Also does it cost more than 3Naira per liter,(100,000/Tanker) to transport fuel from the Lagos Jetties/Depots to areas within Lagos or better still what is the maximum distance that (100,000/33,000 L tanker) can transport. We believe transporting fuel within Lagos is less than that and Lagos accounts for More than 30% of our National Petroleum consumption, why then are we paying extra 6 naira to transport and “Bridge” fuel within Lagos and other nearby states. So many questions for the PPPRA, NUPENG, NNPC, Marketers and the Rest of us.

Do we also pay the Traders Fee, Finance Costs, Freight Charges on Locally produced petrol from our Refineries which we have been told by NNPC are Working at 30% capacity, If so WHY?, if Not why is there No separate template for domestic Fuel Production?, or are Those claims misleading?.

This Complicated process and the accompanying questions are only those Associated with Petrol subsidy , The Kerosene subsidy is another Mind Boggling maze which we are handicapped to Investigate. The Kerosene subsidy maze can be likened to a Black Hole which does not exist yet does exist which creates unending happiness for its beneficiaries and Utmost confusion for the Rest of us. In the Second part of this article we examine the Economic Factors affecting Petrol subsidy and their effects on us.

http://skuulmi.com/2015/05/how-to-calculate-fuel-subsidy

2sex:
My question is, what is the excuses given by fed gov for not fixing the refineries nor building new ones considering the billions of dollars that has found it's way into hidden bank accounts?

donguutti:
Phase 1, I did some research on the Subsidy issue and from my calculation we can eliminate between 10-15 naira via optimization of the
subsidy regime

Phase 3...Kerosene subsidy is non existent and an NNPC scam, yet i have this feeling that this government might actually make a
populist move by enforcing the kerosene subsidy.

Kerosene subsidy is long overdue, but I pushed it to three so that before it happens, the govt would have enjoyed a level of good will by effectively implementing phase two, I know Nigerians, give them 17hrs power and Buhari will become a Jesus overnight , that is the best time to strike with Kerosene, The Govt still need to prove its sincerity of purpose, not because your name is Buhari and you flogged people in 1984, then we must trust you in 2015, we must trade one good will for the other to be reasonable.

Phase 4...That would be almost impossible to achieve and would require changes to existing laws,Revoking refinery licenses
would not be palatable with the President Given his fatherly role in their creation.Would the new operators be private or public agents
or a Performance based private equity type management.

you should propably read more before making unfounded claims

Like you I'm surprised at the link between DPK and aviation fuel(jet A1), Jet A1 should be of a much higher quality so if there are people using one for the other I would be seriously surprised but then stranger things have been known to happen in this country.

As per power, your idea of directing power to places with higher population densities is off, you get more bang for the buck(well KWH in this case), if you go in the opposite direction. High density areas also tend to have higher energy consumption per capita (your average household in Lagos might have both a fridge and deep freezer), if you concentrate on low consumption areas you can reach a larger geographical spread. A bit of both would be workable. The siting of plants wrt load centers and fuel supply means a national grid will still be the ideal solution, anything else will require serious work on tariffs and regulation.

I agree the refineries should be leased out to established companies, anytime I read articles about them I cringe, I have an idea how much maintenance knowledge you need to have to run a complex plant and I don't think our government can provide the leadership.

All in all, nice article. Will be back after I digest it fully.

Phase 1: You may not know what you are up against (Trust me) and I see no possibility in Buhari achieving it.

Phase 2: Brilliant on paper but implementation?

Phase 3: The cabals will rise up against you and instigate the masses. Expect labour strikes and that will mark the beginning of the end.

Phase 4: You will need to amend existing laws. Trust me the "cabals" and friends of the cabals in the NASS will never allow it happen even in the next 5years
Phase5***

I agree, that is precisely why I did not attach a time frame to it, however, Obj's blackmail weapon will come in handy here, any senator that misbehaves will have EFCC checking the price tag of his boxer , na joke i dey ooo, the govt can sponsor trekking youths to be demonstrating daily at the doorstep of the NA, isn't that what we are supposed to be doing ordinarily?

Phase 6: The previouse phases will have negative effect on phase 6

What we need is system restructuring not all these tactics that are Dead on Arrival.

jpphilips:
Why do you think Kerosene explosion happen in Nigeria? The Dual purpose in DPK refers to?

jpphilips:
Lagos will consume more electricity and that is what I want to achieve, I want high density areas to use electricity and turn off generators, that will reduce the number of times they refill and reduce the subsidy we pay on each refill.
My mission is not an expansionist programme but subsidy removal, the least harmful way!!

jpphilips:
Not a lease agreement but operating contract agreement.

barcanista:
@jpphilips

I don't like back and forth argument. You don't know what you are saying if you think Buhari has integrity or he is serious. Someone that can't even declare his asset. You are also on a long thing if you think the cabals will allow "Phase 1"

For you to say Obj will "blackmail" NASS members shows that you are ignorant of the political workings of Nigeria.

For your "Osinbade is building it" claim, I laugh at you. Nigeria has lots of briliant plans on PAPER since the time of Gowon but implementation is another thing. I'm not thrilled by brilliant proposals on paper but by executing brilliant policies.

You should know the difference between system restructuring and policy overhaul. In system restructuring I mean the adoption of "True Fiscal and Regional Federalism" not policy overhaul that are usually Dead on Arrival within the present system.

You are banking 90% on assumption, this isn't a good way to plan.

Fyi: Buhari is a product of the cabals. Don't worry, you will soon come to terms.


I'm done bro...

unfounded claims come from the Phase 2 and Phase 5 You claim "it is estimated that a Nigerian home, consumes an average of 45l of petroleum products in 24hrs" if we take the number of homes you estimated and multiply by 45 l per 24 hours we get a figure that only
exists in fantasy land.

Phase 5....NPDC rebasing..what is the true cost of a barrel of oil to be delivered to the refineries by NPDC , what
happens if consumption is greater than NPDC production.Even if we divert all domestic production quota
to the refineries at "True cost" would that not be a transfer of subsidy and not elimination, transfer from
finished product to unprocessed crude.Can the Government absorb the opportunity cost -Lower earnings.

What do you think about the president's proposal for swap agreements and how would those swaps help

develop domestic refineries in a more efficient manner that the swaps currently in operation

barcanista:
@jpphilips

I don't like back and forth argument. You don't know what you are saying if you think Buhari has integrity or he is serious. Someone that can't even declare his asset. You are also on a long thing if you think the cabals will allow "Phase 1"

For you to say Obj will "blackmail" NASS members shows that you are ignorant of the political workings of Nigeria.

For your "Osinbade is building it" claim, I laugh at you. Nigeria has lots of briliant plans on PAPER since the time of Gowon but implementation is another thing. I'm not thrilled by brilliant proposals on paper but by executing brilliant policies.

You should know the difference between system restructuring and policy overhaul. In system restructuring I mean the adoption of "True Fiscal and Regional Federalism" not policy overhaul that are usually Dead on Arrival within the present system.

You are banking 90% on assumption, this isn't a good way to plan.

Fyi: Buhari is a product of the cabals. Don't worry, you will soon come to terms.


I'm done bro...

I am a firm believer in Buhari, I voted for him first in 2003 and has never wavered, until he proves me wrong, I have no reason whatsoever to doubt his integrity, you can now go to bed son!, remember to shut the blinds

The dual does not refer to aviation, the principal difference between aviation fuel and normal kero is that aviation fuel should not allow ice formation at low temperatures, this requires extra-processing thus the increased cost, so for anyone to be using Aviation fuel as normal kero...smh.

I never said that the dual refers to aviation, dual refers to "two purposes", yes they contaminate Jet A1 with normal kero, I have conducted a QC check on jet A1 and got a density of 0.83 guess you know what that means.
If Government removes subsidy and flight charge increases, does it not prove that somewhere along the chain, Govt subsidize it?

Found an article from 2011 that supports your assertion, wouldn't be surprised if it's still happening. I can guess who the marketer being referred to in the article is... does the term sea side boys ring a bell? http://www.thisdaylive.com/articles/kerosene-as-aviation-fuel-threatens-air-safety/105628/

Focusing on only subsidy removal is farrrrr less than ideal. Urban migration would increase putting more strain on the resources and you're likely to end up where you started. Since you say your goal is to remove subsidy then I'll leave this point alone.

People in the village will just relocate to the city because Lagos have more electricity than them? I doubt if you will do that.
however we get electricity right, we can agree that the rural dwellers will be short changed in the short run, because the new owners will definitely want to maximize profit, why do you have more Redeem churches in the cities than villages?

My bad, you mean something like an O&M? that would work.

DVanguard:
@jpphilips:
I respect your knowledge of Energy, Power and the Economy. I read your article, it really hit the points and belief i have about the challenges in our energy and power sector. You indirectly did not want to state that you don't believe in the subsid but technically created a platform to determine how much we need daily for consumption and how much compensation (subsidy) needed by the govt to pay for imported fuel.
I am challenged by your wonderful writeup. Kudo's.

I'll like to differ from the 'accolades' you've been receiving from posters above because your write up is filled with distortions, misinformation, misrepresentation and forgive me, ignorance. Then I'll like to add hatred for Jonathan and his team.

I rather you point out the "distortions", "misinformation" and "misrepresentations" that is what the thread is about, it is not water tight yet, so I implore professionals to criticise the plan constructively, where you can not, i rather you stop distracting others who can.
The difference between you and I is this; while you brood over "hating" public officials, I utilize my quiet time, pick up their policies, analyse them comprehensively and extricate the merits from the demerits, of course over Benson and a cup of coffee
I dont have time to hate anybody, their policies affect me one way or another as such it is my duty to design an escape strategy for myself.

But before then, the only way to remove subsidy is simply by removing it. Just announce a complete removal and that's all. At this stage, it will cost us more (even at the risk of not solving the problem) should we tinker with a 'phased' removal.

Tomorrow, I'll explain better.

barcanista:
Phase 1: You may not know what you are up against (Trust me) and I see no possibility in Buhari achieving it.

Phase 2: Brilliant on paper but implementation?

Phase 3: The cabals will rise up against you and instigate the masses. Expect labour strikes and that will mark the beginning of the end.

Phase 4: You will need to amend existing laws. Trust me the "cabals" and friends of the cabals in the NASS will never allow it happen even in the next 5years
Phase5***

Phase 6: The previouse phases will have negative effect on phase 6

What we need is system restructuring not all these tactics that are Dead on Arrival.

Thanks

DVanguard:
The Challenge the present government has now is how to enlighten the populace against the believe that subsidy must be removed. The so-called cabal has succeeded in that part which will be difficult to change. If the New govt removes it without addressing some of the question you raised in your phase 1, we are definitely creating another market cartel in the PMS market like the Diesel market.
{before we say we remove subsidy, we should be sure of the quantity of fuel we consume daily, the quantity we require with a period of time, the quantity we have subsidies as at present, the expected quantity. If all these are done, it will give us a clear view if we really pay subsidy, need to pay subsidy or remove subsidy. Cos from most position, we just keep importing without having a concrete record on our daily consumption.}
I believe the FG should streamline the number of Licensed Importers and ensure that certain guidelines are set before they are licensed to import fuel. The licensed importers will be given a grace period that after proper consultation will have a deadline that will ensure local production. Therefore the FG will encourage smaller refineries to be built and create a legal frame work for easy operation of the private sector in the system. The FG needs to be sincere and train it staffs to ensure they meet up with the challenge. Bottle necks on importation, port clearance, licenses approval etc should be worked on to easy and interest investors.

Fixing power is a very big challenge that somehow compliment the high consumption of energy (pms). 60% of Nigerians that live in urban areas uses generator. If the power sector works the demand for pms will drop drastically. The proposal by VP is a fast and quick way of fixing power sector. But in the power sector there are two school of thoughts;
1. Need a National grid to monitor the distribution of power by building big power plants.
2. The building of small power plants and eliminate the huge cost of transmission and power loss along the line.
These is a big challenge, both of them have their advantages and disadvantages which can not be elaborated because of time. I belong to the school that believes small power plants should be built to solve the immediate challenge of the country. States that are buoyant can build their own power plant and supply their states and if the have enough can sell to the FG or to other states. With these system it will reduce the burden on the FG to provide power to the whole Nation. Over time they can even interconnect these smaller power plant in a ring form.
Also, private investors can be encourage to build small power plants to power industrial area. Power plants generating 33kv or 11kv should be encouraged, these will eliminate the huge investment in transmission but will require also investment in stability of the power system.

I still have a challenge in the source of power. The challenge of pipeline is yet to be resolve and also storage of gas within residential or urban centres are very dangerous. Using Solar and wind are very expensive. The best alternative is thermal, hydro and coal.
The coal power plant should be encouraged because of the huge deposit of coal we have in eastern Nigeria. Nuclear should be out of it cos we are yet to manage the hazards generated from our crude oil fields.