Downstream Oil and Gas Sector Watch

Downstream Oil and Gas Sector Watch

Sixty-three (63) years after the discovery of crude oil in Nigeria, the Nigerian downstream sector (i.e., petroleum product refining, storing, marketing and distribution) is still evolving and yet to reach its full potential.

Wale Ajayi

Partner & Head, Tax, Regulatory & People Services

KPMG in Nigeria

downstream oil and gas sector watch

Ranked as the 13th largest crude oil producer in the world with an average daily output of about 2 million barrels per day, one would expect that the downstream sector would be abuzz with significant investments and activities. Unfortunately, this is not the case. The sector is currently bogged down with numerous challenges, such as inappropriate product pricing, bridging product supply, insecurity, irregular gas supply, pipeline vandalism, inadequate pipeline infrastructure, non-functional/under functioning refineries etc.

As expected, the journey to sustainable development is not without challenges. In this newsletter, we have highlighted some of the recent developments in the downstream sector of the Nigerian oil and gas industry, and events that are likely to impact the industry in the coming years.

Product pricing and the subsidy scheme

Most economists believe that to maximize social welfare, the prices of goods and services should be determined by the interaction of market forces. However, in practice and especially in developing countries, such as Nigeria, policies are often driven more by political considerations rather than rational economic theory.

Given the importance of petroleum products and its impact on the social welfare of its citizens, the Federal Government of Nigeria (FGN) had historically subsidized the products pump price; bridging the actual cost of the pump price and the official pump price petroleum products are dispensed at the pump. The subsidy scheme attempts to make up for the difference between the importer’s cost and the official pump price of the products, as capped by the FGN.

However, the product price cap and resulting subsidy on products has not availed citizens that much, in reducing the hardship experienced. Until recent times, the Sector was bedeviled with acute seasonal product scarcity, hoarding, smuggling, adulteration, long queues and several strike actions by participants in the sector. These issues deny the citizens the intended benefit of the product subsidy, as the subsidy claims continue to increase over the years, at the expense of other pressing needs: education, healthcare, infrastructural development, etc.

A remarkable attempt at eliminating the subsidy on petrol by the FGN, under the previous administration in January 2012, was strongly opposed. With the restrictions in sourcing foreign exchange, private marketers have since stopped the importation of refined petroleum products. NNPC is currently the sole importer of petrol into Nigeria.

The subsidy scheme currently places a huge burden on the nation, as the Government has had to continually fund the difference between the actual landing cost, which currently stands at 1802 per liter of petrol and the regulated pump price of N145. Other implicit costs associated with the subsidy scheme include the compensation for exchange rate loss suffered by the importers due to differences between the prevailing exchange rate on the importation of the products and on subsidy settlement and the zero-interest charge on loans linked with the petrol subsidy between June 2017 and December 2018.

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