CONTINUED FROM YESTERDAY
THE NNPC is faced with many contradictions within the economic constraint of import priced input (domestic crude oil), fixed price output (PMS, HHK) and its refusal to fight corruption (and thereby eliminate the so-called subsidy). The 2002 IMF inspired decision to impose import parity prices on domestic crude oil was not correct. Furthermore, the FGN does not want to fight corruption in the oil and gas sector or implement the PIB. We lose our absolute advantage as an oil producer when we import petroleum products. Import parity pricing for domestic crude oil eliminates the distinction between export and domestic crude oil, discourages domestic refining and encourages imported petroleum products. We need production cost pricing for our brown field refineries in order to update them and make them operate profitably under a financially independent, commercial, efficient and honest management.
THE NNPC is faced with many contradictions within the economic constraint of import priced input (domestic crude oil), fixed price output (PMS, HHK) and its refusal to fight corruption (and thereby eliminate the so-called subsidy). The 2002 IMF inspired decision to impose import parity prices on domestic crude oil was not correct. Furthermore, the FGN does not want to fight corruption in the oil and gas sector or implement the PIB. We lose our absolute advantage as an oil producer when we import petroleum products. Import parity pricing for domestic crude oil eliminates the distinction between export and domestic crude oil, discourages domestic refining and encourages imported petroleum products. We need production cost pricing for our brown field refineries in order to update them and make them operate profitably under a financially independent, commercial, efficient and honest management.
We can avoid the problems of price modulation by using a production cost-pricing model (recommended by OPEC) to determine the PMS price. Such a pricing model would not be dependent on the uncertainties of PMS market prices as determined by Platts Oil. The cost for new onshore infill wells in West Africa is about $10/bbl. However, the funding/development cost of our crude oil has not changed from $3.50 as the 445000 bbls of domestic crude oil is still being produced from more or less the same old wells. The Distribution margin is N14.3/litre or $11.81/bbl. A 10 per cent increase due to recent FGN investment in the repair and turn around maintenance of our refineries raises refining cost to $13.86/bbl. The major change has occurred in pipeline transportation. Pipe protection is a security issue. We can solve it with an added pipeline transportation cost of $2.5/bbl. Pipeline transportation cost will increase from $1.5/bbl to $4/bbl. The cost of PMS in Nigeria will therefore be ($3.5+$4.0+$13.86+$4.0+$11.81) or $37.17 per barrel. This is N45/litre. If we impose a 20 per cent profit margin, we will get N55/litre. There is no fuel subsidy. Any price above N87/litre introduces a corruption subsidy that is paid to the fuel cabal from the public purse. At a domestic PMS price of N87/litre, there is an excess of N32/litre that is going to the FGN. This is how we were able to fund the PTF during Abacha’s regime.
The Abacha regime promulgated the Petroleum (Special) Trust Fund Decree No.25 of 1995, which was amended by the Petroleum (Special) Trust Fund (Amendment) Decree No.1, 1995. This decree was very important because it broke down the different cost component of PMS Price for the first time. The decree established a Petroleum (Special) Trust Fund “into which shall be paid all the monies received from the sale of petroleum products less the approved production cost per litre which, for the time being, is as follows – (a) cost of crude oil – 2.35k; (b) excise duty and VAT – .33k; (c) marketer’s allowance – 1.30k; (d) NNPC cost and margin – 1.70k;”. Thus, after a detailed study by the FGN, the production cost of one litre of PMS was N5.68. The profit margin (N5.32 per litre) funded a Petroleum (Special) Trust Fund. The fund was used for development projects that directly benefitted the masses. There was no fuel subsidy. Rather, the FGN used the PMS price increases to generate additional revenue by transferring wealth from the Nigerian masses to the State. We know what works. We could do the same today at a PMS price of N87/litre and use the extra fund thus accumulated to repair our refineries and solve the major problems facing our refining sector. We should reject the IMF inspired neo-classical theory of import parity pricing of our domestic crude oil and refined products. This presupposes that we must refine enough petroleum products to meet our domestic needs.
We will examine some of the major obstacles to achieving refining self-sufficiency in Nigeria. These obstacles include pipeline security, metering, turn around maintenance (TAM), upgrading our old (Brownfield) refineries, eliminating corruption and mismanagement, appropriate pricing of refined products and building new (Greenfield) refineries. One of the major issues facing the FGN is pipeline security. The NNPC claims that pipeline sabotage and theft of petroleum products are responsible for the poor domestic refinery output and disrupted pipeline supply. The NNPC declared that it lost 531 million litres of PMS (N51.07 billion) in the first nine months of 2015 due to sabotage of our petroleum product pipeline and theft of products. Most of this loss occurred in the 30 miles Atlas Cove/Mosimi pipeline. The same problem exists in the Bonny-Port Harcourt (34 miles) and the Escarvos-Warri crude oil pipelines, which supply domestic crude to the Port Harcourt and Warri refineries respectively. The NNPC chose marine route alternatives to pipeline transportation at a cost of $5.37/bbl. NNPC hired PPP Fluid Mechanics and Ocean Marine Securities to provide the marine services. These two companies supplied 11.6 per cent of the total requirements of the Port Harcourt/Warri refineries from 2010 to 2015. Refinery capacity utilisation/efficiency was less than 10 per cent. NNPC imported petroleum products rather than solve the pipeline security problems.
We can solve the pipeline security problem with an added pipeline transportation cost of $2.5/bbl. There are 875 miles of petroleum product pipelines and about 1,325 miles of crude oil pipeline in Nigeria. Therefore, 20,000 men made up of 6,000 soldiers from the Armed Forces and 14,000 citizens from communities along the pipeline routes can protect our pipelines. An added pipeline transportation cost of $2.5/bbl yields $0.614 million/day or N44.18 billion/year, which can pay the 20000 men and run the whole security operation. It might be cheaper to use more modern technology instruments like drones, but given the low technological capacity of Nigeria, we might not be able to maintain the drones or use them effectively. Furthermore, mobile patrols along the pipelines allow us to absorb about 14000 ex-militants and graduates of higher institutions. We could start by focusing and securing the crude oil pipeline supplying the current refineries (the Bonny-Port Harcourt (34 miles) and the Escarvos-Warri crude oil pipelines).
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