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Wednesday, 24 December 2014 16:56

Oil’s Slump Gives Nigeria Chance to End $7-Billion Fuel Subsidy

JonathanBy Elisha Bala-Gbogbo

ABUJA, Nigeria, December 24, 2014 (Bloomberg News) -- The tumbling oil prices that have slashed Nigeria’s revenue and roiled currency and stock markets in Africa’s biggest economy may have a silver lining: an excuse for the government to scrap fuel subsidies that cost as much as $7 billion 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, may not seize, analysts say.

 

“Politics often trumps prudence and there’s an entrenched social expectation for fuel to be subsidized,” Gareth Brickman an analyst at Johannesburg-based ETM Analytic said in a Nov. 28 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 percent 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 Abuja-based Petroleum Ministry. This ensured the price of gasoline was capped at 97 naira ($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 1.1 trillion naira ($6 billion) in illegal fuel-subsidy payments, alleging “endemic corruption.”

 

NigeriaOilState Refineries

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 percent 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 Dolapo Oni, energy analyst at Lagos-based Ecobank Research.

 

With the 45 percent decline in oil prices this year, Nigeria’s oil unions, which ended a four-day strike on Dec. 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.

 

“The unions want lower fuel prices because past increases were based on the rise in oil prices,” Emmanuel Ojugbana, a spokesman for the Petroleum and Natural Gas Senior Staff of Nigeria, said in a Dec. 17 phone interview. “So now that the price has fallen, we expect the government to also reciprocate.”

 

Break-Even Price

The “fuel subsidy is completely wiped out if prices fall below $70 a barrel,” Oni said. “We’re there now.” In the spending proposals sent to lawmakers on Dec. 17, Jonathan plans to increase fuel subsidies 9 percent next year to 1.2 trillion naira.

 

Government estimates indicate “that the break-even crude oil price” that equals Nigeria’s pump price without a “subsidy hovers around $60 per barrel,” Finance Minister Ngozi Okonjo-Iweala said while announcing 2015 budget proposals on Dec. 17. “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.

 

‘Partial Subsidy’

“The timing is ripe for a partial subsidy cut, but probably not an all-out removal, which could trigger a backlash and give the opposition rhetorical ammunition” ahead of the election, de Pontet said in a Nov. 26 e-mailed response to questions. Extended oil-price declines provide an opportunity for a “phased reduction less jarring than the full cancellation” attempted in 2012, he said.

 

With oil as the source of about 70 percent of government revenue and 95 percent of foreign-currency income, pressure has mounted on the naira, forcing the central bank to devalue the currency last month. Fuel imports are one of the key sources of foreign-currency demand pressure. The currency has declined 13 percent this year against the dollar, making it the worst-performer after Ghana’s cedi out of 24 countries tracked by Bloomberg in Africa.

 

New Capacity

As much as 600,000 barrels per day of additional refining capacity may become available in Nigeria by 2018, twice the amount of oil products consumed in the country, as two plants now under construction, start producing, Oni said. These include Dangote Group’s 500,000 barrel-per-day plant in Lagos. Increased local refining will eliminate the cost of importing fuel and help ease pressure on the currency.

 

Even at current levels, the price of gasoline in Nigeria at $2.26 per gallon ranks at 55 out of 61 countries, data compiled by Bloomberg show. Fuel prices in Nigeria are higher than that of all other OPEC members except Angola, according to the website Globalpetrolprices.com.

 

Yet, the consensus of analysts interviewed by Bloomberg is that Jonathan won’t end subsidies with elections looming, though he might revisit it later.

 

“The government is just trying to be careful in case there’s any major shock that will send the price back above $100 per barrel,” said Oni. “It would want to avoid the backlash from two years ago when there were strikes and protests.”

 

To contact the reporter on this story: Elisha Bala-Gbogbo in Abuja at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

To contact the editors responsible for this story: Alastair Reed at This e-mail address is being protected from spambots. You need JavaScript enabled to view it Dulue Mbachu, Antony Sguazzin, Karl Maier

 

(This story was originally published by Bloomberg News)

 
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