In a revelation that underscores the ongoing challenges in Nigeria’s oil sector, Pinnacle Oil and Gas Limited has disclosed that the country is incurring about N1 trillion every month on petrol subsidies.
This disclosure was made by the Managing Director/CEO of the indigenous oil and gas company, Robert Dickerman, during the Nigeria International Energy Summit (NIES) held in Abuja.
Despite the government’s efforts towards deregulation in the downstream sector, the persistence of such a hefty subsidy indicates a significant financial burden on the nation’s economy.
The subsidy mechanism, intended to make petrol affordable for Nigerians, has inadvertently resulted in the product being cheaper within the country compared to neighbouring nations.
This price disparity has been identified as a key driver for the smuggling of petrol across borders, further complicating the subsidy issue.
Speaking at the forum’s panel session six, which focused on Nigeria’s Downstream Sector, Dickerman highlighted the paradox that, despite substantial progress in the industry, the massive subsidy is a clear indication of the challenges still facing Nigeria’s oil and gas sector.
He said the situation not only affects the government’s finances but also impacts the operational dynamics of companies within the sector, like Pinnacle Oil and Gas, which operates across the entire downstream value chain.
Dickerman stated that the continued payment of subsidies at such a scale raises questions about the sustainability of such expenditures and the need for more effective policies to address the underlying issues.
He said, “Nigeria has a long history of allocating resources to oil and gas production at the expense of most other economic and social programs. To balance this, there has been a long-standing policy to mitigate consumer costs via palliatives such as fuel and food subsidies.
“But one of the net effects of oil money is underinvestment in local production, manufacturing and other value-added activities that could generate foreign currency through exports. There has also been a large under investment in the maintenance and upgrade of existing infrastructure including electricity, roads, health care, water, waste, education and financial infrastructure such as consumer credit.
As a result, we have a huge negative trade deficit, except for crude oil and LNG, and our banks are not sufficiently capitalized to support significant new capital programs.
“With legacy monetary policymaking currency exchange difficult, we desperately need Foreign Investment. This is a reality. So the best policy during this time of crisis is a national policy to transform our economy/regulations/laws to accommodate and encourage FDI.
“Foreign investors, foreign lenders and government-run DFIs have been very clear about what they want to see: Conservative fiscal policy, tackling corruption, enabling competitive markets, and enforcement of fairness in markets through policy, regulation and the ability to enforce contracts. Keeping that context in mind, I want to point out that there is still a massive subsidy in PMS, albeit in the FX portion of PMS Price, not the global price in dollars.
“The consequences of this subsidy are: The cost of gasoline in Nigeria is the lowest in Africa by far, which encourages smuggling out, further depriving Nigeria of value. Smuggling causes Nigeria to subsidize neighbouring countries even while our economy struggles. The cost is hurting the entire budget, Federal and State, as critical programs cannot be funded to pay this subsidy. It is currently calculated to be about 1 trillion Naira/month.
“Also, with this subsidy in place, ceasing subsidy payments would result in no petrol supply, if there are no refineries producing gasoline. All supplies come from the international market, which will only sell at market prices.
“There is no competition in bulk supply, as only the national champion owned by the government can import. Wholesale and retail prices are set based on their subsidized cost and they determine who gets supply. Without a competitive market, foreign investors are discouraged from investing in this sector in Nigeria.
“The solution to this problem seems obvious, even acknowledging the daily struggles most citizens and companies have today with reduced purchasing power, high inflation, high interest costs and high unemployment that exists today. Short-term palliatives have never resolved long-term issues in any nation at any time in history. We need long-term solutions.”