Withdrawal of Fuel Subsidy Begins in 2016

Pleading acute shortage of funds, the federal government monday said it would begin a gradual withdrawal of fuel subsidy next year.

The Minister of State for Petroleum, Dr. Ibe Kachikwu, who disclosed the government’s decision while appearing before the Joint National Assembly Committee on Finance, Appropriation and National Planning on the consideration of Medium Term Expenditure Framework (MTEF), said the subsidy put at over N1 trillion in 2015 was no longer sustainable.

The federal government’s decision to shave off fuel subsidy coincided with reports that tumbling crude oil prices might adversely affect the nation’s 2016 budget.

According to Reuters, crude oil price tumbled four per cent yesterday to $36-40 per barrel, coming close to its 11-year low, and potentially endangering the implementation of the 2016 budget, which is predicated on oil price of $38 per barrel and output of 2.2 million barrels of crude per day.

The sharp drop on crude oil prices, it said, followed growing fears that the global oil glut would worsen in the months to come in a pricing war between the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC producers.

Kachikwu, however, at a press conference in Abuja, said OPEC might convene an emergency meeting earlier than its June 2016 scheduled meeting to assess the measures it had put in place to check further slide in crude oil prices.

At the Senate, the minister of state said the gradual removal strategy would begin with the nation's return to the pump price of N97 per litre from the current N87 because the government has no money to sustain the current price.

He added that if the strategy was not effective, the government would be compelled to consider total withdrawal of fuel subsidy.

"The total subsidy figure for 2015 when taken along with the NNPC will be in excess of N1 trillion. We can get this specifics but the point is largely that it does not involve NNPC because the agency takes its off-cuff. We will work towards taking those figures off our budget in 2016,” he said.

He said with the federal government’s current pricing work, it was clear that subsidy was no longer sustainable. “The government doesn't need to fund subsidy. There is energy around the removal of subsidy. Most Nigerians we talk to today would say, that's where to go,”he stated.

The minster said: "I have since left the dictionary of subsidy by going to price modulation, which is a bit more technical. Price of refined products today is N87. It was N97 before it was removed and we really have to go back to that because we don't really have the finance to remove it. There are lots of safety barometer between the N87 and N97 per litre regime between which government does not have to fund subsidy.

"Yet the prices would be fairly close to what it used to be today. That is the first mechanism we are going to work on. It is when that mechanism fails that we will begin to look at a total subsidy exit. We believe we could achieve that."

Kachikwu, who further explained the mechanism being put in place to increase oil production volume in 2016, said with the projection by OPEC, the government expects an increase in oil price from $38 per barrel in early January to between $45 and $50 per barrel. "We expect it to hit $70 per barrel in 2017," he added.

In her submission, the Minister of Finance, Mrs. Kemi Adeosun, said the government had put the machinery in place to reduce personnel cost by N100 billion in 2016.

She said the federal government spent as much as N1.8 trillion on personnel cost in 2016, noting that the government has to adopt different measures to scale down the cost next year.

She said government was already working with banks so that it could go cashless by giving debit cards to ministries, departments and agencies (MDAs) to procure items.

Adeosun explained: "If they want to buy fuel for instance, their drivers will make use of the cards. We will be able to control the cards to know who and where the fuel was bought. We are really working hard to drive down overhead. If we don't attack our recurrent, the risk is that extra money goes into it and we will have nothing to show for it. This is a big risk that we cannot afford."

She added that the federal government was already discussing with some lenders with a view to borrowing money to drive capital projects, adding that the money borrowed from commercial banks for states' bail-out had been restructured into a 20-year loan with nine per cent interest.

On the projected N1.5 trillion revenue for 2016, Adeosun said the government was only being conservative by the figure, explaining: "It is possible that we get much more but I think for the purposes of this budget, it's better to leave it at that," adding: "We have done N401 billion into the consolidated revenue fund this year but when I look at it, about 60 per cent of it is from the CBN. Most of the other entities have not credited anything."

In his submission, the Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, disclosed that the true exchange rate is N260 per dollar at the parallel market whereas the official rate is N197 to a dollar.

He said: "The CBN rate would revolve around a particular band which is N197. It could swing up to N197 or below. The truth is that historically, exchange rate for budget has never been based on the parallel market rate which as far as we are concerned is a shallow market because it controls about 5 per cent of the market."

He said the market was substantially dominated by speculators and rent seekers, observing that in the last 12 to 15 months, there had been a massive drop in commodity prices especially on oil which he said had significantly affected the country's revenue.
On his part, the Minister of Budget and National Planning, Senator Udo Udoma,

explained the rationale behind the N500 billion budget for social welfare of unemployed graduates.
He said when the MTEF was being prepared, the government did not have the number of intending beneficiaries and didn't want to put in anything that it was not 100 per cent sure of.

For effective implementation, he said, the government would have to relate with relevant agencies on the issue. “We are making these arrangements because the NNPC and other stakeholders had advised against subsidy in 2016 although consultations are still ongoing in this regard."

Meanwhile, Kachikwu, who is also the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), has unveiled his plans to drive down the high cost of production in the country.

The minister of state, who spoke in Abuja during a press briefing on the forthcoming sixth edition of the Africa Petroleum Congress and Exhibition (CAPE IV), which Nigeria would host in March 2016, said for African producers to remain above board in the ongoing phase of crude oil price slashes, they would have to look for viable means of cutting their costs of production.

He stated that major operators in Nigeria’s oil and gas sector are considering setting up an integrated security model to help cut their costs of production in the country.

He said that this was what oil majors in Nigeria were already thinking about to mitigate the hardship brought about by the price instability.
According to him, the industry in Nigeria would embark on prudent restructuring processes that could include an integrated security model for all to benefit from.

Already, security issues, sabotage and crude oil theft have continued to present significant challenges to Nigeria’s oil industry. These continue to adversely impact on onshore oil and gas production as well as delivery to the market, thus leading to huge revenue loss to both government and operators.

Kachikwu, however, said: “Pricing has nothing to do with cutting your cost. Cutting of cost is an efficiency issue. Ideally even when you have high prices cutting your cost increases your margins. But what has tended to happen is when you have a lot of windows in pricing, you take a lot of things for granted.”

He said his ministry is strategically restructuring processes that would enable the country to cut down cost.

“For the majors, we are engaging with them at being very astute in terms of assets management to trim down costs. We are becoming a bit more preferential in terms of cost driving the investments that we make,” the minister said.

Kachikwu said the nation’s regulator’s operational network and how it manages the industry would change, explaining that an integrated security model would be introduced to drive the cost of security.

He said next year would be interesting and challenging for oil operators, calling on African producers to adopt innovative approaches to stay up in the market.

“I think the 2015/2016 timeframe is going to be full of a lot of actions for the oil industry: actions bordering on restructuring; integrity; new dynamics in terms of oil exploration and it is a very tasking as well as interesting time and I think a lot of country’s would be benefitting from this," he said.

The minster said the greatest challenge for a lot of countries, especially African producers was to go back to the strategic status of being the least cost producers in the market. “In an era of tumbling oil prices, we need to go back to what is our base advantages as a least cost producer,” he said.

Kachikwu said to safe cost, only viable projects would be done.

He also stated that OPEC might convene an emergency meeting earlier than its June 2016 scheduled meeting to assess the measures it had put in place to check further slide in crude oil prices.

According to him, “The strategy was to allow the market forces to determine the prices for a while in the expectation, obviously, that a lot of the higher cost producers would step aside for the lower cost producers.”

He said the strategy had led to the exit of over two million barrels of non-OPEC oil from the market, adding that it was expected that the trend would continue.

Kachikwu also called for unity amongst member countries of the African Petroleum Producers Association (APPA) and said that African producers had continued to lack influential voice in the global oil market due to what he described as self-competition amongst the group.
He said: “We have failed to take advantage of size and have let volume be the speaker. We need to begin to look at that. Collectively we can actually bring some real influence and that is exactly what I did this time around at the OPEC to be able to get a consensus that enabled everybody stay in the room instead of walking away.

“APPA needs to meet more often, strategise more often and speak with one voice. We need to stop being self-competitive amongst each other. We don’t need to go to OPEC meeting and get ourselves depleted, one thing I did at the OPEC was to first hold an African sub meeting and get people to align. That is what we need to do and as we do that we are going to see a lot more respect for the whole. We need to do more than sitting down but ask to be able to get some more.”