The planned electricity tariff hike scheduled for July 1 has been postponed until the first quarter of 2021. This decision was taken by the leadership of the National Assembly after a meeting with the regulators NERC, and DisCo representatives.
In a press statement seen by Nairametrics, members of the National Assembly claimed that while the tariff increase was necessary, the timing was bad as Nigerians are still reeling from the negative effects of the COVID-19 Pandemic.
According to the President of the Senate, Ahmed Lawan, “The agreement here is that there is not going to be an increase in the tariffs on July 1st. The Speaker and I, are going to take appropriate action and meet with the President. We are in agreement here that there is no question on the justification of the increase but the time is simply not right and appropriate measures need to be put in place.”
Electricity tariff hikes have remained in the political doldrums for years with the government and national assembly pushing back tariff increases for all sorts of reasons. The latest push back comes at a time when the World Bank just recently approved a $750 million power sector loan for Nigeria.
Why DisCos wanted to increase tariff: The increase in price is a follow-up to the charges set in 2015. The tariff increase would cater for revenue shortfalls in the sector. The order was issued to the 11 DisCos on December 31, 2019.
The Minister of Power, Saleh Mamman, had said in a Nairametrics report that the hike was inevitable due to the rising cost of electricity generation in Nigeria. According to him, improvement in electricity supply necessitated the need to increase electricity tariffs.
Mamma said electricity supply was being affected by cost-ineffective tariffs and that it was a drawback on the operation of the energy distributors. So, if the electricity supply was to improve, there’s a need for the procurement of needed equipment that would reflect on the electricity tariff.
Implication: The increase in tariff was meant to stop the continuous subsidy of electricity by cash strapped Federal Government as customers pay the right price. It also meant everyone in the electricity market will take full responsibility for service delivery and payment remittance.
With the tariff increase postponed till next year, DisCos will continue to remit between 30% to 40% (depending on the DisCo) of their monthly collection while the tariff shortfall will be backstopped by the government via subsidies.
According to DisCos, current tariffs represent about 60% of the actual cost-reflective tariffs with the government making up for the shortfalls through subsidies. The shortfalls are paid to Generating Companies and Gas suppliers.
The decision to stop the tariff increase is a major set back for the industry that has been plagued by lack of funding due to challenges attracting investments. According to DisCos, most investors will not invest in the market that is not cost-reflective.
See the press release below.
N’Assembly leadership halts planned hike in electricity tariffs
The leadership of the National Assembly on Monday waded into the controversy on the planned hike in electricity tariffs from July 1st, 2020 and succeeded in convincing the Distribution Companies(DISCOs) to defer the plan till the first quarter of 2021.
The President of the Senate, Ahmad Lawan, the Speaker of the House of Representatives, Rt. Hon. Femi Gbajabiamila and other principal Officers of the two Chambers met at the National Assembly with the Chief Executives of the government electricity regulatory body and DISCOs across the country.
Also in attendance were the Chairmen of the Committees on Power from the Senate and House of Representatives.
The National Assembly leaders were emphatic at the meeting that the timing of the planned hike was wrong even though they had not much issue with the need to introduce a cost-reflective tariffs for the power sector to attract the much-needed investment.
In the course of the meeting, the DISCOs too admitted that they were not well prepared for the planned hike in tariffs even though they so much desired the increase.
The meeting agreed to defer the planned hike till first quarter of next year while the leadership of the National Assembly promised to meet with President Muhammadu Buhari on the issue.
“The agreement here is that there is not going to be any increase in the tariffs on July 1st,” Lawan said at the end of the meeting.
“The Speaker and I, we are going to take appropriate action and meet with the President.
“We are in agreement here that there is no question on the justification of the increase but the time is simply not right and appropriate measures need to be put in place
“So between now and the first quarter of next year, our task will be to work together with you to ensure that we put those blocks in place to support the eventual increase in tariffs,” Lawan said.
Lawan said the government has been doing a lot as part of its obligations to provide some form of Intervention.
“I’m quite aware that for this year, probably starting from last year, over N600 billion was earmarked for this sector to improve.
“The potential increase in the tariffs is definitely something that will be of concern to us in the National Assembly.
“There is too much stress in the lives of Nigerians today and indeed across the world because of the challenges imposed by COVID-19 pandemic and even before then, we had issues that would always make it tough for our people to effectively pay the tariffs.
“One way or the other, for this business to flourish, for this sector to be appropriately fixed, for it to attract investment, something has to give way, there is no doubt about that but it is also crucial that we look at the timing for any of our actions,” Lawan said.
In the same vein, Rt. Hon. Gbajabiamila said the National Assembly is on the same page with the DISCOs on the issue of cost-reflective tariffs.
“There is time for everything. A well-intended programme or policy of government can fall flat on the face and never recover if you do it at a wrong time. I think we all agree to that.
“There cannot be a time as bad as this for us to increase anything. Forget about electricity, anything. Whereas, even in time of decreasing revenue, we are even reducing the pump price. I don’t know how we can justify an increase in the cost of electricity at this time in Nigeria.
“The good things is that we have agreed that we need to do something about the cost,” the Speaker said.
Gbajabiamila posed some questions to DISCOs and the Nigerian Electricity Regulatory Commission(NERC): “How did we arrive at the tariffs or costs. Who were the stakeholders that were present. What was the role of the National Assembly. More importantly, is the President aware of this because the President is perhaps the biggest stakeholder of all, apart from the Nigerian people.
“Whatever will affect his government is something that should concern all of us. I think this will affect his government. This timing. Not the increase. The timing. I think it will affect his government and if it is going to affect his government, we should all rally around our people, our president and the government to make sure we do the right thing,” Gbajabiamila said.
The representatives of the DISCOs said if the planned hike is eventually deferred till next year, the government should continue to bear the difference in the present tariff and what was considered as the appropriate tariff.
In attendance at the meeting were the representatives of NERC, Kano Electricity Distribution Company, Ikeja Electricity Distribution Company, Kaduna Electricity Distribution Company and Eko Electricity Distribution Company.
Buhari to finally send Petroleum Industry Bill to National Assembly next week
Sources in the Presidency have disclosed that the President may be presenting the bill to the National Assembly.
President Muhammadu Buhari is expected to present the long-awaited Petroleum Industry Bill (PIB) to the Senate as early as next week.
According to Reuters, who were quoting 4 sources familiar with the development, the presentation of the bill to the National Assembly, follows its official approval by the president late last week. This is as the National Assembly has already formed teams of members that will work most closely on the individual portions of the bill.
Both chambers of the National Assembly must have to pass the bill after deliberating on it before it can then be passed on to the president for his final signature.
The PIB which is an oil reform bill has been in the works for about 20 years, is key to the repositioning of Nigeria’s Oil and Gas Industry under its post-COVID-19 agenda as the main laws governing oil and gas exploration have not been fully updated since the 1960s due to some contentious issues like taxes, payments to local communities, terms and revenue sharing within Nigeria.
The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), had disclosed that the delay and non-passage of the bill has made international investors to start losing confidence in the country’s oil and gas industry.
While revealing last month that the PIB will be presented to the National Assembly in the next few weeks, the Minister of State for Petroleum Resources, Timipre Sylva, also said that the executive arm will be requesting the lawmakers to specially reconvene to receive and start deliberations on the bill.
These oil reforms and regulatory certainty became more pressing this year as low oil prices and a shift towards renewable energy made competition for investment from oil majors tougher.
The draft copy of the bill which was prepared by the Petroleum Ministry is a product of series of consultation between the federal government, oil and gas companies and other industry stakeholders.
Excerpts from the bill reported by Reuters include provisions that would streamline and reduce some oil and gas royalties, increase the amount of money companies pay to local communities and for environmental clean-ups alter the dispute resolution process between companies and the government.
It also included measures to push companies to develop gas discoveries and a framework for gas tariffs and delivery. Commercializing gas, particularly for use in local power generation, is a core government priority.
Experts pick holes in pump pricing of petrol, proffer solutions
Experts give their views as Nigerians grapple with the effects of an increase in petrol pump price.
The recent sharp increase in the pump price of petrol has been greeted with shock and condemnations from Nigerians, as it is coming at a time the global price of crude oil dropped or been static at best.
This is also happening at a time, where Nigerians are grappling with the devastating impact of the coronavirus pandemic on the economy, leading to a significant drop in the income of Nigerians.
This price increment is the resultant effect of subsidy removal, and full deregulation of the downstream oil sector by the Federal Government, which has been on the policy agenda of past governments, starting with Olusegun Obasanjo’s administration to the present administration of Muhammadu Buhari. This is further exacerbated by the fact that, the country imports over 90% of its refined petroleum product, as the refineries have not been working optimally.
While announcing the implementation of the full deregulation of the downstream oil sector, with the removal of the existing cap on fuel prices, the Petroleum Products Pricing Regulatory Agency (PPPRA), noted that henceforth the pump price would be fully determined by market forces.
In response to some comments and innuendos, the Minister of State for Petroleum, Timipre Sylva, said the deregulation policy, was to ensure economic growth and development of the country. He insisted that it was unrealistic for government to continue to subsidize petrol, as it had no economic value.
Sylva explained that subsidy was benefitting mostly the rich, rather than the poor and ordinary Nigerians. He said the policy is in line with the global best practice, as the government will continue to play its traditional role of regulation, to ensure that this strategic commodity is not priced arbitrarily by private oil marketing firms.
The importance and critical nature of petrol seems to be what is driving the condemnation and protests amongst many Nigerians. This is because the demand for petrol is not price elastic; which means, an increase in the price of petrol, does not necessarily produce a decrease in demand, due to the importance of the product in driving different sectors of the economy.
Explore the Nairametrics Research Website for Economic and Financial Data
One of the most critical issues that is generating intense debate on the deregulation policy of the downstream oil sector, vis–a–vis the sharp increase in the pump price of petrol is, why the increase?
Especially, when you consider that there has not been any major increase in the global price of crude oil, which is the main component in determining the pump price of petrol. In fact, the price of crude oil has been on a decline recently.
Recall that, Pipelines and Product Marketing Company (PPMC), a subsidiary of NNPC, in an internal memo, to oil marketers and stakeholders, increased the ex-depot price of fuel from N138. 62 per litre to N151.56 per litre. Some analysts have suggested that the increase could be attributed to the high exchange rate, following the devaluation of the naira against the dollar, and rising costs in the value chain. But the very critical question is, is the devaluation of the naira enough to drive such increase?
The Managing Director of 11 Plc (formerly Mobil Oil Plc), Adetunji Oyebanji, who also doubles as the Chairman of the Major Oil Marketers Association of Nigeria (MOMAN, had about a fortnight ago, said the retail pump price of petrol should be around N155 per litre.
In his analysis of the development, Professor Adeola Adenikinju, Director, Centre for Petroleum Energy Economics and Law, University of Ibadan said, “The major drivers of PMS price in a deregulated environment are the price of crude oil and the exchange rate. However, in many countries, governments also levy indirect taxes on petroleum products, to fund government road and other developmental projects, because of their inelastic demand.
“In Nigeria, NNPC gets the exchange rate at the official rate of about N386/$1. At that exchange rate, and given the current crude oil price of about $42.60 per barrel for Bonny Light, the current pump price of PMS of around N151.56 per litre is not justified by this analyst’s calculations, even if other cost components like distribution and marketing margins are included, except if BDC exchange rate or other charges are included.”
He expressed his support for the liberalization of the petroleum downstream sector, that will encompass opening up the sector to all players, not just NNPC. He said we need real competition in the market place, as that is the only way to bring effective competition and allow retail price to reflect marginal opportunity costs of PMS.
Going further he said, “We found ourselves in an embarrassing position as a major oil exporting country, that is also a major importer of refined products. A substantial part of what constitutes the costs of refined products now, including taxes in importing countries, shipping, finance costs, ports charges, lightering charges etc., are all avoidable costs, if we have a thriving and efficient domestic refinery sector.
“There is currently some opaqueness in the activities of the NNPC in the current subsidy system. The government is losing out on how much the NNPC transfers to the federation accounts for handling the government share of crude oil. NNPC is charging the government and Nigerians, not just the under-recovery amount, but also nebulous charges like costs of pipeline repairs, and estimates of crude oil losses.’’
On his own part, an Oil and Gas Expert, Olumide Ibikunle, disclosed that the global crude oil prices are majorly linked to the price of the final product, which are refined products like petrol, diesel, kerosene, and then foreign exchange. However, he admitted that there are other elements in the pricing template.
He said, “You need to realize that, there are other elements of the pricing template. I just mentioned 2 of the most important ones, which are the exchange rate and the crude oil prices. There are other items like international shipping cost, which is also a key part of it; lithering costs; freight costs, also depending on the availability of tankers for instance, if tankers are not available in the international market to ship refined products; the cost of moving refined products also increases.”
He said that at best, what we have is partial deregulation, as government is trying to guard against the volatility of the global crude oil prices, which changes on a daily basis. He pointed out that, it is not good to have prices of petrol fluctuate every day at the retail stations. Hence, the introduction of price modulation mechanism by government, to manage those volatilities.
Olumide also said, “These products are ordered in advance. I don’t need PMS today and place the order today. I place the order 2 or 3 months in advance. You must realize the dynamics at that time versus what it is now, might be different. so that consideration is also something that fits into the price consideration, and we must also factor that in.”
“So, if prices are N160 today, perhaps it is reflective of the $46 or $45 per barrel, that we saw 2 months ago. Hence, what you see in October or November, will be reflective of what you see in September,” he concluded.
It does seem the recent increase is driven mostly by the exchange rate, but inability to get our refineries working at optimal capacity, government taxes, and the inefficiencies in the system, which is superintended by the Federal Government.
Shell to focus on Nigeria, Gulf of Mexico and others as it seeks to cut 40% of costs
Shell is seeking to cut 40% of operating costs in its upstream oil and gas.
Royal Dutch Shell announced that it would focus its operations on Nigeria, Gulf of Mexico, The North Sea and a few others as it looks to reduce oil and gas production costs by 40%.
This was announced by Reuters in an exclusive report Monday after speaking with sources. Shell sources also reveal it would direct the saved costs into more renewable energy investments. The new project would be called Project Reshape, and would be implemented in all three divisions of the company with the aim of saving $4 billion due to the effect of the pandemic on the industry.
Nairametrics reported in July that Shell warned in its second-quarter 2020 outlook that it could write down between $15 billion – $22 billion in post impairment charges for Q2, due to the heavy effect of the pandemic in their business. Shell had earlier this year, shocked investors by cutting dividend by 2 thirds for the first time since World War 2.
A source told Reuters that the new reshape of the company would not only shake up the structure but also the culture and “type of company we want to be”, as the company fancies investments into the power and renewable sector with historical low margins, and also competition from other oil companies seeking to go green.
Shell is seeking to cut 40% of operating costs in its upstream oil and gas to make the new vision possible and focus on just key assets in Nigeria, Gulf of Mexico and others.
In the Downstream sector, Shell also plans on cutting costs in its fuel stations business with about 45,000 in service. A spokeswoman from the company announced that a cost competitive total strategic view of the organization is in place, “which intends to ensure we are set up to thrive throughout the energy transition and be a simpler organization.”
CEO, Van Beurden said Shell would deliver $billion in its cost savings drive by Marche 2021, which includes suspended bonuses and job cuts. Shell also plans to reduce it refineries from 17 to 10 and announced plans of selling 3.