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Energy

Deregulation: In whose interest?

Subsidy removal would free up the much-needed funds to be channeled into critical sectors of the economy.

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Amid the many shocks Nigerians have had to deal with in 2020, the recent increase in fuel price by the Federal Government is perhaps the bitterest pill to swallow.

Pipelines and Product Marketing Company (PPMC), a subsidiary of the Nigerian National Petroleum Corporation, (NNPC), issued a memo on Wednesday stating that effective immediately, the price of fuel would increase from N148 to N151.56k.

This is coming at a time the new electricity tariff regime is kicking off, having been postponed twice from April 1, 2020, to take full effect on September 1, 2020. This, according to the government, is in the best interest of all.

READ: Kachikwu advocates refineries repair as petrol landing cost reaches N180 per litre

But how is an increase, any kind of increase, in the interest of Nigerians?

Recall that over the last couple of months, the government had increased the pump price from N121.50 to N138.60, N143.80 and N145 per litre at different times, on the advice of the Petroleum Product Pricing Regulatory Agency (PPPRA), after reviewing market fundamentals and operating costs.

Fuel price had started the year at N145 per litre, and only crashed down to N125 in March due to the global crisis which led to a fall in demand, and subsequently a fall in price.

It was at this point that the government effectively removed fuel subsidy since the landing costs had dropped below the pump price, and there was no longer need to subsidise the price for Nigerians.

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Before the crash

Prior to the global crash, the government paid the difference between the Expected Open Market Price (“EOMP”) and the approved retail price of petrol (known as fuel subsidy), in order to make the produce available to the populace at an affordable price, irrespective of the prevailing market forces.

For instance, where a pump price of N145 had been agreed on, and the landing cost of fuel is put at N143, the marketers cannot be able to sell at N145 per litre since they still have to factor in other costs of operations, and transporting the fuel to their stations.

With the government bearing a part of the costs in the subsidy plan, the marketers can sell at the general agreed price, without running at a loss, while the consumers get to buy the product less than the actual costs.

READ: CBN: Unconventional monetary policies needed to grow and diversify the economy 

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With this system, a removal of subsidy would almost certainly result in an increase in fuel price except in situations like we saw in March where the landing price had already dropped below the pump price. We can see an example of this in the spike in fuel price which took place immediately former President Goodluck Jonathan removed fuel subsidy in January 2012.

Overnight, fuel price had gone from N65 to N141. After several protest marches across the country, the price was later brought down to N97 in a partial subsidy arrangement where the government could spend less on subsidy and free up funds to channel into other sectors of the economy.

This however, was not the case this year, as the government delayed the removal of subsidy until a time when the landing costs of fuel had fallen below the pump price. The result of this was that Nigerians enjoyed a reduction in fuel price immediately, with the price only increasing when the global oil market picked up and landing costs of fuel went up again.

READ: FG abolishes fuel subsidy regime as full deregulation sets in

Given the current trends in the global market, a reduced pump price will only be possible if we return to the years of subsidy regime, with the attached controversies, smuggling, fuel scarcity and the resulting long queues at petrol stations.

Thankfully, we are far from the era of queuing long hours to buy fuel. The President recently directed a nationwide mass metering programme for electricity consumers in the country and approved a one-year waiver of import levy on electricity meters to speed up the process and reduce the cost of the metering for Nigerians.

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The government is working with the Electricity Distribution Companies to ensure increased electricity supply and improved quality of service. This will protect Nigerians from arbitrary and estimated billings, while improving living standards and reducing costs of business operations for entrepreneurs.

Given that the government spent an estimate of N10 trillion spent on Fuel subsidy between 2006 and 2018, one can see that subsidy removal would indeed free up the much-needed funds to be channeled into critical sectors of the economy.

For instance, the COVID-19 pandemic has exposed serious gaps in the health sector, and there is no doubt that some additional funds would do wonders for the sector.

With the subsidy removed earlier this year, fuel price is now subject to the market forces of demand and supply which will allow all market players to operate on fair grounds. Eventually, competitive pricing will follow this realistic pricing system, and Nigerians will be better for it.

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Article written by John Adebayo, a public commentator.

Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform.To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

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Columnists

Why the proposed Borno power plant may not materialise 

The glaring security challenge cannot be overlooked in considering a major power plant project in Borno State.

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Only a few days ago, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, led a delegation to Borno State to meet with the Governor of the State, Babagana Zulum.

In the conversation with Zulum, Kyari promised the establishment of a gas-fired power plant in Borno State within a maximum of 4 months to solve the recent blackouts that resulted from insurgents cutting off Borno from the national grid since January this year.

In Kyari’s words, “We have talked to each other and we think it’s very possible to establish a dedicated power plant in Maiduguri which will serve current needs of power supply not only in Maiduguri but to other parts of the neighbouring cities.”

Yet, there is a significant possibility that the power plant promised by Kyari may not materialize for many reasons, the first of which is security. In the meeting with Kyari, Governor Zulum had noted: “The ongoing insurgency has cut off the entire Borno from the national grid in the last three months. We put all our efforts and restored it back… but unfortunately, after 48 hours, the same group of insurgents went back and destroyed the main tower again.”

This glaring security challenge cannot be overlooked in considering a major power plant project in Borno State, particularly noting that the State and its surrounding communities have been the hot zone of insurgent and terrorist attacks by Boko Haram insurgents since 2009. Borno, Yobe and Adamawa have particularly been states where the insurgents have set up shop and carried out various activities, including kidnap, extermination of entire communities, burning of markets and religious buildings and the attack on the United Nations compound, in each case claiming tens or hundreds of innocent lives.

One report reveals that at least 37, 500 people have been killed by the insurgent group since May 2011, a modest number, some say. Also, till date, some of the secondary school girls kidnapped in the April 2014 Chibok incident are yet to be returned to their families. It is then bewildering how Kyari intends to see to the construction and operationalizing of this gas power plant.

Additionally, while the Minister of Petroleum for State, Chief Timipre Sylva, announced last year about the discovery of oil and gas deposits in the North, we have not seen any exploration and production kick-off. It then begs the question of where the gas for the Borno power plant intends to be sourced. The only gas pipeline that runs through the North – the AKK- is still in its first phase of construction out of three phases and has been earmarked at the earliest, to be completed in 2023 – not counting the typical delays the project will experience along the way.

Should the AKK by some stroke of luck materialize much earlier than the target date, the pipeline route is a considerable distance from Borno. It runs the route of Ajaokuta-Abuja-Katsina-Kano, its endpoint, a striking 481km from Borno State. Thus, there would have to be construction of a tie-in pipeline almost as long as the AKK from Kano to Borno State to get gas to Borno.

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Optimists may reference the oil and gas discovery in the North and how production may start soon, thus obliterating the need for a 481km pipeline. This optimism however is not well-founded, as insecurity has been shown to be a major risk to oil and gas projects everywhere in the world. One of the major reasons the Trans-Saharan Gas Pipeline proposed to run from Nigeria to Algeria was abandoned was due to security challenges posed by Nigeria’s Movement for the Emancipation of the Niger Delta (MEND), the Tuareg guerilla movement in Niger and other insurgent groups along the proposed route of the pipeline.

These increased the risks across board, including for completion and operations through the lifecycle of the project. As such, failing to fix the security threats in northeast Nigeria makes any proposed gas plant project a pipe dream. Transporting gas via LNG trucks is not a better option, given that the drivers and their cargoes would be in danger of being kidnapped, shot at or bombed. The risks for both personnel and investors are high.

In any event, promising a power plant in 4 months for the people of Borno is unconscionable, since a typical gas power plant will take between 1 to 6 years to construct in relatively peaceful regions. What the government needs to do instead of making promises it cannot keep is to work arduously to fix the security challenges in Northern Nigeria and at the same time consider using decentralised solar power to provide power supply to homes, government institutions, schools and businesses while plans to produce gas in the region or transport gas to it are underway.

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Business News

FG to open LPG distribution channels in all local governments

The project is targeted at reaching 99 million women and households within three years cutting across 774 LGAs in the federation.

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Nigeria's Natural Gas Liquids

The Federal Government disclosed that it is planning to launch Liquefied Petroleum Gas distribution channels in every local government in Nigeria.

This was disclosed by the Minister of State for Petroleum,  Timipre Sylva, at the inauguration of the Nigerian Women for Liquefied Petroleum Gas (LPG) Project, organised by the National Centre for Women Development (NCWD), Zigma Gas Limited and the Federal Ministry of Petroleum Resources on Friday in Abuja.

READ: LPG: Nigerians paid more to refill 12.5kg gas cylinders in January 2021

What the minister said

“The ministry is targeting to ameliorate the energy challenge in Nigeria and clean cooking gas is key in this regard because 70% of greenhouse emissions are caused by deforestation.

“This LPG project will enable us to empower rural women to use a more cleaner energy source for cooking.”

Mrs Mary Ekpere-Eta, DG NWCD added that the scheme would benefit Nigerian women and youths as it will support the efforts of the Federal Government in achieving its 2023 sustainable energy targets.

READ: World’s biggest oil company, Saudi Aramco pays a whopping $75 billion in dividend

“The project is targeted at reaching 99 million women and households within three years cutting across the 120,000 polling units and all wards in the 774 LGAs in the federation.

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“The first phase of this project will be targeting 11 states – Katsina, Sokoto, FCT, Ebonyi, Plateau, Adamawa, Borno, Bayelsa, Cross River, Imo and Ogun,’’ she said.

READ: NNPC expects $8.7 billion investments from refineries, pipeline rehabilitation

What you should know 

The FG has launched other policies aimed at maximising Nigeria’s internal gas usage, Nairametrics reported in February that the FG plans to convert one million cars to gas at no cost, in its autogas initiative.

 

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