FACULTY: LAW
COURSE TITLE: ENERGY AND PETROLEUM LAW
TABLE OF CONTENTS
Acknowledgements
Introduction
What
is petroleum subsidy?
An
overview of petroleum subsidies in Nigeria.
Who
benefits the most?
Are
petroleum subsidies good for National Development?
What
plans has the government Announced to reform the petroleum sector?
Who
would be the winners and losers if the transformation of the petroleum sector
is carried out?
What
are Nigerians stand to gain from the transformation of the petroleum sector.
INTRODUCTION
If
any sector of our society is in dire need of reform, it is the petroleum
industry. Over the years government has introduced various measures to support
the industry and keep its products affordable for Nigerians.
So far over 1.123 trillion naira is being spent
annually with nothing concrete to show for it. In the main the benefits accrue
only to a for Nigerians, because the process has been abused and is rife with
corruption.
It doesn’t make sense to continue supporting such a
scheme.
So for us it not about subsidy
removal, it is about transformation. Transforming the oil industry to better
perform in international best practice by restricting government involvement to
regulation.
Encouraging competition and allowing
petroleum products find their true market prices.
We should support the removal of the
subsidy and the passage of the petroleum to totally transform the petroleum
sector and make it profitable for the
government and people. When this is done, trillion of naira that government spend;
in supporting the industry will be saved and redirected to sectors that most benefit the poor.
WHAT IS FUEL SUBSIDY?
Generally, subsidy refers to the
money paid, usually by government, to keep prices below what they would
otherwise be in a free market system such intervention by government leads to a
distortion that has the potential of imposing large economic costs. More
specifically, fuel subsidy is the difference between the price a consumer pays
for the pump price of fuel and the actual total cost of producing or importing
it.
For instance, the price of petrol is
currently pegged at N65 per litre but the actual cost of supply is about N138
per litre at crude oil price of $110 per barrel. Therefore, the subsidy element
is about N73 per litre. This means that for every litre of petrol purchased at
the official price of N65, the government contributes N73. it should be noted
that only petrol and kerosene currently enjoy government subsidy, and that
imported and locally proceed. Petroleum products enjoy these subsidies.
Government expenditure on this
amount to about N1.123 trillion naira annually.
AN OVERVIEW
OF PETROLEUM SUBSIDIES IN NIGERIA
Nigeria
like many countries around the world, have used subsidies over the years to
promote a range of social and economic objective. Like many developing nations,
it has many priorities vying for support. These include poverty allegation,
infrastructural development, health and
education.
Given these competing demands,
deciding where to allocate public financial resources is one of the governments
most important and difficult tasks.
The people have a vital stake in
these decision, but unfortunately there is often little public debate about what should be subsidized. Even when
citizens are desirous of participating in discourse on the issue, information
about the costs and who benefits is often scarce. In most cases however, the
ordinary man is busy making living and raising families with little time to devote
to monitoring the activities of government.
However, the need for effective
oversight of government’s expenditure cannot be overemphasized. This is even
more so because subsidies have major
impact on social equity, economic growth and environmental preservation.
For decades now, Nigeria has subsidized
the cost of petroleum producers. In fact the government spends more on
subsidies to fuel than it does on capital expenditure for public infrastructure
health and education. It is estimated that government spends about N1.123 trillion
annually on fuel subsidy. Over the years government has progressively reduced
the subsidy on diesel, petrol and Kerosene. Presently, there is zero subsidy on
diesel (AGO), one premium motor spirit (petrol and House hold kerosene are still
being subsidized.
WHO BENEFITS THE MOST?
In debating the merits of Nigeria’s
fuel subsidy it is important to understand who benefits the most form the
program. Contrary to popular bereft, it is the rich not the poor who
dis-proportionally benefit from Nigeria’s fuel subsidy. With the government
subsidizing the market to keep domestic fuel prices artificially lo, it is
those consume the most that have a greater benefit form the subsidy. Nigeria’s
poor rely primarily on public transportation as such their per capital fuel
consumption is significantly less than the country’s rich, who generally use
private vehicles.
Neighboring countries also benefit
significantly form Nigeria’s fuel subsidy through smuggling. It is a fact that
chose in the villages who never travel anywhere do not consume fuel whatsoever.
Their benefit form the subsidy is almost zero. However because of the subsidy
the government is unable to provide basic amenities that would impact their value
more directly.
The urban poor also don’t benefit as
much.
Illustration:
Ibrahim Musa a grate man takes a bus
from federal government Housing Estate Ludge F.C.T to Maitama and back. It
takes a bus about four litres to do this journey. This but take sixteen people
fuel subsidy on the four litres of fuel used is n302.8 if the divide this by 16
people and it gives you N18.93 that means today Ibrahim Musa who one of the
sixteen people in the bus gets N18.93 as subsidy.
ARE PETROLEUM SUBSIDIES GOOD FOR
NATIONAL DEVELOPMENT?
Fuel subsidies affect the economy in
several ways. A readily observable effect is the cost on the government budget,
but there are more subtle and equally important impacts on the economy. By
artificially lowering the price of certain type of energy subsidies encourages
over consumption and inefficient use of those resources. Lower prices also
alter investment decisions by discouraging energy diversification and reducing
the incentive for energy supplier to build new infrastructure.
Giving that we
import most of the petroleum products we use, Nigeria must buy most of its fuel at international market
prices. Selling that field more cheaply domestically results in huge losses for
the NNPC that must be funded by the government (i.e the taxpayer), resulting in
a major financial burden on the whole economy.ss
Large subsidies on imported oil make
Nigeria’s fiscal position highly vulnerable to changes in global energy prices.
When international oil prices rice dramatically, like they always do, the
government is forced to either drastically increase prices- which can be politically
difficult and cause a sudden rise in inflation or make corresponding increases
to its subsidy budget, which can be crippling for the economy. If the
government chooses to maintain subsides.
At times of high oil prices, it must
borrow additional funds or cut expenditures to other programs. The volatile
market and uncertainty about the government’s financing needs increases the
cost of government borrowing, adding to future debt repayments.
Most damaging is the fact that it
takes funding away form infrastructure, health, education and agriculture. The
negatively impact on development and economic competitiveness in the long-term.
WHAT PLANS HAS THE GOVERNMENT ANNOUNCED
TO REFORM THE PETROLEUM SECTOR?
Nigeria: Imminent Adoption of The
Long-Awaited Petroleum Industry Bill
It has now been five years-during
which licensing rounds, contract renewals, and investment have been put on hold-since the concept of a new
petroleum Act merged in Nigeria. President Jonathan recently announced that the
long-awaited petroleum Industry bill, which is reportedly aimed at major reform
of the Nigeria oil and gas industry, will be submitted shortly to the Nigerian
National Assembly to be passed into law.
The
main objectives of the envisaged legislative reform are as follow:
Establish
a new tax framework that encourages further investment in the petroleum
industry while optimizing accruable revenues to the government.
We have yet to see the final version
of the new fiscal regime that has been fiercely debated over the past four
years between policy makers and industry players.
On the basis of the last publish
version of the petroleum industry bill, oil companies will pay tax on
changeable profits as follows: 50 percent for on share and shallow water areas
and 20 percent for frontier acreage and deep water areas.
Establish a commercially oriented and
profit-driven nationaloil company (‘NOC’) to which certain assets and liabilities of the existing state-owned.
Nigerian national petroleum corp will transferred. The federal government aim
is divest a certain, as yet
unidentified, portion of shares in the NOC to the public within three years.
Deregulate and liberalize the
downstream petroleum sector. With the passage of the petroleum industry bill,
the Nigeria downstream sector would largely be freed from government
regulations, with less interference from the local authorities.
Under the new regime there will be
zero subsidy on petrol and diesel, however, house hold kerosene used mostly by
the poor will continue to be subsidized.
WHAT ARE THE LIKELY BENEFITS THAT WILL ACCRUE FROM THE TRANSFORMATION OF THE
PETROLEUM SECTOR?
Against
the backdrop of the recent debate on subsidies on premium motor spirit commonly
known as petrol) It is pertinent to highlight, in details some of the pertinent
questions that have arisen about what deregulation in this sector means, why
the subsidy on PMS was removed, what the
subsidy removal man in tangible terms, and some of the thing government can and
will, do with the savings that will accrue from this policy.
Frequently
asked questions on deregulation of the downstream petroleum sector and removal
of petroleum subsidy.
1. What is meant by the deregulation of
the downstream petroleum sector?
Deregulation of the downstream
petroleum sector refers to the reduction, or removal of government controls,
nits and regulations that research free operational activities in the sector.
This does not marinara complete elimination of the laws that government smooth
operations of activities in the downstream oil sector rather.
2. What is the rationale behind the
government’s plan to deregulate the downstream petroleum sector? Deregulation
of the downstream oil sector will improve the efficient use of scarce economic
resources by subjecting decisions in the sector to the operations of the forces
of demand and supply. This will attract new sellers, buyers and investors into
the market, thereby increasing competition, promoting overall higher
productivity and consequently, lowering prices over-time. The ultimate effect
of this chain of activities so increased gains for the people of Nigeria who
would be getting the most out of their natural resources. For example,
following governments deregulation in the telecommunication, there has been a
reduction in all tariffs.
Deregulation has the potential of
serving as the catalyst for the total transformation of Nigeria
WHO WOULD BE THE WINNERS AND LOSERS IF
THE TRANSFORMATION OF THE PETROLEUM SECTOR IS CARRIED OUT.
An already stated above, the
benefits of fuel subsidies accrue mainly to high-income groups and their cost
falls on the whole tax paying population. As a result, fuels subsidies are a
regressive policy with the poor households paying relatively more and receiving
fever benefits than wealthier ones. The removal of subsidies would therefore
have long term economic benefits for the economy as a whole including the poor.
Nonetheless, removal of subsidies
would have some short-term negative impacts on some groups. Those likely to be
most impacted by the removal of subsidies in Nigeria would be high-income
groups in urban and rural environments as they consume the most petroleum
products. These groups would most likely reduce their overall consumption in
the short-term in order to mange higher fuels price.
In general, rural and lower-income
groups consumer larger portion of agricultural goods, whose price is less
sensitive to changes in fuel price. However, the urban poor are likely to be
uninerable to fuel price rises. This is probably because, they commute more processed
foods and goods.
In the longer term, a higher
petroleum price is unlikely to have harmful effects on the poor because it
would be compensated by the economy wide benefits of subs idly reduction
improved fiscal sustainability, increases social spending by the government,
more efficient allocation of resources and increased investment.
3. Is
rehabilitating the refineries part of the strategy for deregulating the
downstream petroleum sector?
Yes in the last 12 months the
country’s refineries have worked relatively well, and tis has led to increased
capacity utilization from 30% to the current 60%. This means that for 12 months
now, the country’s refined petroleum production capacity has been steadily on
the increase. To further improve on this to an internationally accepted level
of 90% capacity utilization in the next 24 months, the original contractors responsible
for building the refineries have been contracted to carry-out a turnaround
maintenance (TAM) of these refineries.
4. Are there countries that have
deregulate their downstream petroleum sector and removed subsidies?
Yes, there are examples of countries
that have removed petroleum subsidiaries, including oil producing countries. In
particular. Only recently Ghana announced that it would re removing fuel
subsidies in order to sustain its fiscal consolidation.