The real cost of Nigerian petroleum

JANUARY 14, 2012
In December 10, 2011, if you stopped at the Mobil filling station on
Old Aba Road in Port Harcourt, you would be able to buy a litre of
petrol for N65 or $1.66 per gallon at an exchange rate of $1 to
N157 and four litres per gallon. This was the official price.
The Federal Government claims that this price was subsidised at
N73 per litre and that the true price of one litre in Port Harcourt
was N138 or $3.52 per gallon. It means that the government was
determined to remove the subsidy on petrol and sell at $3.52 per
gallon.
But if you had stopped at the Mobil Gas station on E83rd St and
Flatlands Avenue in Brooklyn, New York, USA, you would be able
to buy a gallon of petrol for $3.52. Both gallons of petrol would
have been refined from Nigerian crude oil. The only difference
would be that the gallon sold in New York was refined in a US
North East refinery from crude oil exported from the Qua Iboe
Crude Terminal in Nigeria, while the Port Harcourt fuel was either
refined in that city or imported.
The idea that a gallon of petrol from Nigerian crude oil cost the
same in New York as in Port Harcourt runs against basic economic
logic. Hence, Nigerians suspect that there is something irrational
and fishy about such pricing. What they would like to know is the
exact cost of a litre of petrol in Nigeria.
We will answer this question in four the simplest economic
terms, despite the government’s attempts to muddle up the
issue. What is the true cost of a litre of petrol in Nigeria?
The Federal Government has earmarked 445,000 barrels per day
for meeting domestic refinery products demands. This is not for
export. It is public goods reserved for internal consumption. We
will limit our analysis to this volume of crude oil. At the gate of
the Port Harcourt refinery, the cost of a barrel of Qua Iboe crude
oil is made up of the finding cum development cost ($3.5) and a
production/storage transportation cost of $1.50 per barrel.
Thus, at $5 per barrel, we can get Qua Iboe crude oil to the
refineries in Port Harcourt and Warri. One barrel is 42 gallons or
168 litres. The price of a barrel of petrol at the depot is the total
sum of the cost of crude oil, the refining cost, and the pipeline
transportation cost. Refining costs are fixed at $12.6 per barrel
and pipeline distribution costs at $1.50 per barrel.
The Distribution Margins (Retailers, Transporters, Dealers,
Bridging Funds, Administrative charges etc) are N15.49 per litre or
$16.58 per barrel. The true cost of one litre of petrol at the Mobil
petrol filling station in Port Harcourt, or anywhere else in Nigeria,
is therefore $5 +$12.6+$1.5+$16.6 or $35.7 per barrel. This is equal
to N33.36 per litre, compared to the official price of N65 per litre.
Prof. Tam David West is right. There is no petrol subsidy in
Nigeria. Rather, the current official prices are too high. Let us
continue with some basic energy economics.
The government claims we are currently operating our refineries
at 38.2 per cent efficiency. When we refine a barrel of crude oil,
we get more than just petrol. If we refine one barrel (42 gallons)
of crude oil, we will get 45 gallons of petroleum products. The 45
gallons of petroleum products consist of four gallons of LPG, 19.5
gallons of gasoline, 10 gallons of diesel fuel, four gallons of
aviation fuel, two-and-half gallons of fuel oil and five gallons of
bottoms. Thus, at 38.2 per cent of refining capacity, we have
about 170,000 bbls of throughput refined for about 13.26 million
litres of petrol, 6.8 million litres of diesel and 2.72 million litres of
kerosene/aviation fuel.
This is not enough to meet internal national demand. So, we send
the remaining of our non-export crude oil volume, which is
275,000 barrels per day, to be refined abroad and import the
petroleum product back into the country. We will just pay for
shipping and refining.
The government exchanges the 275,000 barrels per day with
commodity traders, about 90,000 barrels per day, to Duke Oil;
60000 barrels per day to Trafigura, 60,000 barrels per day to
Societe Ivoirienne de Raffinage in Abidjan, Ivory Coast and 65,000
barrels per day to unknown sources in a swap deal.
The landing cost of a litre of petrol is N123.32 and the distribution
margins are N15.49 according to the government. The cost of a
litre is therefore N138.81. This is equivalent to $3.54 per gallon or
$148.54 per barrel. In technical terms, one barrel of Nigerian
crude oil has a volume yield of seven per cent of AGO, 20.7 per
cent of petrol, 10 per cent of aviation fuel, 30.6 per cent of diesel,
32.6 per cent of per cent when it is refined.
Using a netback calculation method, we can easily calculate the
true cost of a litre of imported petrol from swapped oil. The gross
product revenue of a refined barrel of crude oil is the sum of the
volume of each refined product multiplied by its price.
Domestic prices are $174.48 per barrel for AGO, $69.5 per barrel
for petrol, $172.22 per barrel for diesel oil, $53.5 per barrel for
kerosene and $129.68 per barrel for petrol. Let us substitute the
government imported PMS price of $148.54 per barrel for the
domestic price of petrol. Our gross product revenue per swapped
barrel would be summed up as $142.32 per barrel. We have to
remove the international cost of a barrel of crude oil, which is
$107 per barrel, from this to get the net cost of imported swapped
petroleum products to Nigerian consumers. The net cost of
swapped petroleum products would therefore be $142.32 minus
$107 or $35.32 per barrel of swapped crude oil. This comes out to
be a net of $36.86 per barrel of petrol or N34.45 per litre.
This is the true cost of a litre of imported swapped petrol and not
the landing cost of N138 per litre claimed by the government. The
anti-subsidy Nigerian government pretends the price of swapped
crude oil is $0 per barrel, while the resulting petroleum product is
$148.54 per barrel or N138 per litre.
The government therefore argues that the ‘subsidy’ is N138.81
minus N65 or N73.81 per litre. But if the landing cost of the
petroleum products is at the international price of $148.54 per
barrel, then the take-off price of the swapped crude oil should be
at $107 per barrel. This is basic economic logic outside the
ideological prisms of the World Bank. The petroleum products
importers and the government are charging Nigerians for the
crude oil, while they are getting it free.
If the true price of 38.2 per cent of our petrol supply from our local
refinery is N33.36 per litre and the remaining 61.8 per cent has a
true price of N34.45 per litre, then the average true price is N34.03
per litre. The official price is N65 per litre and the true price with
government figures is about N34 per litre, even with our
moribund refineries.
There is therefore no petrol subsidy. Rather, there is a high sales
tax of 91.2 per cent at current prices of N65 per litre.
There are many expert economists and political scientists in the
Academic Staff Une
Nigerian domestic market.
They should not just embark on three days strike, after which the
government reduces the hiked petroleum prices by a margin.
They must embark upon in a sustainable struggle that will lead to
fundamental changes.