NNPC and Mr. President: Where is Our Subsidy?

I.  Introduction

I spent much of Independence Day USA, July 4, rummaging through NNPC's website http://www.nnpc-nigeria.com/, and have taken an excruciatingly hard look at the sections of its "Report on Operations 2002" on that website. 

What I was looking for was our national fuel subsidy.   Not surprisingly, I could not find any. 

Like INEC's website of yore http://www.inecnigeria.org which revealed the 4-12, 4-19 and 5-3 elections shenanigans, this NNPC report also reveals more than it expects to.  The possibility of easily probing Nigerian government's figures via the Internet is certainly one of the unintended "dividends of democracy"  -  that is for those who have the patience to wade through their numbers.

The vulture, yes, is a patient bird.

II.  Interpreting NNPC's Operations 2002 Report

According to NNPC itself (see http://www.nnpc-nigeria.com/oprpt_crude.pdf), in the calendar year 2002, it purchased 163,610,046 barrels of crude oil from the Federation for a total cost of $2,944,980,828 at US$18.00 per barrel at an exchange rate of N110/US$, meaning that it spent N323,947,891,080 (that is N323.95 billion).    Out of that amount of crude purchased, 48% (that is, 78,949,463 barrels, with a cost of  N156,319,936,740 or N156.32 billion)  was allocated for domestic refining, while 52% (that is 84,660,583 barrels, with a cost of N167,627,954,340 or N167.63 billion) was exported.    It could not refine all its domestic crude because, according to NNPC's own information, in the year 2002, the Kaduna Refinery operated at 31.80% average capacity utilization, the Warri Refinery at 48.29% and the Port Harcourt Refineries were at 60.6% capacity utilization.

The export unit price of its unutilized crude was at the prevailing world market price, yielding US$2,125,414,309.78 (that is N269.72 billion figure given by NNPC, roughly $25.11 per barrel).  Thus NNPC made a profit of US$ 601,936,746 (N66.21 billion, at N110/US$) on the sale of its unutilized crude at a favorable $7.11 price margin. 
 
Of course, that profit was not enough to finance its domestic-use crude, meaning that to break even, NNPC needed somehow to source for N90.11 billion  (that is N156.32 - 66.21 billion) from sales profits of its domestic refined products, from imported refined products and from any other commercial activities.

Now of the 13,899,141,270 liters (that is 13.9 billion liters) of general refined products from all sources sold to marketers by NNPC in 2002, 67% (or 9,312,385 liters) was petrol (PMS), 12.40% (or 1,722,834 liters) was kerosene (DPK), 18.47% (or 2,566,983 liters) was diesel and 2.13% (or 296,939 liters) was fuel oil.   The total depot revenue paid to NNPC was N279.57 billion, made up of N123.75 billion from imported refined products and N155.82 billion of domestically refined general products.  This gives an average marketers' price of N20.11 per liter for all of these products.  In addition to the domestically refined general products, petrochemical sales, special products sales and proceeds from fuel oil export sales (all from domestically refined crude) yielded N55.52 billion.

If we add to these two amounts (that is N279.75 + 55.52 =  N335.27 billion)  the revenue from NNPC's crude export (N269.72 billion) and other commercial revenues (N31.27 billion), we have a total revenue of N636.06 billion for NNPC alone in the year 2002.  (Some numbers have been rounded up.)   That is like our national budget of recent years!

If we now deduct the amount of N323.95 billion for crude oil purchase from the federation, that gives NNPC a net revenue of N312.12 billion.

However, in all the above net revenue, NNPC incurred three major charges that have so far not been considered:

(i) operating costs, which it put at N80.06 billion  (See Table 1 below).  Note that there are items in this table that can conceivably be pared down to reduce these operating costs. [For comparison, Rivers State budget for 2003 is N68 billion, and Ebonyi N12.616 billion.  In fact, in financial terms, NNPC is bigger than each state of the federation!]

(ii) asset replacement reserve, which it put at N12.00 billion

(iii) product import cost, which it put at N192.56 billion (See Table 2). Again there are items in this table that are discretionary, and which a government agency such as NNPC can reduce significantly.

In any case, the total of these three costs was N284.62 billion.   That still leaves NNPC with N27.50 billion in the black, minus some other minor charges.

So where might the need for subsidy that the government has been talking about arise from?  Looking at the figures above and Table 2, it could come about from two sources:

(i) while the total revenue from the sale of refined products obtained from the refining of  domestic crude is N211.34  billion (that is N155.82 + N55.52 billion), the cost of that crude is N156.32 billion, yielding a pre-operating expense charge profit of N55.02 billion in that arena. 

(ii) While the revenue from sales of imported refined products was N123.75 billion, the cost of those products was N192.56 billion, leaving a shortfall of N68.81 billion. (This amount was N91.58 billion in 2001).  If we subtract the profit of N66.21 billion from sale of exported unutilized crude oil, this particular shortfall reduces to N2.60 billion.

Thus when one considers ONLY total crude utilization AND total refined products revenue and costs, NNPC should be in the black to the tune of N52.42 billion.

Unfortunately, it is probably this N68.81 billion (or thereabout) shortfall that the president Obasanjo is alluding to when he is quoted recently as stating that:

QUOTE

"Subsidising fuel to the tune of N12 per litre is a wasteful way of spending our money", noting that the N250 billion subsidy per annum could be saved and used in providing education, health, water supply, roads, security and food.

President Obasanjo explained that the age of the four refineries in the country and their lack of maintenance in the past, made them to produce only 13 million litres per day, below the national consumption rate of 30 million litres per day.

Government's continued importation of the shortfall of N17 million litres per day, he noted, is not only too costly, but also benefiting only a few rich individuals and neighbouring countries through smuggling.

UNQUOTE

A quick calculation using the president's subsidy numbers above puts the annual subsidy at N74.5 billion (N12 per liter times 17 million liters per day times 365 days per annum) and not N250 billion.

Obviously, somebody is not giving Mr. President the whole economic/financial picture of NNPC's operations - or possibly the president is refusing to see it.

III.  Epilogue

I urge the reader to take a look at the above numbers and do his or her own number-crunching.   My own impartial and objective analysis of NNPC's own figures shows that there is NO SUBSIDY WHATSOEVER being provided by the government if the total picture - rather than just imported refined products - is taken into consideration.

In fact, NNPC is in the black by anywhere from N27 billion to N52 billion, which operating profit can even be substantially increased if certain charges taken as presented in Tables 1 and 2 are substantially reduced.  The savings can then be passed to the Nigerian citizenry, to REDUCE the pump price of fuel by a total of N25 - N100 billion per annum (reducing old pump price by N2 - 7 per liter) and still make NNPC have enough "profit" as a public enterprise should.

This is why I find it incredible that the NLC is contemplating agreeing to a N28 or even N30 per liter pump price for petrol from N26, when in fact it should be negotiating for a DECREASE to N24 or even to N21.  Oshiomole needs to know that quick!

I rest my case as I wait to be corrected.

_____________________________________________________________________

Table 1:   NNPC Actual Budget Performances 2002, 2001

[see Table 14 of NNPC 2002  Operations Report]

ITEMS

2002(Millions,Naira)

2001(Millions,Naira)

Corporate Headquarters
17,233.99

17,250.38

Common Services *
12,115.45

12,126.95

Refineries
17,075.54

13,358.11

EPCL
8,408.69

9,014.30

Upstream
8,793.97

6,816.97

PPMC
15,806.23

15,481.63

NETCO
622.44

397.23

Operating Cost Before Product Import
80,056.31

74,445.54

Product Import
148,700.39

140,379.85

Sub-Total

228,756.70

214,825.39

Asset Replacement Reserve

12,000.00

12,000.00

TOTAL

240,756.70

226,825.39

*Common Services include staff pension & gratuity, cost of
medical services, plant and staff insurance, zonal
administrative services and staff training

Table 2: Cost of Petroleum Product Imported and Sold 2002, 2001

[see Table 16 of NNPC 2002 Operations Report]

COSTS / RECEIPTS

2002(Millions,Naira)

2001(Millions,Naira)

Cost of Import, Cost of Freight Lagos
147,875

154,974

Sales Tax To Government
0

17,903

Nigerian Ports Authority Charges
3,869

3,056

Demurrage
2,544

2,673

Production & Distribution Costs
8,767

24,046

Plant & Maintenance Costs
17,413

16,099

NNPC Overhead plus Margin
12,093

13,518

Sub-Total

192,561

232,269

Less Receipts from Sales of Imported Products
123,750

140,686

ShortFall (January - December)
68,811

91,583