A revealing, fresh, factual perspective to the ongoing debate on fuel subsidy. Dr. Izielen Agbon, a petroleum engineer and an economist, here says there is no fuel subsidy rather, Nigerian petrol is over prized at N65 a litre.ON 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 $1.57 per gallon at an exchange rate of $1/N157 and 3.875 litres per gallon. This is the official price. The government claims that this price would have been subsidized at N74/litre and that the true price of a litre of petrol in Port Harcourt is N139/litre or $3.35 per gallon. They are therefore determined to remove their subsidy and sell the gallon at $3.35.But, On December 10, 2011, if you stopped at the Mobil Gas Station on E83rd St. and Flatlands Avenue in Brooklyn, New York, U.S., you would be a 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 in New York was refined in a U.S. North East refinery from Nigerian crude exported from the Qua Iboe Crude Terminal in Nigeria while the Port Harcourt gallon was either refined in Port Harcourt or imported. The idea that a gallon of petrol from Nigerian crude oil would cost nearly 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 one litre of petrol in Nigeria. We will answer this question in the simplest economic terms despite the attempts of the Nigerian government to muddle up the issue.What is the true cost of a litre of petrol in Nigeria' The Nigerian government has set aside 445,000 barrels per day throughput for meeting domestic refinery products demands. These volumes are not for export. They are public goods reserved for internal consumption. We will limit our analysis to this volume of crude oil. At the refinery gate in Port Harcourt, the cost of a barrel of Qua Iboe crude oil is made up of the finding /development cost($3.5/bbl) and a production/storage /transportation cost of $1.50 per barrel. Thus, at $5 per barrel, we can get Nigerian Qua Iboe crude to the refining gates at Port Harcourt and Warri. One barrel is 42 gallons or 159 litres.The price of one barrel of petrol at the depot gate is the sum of the cost of crude oil, the refining cost and the pipeline transportation cost. Refining costs are at $12.6 per barrel and pipeline distribution costs are $1.50 per barrel. The distribution margins (retailers, transporters, dealers, bridging funds, administrative charges etc) are N15.49/litre or $15.69 per barrel. The true cost of one litre of petrol at the Mobil Filling Station in Port Harcourt or anywhere else in Nigeria is therefore ($5+$12.6+$1.5+$15.7) or $34.8 per barrel. This is equal to N34.36 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, four gallons of jet fuel/kerosene, 2.5 gallons of fuel oil and five gallons of bottoms. Thus, at 38.2 per cent of refining capacity, we have about 170,000 barrels of throughput refined for about 2.57 million litres of LPG, 12.55 million litres of petrol, 6.43 million litres of diesel and 2.57 million litres of kerosene/jet fuel, 1.61 million litres of fuel oil and 3.22 million litres of bottoms. This is not enough to meet internal national demand. So, we send the remaining of our non-export crude oil volume (275,000bpd) to be refined abroad and import the petroleum products back into the country. We will pay for producing the crude oil, shipping the crude oil to the foreign refineries, refining the crude oil and shipping the petroleum products back to Nigeria.The Nigerian government exchanges the 275,000bpd with commodity traders (90,000bpd to Duke Oil, 60,000 barrels per day to Trafigura (Puma Energy), 60,000bpd to Societe Ivoirienne de Raffinage (SIR) in Abidjan, Ivory Coast and 65,000bpd to other 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 (N123.32+N15.49) or N138.81. This is equivalent to $3.35 per gallon or $140.74 per barrel. This is the price that the Nigerian government wants its citizens to pay. However, the landing cost is made up of the international cost of a barrel of crude oil, the shipping cost of the crude oil to the foreign refineries, the refining cost and the shipping cost of the refined products back to Nigeria (North West Europe to West Africa - WS100). Let us explain further.A barrel of Nigerian Qua Iboe Crude oil cost $107 at the North European Rotterdam market. In technical terms, one barrel of Qua Iboe crude oil has a volume yield of 6.6 per cent of AGO, 20.7 per cent of gasoline, 9.5 per cent of kerosene/jet fuel, 30.6 per cent of diesel, 32.6 per cent of fuel oil /bottoms 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/barrel for AGO, $68.53/barrel for gasoline (PMS or petrol), $172.22/barrel for diesel oil, $53.5/barrel for kerosene and $129.68/barrel for fuel oil. Our gross product revenue per swapped barrel would be (174.48*0.066 +69.55*0.207+ 172.22*0.306+ 53.5*0.095+129.68* 0.326) or $125.20 per barrel. We have to remove the international cost of a barrel of Nigerian crude oil ($107 per barrel) from this to get the refining gross margin of imported swapped petroleum products. The refining gross margin is the difference between the gross products revenue (the sum of the volume of each refined product multiplied by its price) and the cost of the crude oil. The refining gross margin of swapped petroleum products would therefore be $125.20 -$107 or $18.20 per barrel.The total cost of the petroleum products from swapped crude oil is the sum of the cost of production/storage, pipeline distribution cost, the cost of shipping the crude to the foreign refineries, the gross refining margin and the distribution margins. It cost $5 per barrel to produce and store the crude oil and $1.50 per barrel pipeline distribution cost to get it to the Qua Iboe Crude Terminal. The freight cost to Europe (the furthest refinery is Trafigura) is $2.50 per barrel. The refining gross margin is $18.2 per barrel and the distribution margins (retailers, transporters, dealers, bridging funds, administrative charges etc) are N15.49/litre or $15.69 per barrel. Thus the total cost of the imported PMS is ($5+$1.50+$2.50+$18.20 +$15.69) or $42.89 per barrel. This comes out to be a total cost of N42.36 per litre. This is the true cost of a litre of imported swapped petrol and not the landing cost of N139 per litre claimed by the government.The Nigerian government did not sell the 275,000 barrels per day to Duke Oil, Trafigura (Puma Energy), Societe Ivoirienne de Raffinage (SIR) in Abidjan, Ivory Coast and other commodity traders at international prices in its swap deal. Rather, it wants Nigerian citizens to pay for the swapped oil at this price. This is the economic logic defined by the ideological prism of the World Bank. The pro-subsidy Nigerian government imbeds the cost of the swapped crude oil at international prices into the landing cost of $140.74 per barrel (N139 per litre). The government therefore argues that the 'subsidy' is N139-N65 or N74 per litre. By imbedding the cost of crude oil at international prices in the landing cost, the Nigerian government is trying to sell the crude oil to Nigerian citizens (including indigenes of oil and gas host communities in the Niger Delta) at international prices as if they are foreigners in their own country with no claims whatsoever to their natural resources. This is the political implication of the government economic calculations and its demand for the removal of a non-existent petrol subsidy. We are foreigners in our own motherland. Therefore, we must pay for Nigerian crude oil like foreigners do.So let us conclude this basic economic exercise. If the true price of 38.2 per cent of our petrol supply from our local refinery is N34.36/litre and the remaining 61.8 per cent has a true price of N42.36 per litre, then the average true price is (0.382*34.36+0.618*42.36) or N39.30 per litre. The official price is N65 per litre and the true price of petrol in Nigeria is N39.30 per litre (even with our moribund refineries and imports). There is therefore no petrol subsidy. Rather, there is a high sales tax of 65 per cent at current prices of N65 per litre.The labour leaders meeting the President should go with their economists. They should send economists and political scientists as representatives to the Senate Committee investigating the petroleum subsidy issue. The labour leaders should not let anyone get away with the economic fallacy that Nigerians must pay international prices for Nigerian crude oil as if we are foreigners in our own country. The government should explain why it wants to sell Nigerian crude oil at international prices in a domestic market. It should explain why we must become foreigners in our own country because it promises to develop the country with the excess funds just like the Abacha regime had promised to do.We have done this simple economic analysis of the Nigerian petroleum products market to show that there is no petrol subsidy what so ever. In the end, this debate on petrol subsidy and the attempt of the government to transfer wealth from the Nigerian masses to a petrol cabal will be decided in the streets.' Dr. Agbon spent the last 30 years working in academia and the oil and gas industry.izielenagbon@yahoo.com
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