Tuesday, April 20, 2010

Petroleum Products Prices And Subsidies in Nigeria - Chief Martin Onovo

Lagos — Chief Martin Onovo, a Seasoned Petroleum Engineer And the National Leader of the Strategic Union of Professionals for the Advancement of Nigeria, Supa in This Analytical Presentation Argues, Using Relevant Figures And Data That the Federal Government's Deregulation Policy is Harmful to All, Including Itself...


The prices of petroleum products in Nigeria have been a source of contention and controversy. This paper proposes to clarify the actual total cost by adding the costs of all components in retail supply of Premium Motor Spirit (PMS a.k.a. Petrol or Gasoline) the most widely demanded and utilized petroleum product. The cost components are; finding, developing, developing, producing, refining, distributing and marketing. The amount of subsidy on the retail price is then determined by the difference between the actual cost and the retail price.

The method adopted for this cost determination is similar to that used by the American Petroleum Institute (API) for the analysis of the actual total cost of gasoline (PMS) in the U.S. It splits the retail cost into the major components cost of crude oil, the cost of refining and marketing and the sum of all taxes. This method is simple and accurate.

The most accurate industry data has been obtained from and confirmed independently for this effort by industry experts. The draft paper was also reviewed and endorsed by several other experts. The data and analysis herein are as at October, 2005. Exchange rate applied is N130/USD.

The Petrol Process

To purchase petrol in Nigeria, we typically drive to a fuel station. The fuel attendant pumps the request quantity and payment is made 'cash, electronically (Value card, Top card, etc) or otherwise.
The Fuel station typically receives its supply from road tankers which have been loaded at an NNPC or other fuel depots. The NNPC depots receive their supply from local refineries through pipelines. Imported petroleum products are evacuated from ocean-going tankers to local depots which then supply to Fuel stations by road tankers.
Local refineries receive their feed crude oil through pipelines iron oil terminals. The crude oil is produced by oil companies from wells in their OMLs (Oil Mining Lease). The Federal Government of Nigeria (FGN) is the senior partner in Joint Venture (JV) oil producing companies. The NNPC manages FGN investments in the JVs.

Production Sharing Contracts (PSCs) are a different relationship from Joint Ventures. This determination is based on VB production which represents most of the Nigerian production. PSC production can be similarly treated.
Component Costs

Crude oil is first discovered (exploration), then the discovery is developed (field development) before it can be produced (production operations). It is then refined into petroleum products which are distributed and sold for utilization. The costs of exploration, Field Development Production Operations, Refining, Distribution and Marketing (Retail Sales) are identified herein. The sum of all product cost components is the actual cost of the product.

Exploration Costs
Exploration costs typically include seismic acquisition and interpretation costs. Exploratory well costs can be included in development costs since the exploratory well can be easily converted to a development well. 3D Seismic acquisition costs vary based on contractor, coverage, terrain, time, season, water depth, methods, commercial terms, special considerations, etc. Typical costs range from 20 - 70,000 USD/KM2. Interpretation costs range typically from 2 - 8,000 USD/KM2. We will use 50,000 USD/KM2 as estimated cost of 3D seismic acquisition and interpretation. For a 10 KM2 field 20 million barrels recovery; exploration costs can be estimated to be about - 0.025 USD/Bbl. This is equivalent to, 0.02 N/Litre.

Development Costs

Opportunity development costs depend on field location, size, development philosophy and concept. Development cost will include capital costs of field facilities design, procurement, transportation, installation and commissioning. Cost of wells and pipelines to existing terminals are also included. It will typically vary from 2-5 USD/Bbl.

At the NAPE (National Association of Petroleum Explorationists) annual conference in 2005, offshore development cost was indicated as 5 USD/Bbl. However, historical data for completed projects offshore are closer to 3 USD/Bbl. Onshore development costs are also significantly lower than offshore costs. To averagely represent the entire JV operational environment scenarios (offshore and onshore) this paper will capture development cost as: - 4 USD/Bbl. This is equivalent to, 3.27 N/Litre.

Operation Costs (OPEX)

Current (2005) production operation costs of major oil companies surveyed indicated a range of 1.5-4 USD/Bbl. This includes all overhead costs across relevant functions. This paper will capture OPEX as - 3.0 USD/Bbl. This is equivalent to, 2.45 N/Litre.
Therefore, actual crude oil production cost to the Nigerian JV can then be estimated as:

(0.025 + 4.0 + 3.0) USD/Bbl = 7.025 USD/Bbl.
(0.02 + 3.27 + 2.45) N/Litre = 5.74 N/Litre

Previous government (NNPC) estimates (2000) yielded 5.00 N/litre. The difference in these estimates can be attributed to rising oil industry service costs due to international market dynamics, inflation and/or to estimate basis differences.

For typical refinery yield of 95%; 5.74 N/litre translates to - 6.04 N/litre.
This compensates for volume losses inherent in the crude oil refining process.

Refining Costs

Installed refining capacity in Nigeria stands at 445,000 Barrels per day (BPD).
This is made up of:

Old Port Harcourt Refinery - 60,000 BPD

1. New Port Harcourt Refinery - 150,000 BPD

2. Warri Refinery - 125,000 BPD (Upgraded from 100)

3. Kaduna Refinery - 110,000 BPD (Two trains, 60+50)

Refining cost data from these refineries could not be obtained during our survey. Even when such data is available, they are very unreliable. According to the Nigerian Vice-President during an interview with Thisday newspaper in August 2005, "We have never got correct statistics from NNPC. They will never be able to tell you the correct thing. We have that problem with NNPC".

To estimate refining costs, we can rely on international industry data from similar refineries. Contemporary refining technology is of the Fluid Catalytic Cracking (FCC) process like most Nigerian refineries. This process requires fluidizing the solid catalyst and re-circulating it continuously from the reaction section of the cracker to the catalyst regeneration section and back to the reaction section.

Data published by the American Petroleum Institute (API) estimates Gross Refining and Distribution/Marketing Costs and Profits at $1.00 per gallon in October 2005. Using a 50/50 split as established by historical U.S. cost trends, it can be clearly concluded that Refining costs and profits, account for $0.50 per gallon. This value includes the profits of the refineries.

The estimate can be used for this determination since it is from mostly FCC process based refineries just as most Nigerian refineries. Actual refining costs may be lower in Nigeria since labour costs are significantly lower in Nigeria. $0.50 per Gallon translates to $21/Bbl. We will capture refining costs as $21/Bbl. This is, 17.17 N/Litre.

Distribution Costs

Distribution costs in Nigeria are established by regulation. This is the cost margin allowed for Road Tankers that transport petrol from the depots to the fuel stations. As at October 2005, it was 2.42 N/Litre.

Marketing Costs

Marketing Costs in Nigeria are also established by regulation. This is the cost margin allowed for Oil marketing companies that operate fuel retail stations. As at October 2005, this was, 5.87 N/Litre.

Total Costs

The total cost can then be determined as the summation of all relevant costs components previously estimated viz. Exploration, Development, Production Operations, Refining, Distribution and Marketing.

Total Cost = (6.04 + 17.17 + 2.42 + 5.87) N/Ltre
= 31.50 N/Litre.

Therefore, we can conclude that the average cost of domestic petrol dispensed at retail fuel stations in Nigeria is, 31.50 N/Litre.

Current Official Retail Price

Current retail price as established by regulation has been, N65/Litre since 2005. This regulated price is split to cost components in line with the following benchmarks:

N56.71 - Depot Price
N2.42 - Transportation Margin
N1.15 - Dealer's Margin
N4.72 - Marketing Company Margin
= N65.00 - (Official Retail Price)

Subsidy can be determined as Actual Cost - Sales Price
Consequently, Subsidy = 31.50 - 65) N/Litre
= -33.50 N/Litre (This is a negative subsidy which confirms a profit).

We can confidently conclude that government makes a profit of 33.50 N/Litre on domestic PMP (Petrol) at the current price of 65 N/Litre. This translates to a very high 106% profit.

In addition, the government benefits from royalties, taxes and fees which were not factored in this simplified analysis. When factored, the actual crude cost per barrel to government is significantly less and its profit correspondingly higher.
The claim of subsidies on petroleum products is clearly incorrect
Post Script

This analysis has been deliberately simplified to ensure wider appeal and easy comprehension. A much more detailed and rigorous analysis will be inappropriate for the objective indicated. It will also come to the same conclusion and have only an added academic value.

For imported petrol, this estimate will not apply. Imported petrol has unnecessary additional costs like;

1. International Crude Oil Sale Price and Profit Margins
2. Transportation Costs of Products from source country to Nigeria
3.Port Charges, Taxes and Export duties at source country
4. Insurance costs for transportation
5. Brokerage costs for agents
6. Overhead Costs
To improve domestic supply and reduce cost, the following can be considered:
-Maximise existing local refining capacity utilization.
-Increase existing local refining capacity by building additional refineries.

-Improve JV crude oil development and production efficiency to reduce costs.
There is a large market for petroleum products in West Africa. Nigeria can develop its refining capacity to supply this large market and increase its national revenue and GDP.