August 19, 2021

Africa

NIGERIA: As PIB becomes PIA, fuel subsidy will test reform efforts’ seriousness

BY Malte Liewerscheidt

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( 3 mins)

On 18 August, President Muhammadu Buhari inaugurated a steering committee to see through the implementation over the next 12 months of the Petroleum Industry Act (PIA), which he had signed into law earlier this week. The quick formation of the committee, which will report directly to the president, suggests the administration is eager to implement the reforms contained in the PIA. However, this will prove a formidable task that may generate backlash at numerous stages – both from within the institutions subject to reform as well as from the general public. Besides, some of the PIA’s key provisions are contradictory, leaving the administration with important choices to make. A case in point and an early litmus test in both regards will be how the administration will go about the notorious fuel subsidy.

A key aspect of the bill is to disentangle the various functions and roles vested in the behemoth Nigerian National Petroleum Corporation (NNPC) and to create new, independent regulatory agencies for the up-, mid- and downstream sectors. Moreover, NNPC is supposed to be incorporated as a limited liability company (LLC), with the government as the sole shareholder at incorporation. However, such an unbundling exercise is likely to face fierce resistance from vested interests, including organized labor. This is particularly likely should the government decide to divest part of NNPC or some of its assets, such as the four largely defunct state-owned refineries, as has been repeatedly suggested in recent months.

Meanwhile, the fuel import regime remains one of the most pressing issues. As analyzed previously, NNPC, currently the sole fuel importer, may be losing at least NGN 1.2bn (USD 3.2mn) every day as government-controlled pump prices have not moved since December 2020, despite the international oil price rally. Minister of State for Petroleum Resources Timipre Sylva, who heads the PIA steering committee, suggested the government’s goal would be to fully deregulate the import regime, although no immediate actions were taken, while a consensus with labor unions would be sought to avoid sudden price surges.

However, the PIA entails a contradictory reform mandate on this front. While section 205 (1) stipulates that “wholesale and retail prices of petroleum products shall be based on unrestricted free-market pricing conditions,” section 317 (8) introduces a highly regulated import regime that grants licenses exclusively to “companies with active local refining licenses.” Unsurprisingly, the well-connected Dangote Group, with its massive Lagos-based refinery scheduled to start operations in 2022, is currently the only company fitting that description. As such, the government may end up replacing a fuel import cartel owned by NNPC with one owned by Dangote, which also chimes with NNPC’s recent plans to acquire a 20% stake in the refinery.

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