Subsidy in Nigeria has had a long-standing history; since it was first implemented in the 1970s to help stabilise the nation’s fuel prices, it has grown to be an important component of its economic policies. A committee called the Oil and Gas Sector Reform Implementation Committee (OGSRC) was established in 2000 by President Olusegun Obasanjo to examine Nigeria’s petroleum sector and make recommendations for improvements. The Committee was tasked with reviewing the various laws that governed the oil and gas industry intending to update and combine the laws into an all-encompassing regulatory framework.
The Petroleum Industry Bill (PIB), introduced by the federal executive and sent to the National Assembly in 2008, was created from the Oil and Gas Sector Reform Implementation Committee’s recommendations. The federal parliament finally approved a significantly revised version of the Bill on July 1, 2021; on August 16, 2021, the president signed it into law to become the Petroleum Industry Act (PIA). This process took 13 years.
This blog summarises our learnings from the policy brief on fuel subsidy titled ‘’The Economics of Petroleum Industry Act and the Nigerian Reality,’’ published in Nigeria by the Centre for Journalism Innovation and Development (CJID) in 2023.
An Overview of the Petroleum Industry Act and the Future of Oil in Nigeria
The British colonial government of Nigeria agreed to grant Shell D’Arcy, an Anglo-Dutch company, a concession to conduct petroleum exploration in 1938. Oloibiri, Bayelsa State, saw the start of commercial oil production after its discovery in 1956. With an average production of 2.5 million barrels daily, oil became the main source of government income and foreign exchange earnings.
The Petroleum Ordinance of 1889 was Nigeria’s first piece of legislation to regulate the petroleum sector. This was followed by the Petroleum Profits Act in 1959 and the Petroleum Act in 1969. Nigeria joined the Organization of the Petroleum Exporting Countries (OPEC) in 1971 and later amended the Petroleum Act, which became the main legal framework for oil and gas operations. Several subsidiary laws were passed between 1969 and 2000, including the NNPC Act 1977, which established the Nigerian National Petroleum Corporation (NNPC) as the country’s oil company. The PIA was established in 2000 to harmonise industry laws with current global oil industry realities.
The Petroleum Industry Act (PIA) addresses challenges in Nigeria’s petroleum industry, including increasing crude oil theft and the government’s spending on the subsidy regime for premium motor spirit (PMS). The PIA aims to protect upstream oil assets and ensure the country’s continued growth in the oil and gas sector.
In accordance with Section 205 of the PIA, the pricing of petroleum products must operate under unrestricted free market conditions; hence the Petroleum Equalization Fund (PEF) and the subsidy system have been abolished. PEF was the government body in charge of maintaining uniformity in petroleum product pricing. It achieved this by paying marketers the difference between the regulated and market prices with ancillary expenses. The government suspended the implementation of the Act due to supply disruptions, and as a result, the Subsidy continued until May 2023, 21 months after the Act was passed.
The Economic cost of paying a subsidy
A subsidy is a form of incentive the government provides to assist industries or consumers in obtaining a particular product or service. It offers relief to both producers and consumers. In Nigeria, the government provides subsidies on Premium Motor Spirit (PMS) prices, as it plays a crucial role in the country’s transport and electricity generation sectors. Even though other petroleum products have been deregulated, the government continued to offer subsidies on PMS due to its significance to the Nigerian economy. However, this strategy has caused substantial economic repercussions.
Ballooning Subsidy Bill
The subsidy system of Nigeria’s government is influenced by the pump price and foreign exchange rate of Premium Motor Spirit (PMS). The price of crude oil and exchange rate fluctuations impacts the government’s subsidy bill. The increasing value of the dollar against the naira and high crude prices have resulted in a continual increase in the government’s subsidy bill. There are concerns about the reliability of PMS consumption data as corruption has plagued the subsidy system. In the first half of 2022, the total subsidy claim could exceed N5 trillion or even N6 trillion, despite allocating N4 trillion for subsidy claims in the budget for the year.
The Fiscal Impact
The government of Nigeria projected a revenue of N9.97 trillion in 2022, but the subsidy bill is projected to surpass N5 trillion. The government’s crude oil importer, Nigerian National Petroleum Corporation (NNPC), has already outstripped earnings from crude sales, leaving them over a trillion naira to recover from post-June 2022 crude earnings. This draining crude revenue from subsidy recovery poses a major fiscal challenge, worsening the debt service crisis and limiting the government’s ability to fund social services and critical sectors like health and education.
What is the sustainability of subsidy and the political cost?
Fuel subsidy removal in Nigeria remains a sensitive issue with economic and political costs. The Jonathan government announced the removal in 2012, leading to nationwide protests and the loss of popularity. The government eventually reduced PMS prices to N95 per litre and introduced the Subsidy Reinvestment and Empowerment Programme (SURE-P). However, this did not recover the government’s political goodwill. In 2016, the Muhammadu Buhari government claimed to remove fuel subsidy by implementing a price modulation policy and importing state oil company NNPC to Nigeria. Despite these efforts, fuel prices remain significantly below market prices, with NNPC deducting cost differences from government crude oil earnings. The subsidy is unsustainable due to the strain on government finances, and the situation has become more critical in recent years due to high oil prices, devaluation of the naira, and crude theft.
The Petroleum Industry Act (PIA) and the way forward on Subsidy
The Petroleum Industry Act ( PIA) includes a provision for eliminating price controls on petroleum products, but the government has postponed its implementation. This decision has economic consequences since almost one in four Naira spent in 2022 was used to cover subsidy payments. It is wise to remove subsidies during low oil prices, as crude oil prices, processing, importing, and distribution expenses primarily determine prices. Therefore, the government could take advantage of the Dangote Refinery’s commencement to eliminate subsidies on crude products, but this would come with another political cost; citizens may accuse the government of timing such a significant policy change in conjunction with a private businessman’s milestone.
Will Dangote Refinery Help?
Aliko Dangote commissioned a refinery in May 2023, with a 650,000 barrels per day refining capacity, surpassing Nigeria’s four full-capacity refineries. The refinery is expected to produce over 70 million litres of PMS daily, surpassing Nigeria’s daily demand of 66 million. However, crude oil prices remain at international rates, and the market reaction to Dangote’s entry will take time due to supply chain gaps and the need for billions of litres of imported refined products.
The Federal Government’s Subsidy removal announcement
In Bola Ahmed Tinubu’s inaugural address as president of the Federal Republic of Nigeria, he mentioned fuel subsidies as a previous policy. Many analysts anticipated that he would repeal the previous government’s approach and present a supplementary appropriation bill to cover subsidy payments after 2023. However, this unpopular stance resulted in fuel stations refusing to sell, price hikes, increased commuter fare, and higher expenses.
The following recommendations were made to adverse the impacts of subsidy removal in Nigeria;
- Investment of subsidy funds in infrastructure, education, and healthcare programs will help build trust and appreciation for removing PMS subsidies.
- Regulators must prevent collusion among oil marketers and sanction artificial scarcity by petroleum marketers.
- Proactive punishment of marketers who hoard fuel and create artificial scarcity is crucial. The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) must be proactive in punishing oil product marketers who hoard fuel and create artificial scarcity.
In addition to the removal of subsidy, the new Tinubu administration must develop and harmonise policies and accountability mechanisms in the oil and gas industry.
Among the areas needing immediate attention are:
- Implementing stronger frameworks for fair competition and public-private partnerships in the sector
- Renegotiating legacy agreements
- Clarifying regulatory overlaps
- Instituting a single inventory portal to aid sector accountability
- Harmonising industry regulations, tariffs and taxes
- Aligning policies and Strategies with the Energy Transition Plan
To download the centre for Journalism Innovation and Development’s policy brief on ‘’The Economics of Petroleum Industry Act and the Nigerian Reality’’, visit here to download.