THE REAL COST OF NIGERIAN PMS

THE REAL COST OF NIGERIAN PETROL BY DR. IZIELEN AGBON

An article titled, “The Real Cost of Nigerian Petrol” by one Dr. Izielen Agbon was published by Sahara Reporters, an online newspaper, on 15 December, 2011. After reading the article three times I wondered why a PhD holder with over 20 years teaching experience should decide to do his country such a disservice. His “simplest economics” turned out to be so flawed that I think he deserves a rejoinder.

One online commentator, Ifeanyi-Democracy 4ever, gave him the best immediate response on 16 December 2011. He wrote,

“Dr Izielen's calculation of N33.36 per litre of fuel is FATALLY wrong. This is surprising especially coming from a 'Dr' and former HOD and ASUU chairman. Only God knows how many generations of students this 'Dr' has fed with the wrong stuff. These are some of the persons causing UNIMAGINABLE damage to the system then turn around to blame Govt even for their inability to impregnate their wives.

“Back to 'Dr' Izielen's flawed calculation. According to him the cost of development, storage and transport of crude is $5 per barrel. Refining cost is $12.6 per barrel, pipeline distribution $1.5 per barrel while other distribution margins $16.6 per barrel. Assuming these estimations were right, which I doubt, what about the cost of the crude oil itself, which is $107 per barrel (international market price)? This could only be likened to someone doing an estimate of the cost of producing 'suya meat' without taking into consideration the cost of the starting raw material, which is raw beef.”

I entirely agree with Ifeanyi as explained below. According to the Department of Energy Information Administration, which issues the official United States’ energy statistics, the average cost of the pump price of PMS refined in the USA is as follows: 74% Crude Oil, 10% Refining Costs, 11% Taxes (Fed & State) and 5% Distribution and Marketing. These are Government figures.

A private researcher calculated independently and arrived at the following averages for the 150 refineries in the USA who jointly refine 17.6 million barrels per day: 69% Crude Oil cost, 7% Refining costs and refinery profits, 13% Federal and State Taxes and 12% Marketing and Distribution Costs. The margin of difference between these figures and the official figures is just 3% or less.

Dr. Agbon’s suggestion that in Nigeria, 1 barrel of PMS is refined at $5 for Crude, $12.6 Refining Costs, $1.5 Pipeline & Distribution and $16.58 Distribution Margins, giving a total of $35.7, is a huge departure from US averages and a monumental misinformation to the public. The percentages arising from Dr. Agbon’s figures are 14% for Cost of Crude, 35.3% for refining, 4.2% for Pipeline distribution and 46.5 % Distribution Margins.

PMS SHARE % IN COST OF REFINING 1 BARREL OF CRUDE OIL

US GOVT STATS (%) INDEPENDENT RESEARCH (%) AGBON’S NIGERIAN STATS (%)

CRUDE 74 69 14

REFINING 10 7 35.3

TAXES 11 13 4.2

DIST/TAX 5 11 46.5

TOTAL 100 100 100

Please note that refining processes do differ a lot. We are therefore being very simplistic here and dealing only with averages. However, the catalytic processes adopted by Nigerian refineries are very similar to those of US refineries.

1. Cost of Crude at 14% instead of 69% to 74% is totally unrealistic. Before 2003 Nigerian refineries were supplied crude by NNPC at reduced rates. However, from 2003, they started paying for the 445,000 barrels supplied them per day at international rates. As Ifeanyi aptly exemplified, it’s akin to a ‘suya meat’ producer who does not cost the raw beef he will use because he bred the cow in his house.

2. Was Dr. Agbon right when based all his computations on locally produced PMS and then extended his conclusions to cover imported products? For his information, the Group MD of NNPC recently told the Senate Committee on Petroleum that they sell the remaining crude they cannot refine at international prices. Also, that they don’t run any refinery at less that 60% capacity. Dr. Agbon’s capacity utilization figure of 38.2% (efficiency?) should be clarified. Note that all Nigerian PMS is refined at international costs and must be so priced. There is nothing like a Nigerian price today.

3. After using ‘netback calculation method’ and deducting the cost of ‘swapped petroleum products’ (whatever these mean) Dr. Agbon arrived at $36.86 per barrel for Nigerian PMS which translates to N34.45/lit or $0.22/lit. Does it make sense to say we started with $5 worth of crude and that we should sell the refined product for $0.22? Note that he mixed barrels, gallons and litres in his computations to confuse the reader, not me.

4. Dr. Agbon correctly states that PMS today is sold in the US and Nigeria at $3.52/gallon or N138 per litre. Therefore, at the artificially fixed pump price of N65/litre, there is a subsidy in place right now. Dr. Agbon and Prof. D. West, whom he quoted, are therefore both wrong to say that there is no subsidy on PMS pump price in Nigeria today.

5. Dr. Agbon also did not tell us how many liters of PMS are obtained when 1 barrel of crude oil is refined. He only told us that 1 barrel is equivalent to 142 gallons or 138 litres. The truth is that we only obtain 75 litres of PMS from 1 barrel of crude. Did he factor this into his calculations? He only said the cost of refining 1 barrel in Nigeria is $36.86.

6. Dr. Agbon goes further to assert that the Federal Government of Nigeria is actually charging tax on PMS at the rate of 91.2%. A little arithmetic tells me that this means that whenever I pay N65 for a litre of PMS, the Nigerian Government earns N59 from it. I leave the reader to judge the rationale of this assertion.

Dr. Agbon makes a final suggest ion that labour should not accept Government’s ‘economic fallacy’ of trying to sell us crude oil which Government got for free. Really?

Dr. Agbon finally concludes by calling all Nigerians out to settle this perceived dispute on the streets. He made this call only because his wife, children, house, car and other belongings are safe in Dallas, Texas, USA, where he resides. Is there no better way to resolve this issue?

I believe President Jonathan and his Finance Minster, Okonjo-Owealla, that our Government will spend about N1.4 trillion in 2011 settling bills coming from PPPRA. Why those bills arose in the first place, needs to be verified and stopped if not justified. If Government was subsidizing my fuel purchases to that tune, then I suggest Education be allocated the amount instead and not N400 billion in the 2012 Budget. ASSUU’s demands translate to only N109 billion additional costs according to the Education Minister. We can easily meet ASSUU’s requests.

Subsidy on PMS and Kero in Nigeria is real. Government cannot sustain it any longer because huge corruption has been introduced into its administration and the intended beneficiaries have been outsmarted by a wicked cabal that won’t let the system work. They are among the ruling class. President Jonathan is very brace to plan to end their billion Naira scheme. Please support the removal of all fuel subsidies in Nigeria by 2011 end.

James Pam (jamespam2004@yahoo.com) 18 December, 2011