The Full Story of the Fuel Subsidy Crisis
By Dr. Gary K. Busch 12/1/12
Jan 13, 2012 - 2:42:39 PM

There is a nationwide crisis in Nigeria occasioned by the precipitous action of the  Goodluck Jonathan Government removing the ‘fuel subsidy’ in January when he had declared that this would not happen until April, which would have given the country time to discuss and consult on the issue. Instead, by announcing the removal of the subsidy (even when the National Assembly voted to delay its effect) the country is wracked by protests, strikes, demonstrations and acts of minor violence.

This is not the first time that there has been disruption over the increase in fuel prices. They were a feature of the Babangida, Abacha and Obasanjo governments. Each was accompanied by civil disorder among the populace and industrial action by the national unions, especially those in the oil industry. The problem with the rise in fuel prices is that most Nigerians live on or just below the level of poverty at less than USD$2.00 per day and are dependent on low-cost fuel for transport, for providing electricity to their generators in the absence of any regular power supplies, and for cooking. With fuel costs rising, almost every aspect of a Nigerian’s life is made more costly and uncomfortable. He cannot pay for the transport to work or school and the shops and markets can’t function because they rely on generators for power. The price of fuel is a critical factor in the lives of the people. As Nigeria is one of the most important producers of light, sweet, crude oil in the world, they cannot understand why it should be expensive in the domestic market.

The fundamental cause is that crude oil is not what you use to power your car or fill your generator or stove. That requires the refining of the crude oil into gasoline, kerosene, diesel, etc. This is done in a refinery. Nigeria has four working refineries, but these refineries are run down, unmaintained and running at less than 17% of their capacity.

  1. The Port Harcourt Refinery (I and II):  Badly maintained and often unable to receive sufficient oil to process and frequently without electrical power which allows it to function.
  2. Warri Refinery: Another example of inadequate maintenance led to catastrophic system failures such as the main Crude Heater blow up of 2000. The last full TAM was 1994. There has not been one since. Capacity utilization was a mere 37.4% in 1995 down from 72% in 1992. It has declined since then.
  3. Kaduna Refinery: Inadequate maintenance, combined with internal staff relations (as in Warn) and a lack of resources for maintenance were a major factor in the poor refinery performance. Problems with the FCC (‘cracker’), water intake and cooler units are a regular occurrence.  There is no problem with supply of crude oil because it is imported from Venezuela and Saudi Arabia because it uses heavy crudes and produces lubricants.

In the absence of a domestic refining industry Nigeria exports crude oil and imports gasoline (Prime Motor Spirit), kerosene and diesel. There was an effort in 2002 to improve the situation when the government issued eighteen new licenses to build refineries in Nigeria. There was a tender round in May 2002 and a number of indigenous firms won licenses to build refineries. However, none of them were able to get foreign technical partners and the required funding for the projects. Most of the invited technical partners have shunned the downstream sector of the industry as it was fraught with corruption as the winners of the tenders had to make the necessary payments for the issuance of the license and needed substantial ‘up front- cash from their prospective technical partners..

The indigenous companies were expected to raise offshore loans and to help in the production of Basic Design Packages to be submitted during the second phase of licensing exercise. Experts say that for the kind of design required by the Ministry of Petroleum Resources for the project, the local companies needed to invest, up front, about US$360 million to prepare the document, adding that getting the money and the expertise that will handle the job required the participation of foreign technical partners. Without such a professional document raising funds either from the local banks or international financial institutions would have been an insoluble problem for the operators. The locals either did not have the money to spend or relied on selling the rights to their foreign partners who would pay for the Basic Design Package, The prospective partners were not willing and, about five years later, the government revoked these licenses.

There have been several well-publicised announcements of proposed new refineries but these have all been delayed, abandoned or unfunded. Right now Nigeria is lucky if it can meet 17% of domestic demand from local refining.  In 2010, Nigeria consumed approximately 280,000 bbl/d of oil. The country has four refineries with a combined theoretical capacity of around 450,000 bbl/d. As a result of poor maintenance, theft, and fire, none of these refineries have ever been fully operational. In 2009 and some of 2010 these refineries operated at their lowest levels of  between 0 and 30 per cent of capacity, and led to the country importing about 85 per cent of its fuel needs. By early 2011, operational capacity increased but the country still requires product imports to meet demand. So, in its wisdom, the government said that they estimated the domestic market required the refining of 445,000 barrels a day of crude to supply the local market. They would deliver these barrels of oil at the domestic price to those companies who would export the crude oil and import the refined products; some directly and some through major international traders like Trafigura

The list of these traders is very revealing; as a substantial number are linked to ex-Presidents Babangida and Obasanjo or their immediate circle. Obasanjo, in defiance of the constitutional prohibition, served as Oil Minister while he was President. He didn’t waste his time in immersing himself in the industry. His son and the sons of some of the other politicos operated the fuel import business into Nigeria.

These companies did very well from the trade.[i]

Not only did they do well, but the statistics published in most of the studies about the subsidy leave out the most important point. That is, Nigeria exports crude oil and brings in PMS, diesel and kerosene. What about the rest of the barrel?

In the oil industry one speaks of crude oil in terms of barrels, sulphur content (sweetness), viscosity (API gravity) etc. The international price is quoted in terms of ‘marker crudes (West Texas Intermediate, Brent, Bonny, Dubai and Isthmus). The price differs am0ng them based on a variety of relatively stable factors. However, the market in refined products is very different. This is based on the ‘netback’ of the crude being refined. That is the value of all the petroleum products which are produced in the refining process. To understand this it might be useful to sketch out what happens when crude oil is refined.

The problem with crude oil is that it contains hundreds of different types of hydrocarbons all mixed together. You have to separate the different types of hydrocarbons to have anything useful. Fortunately there is an easy way to separate things, and this is what oil refining is all about. Different hydrocarbon chain lengths all have progressively higher boiling points, so they can all be separated by distillation. This is what happens in an oil refinery - in one part of the process, crude oil is heated and the different chains are pulled out by their vaporization temperatures. Each different chain length has a different property that makes it useful in a different way.

Most Nigerian crudes are refined in a ‘straight-run’ fractioning of the oil content and do not require additional catalytic refining. A typical fractioning column looks like this:

The various components of crude oil have different sizes, weights and boiling temperatures; so, the first step is to separate these components. Because they have different boiling temperatures, they can be separated easily by a process called fractional distillation. The steps of fractional distillation are as follows:

1. You heat the mixture of two or more substances (liquids) with different boiling points to a high temperature. Heating is usually done with high pressure steam to temperatures of about 1112 degrees Fahrenheit / 600 degrees Celsius.

2. The mixture boils, forming vapour (gases); most substances go into the vapour phase.

3. The vapour enters the bottom of a long column (fractional distillation column) that is filled with trays or plates.

  • The trays have many holes or bubble caps (like a loosened cap on a soda bottle) in them to allow the vapour to pass through.
  • The trays increase the contact time between the vapour and the liquids in the column.
  • The trays help to collect liquids that form at various heights in the column.
  • There is a temperature difference across the column (hot at the bottom, cool at the top).

4.            The vapour rises in the column.

5.            As the vapour rises through the trays in the column, it cools.

6.            When a substance in the vapour reaches a height where the temperature of the column is equal to that substance's boiling point, it will condense to form a liquid. (The substance with the lowest boiling point will condense at the highest point in the column; substances with higher boiling points will condense lower in the column.).

7.            The trays collect the various liquid fractions. These fractions include

Naphtha or Ligroin - intermediate that will be further processed to make gasoline

  • mix of 5 to 9 carbon atom alkanes
  • boiling range = 140 to 212 degrees Fahrenheit / 60 to 100 degrees Celsius

Gasoline - motor fuel

  • liquid
  • mix of alkanes and cycloalkanes (5 to 12 carbon atoms)
  • boiling range = 104 to 401 degrees Fahrenheit / 40 to 205 degrees Celsius

Kerosene - fuel for jet engines and tractors; starting material for making other products

  • liquid
  • mix of alkanes (10 to 18 carbons) and aromatics
  • boiling range = 350 to 617 degrees Fahrenheit / 175 to 325 degrees Celsius

Gas oil or Diesel distillate - used for diesel fuel and heating oil; starting material for making other products

  • liquid
  • alkanes containing 12 or more carbon atoms
  • boiling range = 482 to 662 degrees Fahrenheit / 250 to 350 degrees Celsius

Lubricating oil - used for motor oil, grease, other lubricants

  • liquid
  • long chain (20 to 50 carbon atoms) alkanes, cycloalkanes, aromatics
  • boiling range = 572 to 700 degrees Fahrenheit / 300 to 370 degrees Celsius

Heavy gas or Fuel oil - used for industrial fuel; starting material for making other products

  • liquid
  • long chain (20 to 70 carbon atoms) alkanes, cycloalkanes, aromatics
  • boiling range = 700 to 1112 degrees Fahrenheit / 370 to 600 degrees Celsius

Residuals - coke, asphalt, tar, waxes; starting material for making other products

  • solid
  • multiple-ringed compounds with 70 or more carbon atoms
  • boiling range = greater than 1112 degrees Fahrenheit / 600 degrees Celsius [ii]

Each crude oil, because of the structure of its hydrocarbons, produces different quantities of each fraction. Sometimes the trays can be positioned to get a little more of one substance. In the winter, in North America, the ‘bottom end of the barrel’ increases in value as cold weather requires heating oil. The ‘top end of the barrel’ is better in summer because more gasoline is used. However, the refining of oil is not additive in that you cannot get out of the barrel more than you put in. Therefore, when making a market in refined products the ‘net back’ of the products becomes important. That is, each fraction has a variable price. So, if one can get 16% of the product as gasoline then that 16% quantity times the market value of the product gives you the value of the gasoline. If the residuals are 40% then the volume of the 40% times the price of the residuals gives you the value of the residuals, and so on. The sum of all the products of percentage volume times the current market price for those products gives you the net back value of the barrel of oil  From this one can deduct the cost of transport, the loss of volatiles during shipment an d the insurance costs.

The important point of all this is, if the crude oil exports of the 445,000 barrels a day are only bringing  back to Nigeria the PMS, kerosene and diesel, where  is the value for the rest of the barrel? Who has the money for the butane, propane, residual oils, asphaltenes, etc. which are an inevitable result of the refining process? These favoured exporters of oil not able to be refined in Nigeria are getting the oil at source at a considerable discount. Including shipping costs to the US Gulf the net cost is under $30.00 a barrel. They are shipping back PMS, kerosene and diesel at the world price for these products. Right now the price of fuel in Nigeria is marginally more than the price of similar fuel in Texas made from Nigerian crude. Equally as important the sale of the rest of the barrel is not being returned to Nigeria as cash or additional product. As these represent, even with the best of cuts of the fractioning column, slightly more than half of the value of the barrel this is a tidy profit for those who are in the subsidy business.

It is small wonder that the subsidy business has attracted the ogas, agbadas and generals of Nigeria. It is a license to print money. Even more is made when they smuggle what little they bring back to neighbouring countries. This subsidy crisis is not just about the price of fuel. It is about the impunity with which the rich rob the poor and seek to punish them when they complain about the rod on their backs. How can Nigeria be poor and in debt? The last two budgets of Obasanjo were predicated on an oil price of USD$25 a barrel, even when the real price was $85. It rose to over £104 a barrel and now it’s almost as high. How much do these thieves and bandits want before they are sated? Is there no end to their avarice?

As one observer deduced “Therefore about 48% of the total cost of PMS before subsidy is a combination of corruption, totally avoidable costs and costs that could be incurred comparatively cheaper in Nigeria   if the heavy lifting is done within the country… If we implement the DSO, and assuming the refineries are retrofitted to yield 50% PMS, at $100/barrel of Bonny Light, the ex-factory price of PMS in Nigeria will be around $42/bbl. This translates to about 38 Naira per litre at 150Naira/ US$. Add 10 Naira to cover distribution and retail margins. This gives 48 Naira!” [iii]That is a lot less than the 170 Naira which has just descended on the marketplace – if you can find it.

So there should be no surprise if the fuel subsidy protest expands into a wider social and political upheaval. There comes a point in every country when it gets harder to grind the faces of the poor. Perhaps this is the right time for Nigeria.

[i] Taiwo Ologbon-Ori, ProShare January 04, 2012

[ii] How Stuff Works.com 2008

[iii] Adebola Adejumo. The Problem is Not Fuel Subsidy but Subsidy Management, Business Day 28/12/11

Source: Ocnus.net 2013