The Mathematics Behind the Subsidy Fraud.

From a final price of N140.85 /pms litre at which it is sold in the Nigerian market, it means that between 63.2%-75% of the total value paid for each litre of pms by Nigerians goes to foreigners. This is a sabotage of the Nigerian economy and a mortgage of the futures of her people.

Adebayo Alonge

(Public Affairs Analyst)

PPRA’s PMS Component Pricing

N122.51/pms litre = Cost of refining and in and out shipping (of crude oil and refined pms)

N3/pms litre = Cost of storage in depots

N8.85/pms litre = Cost of transportation in and around Nigeria

N6.5/pms litre= Marketer’s margin

Thus,

N140.86/pms litre = Market price in Nigeria

Understanding PMS pricing

1 barrel= 152 litres of crude oil and that refining yields 30% PMS from this crude i.e. 45.6litres of pms

Average price of a barrel of crude in 2011= $106 or N16, 960 (at N160 exchange rate).

Therefore,

152litres of crude=N16, 960

Thus,

1litre of crude is N111.57.

(Note that the refiner buys the crude at this price. Please note that Nigerian refineries will purchase at this price, unless if their government does not collect royalties from companies involved in the extraction process)

Therefore average price of a litre of crude PMS (without adding refining costs and associated refiners’ profit margin and assuming PMS extraction rate of 30%) is N33.47.

Let us assume a lucrative refiners’ value addition of  100% ( representing estimated cost of refining at 50% and profit of 50% both of which are rare in most processing businesses), this will lead to value added of N33.47/litre (of which N16.735 is the refiners profit and another N16.735 is the associated refining cost)

Therefore,

Sales price of refined pms/litre= N66.94

Sales tax ( estimated at 5% in Nigeria , though in high tax economies like in the US etc it may be higher)= 0.05%*N66.94=N3.347/pms litre

Final Approximate Sales Price of refined PMS/litre (from the Refiner) = N70.287

From the PPRA template that puts cost of refining and shipping of pms/litre at N122.51, we can estimate that,

The cost of shipping is = N122.51-N70.287

=N52.223/ PMS litre

(Note that the cost of shipping is subject to high degree of manipulation and inflation by marketers although demurrage may also have contributed to this value, which is in my view high)

Understanding what Nigeria loses to importation of refined pms

From the foregoing Nigeria is thus losing the following processing values to foreign economies and companies for a commodity that God has given it in abundance.

The values lost are:

Refiners cost of refining (the cost of refining inputs and wages go to diverse sectors of the economy hosting the refinery) = N16.735/pms litre

Refiners profit= N16.735/pms litre

Sales tax (goes to government of country hosting refinery and may be higher depending on the country) = N3.347/pms litre

Shipping costs (in and out transportation of crude pms and refined pms and possibly demurrage) = N52.223/pms litre

Total value lost to foreigners= N89.04/pms litre (without adding cost of crude pms lost to foreign exploration companies)

Alternatively,

Total value lost to foreigners( including exploration companies) =N105.775/pms litre (assuming crude pms litre cost of N 33.47 is shared on 50-50% basis using existing joint venture arrangements between NNPC and oil exploration majors)

From a final price of N140.85 /pms litre at which it is sold in the Nigerian market, it means that between 63.2%-75% of the total value paid for each litre of pms by Nigerians goes to foreigners. This is a sabotage of the Nigerian economy and a mortgage of the futures of her people.

What Nigeria stands to gain from local refining.

If all the PMS sold in Nigeria was from local refineries,

Only N16.735/ crude pms litre (since 50% of value of crude goes to NNPC based on joint venture agreements) will go to foreign exploration companies representing only 11.88% of the total value of the product.

Thus at least 88% of the total value of the product will remain in the Nigerian economy.

Also refining in Nigeria means that Nigerians will pay the following:

Final sales price by local refiner (based on foregoing calculations) = N70.287/pms litre

Cost of storage in depots =N3/pms litre

Cost of transportation in and around Nigeria= N8.85/pms litre

Marketer’s margin= N6.5/pms litre (this value is based on existing price structure. Based on local refining, 5% of sales price of N70.287 will lead to a margin of N3.5 for marketers)

Therefore,

Market price of locally refined pms/ litre = N85.637 to N88.637

Rounding up, maximum market price of locally refined pms = N90/pms litre

Given that regional and international prices hover around N140/pms litre there will thus be a huge incentive for local marketers to export as they could make margins of 100% as opposed to a maximum margin of 28-30% from sales locally in Nigeria.

With this price advantage, local marketers can become exporters of  one of the cheapest refined pms globally; after all they can play with margins of between 0-100 percent. With such a competitive advantage, the number of private sector refineries in Nigeria will increase and will work at full capacity. Lower prices of refined products from Nigeria will drive demand to her shores and create significant growth in her petroleum industry with attendant benefits of job creation and value retention and integration (as previously explained) within the Nigerian economy.