a critical evaluation of the 2015 subsidy budget provisions for pms and hhk in nigeria

Nigeria Downstream Sector Brief

A Critical Evaluation of the

2015 Subsidy Budget Provisions

For PMS and HHK

2015 PMS and HHK Subsidy Budget Preambles

Premium Motor Spirit (PMS) Subsidy Cost Analysis

Household Kerosene (HHK) Subsidy Cost Analysis

2015 Projected Subsidy Budget for PMS and HHK

Volume 4-7| Mar 2015

Usman Suleman MBA (Oil & Gas ); B.Eng (Civil)

Hosea 4:6 My people are destroyed for lack of knowledge

Nigeria Downstream Brief | Vol_4 March 3rd 2015

2015 PMS and HHK Subsidy Budget Preambles

The recent adjustments to the Medium Term Expenditure Framework (MTEF) by the Senate AppropriationCommittee and the major cuts to the Budgetary provisions for PMS and HHK had necessitated the review ofthis decision, in order to evaluate if the current adjusted budgetary provisions are adequate in the face of therecent devaluation of the Naira, projected average price of crude oil and the projected consumption of PMSand HHK for 2015 using the NNPC reported National distribution of PMS and HHK for 2013.

From the general evaluation, the current adjustments of the exchange rate by PPPRA from 171.36 to 198/199Naira to a dollar had suddenly caused an astronomical leap in the under-recovery value for every liter of PMSand HHK and thus an increase in subsidy as a percentage of the Open Market Price(OMP) to government; evenin the face of a marginal change in the average price of Crude oil over the said period.

This clearly indicates that the value of the Naira to the US dollar together with the crude oil price and projectedconsumption should be used for the basis of evaluating and setting the Subsidy budgetary provisions for PMSand HHK.

These parameters will also form the basis for determining the most likely Subsidy Budget and then comparesame with the Budget provisions by the Federal Government and the Adjustments made by the Senate.

Source: PPPRA Templates for PMS and HHK (2015)NNPC 2013 Statistical Bulletin Opec Crude Oil Open Basket RegimeAuthors Analysis

PMS HHK2015 Projected Consumption_Using NNPC Reported 2013 Actual National Distribution (lpd)

43,546,496.9 8,475,535.7

2015 Projected Domestic Refinery Production_ Using NNPC Reported 2013 Actual Combined Production (lpd)

4,545,832.0 2,521,232.3

Projected Domestic Refinery Production of Demand 10% 30%2015 Projected National Distribution ('000 litres per year) 15,894,471.3 3,091,064.82015 Projected Refined Product Imports ('000 litres per year) 14,235,242.6 2,170,815.02015 Projected Refined Product Imports (million litres per day) 39.00 5.95

53.58 55.97 56.83

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56.07

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PMS and HHK Subsidy Budget Analysis(Subsidy as a % of OMP Vs Naira:$ Exchange Rate Vs Crude Oil Price)

PMS HHK Opec Crude Oil Basket Price $/bbl Exchange Rate (Naira:$USD)


Premium Motor Spirit (PMS) Subsidy Cost Analysis

In evaluating the subsidy budget provisions for PMS, the subsidy per liter for the periods of December 2014, February 1-19th and February 20-28th 2015 were analyzed. For the purpose of understanding the effects of the changing value of thenaira to the US dollar; the Regulated market price for the period of December was set at 87 as against 97 Naira per liter.

The comparative analysis of the subsidy for Period-3 (February 19th-28th 2015); indicates that the recent De-Valuation ofthe Naira from 171.36 to an average of 198.60 Naira to a dollar had contributed more to the increased subsidy from anaverage value of 13.92 for Period-2 (February 1st- 19th 2015) to 32.58 Naira per litre for Period-3 (February 19th-28th 2015)with the increase in the average crude oil price over these period standing at circa. 10% .

To further illustrate this Naira De-Valuation effect, the average subsidy for the same period was compared to December2014, and the subsidy was about 265% of the evaluated subsidy for December 2014, despite having a lower averagecrude oil price of 54 $ per barrel as compared to 2-months average price of 67.51 $ per barrel for December 2014 asillustrated in the Chart hereunder.

Thus, in setting the Benchmark for 2015 Budget for PMS the De-Valuation effect of the Naira to the Dollar should beconsidered, together with a more realistic projection of the average Crude oil price outlook for 2015.

From our evaluation, the most likely subsidy budget provision per liter for PMS should be set at 32.58 Naira per litreassuming that the average price of crude oil will fluctuate between 49 to 54 $ per barrel and at a constant exchangerate of $1USD to N198.60.

158.85 171.36 198.60

12.29 13.92

32.58

68 $/bbl49 $/bbl

54 $/bbl

0.00

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250.00

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Period 1_Dec'14 Period 2_Feb 1st-19th '15 Period 3_Feb 20th-28th '15

PMS Subsidy Cost Evaluation for 2015(Subsidy Vs Naira:$ Exchange Rate Vs Crude Oil Price)

Exchange Rate (Naira:$USD)

Subsidy (Naira per liter)

2-months/Bi-Weekly/Weekly Crude Oil Price Average Prior to Price adjustment($/bbl)


PMS Subsidy Comparatives

2-months/Bi-Weekly/Weekly Crude Oil Price Average Prior to Price

adjustment($/bbl)

2-months/Bi-Weekly/Weekly Crude Oil Price Average Prior to Price adjustment($/bbl) Landing Cost

(Naira per liter)

Distribution Margin

(Naira per liter)

Expected Open

Market Price

(Naira per liter)

Regulated Price (Naira

per liter)

Subsidy (Naira per

liter)

Exchange Rate

(Naira:$USD)

Period 1_Dec'14 68 $/bbl 83.80 15.49 99.29 87.00 12.29 158.85Period 2_Feb 1st-19th '15 49 $/bbl 85.43 15.49 100.92 87.00 13.92 171.36Period 3_Feb 20th-28th '15 54 $/bbl 104.09 15.49 119.58 87.00 32.58 198.60


Household Kerosene (HHK) Subsidy Cost Analysis

In evaluating the subsidy budget provisions for HHK, the subsidy per liter for the periods of February 1-19th 2015 andFebruary 20-28th were also analyzed.

The comparative analysis of the subsidy for the said period indicates that the recent devaluation of the Naira from171.36 to an average of 198.60 Naira to a dollar had increased the subsidy from an average value of 63.69 to 79.44 Nairaper liters and with the increase in the average crude oil price standing at circa. 10% within the same period as indicatedin the table and chart below.

To further analyze this Naira De-Valuation effect, the average subsidy for Period-3 (February 20th-28th 2015) wascompared with that of December 2014, and the subsidy for Period-3 was about 119% of the evaluated subsidy forDecember 2014, despite Period-3 having a lower average crude oil price of 54 $ per barrel as compared to the 2-monthsaverage price of 67.51 $ per barrel for December 2014.

Thus, in setting the Benchmark for 2015 Budget for HHK the De-Valuation effect of the Naira to the dollar should beconsidered, together with a more realistic projection of the average Crude oil price outlook for 2015.

From our evaluation, the most likely subsidy budget provision per liter for HHK should be set at 79.44 Naira per litreassuming that the average price of crude oil will hover around 49 to 54 $ per barrel and at a constant exchange rate of$1USD to N198.60.


158.85 171.36 198.60

68 $/bbl49 $/bbl 54 $/bbl

66.9263.69

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100 $/bbl

Period 1_Dec'14 Period 2_Feb 1st-19th '15 Period 3_Feb 20th-28th '15

HHK Subsidy Evaluation for 2015(Subsidy Vs Naira:$ Exchange Rate Vs Crude Oil Price)

Exchange Rate (Naira:$USD)


Subsidy (Naira per liter)

HHK Subsidy Comparatives

2-months/Bi-Weekly/Weekly Crude Oil Price Average

Prior to Price adjustment($/bbl)


Landing Cost (Naira per liter)

Distribution Margin

(Naira per liter)

Expected Open

Market Price

(Naira per liter)

Regulated Price (Naira

per liter)

Subsidy (Naira per

liter)

Exchange Rate

(Naira:$USD)

Period 1_Dec'14 68 $/bbl 101.43 15.49 116.92 50.00 66.92 158.85Period 2_Feb 1st-19th '15 49 $/bbl 98.20 15.49 113.69 50.00 63.69 171.36Period 3_Feb 20th-28th '15 54 $/bbl 113.95 15.49 129.44 50.00 79.44 198.60


2015 Projected Subsidy Budget for PMS and HHK

A Comparative Analysis of Nigeria’s 2015 Subsidy Budget Provisions were evaluated by reviewing current Budget

provisions by the Federal Government and the adjustments made by the Senate Appropriation Committee.

The summary of our analysis indicates that taken into cognizance the current changing value of the Naira to the US

dollar and assuming that the 2013 National distribution of PMS and HHK remains the same for 2015; and with the

average price of Crude Oil hovering around 49-54 $ per barrel; the most likely subsidy cost outlook for PMS and HHK

should be set at 32.58 and 79.44 Naira per litre respectively by the Senate Appropriation Committee.

These equates to a projected subsidy budget outlook of 636 Billion Naira for both PMS and HHK as depicted in the

Chart below. This indicates that the proposed budgetary provisions by the Federal Government and the subsequent

downgrade may likely be in-adequate to meet the actual 2015 Subsidy Cost and may lead to a delay in meeting

payments to the PPPRA Selected Importers of PMS and HHK; and considering that the extra-budgetary request for

meeting the deficit provisions may require the approval of the National Assembly.

Note: That the initial Budget provisions for 2015 could have only be adequate , if the exchange rate of 171.36 Naira to

a dollar remained unchanged with the average price of Crude Oil maintaining a maximum price level of 54 $ per

barrel otherwise the National Consumptionwill have to be just above 55% of the projected consumption.

Projected 2015Subsidy Budget

N464billion N172 billion


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2015 Projected Subsidy Budget (Minimum Estimate)

2015 Nigeria Budget Proposal

2015 Nigeria Budget Proposal Adjustment by NASS

Nigeria 2015 Subsidy Budget Comparative Analysis

PMS HHK

a critical evaluation of the 2015 subsidy budget provisions for pms and hhk in nigeria

Economy & Finance