Nigeria subsidy fears threaten worse fuel shortage - CNBC Africa

Nigeria subsidy fears threaten worse fuel shortage

Western Africa

by Reuters 0

Fuel shortages are set to worsen in Nigeria. PHOTO: Getty Images

Fuel shortages are set to worsen in Nigeria as international traders and local marketers back away from imports over fears that the cash-strapped new government will halt costly subsidy payments.

Already, lines at petrol stations in the major cities are blocking traffic as Africa's largest crude oil exporter runs out of domestic fuels. The shortage in some rural areas is even more acute due to a payment battle between independent retailers and the government.

"We have exhausted our stocks," said Stanley Yakubu, a worker at the Forte Filling Station in the Maitama neighborhood of Abuja. "We thought government and marketers have resolved their issues but supply is very slow in coming."

Traders said new bookings for vital tanker imports of transport fuel into Nigeria have slowed to a trickle, and some cargoes offshore are being redirected to other regions.

Efforts by outgoing president Goodluck Jonathan in 2012 to end expensive subsidies, which would have doubled gasoline prices, led to riots in the street.

The steep drop in world oil prices would have cushioned consumers from any withdrawal of subsidies, but gasoline prices would still jump by roughly 30 per cent if the current capped price of 87 naira per litre is allowed to move closer to the 115 it would cost without the government support.

Additionally, as subsidies cover the difference between the capped price and the cost to buy the fuel on the international market, marketers worry Nigeria could end the payments without letting capped prices rise, leaving them to shoulder the potentially sizeable price difference.

Nigeria relies on oil exports for 80 per cent of its revenue and has already burned through half of its borrowing allowance this year.

It could follow Angola and Indonesia in cutting expensive subsidies, but with crude prices now edging back up after last year's slump, the most ideal moment may well have passed.

"The time to cut was January/February, when oil prices were so low," said Stanislas Drochon, director of Africa oil and gas with IHS. "That was really a missed opportunity, but it's not too late."


Though Nigeria exports around two million barrels per day of crude, it is almost wholly reliant on imports for the 40 million litres per day of gasoline it consumes, due to inadequate refineries.

The effort is expensive, accounting for an average of 2.5 per

cent its gross domestic product from 2006-2012, according to the IMF. The government set aside 914 billion naira ($4.6 billion) for it in 2014.

Critics say the subsidies are not only inefficient but open to abuse by corrupt operators.

Imports that have arrived so far this year total at least 300 billion naira, according to pan-African lender Ecobank, a bill that would come due after incoming President Muhammadu Buhari's May 29 inauguration.

"The new regime will be the one who pays the bills," said Dolapo Oni, a Lagos-based energy analyst with Ecobank. "And no one wants to wait for the new government."

Buhari has not made clear his plans for subsidies, which are paid by the Petroleum Products Pricing Regulatory Agency (PPPRA).

The latest budget, passed earlier this week, slashed the money dedicated to it by 90 per cent, to 100 billion naira.

Nigerian banks are already scrambling to limit their exposure to the oil industry at large following the precipitous decline in crude prices.

"Quite a few players have had issues getting letters of credit," one trader said. "Some people are choosing not to import anything."