‘THE COST OF FUEL SCARCITY’
The Book, ‘The Costs of Fuel Scarcity’ written by Engr Johnson O. Awoyomi, an accomplished Engineer and a three-time member of the National Fuel War room, is an in-depth analysis of Nigeria’s Oil and Gas Industry. In the book, the author superbly captured the challenges in the industry and proffered solutions on the way forward.
Given the significance of the book, the Editorial Board of VALUECHAIN Oil and Gas Magazine has decided to serialize its content for the benefit of stakeholders in the industry and our teeming readers. Keep a date with us.
CHAPTER 6:
1.1 INTRODUCTION
According to the Association for the Advancement of Cost Engineering (AACE) International, there are two kinds of cost elements – direct and indirect cost, which are often borne of any endeavor or project. The breakdown of these elements of costs is shown in Figure 6 1. In this chapter, some cost engineering expertise would be deployed to attempt the number of probable costs incurred each time fuel scarcity arises.
Direct Costs
Direct costs are costs that can be directly attributed to a particular item of work or activity. Practically, these costs are related to material, labor, equipment, and subcontracted elements that remain after the contractor departs. Direct costs can be clearly and unambiguously allocated to a specific work item. Therefore, in the context of fuel scarcity, direct costs will include all the costs that can be clearly and unambiguously allocated to address the menace of fuel scarcity.
The category of direct costs that are often incurred each time fuel scarcity arises in Nigeria includes the following;
1. Labor cost: The total amount paid to the field personnel who performs the actual work of addressing the fuel scarcity. The labor cost is listed in.
2. Table 5 1.
3. Material cost: This cost includes prices of all materials or parts used during the fuel scarcity crisis. They can be the cost of commodity or bulk materials (piping, fittings, cables aggregates, etc.) used in fixing vandalized product pipelines, repair of the bad segment of the roads, dredging of the waterway, etc.
4. Equipment cost: This cost refers to the cost of equipment used to accomplish work (such as backhoes, cranes, bulldozers, etc.) for the repairs of the damaged pipelines, repairs of the road for ease of passage by trucks, dredging of waterways to provide better draft for the ship-to-ship (STS) vessels carrying products.
5. Subcontract cost: The costs of services provided by subcontractors for performing a specific portion of work that cannot be self-performed by the War Room members. These include catering services, security and field personnel, etc.
Indirect Costs
Indirect costs are those resources that need to be expended to support an activity or asset and are also associated with other activities and assets. They include home office, administrative and similar costs. In terms of fuel scarcity, the indirect costs are the cost of those resources that need to be expended to support the implementation/fighting of fuel scarcity and that are also associated with other activities. They include the following:
1. Taxes: All kinds of taxes payable on services rendered and resources used during the course of prosecuting the fuel crisis are additional costs.
2. General conditions: These include the cost of items that need to be furnished to perform a given contract as a whole. Typically includes supervision, temporary facilities, office trailers, toilets, utilities, permits, photographs, small tools, clean up, etc. deployed to address the problem of fuel scarcity.
3. Risk/Reward (Contingency): Profit is the amount of money included by a contractor in his price as compensation for risk, efforts, and endeavor in undertaking a project. Contingency is the amount added to an estimate to allow for changes or project cost growth that experience shows will likely be required. This is huge in the case of fuel scarcity because as the name implies is a “war period time” and everything is urgent and important. Take, for instance, once a contractor is engaged to repair a vandalized pipeline, a high-risk inherent operation, a high padded contingency, and profit rate is applied.
4. Overheads: An overhead is a cost or expense inherent in performing an operation i.e., engineering, construction, operating, or manufacturing that cannot be charged to or identified with a part of the work, product, or asset. They must either be allocated on some arbitrary basis believed to be equitable or handled as a business expense independent of the volume of production. For the fuel scarcity case, the list of the overhead cost elements includes all the cost being incurred on;
• All the support staff (clerks, messengers, secretaries, drivers, etc) of all the CEOs that are involved in the fuel scarcity.
• Maintenance and the fueling costs of vehicles
• Office lease or rents, insurance, advertising, etc.
Other cost types
Other types of costs that get incurred in the course of fighting fuel scarcity include the following in Table 6 2. The list is inexhaustible but serves as a guide to the enormity of the cost being incurred each time there is fuel scarcity.
1.2 Cost Magnitude
Now let us attempt to put some figures to them so that it can be very clear on the magnitude of the cost to the economy.
1. Overpayment for the product
This is very huge because during the period of fuel scarcity, the product becomes scarce and the law of demand and supply cannot come to play. Both owners of depots and filling stations benefit from this scheme.
The NOC supplies the ‘scarce’ commodity at say, N117 per litre to all the depots (DAPPMA, MOMAN, IPMAN, etc.), and the depot owners are required to sell to all retail filling stations at N133.28 per litre. But alas this is not so during the fuel scarcity. They, instead sell to the retailers at say – over N140 naira per litre, and this in return making filling stations sell to consumers between N160 and N220 per litre depending on locations. Assuming an average selling price of N170 per litre (by retailing stations) as against the recommended price of N145, this gives a financial loss of N25 to every consumer. If the car owner consumes 100 litres of PMS monthly (very conservative), the extra financial burden to him is N2500 per month. Also, considering a national daily consumption of 35 million litres, a financial burden of N875 Million is brought upon the consumers or motorist’ community on daily basis. Thus, resulting in high transportation costs including some basic needs in the society.
2. Queuing to buy fuel
Considering the following assumptions for this analysis;
• The number of vehicles in Nigeria is 11.5 million – (source: Q1 2017 by Nigeria Bureau of Statistics – NBS).
• 20% of the vehicles have their tanks filled up twice a week, which is 2.3 million vehicles.
• Time taken to stay in the queue to get a tank filled is approximately 30mins (very conservative).
• One hour in a week and aggregates to 2.3 million man-hours for the populace.
• Every person on the queue earns just about N100 per hour (is a composite rate of low earning class).
The total man-hours cost lost from staying in the queue on weekly basis is N230 million.
The analysis above is conservative as some drivers actually could stay overnight at filling stations to purchase fuel. This is very conservative and it only shows that “fuel scarcity” is quite an expensive business to the nation as well as individuals. Remember, the time spent at filling stations is not available to do other gainful things.
3. Typical Fuel War Room Cost
On average, the War Room sits for 4 hours per day (conservatively) with daily attendees of about 40 persons as itemized below:
• The War Room Commander (1No)
• The Chief Operating Officers (2Nos )
• Managing Directors (lot 9Nos)
• Managers (Lot 15Nos)
• Others (Data Gatherers/Analysts) (10)
Deploying a composite man-hour rate concept and assuming a man-hour rate of $100 on the average (conservatively assumed) and considering each person spends four hours engaging in War Room activities per day; the man-hour cost of an operational War Room in a week (weekend inclusive) will be about $100,000 – weekly basis.
The costs of the snacks and lunch served to the members that attend the War Room, the costs of the venue for War Room meetings and the opportunity costs for those staff attending War Room meetings at the expense of their daily work routines have not been considered. By adding these costs to the man-hour cost, it can be deduced that the cost for fuel scarcity is unsustainable.
4. The under-recovery cost
This represents the alternative forgone or the things we could have invested in such as infrastructures, roads, and refineries but could not. Assuming from the Petroleum Products Pricing and Regulation Authority (PPPRA) template, as of 24th February 2018, the expected open market price (EOMP) of PMS at the filling stations is N175 per litre. While the approved (subsidized) pump price is N145 per litre. This amounts to N30 per litre as under-recovery. If we multiply N30 by 50 million litres daily consumption, what we have as a daily under-recovery is N1.5 billion. This is what the government would pay as subsidy on that day. This is not sustainable in the long run. A daily average of N1.5 billion in a year will amount to N547.5 billion. If by the PPPRA template the EOMP of PMS is N140 per litre, then the over-recovery will be gotten by multiplying (N145-N140) by 50 million litres.
5. Image/Reputational Cost
This is the first and the most important cost because the NOC and the nation suffer any time there is fuel scarcity. The nation’s image gets dented that “as an oil-producing country, we are yet unable to provide refined products for local consumption” and have to resort to importing refined products. The second part is concerning the NOC’s inability to refine for local consumptions despite owning four refineries of 445-kilo barrels per day capacity. To this end, there would be counter messages in the media that portray a negative image of the NOC and the nation’s reputations at large.
It is now clear that the cost of fuel scarcity is huge and even unsustainable. It is better to avoid any issue that could result in fuel scarcity, hence setting up a War Room. If not what are the solutions and this form the focus of the next chapter.
CHAPTER 7
GOING FORWARD – FUEL SCARCITY RESOLUTIONS
Introduction
In the bid to have a final resolution to the menace of fuel scarcity in Nigeria; the considerations are always not only economical but social, political, and geographical.
In this chapter, the attention will be focused on the following: the short-term solutions that can be implemented pending when the government is politically ready to deregulate the downstream sector; the long-term solution, and lastly the energy mix of the nation.
1.3 Short term solution
While awaiting the final burial of the fuel scarcity menace, the following short-term initiatives would be of great benefit. In chapter one, the causes of fuel scarcity were mentioned and drawing from that list, the short-term solutions were derived (Table 7 1).
1. Refineries Revamp
Kuwait with its massive oil reserves refines almost all its crude oil, they have refineries located in and outside the country. There is little or no crude to sell, all is refined locally. Japan with no single deposit of crude oil has over 25 operating refineries. What is stopping us from doing the same? It is a national shame that Nigeria has four refineries and a nameplate capacity of 445-kilo barrels per day still majorly depend on PMS importation to meet the local requirements. Whatever model needs to be run or implemented, these refineries must be made to work. If nothing is done, the private refineries coming on board will poach all the experienced personnel and may force the government to sell the refineries as scraps. There is an urgency of yesterday in this regard and the time to act is now.
• Solution: I recommend that a ‘War Room’ scenario is set up to revamp the refineries and not ‘War Room’ for fuel supply/importation. I am sure if 50% of the energy expended in the fuel PMS War Room was deployed to refinery revamp, refineries will begin to function optimally, benefits like employment would arise, locally refined PMS available for use and importation could be used to balance any demand unmet.
• Government to encourage the erection of more private refineries – could be modular or full blown ones
2. Pipeline Repairs Security and protection
The current efforts of the government at the pipeline repairs must be sustained, but more importantly, the pipelines must be protected from further vandalism. For the size of our country, it is a very expensive venture to supply PMS to all the nooks and cranny by trucking. The best practice globally of moving refined products in large volumes is via pipelines and a reasonable amount through rail. Community policing of our pipeline infrastructures must be institutionalized and innovative technologies need to be adopted such as the use of military drones. Also, national infrastructural re-birth is long overdue by considering a gradual replacement of the aged pipeline infrastructures using HDD (Horizontal Directional Drilling) Methodology – this will reduce or minimize the frequent failure experienced due to the age of the pipelines and vandalism.
3. Payment of the outstanding debts owed marketers
Government should as a matter of necessity pay the marketers – MOMAN, DAPPMA, the amounts owed (in phases), that contributed to marketers’ inability to import PMS (as their creditors are not willing to offer more credits until backlogs are cleared). This will bring marketers back into the entirety of the value chain of PMS distribution covering- import, receipt, discharge, loading/trucking, and retailing. The benefit of this option is the increase in efficiency of the entire distribution chain.
4. Deploy Technology Solutions – Tracking
We need to deploy technologies to monitor and track both the shuttle vessels, pipelines, and PMS trucks along the coastal waters and as well as right from depots to the retail stations. All the trucks must be equipped with tracking technology before permitted to load at depots. The implications of the deployment of tracking solutions include the following:
• Minimization of massive smuggling across the border.
• Reduction of daily truck-out averaging over 60 million litres/day to the real daily requirements.
• Products’ availability for local consumption.
The costs of installation of the tracking solutions must form part of the cost of the business from the sides of the marketers and the transporters.
5. Dredge the Jetties – Lagos, Warri, Calabar, etc.
Continuously dredge the jetties to eliminate draft limitations and inefficiencies. The inefficiencies due to draft limitations in the ports need to be gotten rid of by a continuous dedicated dredging program in place. A review of the high port charges commensurate with the quality of services being provided will be a good starting point.
6. Better coordination among the stakeholders
There should be improved coordination for vessel clearance by affected agencies; Navy, NPA, DPR, Customs, NIMASA, etc. This would serve as a one-stop-shop program to provide better options in terms of operational efficiency and transparency.
i. Proper monitoring of marketers to prevent round-tripping
The use of innovative solutions is needed to improve the proper monitoring of activities at the port. Marketers need some check-mating by emplacing proper and more organized monitoring and control of what they do to eradicate the allegations of “round-tripping.”
ii. Robust collaboration with Union members
Modern-day unionism is about collaboration and synergy between union members and employers, this should be the target in the oil and gas sector unionism in Nigeria.
iii. Discourage the ‘black marketing’
Nigerians are highly entrepreneurial and therefore always at alert to capitalize on any opportunity such as fuel scarcity to rein in more money. The government should clamp down on these people to serve as scapegoats.
iv. Block smuggling of PMS to the neighbouring countries
Due to large arbitrage existing between the neighboring countries and Nigeria as shown in Figure 1 3, Nigeria’s PMS is in great demand. The customs, immigration, and securing groups in Nigeria must ensure effective policing of our borders against PMS smuggling.
v. Subsidy element inclusion in the national budget
The inclusion of subsidy elements in the national budget should be reviewed and approved by both the executives and the national assembly. This would also entail the engagement of NASS members on the amount required to maintain the pump price of PMS at N145 per litre (for a period that the government wants – say another 12 months) with a view to obtain their buy-in on the amount for appropriation.
This method has a lot of merits which include; transparency to attract the full support of stakeholders and marketers will begin importation. However, the subsidy element is huge and investment might not be attractive.
Can NNPC continue with the 100% importation?
The answer is yes as currently being proved by NNPC – single-handedly importing the whole PMS for national consumption since January 2018 till date! NNPC has been doing a great job in meeting the national PMS requirements of fuel importation since the marketers stopped PMS importation in 2017 to date. And this is positive for NNPC, being an NOC having access to FAAC allocations making it easier to recover the under-recovery costs. However, NNPC is not set up solely to import PMS for over 180 Million Nigerians and with time inefficiency may set in.
1.4 Long term solution – Deregulation of downstream oil value chain
In the words of Professor Ben Ayade, the current Governor of Cross River State, during the just concluded Nigerian International Petroleum Summit (NPIS) held in February 2018, he said: “Let us tell ourselves the truth, the final solution is not just a single solution but a myriad of options”. The deregulation of the downstream sector has many subsets depicted in and Figure 7 1 and Table 7 2.
1. Launch pipeline infrastructural rebirth
Petroleum products are moved faster and more reliably through pipelines for the economy of scale. The pipeline infrastructure rebirth needs to be launched (not necessarily completed) before deregulation. Since the pipeline company collects tariffs for moving petroleum products for marketers to various parts of the countries such tariff can be re-cycled back to maintain the pipeline infrastructures.
2. Launch all depots (coastal and inland) revamp rebirth
Prior to full deregulation, both coastal depots and inland depots require refurbishment by phases and it must begin before deregulation. The storage company gets paid for storage of petroleum products by marketers, such funds should be available for maintenance of their facilities.
3. Readiness of the regulators – how much regulation required
How much regulation do we require in a deregulated environment? Some say none some say little. There must be some regulation – safety, quality, quantity, pipeline tariffing, storage throughput, security, practices of stakeholders, etc. The issues around infrastructure need regulation while the products are fully deregulated.
4. Deregulate the downstream sector
Having in place – pipeline infrastructure rebirth, depot facilities rebirth, and readiness of the regulator, then only can deregulation begin. A phased approach is suggested for transition to be gradual and effective. It could be split into two, considering 50% for year 1 and the balance for Year 2 or a 25 -75% split.
Downstream deregulation brings about these benefits- transparency, cost competitiveness, investment, employment, GDP growth, and more markets.
5. Introduce PM tax as per other economies
The introduction of fuel tax has been done by many countries as depicted in Figure 7-2, which serves as an additional source of revenue for the government. However, this needs to be “politically right-timed” with a lot of stakeholder engagement – as there will be a lot of agitations, Citizens’ protest, Labour, Trade Unions, and civil societies.
6. Proper energy mix dimension
This section will focus on proper energy mix for the country, the talking points will be on oil, gas, renewables, power, electric vehicles (EVs), batteries, storage, carbon dioxide, hydrogen, climate change, carbon footprint, digital and physical world, cyber-security, etc. All these make good economic sense for the globe and in particular for Nigeria to have energy security. Energy security is a road map for economic prosperity and it is about energy realism. We need the cascade of technology breakthroughs driven by innovation and to move from energy scarcity to unpredictable abundant energy, innovation needs to be incentivized.
• Oil
Will this oil age be forever? Oil will still be around for some time but will dwindle to around 60/40 split oil versus other sources like renewables – solar, wind, hydro biofuel, etc. The age of cars, driving license, oil gauge and tyres check, insurance papers, etc. will disappear gradually and the next generation will find it funny to know that such ever existed sometime in history. Is this an energy transition, evolution, or revolution? Some say it is more of an energy revolution as opposed to a transition.
• Renewables
Wood, solar, wind, biofuel, landfill gas, etc are all sources of renewable energy. In the northern part of Nigeria where sunlight is abundant, fossil fuels powered sources of energy should decline. Creating or deployment of large solar farms for power generation has great potential. In the same vein, wind farms can be deployed to produce power.
The use of renewables has passed the stage of feasibility and is now at the implementation stage and cost competitiveness phase. It is worth noting that renewables provide approximately 22% of the global energy requirements as of Q1 2018. However, the current issues with solar energy are batteries for storage, space for the solar panels, and how fast it can charge to its full capacity.
• Biofuel
This is a good option for Nigeria as it has a high propensity for employment generation and this can be an option to solve unemployment in Nigeria. More so, we have a lot of virgin land for bio-fuels that are highly cultivatable without impacting the food production slot.
• Electric Vehicles (EVs)
Currently out of 1.3 billion cars in the globe, just about 0.2% are EVs. This will change over time and it needs to be in a controlled manner. The future of EVs is great and is happening faster than we expect. There are over 70,000 EVs in California. EVs are more efficient than fuel/autonomous vehicles, but the issue is where and how fast do they charge?
There is a need for Africa to wake up from her slumber – from coal to oil, oil to gas, gas to renewable, time is no longer on our side. Africa’s population is growing without a corresponding growth in our food supply, good health, power, infrastructures, roads, etc. Africa is slowed down for lack of capacity, resources, expertise, funding, etc.
1.5 What lies ahead for the industry?
1. Cars, trucks, and the mobile industry: EVs are going to be on the increase and that will impact mobility. Issues of storage and battery will be tackled head-on.
2. Gas: The future is in gas and demand for gas will increase and investments will grow through four keywords: optimism, momentum, uncertainty, and interconnectedness. Little wonder why Nigeria has tagged this decade as the “Decade of Gas.”
3. Power: Optimism exists here and as well as decarbonisation. Nigeria is targeting gas as the primary source of its power and California is targeting 50% of its energy to be from renewables by 2030. Customer focus, energy transition and strong innovation are critical in times like this.
4. Policy: Energy and climate change policy, investment strategy, and lowering of carbon footprints would increase and Africa with in Nigeria in mind in particular cannot lag.
(Concluded)
