The pros and cons of sustaining Nigeria’s Petroleum Equalization Fund

In the last six months, the price of petrol (PMS) has been uniform across states in the country compared to kerosene (HHK) and diesel (AGO), data released by the National Bureau of Statistics data (NBS) revealed. The NBS data for December 2020 reveals that, apart from four states, namely, Kaduna, Abia, Kwara, and Katsina, the difference between the national average pump price of petrol and the prices across all the states is less than N5.

This relative uniformity in petrol price is due to the bridging arrangement in the petroleum equalization fund (PEF).

December 2020 Prices of Petrol, Diesel and Kerosene 

Due to the fact that PEF is exclusive to petrol alone, a relatively high disparity was observed in the prices of diesel and kerosene across the states. This reflected in the difference between the highest and lowest prices of petrol across states in December. This price difference of N21 for petrol was observed to be three times lower than the price difference for diesel and nine times lower than the price difference for kerosene. 

The Petroleum Equalization Fund (PEF) Management Board was formed primarily to compensate marketers of petroleum products such as gasoline, diesel and kerosene, who are disadvantaged due to their farther travel distance and higher costs of transporting refined products from the depot’s supply points to the retail outlets. This allows for the selling of petroleum products at uniform prices throughout the country, in spite of varying costs of transporting products to different destinations.

Why the continued use of the Equalization fund for petrol?

The Nigerian government fully deregulated diesel in 2008 and kerosene in 2016. This entailed the scrapping of subsidy payments on the two products as well as stopping charging fees from the marketers for the equalization fund.

Thus, proponents for eliminating uniformity of petrol prices through the equalization fund argue that if the diesel and kerosene market are functioning well in spite of disparities in their prices across the states, why continue to unify petrol prices? 

In his recent remarks, the Chairman of the Independent Petroleum Marketers Association (IPMAN) kicked against the planned elimination of the PEF for petrol, on the grounds of unity of the country. Mr Okonwko said, “In order to unite the country, there must be (a) semblance of uniformity in prices of petroleum products all over. For instance, the price you buy a particular soft drink is the same all over the country and that is internal equalization by the companies.

Contrary to the IPMAN Chairman’s sentiments, Ebehi Iyoha notes: “The biggest problem with the uniform pricing policy is that it alters normal market incentives… If an area that is far away from a depot typically has low demand, petrol marketers will decrease the volume they supply to that area and supply more to areas with higher demand, based on the volumes and prices that will yield them the highest profits.

She argued further that “Under the uniform pricing policy, marketers not only try to maximise profit from operations but also try to get as much as they can in equalization payments. This could mean supplying large quantities… to areas with low demand, as long as the resulting transportation payments from PEF are high enough to turn a profit. The excess supply created in these areas likely contributes to the persistence of petrol diversion for export to neighbouring countries.”

Besides the disincentives of price controls to market forces, the continued quest for uniformity also comes with concerns about implicit corruption. An analysis of Nigerian’s Extractive Industries Transparency Initiative (NEITI’s) records and The Nigerian Bureau of Statistics (NBS) data from 2012 to 2016  showed discrepancies in the claims of the PEF management board to the tune of 454.68 billion naira in revenues obtained from the collection of bridging allowance. 

According to NEITI’s FASD paper, PEF management board claimed to have generated 519 billion naira in revenue between 2012 and 2015. Bridging allowances brought in a total of N381.8 million. However when these figures were compared with the NBS’s data on petroleum products importation and consumption, they revealed a sum of 454.68 billion was unaccounted for. 

PEF Expected Revenue –  (2012- 2015) 

Source: NBS, Dataphyte

The expected revenue from PEF from 2012 to 2016 was calculated using NBS data on the consumption of petroleum products from 2010 to 2015 and a bridging allowance rate of N6 per liter of imported petroleum products. The petroleum products considered for the analysis were only Petrol and Kerosine because, at that time, only Diesel was exempt from such price controls.

PEF Accounted Revenue VS Expected Revenue (2012 – 2015)

Source: Dataphyte 

In their paper: Relevance lost? The Petroleum Equalization Fund in Nigeria, Abel Ezeoha et al submitted that “the operations of the (Petroleum Equalisation) Fund are characterized by shortages of petroleum products, corruption and management deficiencies.

Ongoing debates on deregulation of the downstream sector, including that on the elimination of petrol subsidy will benefit as well from assessment of the benefits and drawbacks of the petroleum equalisation fund, with regards the uniform pricing of petrol across the nation. However, the fact that the fund is now nothing more than a petrol equalisation fund hints that the petroleum equalisation fund could have outlived its usefulness.

This story was produced under the NAREP Media Oil and Gas 2021 fellowship of the Premium Times Centre for Investigative Journalism’