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African producers cut oil subsidies

08 Jan 2016 19:19 GMT
African producers cut oil subsidies

Lower oil prices are prompting the continent's crude exporters to review costly subsidies for domestic oil products

Johannesburg, 8 January (Argus) — Sub-Saharan Africa's leading oil exporters, Nigeria and Angola, are removing state subsidies on refined products because of lower crude prices.

A sharp fall in oil export revenues has forced the countries to reduce expenditure, including on price subsidies for domestic gasoline, diesel and other refined products. These subsidies have been used by both governments for political reasons, but they have been costly and inefficient.

Angola increased domestic gasoline prices by 40pc on 1 January to 160 kwanza/litre ($1.18/l). The diesel price rose by 80pc to Kzr135/l. The government has steadily removed the subsidy on refined products since 2014 because of budgetary pressures. Angolan refined product prices were among the cheapest in the world, which led to smuggling of gasoline and diesel to neighbouring countries. Energy subsidies cost the government Kzr480bn in 2014, or almost 4pc of GDP.

The Nigerian government has made no provision for subsidies in its 2016 budget. President Muhammadu Buhari on 30 December said subsidies would not be needed by the end of the first quarter because of falling international oil prices. Nigeria spent $35bn on subsidies in 2010-14, according to the World Bank. The government set aside 407bn naira ($2bn) last month to pay additional subsidies, including arrears for products supplied in 2014. Nigeria's provisional budget for this year is based on an oil price of $38/bl, down from $53/bl in the 2015 budget. The government expects to have a budget deficit of $11bn this year.

Elastic band

State-owned NNPC last month said it would introduce a new "price modulation system", which would see domestic gasoline prices range from N87/l (44¢/l) to N97/l. The system is an "elastic price mechanism regime to be reviewed periodically to reflect the prevailing international price of crude", the firm said.

Nigeria's products pricing agency PPPRA on 1 January issued a new pricing template to set the price of domestic refined products prices. Gasoline is priced at N86-86.50/l, down from N87/l. The government's subsidy cost may also be reduced by increased refined products supplies from NNPC's refineries, reducing the country's reliance on imports. NNPC this month restarted its Port Harcourt, Warri and Kaduna refineries. The refineries operated at under 5pc of their combined capacity of 445,000 b/d in the first 11 months of last year because of operational problems and criminal sabotage on pipelines supplying them with crude.

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