THE SCENARIOS & STRATEGIC IMPERATIVE: Nigeria's Subsidy Beneficiaries List

By Feso Bright

Figure 1

The recent release of a list containing the beneficiaries of the controversial government fuel subsidy programme has created a lot of furore in Nigeria. The names on the list are the typical names one would expect- the downstream oil and gas sector independent marketers et al; however there are a few names which constitute a surprise element. Nonetheless I see release of this list in a very different light; there is a learning opportunity here- an opportunity to dimension the industry with a view to understanding just a little bit more. A couple of months ago, I had a chat with an oil industry veteran- with over 30years of experience in the industry; he made one remarkable statement: "Nigeria's oil and gas industry is a jungle and here...you have to play by the rules of the jungle!" (implying that things do not work out in Nigeria as they do in other countries of the world). I struggled to deal with that statement in my mind for a few weeks but then I came to a conclusion-
Man has created and deployed science (natural, physical, management, economic, social science et al) to deal with the seemingly uncontrollable environment and most times, man has surmounted these challenges. Why do I say this?

People across the industry and in society tend to glorify the problems and apparent "chaos" in the Nigerian Oil and Gas industry; oil companies and policy makers are demonized frequently. What people do not realize some times is that they resign themselves to a state of bounded rationality choose to ignore the fact that even within chaos, there is order. Drawing from the chaos theory of Edward Lorenz- where he discovered that everything is interrelated hence a butterfly flapping its wings in South America can affect the weather in Central Park. Related to this is the concept of fractal patterns- a phenomenon in which the most chaotic element has been discovered to have some consistencies- case in point- the mandelbrot set (Benoit Mandelbrot). Ladies and gentlemen you see, I have started by flirting with the abstract so you can understand, that the Nigerian situation is no more unique than that in Norway or Chile, the United Kingdom or the United States. I think that, what we have in the Nigerian industry is a lack of appetite for the scientific and structured approaches to solving problems; even the seemingly insurmountable. 

Strategy is all about spotting patterns and taking proactive action. I have drawn up seven tables based on the subsidy list; a closer look at the tables will get us talking for the next decade if we do not get things right. The most obvious debating point is the question of whether or not subsidy removal should ensue come 2012 in Nigeria; less discerned are the strategic imperatives we may discover by taking a closer look at the figures and the businesses in the spotlight. This article presents two scenarios:

(a) All the subsidy is utilized on PMS (Premium Motor Spirit- aka Petrol) importation

(b) All the subsidy is utilized on HHK (House Hold Kerosene- aka Kerosine) importation

AGO (Automotive Gas Oil- aka Diesel) is fully deregulated as such we do not analyse that. The purpose of this article is to highlight the figures. It is my hope that the group of 36 companies (hereinafter referred to as G-36) as well as industry watchers will begin to see that there are opportunities for self improvement; patterns may reveal themselves to the discerning reader. It then becomes easier for the reader to understand the need to embark on strategic reinforcement or consolidation. It all depends on which side of the table one is seated at.

Figure 1 presents the G-36. There are more; over 61 independents which are beneficiaries of the oil subsidy but I reckon this table represents a majority of the monetary value of the subsidies paid out by the Nigerian Government. Figure 1 shows that there is significant turnover going on in the downstream oil and gas industry. Bankers definitely want to watch out for these names; I can imagine that the first Monday after this list came out, we had the serious banks outlining how  they have performed in securing wallet share of these companies. In fact, these figures may just the tip of the iceberg for these companies in terms of annual sales turn over. Businesses should be taking a look at share of wallet and financial capacity.

Figure 2

From Figure 2, if all the subsidy is spent on PMS then we have the potential to consume over 17 billion litres of PMS (taking into consideration the locally refined crude). For HHK we have a similar situation- over 13billion litres of HHK imported.

Figure 3

Over 2 trillion naira worth of Kerosene in this scenario.

Figure 4

Over 2.5 trillion naira of Petrol sold in this scenario

Figure 5

Now this is the more interesting part. All these costs have some significant levels of linkage to the oil and gas economy. For HHK, how do we ensure a reduction in the cost elements? Is the storage charge too high or too low? How effective is the bridging fund? How do we dimension the marine transport average or the financing, lightering expenses et al? What are these costs when compared to other economies (in USD terms)?

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Figure 8

The requirement is to keep it simple.....; out of the chaos what do you see? Do you see potential or do you really see stumbling blocks? What are the strategic imperatives?
(1) I see an opportunity for stakeholder engagement across the value chain of the industry; what do the transporters and retailers think? If we build refineries what happens to their businesses? (2) What is the long term strategy for each of the G-36 "beyond petroleum" - as a BP would say. I would want to take a look at the visions, missions and objectives of these companies; these subsidy figures reveal an aspect of their businesses....but does petroleum form a core? How does Pinnacle Construction view itself as a corporate entity? Is petroleum the mainstay of say- an Oando? I for one, know that Oando is relatively diversified across gas (midstream) and upstream- with a couple of assets there; but what about a renewables agenda?
(3) Corporate entities with huge earnings certainly must have significant externalities on their immediate environment; as such what is the level of corporate social responsibility and sustainability element in their businesses. It will be interesting to measure how far and deep these G-36 perform. Corporate social responsibility has been ranked on the basis of Economic (Level 1), Legal (Level 2), Ethical (Level 3) and Philanthropic (Level 4) responsibilities in ascending order of quality (Carrol) and I reckon that a significant chunk of this list will perhaps be on level 1 or 2 (economic or legal). What is the path towards  a level 4 corporate social responsibility practice?
(4) How do these companies view their market? How do they map for success? What is the path each company has chosen towards sustainable business competitive advantage? How has each company been able to master its 5-forces? Has this been based on deliberate planning or spontaneous and emergent practices? Do the management teams believe in long term survival or short term survival? What drives corporate action for the G-36 companies? I would like to speak to a few of these teams and find out; maybe even make some recommendations. 

Source: PPPRA

The question for the G-36 is: What has it done with its piece of the pie since 2006? How has it tapped its potential to grow and achieve sustainable competitive advantage?


As for the Federal Government of Nigeria the charge is simple:

Source: PPPRA

What is the nature of revenue management? How competitive is the downstream oil and gas sector? With the abolishment of subsidy regime what happens to all the stakeholders involved? Do their businesses just die off; I presume that there is infrastructure dedicated to the subsidy industry as-is. What safety brackets have been put in place for the subsidy beneficiaries? The public focus is on the G-36 and others listed but what about all the companies along the entire value chain; from NPA to the transporters et al. What is a cabal? Is there really a cabal or are we giving stakeholders a wrong name? What are the economics of 'an aggressive plan to encourage the construction and refurbishment of refineries? There is a lot of work to be done by the private and public sector, in partnership. For me, these scenarios and questions (and other questions they are bound to illicit) point in one direction: we must heed the strategic imperative for a dedicated, structured and scientific way to manage our chaos- after all, not all chaos is bad.