By Alex Ter Adum, PhD
The debate over petroleum subsidy reform under the Atiku Economic Recovery Plan (AERP) has become unnecessarily confused because two fundamentally different policy ideas are being presented as though they were the same.
They are not.
There is a world of difference between government arbitrarily fixing the pump price of Premium Motor Spirit (PMS), say at ₦200 per litre, and using public funds to reimburse refiners or importers for the difference between that regulated price and the actual economic cost of supplying the product, on the one hand, and using a targeted crude-feedstock incentive to reduce the cost of producing fuel domestically, on the other.
The first is essentially the old subsidy architecture.
The second is what AERP proposes.
If Atiku Abubakar were proposing that the government simply decree that PMS must sell at ₦200 per litre when the economic cost of supplying it was substantially higher, critics would be right to be alarmed.
A private refinery cannot sustainably be compelled to sell below cost. Someone must ultimately absorb the difference. If the refinery does, its cash flow and commercial viability are threatened. If the government reimburses the refinery, taxpayers bear the burden. And if importers are also eligible, the policy could once again make imports more attractive, increase demand for scarce foreign exchange and expose the treasury to potentially enormous and unpredictable liabilities.
That model has serious structural weaknesses.
But that is not the AERP proposal.
AERP does not propose to arbitrarily fix the pump price at ₦200 – or at any other politically determined price.
Its central proposition is much more fundamental:
If Nigeria is developing significant domestic refining capacity, why should the government continue to design petroleum support primarily around the consumption or importation of finished petroleum products?
Why not redirect the intervention upstream and use it to make Nigerian crude cheaper to refine in Nigeria?
That is the central philosophy of AERP.
The old subsidy architecture subsidised the refined litre consumed. AERP seeks to incentivise the crude barrel refined domestically.
FROM SUBSIDISING THE LITRE TO INCENTIVISING THE BARREL
Consider a simple analogy.
If the government wants to make pounded yam cheaper for ordinary Nigerians, it does not make much economic sense to encourage the export of the best raw yams produced by Nigerian farmers and then subsidise the importation and consumption of processed pounded yam.
A more rational intervention would be to strengthen the domestic value chain: support local farmers and processors by ensuring that the raw yam reaches Nigerian processing industries at a competitive cost. The lower input cost would improve the economics of domestic processing and create room for the resulting product to reach consumers at a more affordable price.
The same principle applies to petroleum.
Under the proposed AERP architecture, eligible domestic refineries would have access to Nigerian crude feedstock under a transparent, predetermined and fiscally controlled incentive mechanism designed to reduce their crude-input cost.
The refinery remains a commercial enterprise.
The government does not tell the refinery:
“Sell your petrol at ₦200 or face the consequences.”
Nor does the government promise an unlimited reimbursement for every litre sold below a politically determined price.
Instead, the government intervenes at the input stage to improve the economics of domestic refining, while allowing competition, operating efficiency and lower production costs to influence the resulting market price.
That distinction is critical.
WHAT HAPPENS IF GOVERNMENT FIXES THE PUMP PRICE?
Take Dangote Refinery as an illustration.
If the refinery’s economically sustainable cost of supplying PMS were ₦1,250 per litre and the government ordered it to sell at ₦200, there would be a ₦1,050 gap.
That gap does not disappear because the government announces a lower price.
Someone must pay for it.
If the refinery absorbs the loss, sustained production becomes commercially difficult.
If the government reimburses the refinery, taxpayers ultimately bear the cost.
If the subsidy is extended to importers, imports may become commercially attractive again, increasing Nigeria’s demand for foreign exchange and potentially recreating the very structural problems subsidy reform was intended to solve.
AERP attacks the problem from the other end.
Instead of artificially suppressing the selling price, it seeks to reduce the cost of production.
If the cost of crude feedstock is reduced through a transparent, targeted and fiscally capped incentive, the refinery’s overall cost of production can fall. That creates room for competitive price reductions without forcing a private refinery to operate below its economically sustainable cost.
That is a fundamentally different intervention.
SUBSIDISING PRODUCTION, NOT IMPORTATION
The distinction becomes even more important when Nigeria’s foreign-exchange position is considered.
A conventional pump-price subsidy can inadvertently make imported petrol profitable because the government absorbs the difference between the landed cost and the regulated retail price.
Nigeria could therefore end up in the absurd position of spending scarce foreign exchange to import petrol while simultaneously spending scarce public revenue to subsidise its consumption.
AERP seeks to reverse that incentive.
The preferred economic sequence becomes:
Nigerian crude → Nigerian refinery → Nigerian value addition → Nigerian jobs → Nigerian taxes → competitive domestic fuel prices.
That is the strategic logic.
It does not mean that a crude-feedstock incentive is cost-free. It is still an economic intervention and therefore carries a fiscal cost.
The difference is where the intervention occurs, who qualifies, what triggers it, how much the government spends and what Nigeria gets in return.
The cost can be targeted, capped, monitored and tied to measurable domestic production rather than becoming an open-ended liability linked to every litre of petrol consumed.
THE BUDGET BENCHMARK AS THE REFERENCE POINT
Under the AERP concept, the crude incentive would be referenced to the annual budgetary international crude-oil benchmark.
For illustration, if the budget benchmark were $64.85 per barrel as at present, while international crude prices were trading at approximately $105 per barrel, qualifying domestic refineries could be given access to Nigerian crude around the predetermined budgetary benchmark rather than being exposed fully to the higher international market price.
The difference is significant.
A qualifying domestic refinery could potentially avoid a crude-input differential of about $40 per barrel at such a price level, in addition to costs associated with international sourcing, shipping, insurance, foreign-exchange transactions, commissions and related logistics.
Where domestic crude is available and commercially allocated under a transparent mechanism, reducing those costs can materially improve the economics of domestic refining.
The resulting benefit does not have to be paid out as a cash reimbursement to the refinery for every litre of petrol sold.
It is embedded in the cost of the crude feedstock.
That lower input cost can then flow through the refinery’s economics to a lower ex-gantry price and, ultimately, a potentially lower pump price.
In other words:
AERP seeks to make petrol cheaper by making domestic refining cheaper – not by commanding refiners to sell below cost.
THE INCENTIVE SHOULD MOVE WITH THE OIL PRICE
Another important feature of the proposed architecture is that the incentive is not necessarily activated in every market condition.
If international crude prices rise substantially above the annual budgetary benchmark, the intervention can become relevant because domestic refiners would otherwise face a sharp increase in feedstock costs.
If crude prices fall below the benchmark, the market itself provides the correction and the incentive need not operate in the same way.
The mechanism is therefore designed primarily to address upward price shocks, rather than permanently subsidising production regardless of market conditions.
This is important because it means the policy is not simply an unconditional subsidy.
It is a counter-cyclical production incentive designed to protect domestic refining economics when international crude-price movements would otherwise undermine the affordability of locally refined petroleum products.
It also provides an economic framework for incentivising the Domestic Crude Supply Obligation (DCSO) under the Petroleum Industry Act (PIA), while pursuing Nigeria’s broader objective of domestic energy security.
WHAT ABOUT GOVERNMENT REVENUE?
There is another dimension to this debate that deserves greater public attention: the transparency and accounting of Nigeria’s oil revenues.
If the budgetary crude benchmark is significantly below the prevailing international price, Nigeria can generate substantially more revenue per barrel than was anticipated when the budget was prepared.
For example, where a benchmark of $64.85 is used as is the case with the 2026 budget and international prices rise substantially above that level, Nigerians are entitled to ask a straightforward question:
Where is the additional value going?
This question becomes even more important when Nigerians are simultaneously told that higher international crude prices are contributing to higher domestic fuel prices.
Under the present refining structure, where domestic refiners may still need to source a significant proportion of their crude feedstock internationally, international crude prices can transmit directly into domestic fuel costs.
AERP seeks to change that equation by using Nigeria’s own crude resources as an instrument for strengthening domestic refining and protecting consumers from unnecessary external cost pressures.
Historically, Nigeria recognised the importance of saving and managing excess oil revenues.
During the Obasanjo/Atiku administration, the National Economic Council supported the creation of the Excess Crude Account (ECA), through which revenues above budgetary assumptions were accumulated as a form of fiscal stabilisation and savings for the future – the proverbial “rainy day.”
Whatever one’s view of the subsequent political controversies surrounding the ECA, the underlying economic principle remains relevant:
When oil revenues rise above the assumptions underpinning the national budget, Nigerians deserve transparency about how that additional value is being accounted for and deployed.
AERP therefore presents an opportunity not merely to redesign petroleum intervention but also to strengthen the connection between crude-oil revenues, domestic refining, energy security and consumer welfare.
THE SAFEGUARDS ARE THE POLICY
The credibility of AERP, however, will depend on the quality of its implementation.
That is why the programme contains strong and enforceable safeguards, including:
- a transparent local-crude supply benchmark linked to the annual budgetary crude-price benchmark;
- a clearly defined maximum incentive or fiscal ceiling;
- strict eligibility requirements for participating refineries;
- independent verification of crude intake;
- verification of refined output and domestic deliveries;
- clear domestic-supply conditions;
- transparent pricing and reporting;
- independent auditing and public accountability;
- strict anti-diversion and anti-smuggling controls; and
- a prohibition against arbitrarily forcing private refiners to sell below economically sustainable cost.
The objective is to ensure that the benefit of the crude incentive is transmitted through the value chain to Nigerian consumers rather than captured entirely as an additional refinery margin.
This is why AERP should not be judged by simply asking:
“Is Atiku bringing back subsidy?”
That question is too simplistic.
The more important questions are:
What is being subsidised?
At what point in the value chain is government intervening?
Who qualifies?
How much can the government spend?
What conditions must benefiting refineries satisfy?
How is the benefit transmitted to consumers?
And what prevents the scheme from becoming another open-ended fiscal liability?
Those are the questions serious policy analysis should seek, not condemnation of what is not proposed.
THE CHOICE BEFORE NIGERIA
The critics are, however, right about one thing:
Nigeria must not repeat the mistakes of the old subsidy regime.
But that is precisely why the AERP proposal should be judged on its actual architecture – not on a hypothetical policy under which the government fixes PMS at ₦200 and reimburses private refiners indefinitely.
The choice is not simply between “subsidy” and “no subsidy.”
The real policy question is:
If Nigeria chooses to provide targeted support, what should it subsidise?
Should Nigeria subsidise the consumption of imported petrol?
Or should Nigeria use a controlled, transparent and fiscally capped incentive to make it cheaper to refine Nigerian crude in Nigeria?
AERP chooses the latter.
It shifts the intervention:
from consumption to production;
from imports to domestic refining;
from finished products to crude feedstock;
from arbitrary pump-price controls to lower production costs;
from open-ended reimbursement to targeted incentives;
from foreign-exchange dependence to domestic value addition.
The ultimate objective is straightforward:
Make domestic refining commercially stronger, make petroleum structurally cheaper, conserve foreign exchange, retain more value inside Nigeria and ensure that Nigerians – not importers and middlemen – capture a greater share of the value of Nigeria’s crude resources.
We should therefore not just subsidise the petrol Nigeria consumes when we can incentivise the crude Nigeria produces and refines.
We should not subsidise the imported litre.
We should incentivise the Nigerian crude barrel for local refining.
That is the essential difference between returning to the past and building a new subsidy architecture for Nigeria’s emerging domestic refining economy.
AERP is not about bringing back the old subsidy regime.
It is about redesigning intervention around domestic production, energy security and lower costs.
Alex Ter Adum, PhD
D-37 Policy Reform Think Tank
