D-37 Policy Reform Think Tank
The benefits of the Atiku Economic Recovery Plan (AERP), if properly implemented, could extend beyond restructuring Nigeria’s subsidy architecture from consumption to production at the midstream level. Its principles could also be extended upstream to eliminate waste, reduce exploration and crude-extraction costs, and bring Nigeria’s production economics closer to those of comparable oil-producing countries.
Combining upstream reform with preferential crude-feedstock pricing for the local market could strengthen domestic refining while simultaneously improving the economics of crude production and enhancing the value Nigeria derives from its petroleum resources.
Nigeria should therefore approach the AERP with an open mind and use it as an opportunity to reform the economics of the entire petroleum value chain – from the oil field to the refinery.
This is particularly important because Nigeria’s crude-production costs remain relatively high. Available industry estimates place them broadly in the $25–$40-per-barrel range, compared with substantially lower costs in several major oil-producing countries.
Country| Indicative Production Cost/Bbl
Nigeria| ~$25–40
Algeria| ~$20–30
Libya| ~$20–30
Egypt| ~$20–30
Angola| ~$30–32
Ghana| ~$26–28
Venezuela| ~$23–40
Russia| ~$17–28
Iran| ~$13–27
USA| ~$29–36
Saudi Arabia| ~$10–21
Kuwait| ~$8
These figures illustrate the scale of the challenge: Nigeria’s production costs are high by international standards, reducing the competitiveness of its crude and limiting the value retained by the country.
Nigeria should therefore use the AERP as a framework for structural upstream reforms targeting oil theft, pipeline vandalism, security costs, inefficient evacuation systems, ageing infrastructure, contracting delays, operational inefficiencies and production losses.
The objective should be clear:
LOWER PRODUCTION COST – HIGHER MARGINS – MORE COMPETITIVE CRUDE – GREATER NATIONAL VALUE
THE INTERNATIONAL LESSON
The relevant international experience is not merely that oil-producing countries operate refineries. It is that some have deliberately managed the transfer economics of domestically produced crude supplied to local refineries as part of their broader energy-security and domestic-refining policies.
Algeria , historically, has supplied its refineries through SONATRACH , the state-owned oil company, using administered crude-transfer arrangements that have supported domestic refining and helped underpin controlled domestic petroleum-product prices.
Iran has used regulated domestic crude-pricing arrangements under which refineries receive crude according to prescribed pricing relationships, demonstrating how crude-feedstock pricing can be used as a domestic policy instrument.
Kuwait operates an integrated national petroleum system linking upstream production by the Kuwait Oil Company with domestic refining operations, allowing the state to manage petroleum economics across the value chain.
Saudi Arabia , through Aramco, similarly integrates domestic crude production with its refining system, while domestic product-pricing discount policies provide an additional mechanism for pursuing energy-security objectives.
These systems may not be exactly as the AERP. But they demonstrate, however, an important principle: an oil-producing country can deliberately manage the economics of domestic crude supply to local refineries in order to strengthen local refining, improve energy security and retain more petroleum value within the domestic economy.
THE AERP MODEL
The AERP proposes a transparent, capped and conditional non-cash feedstock mechanism:
REFERENCE CRUDE VALUE − APPROVED PREFERENTIAL FEEDSTOCK PRICE = EMBEDDED PRODUCTION SUPPORT
For example, if the reference crude value is $75 per barrel and the approved preferential feedstock price in accordance with the annual budget benchmark is $60, an eligible refinery receives the benefit by purchasing the crude at $60 per barrel – not through a subsequent $15 government cash payment.
This distinction is fundamental to the architecture of the AERP.
By enabling an eligible domestic refinery to obtain locally produced crude at a preferential price, the mechanism can also reduce the refinery’s exposure to foreign-exchange requirements. It eliminates the need to import the feedstock where suitable domestic crude is available and therefore reduces the associated foreign-exchange demand, shipping, insurance, freight and other landing costs.
For illustration, if an imported barrel carries a $75 international reference value but incurs another $15 in shipping, insurance, freight and related costs, its landed cost at the refinery could approach $90 per barrel. A preferential domestic crude price of $60 would therefore create a potential $30-per-barrel feedstock-cost advantage relative to that imported landed barrel.
That reduction directly addresses one of a refinery’s most significant production costs: feedstock.
The resulting improvement in refining economics can then be transmitted to the domestic market through lower production costs and greater room for competitive pricing of refined petroleum products.
Crucially, the AERP architecture would limit any preferential pricing to verified eligible barrels, tied to actual refining activity, domestic supply obligations, transparent measurement, auditable transactions and robust anti-diversion controls.
Combined with upstream cost reduction, the strategy becomes:
LOWER-COST CRUDE – COMPETITIVE DOMESTIC REFINING – MORE LOCAL PRODUCTS – LESS IMPORT DEPENDENCE – MORE VALUE RETAINED IN NIGERIA
The objective is therefore not simply to produce more barrels.
It is to produce barrels more efficiently and at lower cost, refine more of them domestically, reduce the cost of refined products and ensure that Nigerians capture a greater share of the value generated across the petroleum value chain.
D-37 Policy Reform Think Tank
