Uche Usim, Abuja and Adewale Sanyaolu
Nigeria’s downstream industry is in the news again as always with the recent decision of the Federal Government to re-introduce price modulation mechanism for Premium Motor Spirit (PMS), popularly called petrol.
But how well this concept is driven to achieve the desired goal with minimum disruption to supply to businesses and individuals across the country would determine how the Muhammadu Buhari administration would be judged by most commentators in the years ahead given the relevance of petroleum product to the lives of the citizens in the country.
This is because while both the nation’s business community and individual households need regular supply of petroleum products, the price at which it is sold to them also matters as much, thus explaining many have continued to express mixed feelings since the state oil firm gave indication it was exiting management and refining of products going forward.
But the Corporation’s hasty desire to leverage the low international prices of crude oil to relaunch its price modulation programme in the downstream has come under severe attack as its critics have began citing gaps that would like emerge if the policy was implemented in a hurry.
One of such moral hazards according to analyst was what would happen to the price of refined products if suddenly the coronavirus pandemic ends suddenly with crude oil jumping to $120 per barrel. In such a circumstance, can an average Nigerian be able to afford a litre at N200 or more to run his generator when there absolutely no guarantee of power supply or fuel his car to work in the absence of cheap public transportation alternative in an environment where gasoline prices are fully determined by market forces.
When first introduced in 2016 by Mr Ibe Kachikwu, the then Minister of State for Petroleum Resources, price modulation scheme, according to the government was aimed at overcoming the mistakes of the past and to allow market forces determine prices of petroleum products.
But no sooner had government experimented the price scheme, that prices of crude oil began rising again thus forcing it to return to a regime of subsidy payment.
Little wonder its reintroduction by the Federal Government on March 19, 2020 has generated mixed reactions among Nigerians and consumers of petroleum products.
But not a few Nigerians were bemused when the Federal Government announced a cut in pump price of petrol price to N125 per liter from N145, thus robbing the N20 drop on the face of the marketers who were ordered to effect the change with immediate effect.
President Buhari, who gave the approval, equally directed the Nigerian National Petroleum Corporation (NNPC) to reduce the Ex-Coastal and Ex-Depot prices of PMS to reflect current market realities.
Minister of State for Petroleum Resources, Timipre Sylva, who briefed newsmen, disclosed that the Petroleum Products Pricing Regulatory Agency (PPPRA) would subsequently issue a monthly guide to NNPC and marketers on the appropriate pricing template.
Sylva further disclosed that the reduction in prices would also affect other petroleum products like kerosene and diesel.
He said the reduction of price in diesel and kerosene would be determined by authorities and announced as soon as possible.
According to him, the reduction in pump price would have a salutary effect on the economy, provide relief to Nigerians and also provide a framework for sustainable supply of PMS into the country without saying the likely consequence on the economy of deregulated regime.
Sylva said: “The drop in crude oil prices has lowered the expected open market price of imported petrol below the official pump price of N145 per litre.
“The agency is further directed to modulate pricing in accordance with prevailing market dynamics and respond appropriately to any further oil market development.’’
But, less than one month after reducing petrol price to N125 per litre, the Federal Government again, in line with its promise to modulate pricing in accordance with prevailing market dynamics (crude oil prices) which is currently at $23 per barrel, yet again reduced petrol price to N123.50 per litre from N125.
But, the latest reduction to N123.50 per litre appears not to have gone down well with oil marketers who described the action as a bad business decision and contrary to all known business rules and due process.
The truth is that Nigerians and petroleum products consumers need a thorough sensitisation on the unfolding regime of deregulation where market forces would be determining pump price of fuel. They also need to understand that market forces can swing prices up or down depending on international market trends and must know that in as much as they would be excited at price floors, they should equally be ready to accommodate peak prices when the pendulum swings in that direction.
Outside building such bridges of understanding, the NNPC and indeed the Federal Government would have the consumers to contend with when prices soar beyond their comfort zone, because it is in the nature of man to crave for subsidy particularly when the means for paying competitive prices are heavily constrained.
Since the NNPC gave indications of its planned exit from downstream activities economy experts have hailed it thus strengthening their opposition to government’s continuous regulation of the sector and listed smuggling of petroleum products, low level of competition, anti-competitive practices, non-transparent petroleum subsidy practices, poor maintenance of infrastructure, poor products supply and distribution, inapt pricing of products supply and high level of fraud as sufficient reasons to deregulate and break the monopoly of the Nigerian National Petroleum Corporation (NNPC).
Notwithstanding however, many also believe that the sustenance of government regulation and price fixing, would help poor Nigerians in the majority, who may not afford the products under a deregulated market.
Some others have argued the time is now ripe for Nigeria to align with global realities and practices by allowing market forces determine price of petroleum products, so that the trillions of naira hitherto channeled into questionable subsidy payments can be available to meet other economic needs.
In 2019, the Senate flayed the payment of N11 trillion subsidy to oil marketers for six years, stressing that the development, if not halted, could kill the nation’s economy. This was as the Senior Special Assistant to the President on Niger Delta Affairs, last week, said the country spent N1.5 trillion to subsidise petrol in 2019
Similarly, in 2018 alone, a report by the Nigeria Extractive Industry and Transparency Initiative hinted that Nigeria spent about N722.3 billion on fuel subsidy,
It was therefore a soothing relief for many industry stakeholders when last week the Group Managing Director of the NNPC, Mr Mele Kyari said the Corporation was exiting subsidy regime going forward.
“Going forward, there will be no resort to either subsidy or under-recovery of any nature.“NNPC will play in the marketplace, it will just be another marketer in the space. But we will be there for the country to sustain the security of supply at market price”. He said
Kyari further announced that the national oil company, upon completion of the ongoing rehabilitation exercise of various refineries, would procure the services of a company to manage the plants on an Operations and Maintenance (O&M) basis.
He said: “We are going to get an O&M contract, NNPC won’t run it. We are going to get a firm that will guarantee that this plant would run for some time. We want to try a different model of getting this refinery to run. And we are going to apply this process for the running of the other two refineries”.
He explained that the ultimate plan was to get private partners to invest in the refineries and get them to run on the NLNG model where the shareholders would be free to decide the fate of the refineries going forward.
Commenting on the development, an economic analyst and Lead Director, Centre for Social Justice, Eze Onyekpere, said the NNPC was smart to have leveraged the low oil prices to abolish the subsidy regime that is fraught with irregularities.
“This is an opportunity to let go of subsidy. There is no need hanging on subsidy payment. If you remove it now, Nigerians won’t lament and they will adjust when crude prices go up. But if you do it when the price is high, Nigerians will cry and shout. So, let the government seize the opportunity the crash in crude oil presents”, he said.
Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Mr.Tunji Oyebanji, in a telephone interview with Daily Sun, reiterated that the global reduction in crude oil prices has presented Nigeria with the opportunity to reform and restructure its petroleum downstream industry.
He lamented that adjustments in fuel prices was rather becoming too frequent with the latest review coming within a month, thus leading to distortions and imbalance for market operators because it comes in a sudden manner.
He disclosed that the last adjustment by the PPPRA from N145 per litre to N125 cost MOMAN members about N3.8 billion in revenue loss because the timeframe given for compliance with directive was with immediate effect.
‘‘A lot of our members still had fuel in their underground tanks while those that don’t have already placed orders that were in transit. But with these two sudden changes, who bears the cost of the short fall. The PPPRA should not only be concerned with political considerations but should also consider economic and financial implications of some of these pronouncements? He posited
Oyabanji regretted that most members of the public do not understand the dynamics of the downstream sector, such that whenever there is a downward review of prices, only marketers bear the brunt since they are not always given a moratorium, but must always comply with immediate effect .
The MOMAN boss said the association and other critical stakeholders have always advised PPPRA to always carry the association along whenever it plans to have a price review or adjustment, so that those with buy orders would have received same and finished exhausting it, before the new price regime takes effect, otherwise, they may sooner than later run out of business with the frequent changes in fuel price.
Oyebanji said that the drop in crude oil price would also open up petrol (PMS) Importation by bringing multiple players to participate in importation.
He said that removing fuel subsidy at the period of drop in prices would eliminate waste, address the issue of low margin of marketers as well as set the country on the path of determining appropriate pricing for the product in the country.
He also advocated the need for the restructuring of the nation’s downstream oil industry in order to set it on the path to sustainability.
Indeed, the Managing Director of OVH Energy, an Oando licensee, Mr.Huub Stokman, described Nigeria’s downstream industry as the most fragmented in the petroleum industry value chain because it is competing with the Nigerian National Petroleum Corporation (NNPC) which as operator and regulator imports about 100 per cent of the country’s petroleum requirement.
Stokman, urged the Federal Government to deregulate the sector to free up funds for the development of other critical sectors of the economy.
Also reacting to the planned industry deregulation, an energy expert and partner, Bloomfield Law Practice, Dr. Ayodele Oni, maintained that the price modulation model currently being adopted was not sustainable.
He explained that the global crash in oil prices was caused by the outbreak of the coronavirus and resulting excess supply over demand of oil in global markets.
With no end in sight to the coronavirus pandemic, he said it is unclear how long reduction in the global price of crude oil will last.
‘‘Currently, petroleum subsidy paid the by the Federal Government of Nigeria is determined by the deficit between the expected open market price of petrol and the pump price of petrol, both of which are determined by the PPPRA. The drop in global crude oil prices has resulted in the landing cost of petroleum and a consequential reduction in the expected open market price of petroleum and as a result, a reduction in the cost of petrol subsidy.
The Federal Government’s actions in allowing market forces to determine the cost of petroleum has served as an indication to many of its willingness to deregulate the downstream petroleum sector. However, this outlook may be a premature, as the Federal Government’s directives by all means indicate that the pump price of petroleum will still be regulated monthly albeit in line with prevailing market forces.’’
Nonetheless, Oni said as many stakeholders have recognised, the current market realities make this an appropriate time to deregulate the oil sector and allow market forces to determine the pump price of petrol and create increased competition in the downstream petroleum industry.