Adewale Sanyaolu
The Federal Government has come under fresh attack over its recent price modulation option aimed at keeping pump price of Premium Motor Spirit (PMS) popularly called petrol within a certain band range as a measure to reflect the drop in crude oil prices occasioned by the Coronavirus pandemic.
While consumers appear to be comfortable with the reduction in petrol prices, stakeholders in the downstream sector of the petroleum industry which include members of the Major Oil Marketers Association of Nigeria (MOMAN), Independent Petroleum Marketers Association of Nigeria (IPMAN), are worried, saying the move to introduce price modulation for petrol was not a sustainable model for the industry.
Indeed, Nigerians were shocked when on March 19, 2020, the Federal Government announced that it has slashed pump price of petrol price to N125 per liter from N145, indicating a N20 drop.
President Muhammadu 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 regime.
Sylva 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 could help have a salutary effect on the economy, provide relief to Nigerians and also provide a framework for sustainable supply of PMS into the country.
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, again on Tuesday further 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 as they described the action as bad for their business and not in conformity with business rules and due process.
Chairman of MOMAN, Mr.Tunji Oyebanji, in a telephone interview with Sunday Sun, lamented that adjustments in fuel prices was now 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 lamented that the last adjustment by the PPPRA from N145 per litre to N125 cost its members about N3.8 billion in revenue loss because the timeframe given that the directive be complied with, 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. Now with these two sudden changes, who bears the shortfall.The PPPRA should not only be concerned with political considerations, but rather should consider economic and financial implications of some of these pronouncements?”
He said most members of the public do not understand the market dynamics of the downstream sector, saying whenever there is a downward review of prices, marketers bear the brunt because they are not always given a moratorium, it is always immediate.
The MOMAN boss said the association and other critical stakeholders have always advised PPPRA that whenever it plans to have a price review or adjustment, they should endeavour to give stakeholders a three-month notice ahead of implementation, so that those that have placed 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.
MOMAN reiterated that the global reduction in crude oil prices has presented Nigeria with the opportunity to reform and restructure its petroleum downstream industry.
Oyebanji said that the drop in crude oil price would also open up petrol (PMS) Importation by bringing multiple players to participate in importation, while appealing to government to review industry margins.
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.
According to him, ’’the elimination of oil theft and leakages in the system, the optimization of the supply chain, the introduction of alternative energies and the regular and consistent maintenance of the distribution infrastructure are all necessary aspects of this downstream reform, which the passage of the Petroleum Industry Bill will provide an opportunity for the country to resolve once and for all’’
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.
On his part, energy expert and partner, Bloomfield Law Practice, Dr. Ayodele Oni, maintained that the price modulation model currently being adopted will not be sustainable.
He explained that the global crash in oil prices has been caused by the outbreak of the Coronavirus, resulting into excess supply over demand of oil in the 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 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 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,’’ he said.
Nonetheless, Oni said that 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.
According to him, the crash in global oil prices has significantly reduced Federal Government revenue and ability to fund a budget which was benchmarked at an oil price of US$57 per litre.
‘‘When this is coupled with the COVID-19 pandemic and the Federal Government’s increased spending on healthcare and financial interventions for businesses, it becomes abundantly clear that the Federal Government desperately needs to plug any hole in its revenue to have the chance of funding the 2020 budget.
“Additionally, the COVID-19 pandemic and the resulting economic shut down implemented to stop its spread have detrimentally affected businesses in Nigeria. The deregulation of the downstream petroleum industry would enable these businesses to charge competitive oil prices which are reflective of their cost of operations and the global oil prices. This is necessary in order to give companies engaged in the downstream petroleum sector a fighting chance at survival in these perilous economic times.
“The present circumstances create an appropriate time, as the crash in global oil prices will inevitably lead to low pump prices of petroleum, even in a deregulated market. This would give Nigerian citizens the time to adjust to the new system before the price of oil recovers and pump prices increase again,’’ he said.
On its part, IPMAN called on the government to adhere to due process by carrying stakeholders along when making fuel price changes.
The Zonal Chairman, Independent Petroleum Marketers Association of Nigeria (IPMAN), South West, Mr Dele Tajudeen, argued that the reduction would also see the capital used by petroleum marketers in buying the products reduced.
Tajudeen, however, regretted that the failure of the Federal Government to follow due process in announcing petrol price changes will lead to untold hardship and loss of profit margins.
‘‘The negative aspect is that we were not formally informed about the directive, because at any given time, we have products in our underground tanks because we do not wait to exhaust our products before we make fresh orders,’’ he explained.
According to him, many petroleum marketers loaded petroleum products on Wednesday when the directive was announced, adding that it would be impossible to sell the products in a day as some petroleum products are still in transit as at the time the pronouncement was made.
“The question is what will happen to those products that were loaded on Wednesday that are yet to get to their destinations. The communication from NNPC is unlike other Federal Government agencies that give a time frame for you to get prepared.
“This will translate to great loss for our members because a truck load of 33,000 litres will mean losing N660,000 and if it is a 45,000 litres truck, we will be losing N900,000 on a truck. These losses are for trucks loaded on Wednesday not to talk of products in our underground tanks,” he said.
He added that the implication was that the product they have right now would be sold at N20 below the cost price, saying this would translate to more than a billion naira loss across board.
‘‘Our appeal to NNPC and to the Federal Government is that people who loaded last Wednesday and some days ago, should be considered by giving them credit notes, because at this point in time, we need to be encouraged because we cut across every nook and cranny than others who operate in city centres. NNPC should consider those who just recently loaded, because there is no way the products would have gotten to their stations,’’ he said.