…Covid-19 impacts the industry negatively
…PPPRA still fixes prices for the downstream
…Only full deregulation will attract investments in the sector
…Operators lost N10 billion as a result of reduction in price
-By Felix Douglas
The downstream of Nigeria’s petroleum industry has been a concern to its operators including end users that depend on it for miscellaneous uses. There is perturbation among stakeholders over government intervention and interest without allowing the market forces to drive the sector.
To this end, experts in the industry in a webinar session organised by Financial Energy Review took turns to speak about development in the country’s downstream.
Expressing his views about Nigeria’s downstream and its attendant issues, renowned academia with vast experience in the oil industry, Professor Wumi Iledare, opined that governance of the downstream sector is amorphous and lacking definite structure.
Professor Iledare who moderated the webinar session said that the Department of Petroleum Resources (DPR) has the Petroleum Inspectorate Act power to regulate the downstream. While the Petroleum Product Pricing Regulatory Agency (PPPRA) is responsible for price modulation and advises the minister of petroleum. The minister, by Petroleum Act, has the sole power to determine what the price of petroleum products is, “If this is not changed, there cannot be deregulation.”
With deregulation in place, there will be less pressure of Foreign Exchange (FX) and government to be promoting energy security. “If we deregulate, there would be no need of subsidy, this will pave way for government to concentrate on viable projects like schools, roads, health facilities and social infrastructure.” Hence, deregulation is the reason for subsidy.
Iledare asserted that it has become inevitable for the petroleum industry to be reformed, the upstream, downstream and midstream.
Giving his own perspective on subsidy and deregulation of the downstream, Managing Director of 11Plc (formerly Mobil Oil Plc) and Chairman of Major Oil Marketers Association of Nigeria (MOMAN), said, Covid-19 has been a great challenge for the industry. The industry has been severely impacted. “As you know, our industry thrives on movement of people, goods and services. Once the world is shut down that means the demand for our products is severely impacted. In fact, figures show that sales in the month of April were down about 70% on normal monthly performance.”
The industry was also hard hit because crude prices fell drastically and has been a trying time for operators. Amidst issues bothering the oil industry, there was pronouncement from the Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), who stated that subsidy has been removed and the country will never resort to it while the Minster of State for Petroleum Resources also commented that the downstream had been fully deregulated.
Oyebanji stated further that what concerned operators of the oil industry is that the decision of government is opaque. “We need to have a bit of more clarity in this area.” If indeed the downstream is fully deregulated, government will not fix the price just like any other product such as telecommunications and food, the market determines the price.
The MOMAN Chairman was of the view that many of the institutions that support the current regime are still in existence. These includes Petroleum Equalization Fund (PEF), Petroleum Subsidy Fund (PSF), which were created by legislation are still in place. Again, the PPPRA which is the institution that is charged with the responsibility of setting prices on a periodic basis.
Since these institutions still exist, operators are confused as to whether indeed, the country has fully deregulated or the government has only decided to subsidise the price of Premium Motor Spirit (PMS). Fixing of price shows that the industry is being regulated. Government only making efforts to take its hands-off subsidy as refineries are in bad state with importation of PMS.
Oyebanji added that there are issues in sourcing FX to import petroleum products which remains a persistent challenge.
What is the role of government in a deregulated environment? Government does not set prices, but rather a mechanism to monitor what happens in the industry.
For instance, in the telecommunications industry, the Nigeria Communications Commission (NCC), monitors it. Central Bank of Nigeria (CBN) regulates and monitors the banking sector to ensure sanity in the process of providing services. Operators are not against similar gesture in the downstream industry to ensure that customers are not exploited, they are only concerned that roles of agencies saddled with such responsibility in the industry should only monitor it instead of fixing prices which has become a trend in the downstream.
Thus, “Our recommendation would be that we should go to full deregulation because that will create the kind of environment that will attract investments that the downstream needs so urgently. And we need that investment across the entire value chain.”
The 11 Plc boss emphasised on refining, that Dangote 650, 000 refinery with some other modular refineries that are being built in Nigeria, will support the downstream. These refineries when they are in operation, will support the country to become a major refining hub and supply fuel to other parts of the world including Africa and makes it a net exporter of refined products. Instead of consuming 30% of its foreign exchange to importing fuel products, it will be generating FX through the sales of refined products.
On the trucking system to convey PMS and other petroleum products, Oyebanji revealed that the trucks on Nigerian roads are thirty-five years old, which requires new investment. But only full deregulation will attract investments that will in turn provide jobs in the country.
Although subsidy has been removed, but when price of crude oil rises, the price of refined products goes up as well and it will reflect at the pump. The reason why government stops subsidy is that the country is spending close to N1 trillion on it every year. “How can we sustain that when we have poor infrastructure, roads, electricity and health facilities?”
Oyebanji explained that players in the industry need to access how the market fair so that they will know when to import petroleum products in the country. Operators in the sector lost N10 billion when prices were reduced recently and that does not encourage investors. If operators can access the market and determine when to import products, there will be efficiency which will attract more investment in the country.
The Petroleum Industry Governance Bill (PIGB) that has not been signed which defined NNPC as a commercial entity and not a regulator. The NNPC Act also defines the corporation as a commercial venture not a regulator. Therefore, if the state-owned oil company is perceived as a regulator, full deregulation will be impossible.
On the other hand, the PPPRA Act suggests that its role is to advise the minister and not NNPC.
Oyebanji remarked that Nigeria has to decide what it wants and how to treat PMS and gasoline. Is it as a social welfare project or a commercial product? If it is a commercial product and the country worries about energy security, and it wants regular constant supplies of PMS to be affordable, it has to choose which way to go.
Other countries have strategic government stock which they keep and untouched. The stock is permanent in the event of shortage within the system, the stock will serve as incentives until supplies normalized and improved. This is energy security from the side of government and not be involved in business of petroleum.
In his words, “imagine as a marketer, you have just imported a cargo of 15000 metric tons at a particular price and then somebody somewhere feel that the price is too high and start selling at 20% or 30% below the price of the inventory of the competitor that are in the industry.”
Consumers will abandon your product which is perceived to be more expensive and go for the cheaper one. Definitely, this is not a commercial decision.
The downstream cannot thrive successfully without FX since the oil industry is dollar denominated to import petroleum products. operators have no choice than to use FX for trading. This is where the financial institution becomes significant to the industry.
Contributing and sharing her thoughts on financial support of the banks to operators of the downstream, Oluwatoyin Aina, Head, Downstream, First Bank of Nigeria, made it known that the role of the bank is basically that of financial intermediation.
Toyin added that First Bank has been in operation for 126 years and supports the oil and gas value chain with focus on upstream, midstream, downstream and oil services. The bank supports the industry by providing operators with working capital and finance where they pay naira to NNPC for importation of PMS.
For operators importing Automotive Gas Oil (AGO), Dual Purpose Kerosene (DPK), Low Pour Fuel Oil, (LPFO) and other petroleum products that are not deregulated, First Bank issues letters of credit because these products require FX to meet bank’s obligations. Thus, “The way it works for banks in Nigeria and most developing economies whose denomination is not US dollars, we actually rely on the corresponding banks to give us these line that we will make available to our customers.”
Toyin stated that in Nigeria, there are regulations around how FX can be obtained by marketers. The CBN has three official windows. Significantly, the whole sales and retail windows, marketers have access to them to buy FX so as to pay loans.
However, since the advent of Covid-19, which affected global demand across the world, the sale of crude oil dropped. It created a perfect storm that affected Nigeria negatively as a nation. Currently in Nigeria, about 90% of the country’s foreign exchange is from the sale of crude oil. There has been attrition to the external reserve. Based on the CBN figures, the country’s external reserve has an attrition of about 3.3billion between 2020 which puts it at $35 billion in terms of balance.
This has made it difficult for CBN to make US dollars available for marketers and generally for import. Obviously, this has affected the amount of support that the banks have been able to give to their clients. It is a challenge that the banks are faced with over the past three months.
According to Toyin, the problem created by Covid-19 is beyond the financial institutions, it tells on the “policy direction of the economy and what we are putting in place to ensure that we diversify our sources of FX, we have a diversified economy because there are various sectors that contribute to the GDP.”
However, Nigeria’s source of FX as a nation is still tied to crude oil, until the country creates an enabling environment where the industry can be improved in terms of infrastructure and production for export and the refineries are working, it will be difficult for it to attain its desired objectives.
Nigeria should be a net exporter of refined products not only on crude oil, it can add value to raw materials produced locally, it will aid a larger port of FX reserves that can be made available to support import. FX reserve will be available if the refineries are working to export refined products.
Apart from oil, agricultural produce is another aspect that will add value to a robust FX reserve.
Toyin averred that there are opportunities provided for the banks to hedge and advise their clients on hedges and how they can help secure margins to plan appropriately for FX requirements. Therefore, initiative of deregulation by the federal government is a welcome development provided the implementation is successful. “If the government looks more on a price liberalization regime and monitoring mechanism to ensure that the industry works perfectly, the GDP from the downstream industry will be more efficient.” This is what competition does when a market is driven by market forces. It helps to bring in sanity and efficiency to the industry with technological innovation by adding investment.
Toyin pointed out that good governance structure in a company makes operators in the industry to access finance because when a company is properly structured, there will be transparency. It gives avenue to both local and foreign investments with private sector participation that will be easier to access finance to grow business.
Concerning the issue of fluctuation of crude oil and how an investor in the downstream can recover investment base on naira pricing, Toyin made it clear that operators should seek for other means of FX. The main FX source of Nigeria is the sale of crude oil. She revealed that another source of FX is agriculture and since Nigeria has abundant natural resources, the country can diversify to it to be able to access FX. It can add value in-country and more FX in terms of returns which will be a buffer to the decision of foreign reserve.
As a financial expert, Toyin disclosed that some oil and gas marketers are doing backward integration into agriculture by diversifying to other sources of FX. Through agriculture, they add value to produce and export in order to access FX.
The banks also encourage investments in refineries because through it the country can become net exporter of refined petroleum products. For instance, if the local refineries are working in Nigeria, they will not sell their refined products in naira, they would be sold in foreign currency because they are fixed stock since crude oil is also priced in dollars.
It has been argued by industry operators that NNPC is a regulator and an operator at the same time which does not reflect a truly deregulated downstream petroleum market.
She said since a fully deregulated market is determined by forces of demand and supply, to get the full benefit and impact, “it will be better for them to be regulators and play a monitoring role so that if they see any marketer that is high handed and not playing by rules of consumer protection, they can come down heavy on such a marketer.” The corporation should be more of a regulator without having to be a competitor to the players.
This will encourage more private sector participation because it is not the business of government to be in business.
Still on the role of government with regards to deregulation that bothers operators in Nigeria downstream sector.
One of the major independent operators and Group Managing Director (GMD) of Rainoil Limited, an indigenous oil company, Dr. Gabriel Ogbechie, bemoaned the impact of Covid-19 in the downstream. He said the past three months have been very tough for the entire economy and the downstream industry not being an exception when the impact of the economy started unfolding, it took members time to realise that things have changed.
During the lockdown, prices of crude oil got into a serious downward slide. In one breathe it was good for consumers in the sense that prices were getting cheaper on the other hand, it was bad for the industry for players who have stock. These stocks were bought at higher prices and operators were being forced to sell at lower prices. Some players lost a lot of money while others manage to market profit. Sales fell by 60% and a lot of retail outlets were managing to achieve at least 40% of their sales target.
Dr. Ogbechie spoke on the possibility of regulating the downstream sector without proper legislation in place, due to the fact that the GMD of NNPC made a pronouncement that subsidy had been removed while the minister, on the other hand, stated his own position that the industry has in fact, been deregulated. He said the minister expressed the fact that despite the huge drop of petroleum products, these prices were not reflected at the pump. Hence, “what we have today is still not deregulation in the strict sense of the word. I think what we have at best is a removal of subsidy rather than deregulation.”
The government asserts that the sector has been deregulated but the country still finds itself in a situation where PPPRA on a monthly basis fixes prices and tells operators how products should be sold. This is not a “Proper reflection of what deregulation should be.”
He noted that PPPRA has fixed prices for June to N121.50k per litre, “if you actually import petrol today, I doubt if you can sell at N121.50k and make some profit.”
Obviously, a 100% of marketers will be queuing behind NNPC and wait to collect PMS which will defeat completely the whole essence of deregulation as claimed by government. Deregulation can only be dealt with from a policy perspective rather from a legislative process.
Dr. Ogbechie said the objective of deregulation of the downstream cannot be achieved when PEF, a body that ensures petroleum products are sold at the same price across the country still exist. “So, if petrol in Lagos should be N121. 50kobo per litre in Lagos, it has to be same price in Abuja and other parts of the country.” PEF bears the cost of transporting these petroleum products across the country. What it means is that every litre of petrol that is sold in the country will make a contribution of N7.20kobo per litre to PEF. From the money, the cost of transportation is borne.
PEF was set up by decree 9 of 1975, it was amended by decree 32 1989, it was set up by an Act of government. If the government wants to take out PEF, technically it needs proper legislation to take a decisive action. PEF should not have a place in a properly deregulated market. In a deregulated market, the market should determine the price.
The indigenous operator made it known that the role of financial institutions during Covid-19 was not friendly to the downstream as banks practically pulled out their support in terms of being able to give letter of credit to marketers. Being able to open letters of credit becomes a huge challenge. Even international banks also pulled their lines from the local banks. The local banks also did not have the support to be able to open letters of credit for local traders. They all pulled their credit.
Dr. Ogbechie stated that to get FX for importation of petroleum product was not easy to come by. “If you want to buy FX today, you are likely going to get at N460 to the dollar. Meanwhile, CBN’s FX rate is N380 to the dollar. Are you getting FX at N380 or are you getting at N460?” Traders are not able to access FX at N380. It is not a palatable experience for operators of the downstream in a regulated market.
He enjoined the government to allow private marketers who have the capacity and have shown faith over the years to invest massively downstream. The level of investment in the last 10 to 20 years for indigenous players are enormous. Government should give the space to the private sector to operate and then play the role of a regulator through its agencies.
The fear of an average consumer in Nigeria has been that when price goes up it does not come down. In other words, if government is completely out of price control and modulation, the market will be left in the hands traders that will erode consumers right.
The Rainoil GMD expressed optimism that prior to 2014, private marketers and the majors accounted for about 80% of fuel import into Nigeria. NNPC only accounted for 20% until in 2016, when government removed subsidy without deregulation.
Due to this pricing modulation policy, marketers pulled back and NNPC took over the space 100% on behalf of the government to import fuel due to energy security for the country. At present, NNPC is the sole importer of PMS. The fears of government had been if the private marketers are allowed to import PMS and sell, consumers might be exploited.
But contrary to fears from either the government or consumer, Dr. Ogbechie pointed out that diesel has been deregulated for some years and marketers are more likely to lose money importing diesel than making profit due to fierce competition among traders.
Diesel has no subsidy and marketers are forced to sell at regulated price, for the past five years, there has never been scarcity of diesel. Diesel is 100% available and the price is market friendly, determined by market forces, driven by competition.
Therefore, if government allows petrol to be fully deregulated, “I see the same thing playing out. Initially there will be teething problems but we are going to take baby steps moving from a situation where NNPC was bringing it in 100% to a point where marketers are having occupied that space and banks having to provide the fund to import the petrol.”
WAY FORWARD FOR THE DOWNSTREAM SECTOR
Being a financial expert, Toyin advised that if deregulation is completely accomplished in the downstream and government no longer regulate petroleum products, the forces of demand and supply will determine prices. this will encourage contribution of the downstream sector to Nigeria’s GDP. The downstream becomes more efficient with investors willing to invest and support it to stimulate the growth of the economy.
From the government perspective, it will reduce the level of speed at which foreign reserve is tampered. While access to finance will be easier and the banks will be assured that loans will be paid as the market is driven by forces of demand and supply without external forces fixing prices for the market.
Dr. Ogbechie was optimistic that the future will be bright for the downstream and the objectives players have for the industry will be attained after deregulation.
He said in recent years, the downstream sector struggles and it has been difficult to make margins. For instance, “to take 15000 metric tons of PMS with N2billion transactions, you will struggle to make N20million which is like 1% return on investment.” These are issues and challenges that deregulation will address.
For the MOMAN Chairman, his fear is that prices are sleeping by and will soon increase but without fundamental change in the downstream through deregulation, the sector maybe in danger of returning to subsidy and sole importation by government which is not good for the industry.
Thus, the industry should be allowed to flourish so as to take its fortune into its own hands for investment to thrive and in turn expand. The downstream should take advantage of low prices to take decisive steps.
According to Oyebanji, consumers need not be worried or fear that marketers will take advantage of them if the sector is deregulated. There is mechanism across the world that can be adopted in Nigeria to ensure that consumers are not exploited by oil traders. If this is the only concern, it can be mitigated.
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