Sustaining the Supply of Petrol

The key progress made in the downstream sector in recent months was the return of stability in the supply of petrol. Ejiofor Alike reports that the current sanity in filling stations should be sustained through continuous engagement on foreign exchange issues

The best thing that has happened to the downstream sector of Nigeria’s oil and gas industry in recent years was the recent adjustment of the price of petrol to eliminate the wastes associated with the old subsidy regime and engender stability in the supply of the product.

Before President Muhammadu Buhari mustered the political will to take this bold decision, successive administrations, including Buhari’s administration had suffered from the embarrassment associated with their inability to pay subsidy claims to marketers, which led to perennial scarcity of petrol and its attendant hardship on the people.

Consequently, the operators in the downstream sector had clamoured for full deregulation for a number of years to free the market from bureaucratic bottleneck, economic losses, non-capacity utilisation and perennial fuel crisis.

Perennial scarcity of petrol was primarily caused by government’s restriction of the volume of business in the sector through import allocation under the subsidy regime and her decreasing capacity to meet the marketers’ obligations under the regime.

In order words, apart from import limitations through quarterly allocations, the failure of the federal government to pay the marketers’ obligations as they mature, had resulted to frequent scarcity of fuel as the marketers’ capacity to import was frequently weakened by lack of funds.
With insufficient funds in the hands of marketers, new investments were not forthcoming while available capacity was not fully utilised, thus impeding job creation and economic growth.
Efforts by the successive administrations to remove subsidy were successfully resisted by labour unions and other political interest that refused to buy-in.

However, with the appointment Dr. Ibe Kachikwu who is private sector-oriented as the Minister of State for Petroleum and Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), President Buhari had demonstrated a political will to break away from the past and set a new agenda in the both the upstream and downstream sector.

On assumption of office, Kachikwu did not hide his intention to succumb to the market dynamics of allowing forces of demand and supply to determine the price, having realised how trillions of naira were frittered away by successive administrations sustaining the corrupt and hugely inefficient fuel subsidy regime.

But due to the sensitivity of the issue, Kachikwu was tactfully cautious to avoid rocking the boat and courting controversy for the new Buhari’s regime by de-emphasizing ‘subsidy removal’ and adopting new phrases such as ‘price modulation’ and ‘price adjustment.’

Aware of the potency of the political forces against subsidy removal, Kachikwu, who until recently, was also the head of the NNPC, had cleverly tarried a while, bamboozling the country with one phrase after another and avoiding the phrase ‘removal of subsidy.’
When he finally struck and implemented his long awaited agenda, he had intelligently and systematically de-emphasised the phrase ‘subsidy removal’ such that Buhari’s administration had little or no crisis to manage.

Serenity in filling stations

Subsidy regime was characterised by non-utilisation of capacity by the marketers and depot owners, thus causing perennial fuel shortages, limiting expansion, employment generation and value creation.

With government’s delay in paying subsidy, the marketers’ capacity to import product and wet the system was constantly weakened and this resulted in frequent crisis and long queues, which also created chaotic situations in filling stations.

Since the new regime was put in place by Kachikwu, normalcy has returned in filling stations and this should be sustained permanently.
Having recorded this huge success, a lot more are still needed to be done by the minister to take the sector to the Promise Land.

Kachikwu should consolidate the gains of his reform in the downstream sector by further pushing for full deregulation and abolishing the import ceiling imposed on the marketers through quarterly allocation of import permits by the Petroleum Products Pricing Regulatory Agency (PPPRA).

The quarterly import allocations, which specify the given volume of product each marketer should bring into the country in a given quarter has adversely limited the capacity of the marketers as they are not allowed to import to their full storage and financial capacity.

For instance, marketers and depot owners that invested heavily in storage capacity and could import up to 300,000 metric tonnes each in a quarter, are given between 30,000MT and N90,000MT import permit each in a quarter.

This has obviously led to empty tanks in all the private depots and adversely affected their capacity to expand and boost the Nigerian economy.

The removal of this hurdle will give the marketers the latitude to source for limitless funding and import to their full capacity, thereby enhancing more expansion and engendering healthy competition by the operators for the benefits of Nigerians and the Nigerian economy.

The competitiveness of the operating environment will no doubt bring down the pump price of the product as each operator struggles to enjoy greater share of the market.

Resolving challenges of forex

The recent price adjustment became necessary partly due to unavailability of foreign exchange and inability of marketers to open letters of credit.
Though the new price will also enable marketers to source their foreign exchange independent of the Central Bank of Nigeria (CBN), the high cost of foreign exchange at the parallel market will no doubt require the continuous engagement between the minister and the relevant stakeholders to avoid a return to the days of crisis.

While the minister allocates foreign exchange to the marketers through the international oil companies (IOCs) at N285 per dollar, the marketers source at the parallel market at over N350 per dollar.

The high cost of forex has currently impacted heavily on the prices of kerosene and diesel, which have hit the roof top and efforts should be made to ensure that the impact is not felt on the price of petrol.

The intervention of the CBN has also been constrained by lack of forex occasioned by the dwindling oil prices and the attacks on oil facilities by the Niger Delta militants, which have curbed production significantly.

Again, as the federal government exits the fuel subsidy regime, its inability to pay $950 million mature obligation owed by the marketers to foreign banks under the old pricing regime may plunge the sector into a fresh crisis.

THISDAY gathered that based on the old pump price of N86.50 per litre and exchange rate of N197 per dollar, the total matured obligation for the Major Oil Marketers Association of Nigeria (MOMAN) and the Depot and Petroleum Products Marketers Association (DAPPMA) currently stands at $950 million.

This figure represents the outstanding indebtedness to Citi Bank and other foreign banks by the Nigerian banks through which the marketers raised the Letter of Credit to import petrol under the old pricing regime.

THISDAY’s investigation revealed that after the marketers had raised the letters of credit with the Nigerian banks at the old exchange rate of N197 per dollar, the government was supposed to provide the equivalent foreign exchange for the Nigerian banks to pay the foreign banks.
It was however gathered that the government could not provide the foreign exchange until the exchange rate was raised to N285 per dollar after the adjustment of the pump price to N145 per litre.

Marketers, who spoke on condition of anonymity, told THISDAY that the federal government had insisted that the marketers should provide additional Naira to reflect the current exchange rate before it could provide the equivalent foreign exchange to liquidate the obligation.
The marketers also raised the alarm that the failure of the government to meet this obligation could plunge the sector into a fresh crisis

“We opened some of these letters of credit two years ago and because of the subsidy regime, the federal government was involved in opening the LCs. We opened the LCs with the Nigerian banks who were supposed to pay the foreign suppliers. The LCs were opened under the old exchange rate of N197 per dollar and the government was supposed to provide the foreign exchange. However, the government allowed the debt to linger until the exchange rate was increased to N285. The total mature obligation now stands at $950 million and they (government) are saying that we must bring more money to shore up the Naira before they will pay the forex. That means the money we paid at N197 per dollar; we should now provide the Naira difference to reflect N285 per dollar. The total dollar is now $950 million and you know what the Naira difference will translate to,” the Chief Executive Officer of one of the companies explained.

Another marketer said before the exchange rate was increased, the government had complained of lack of foreign exchange to pay for matured LCs and wondered why the marketers should now bear the risk of this exposure, which was caused by government’s delay.

“We sold the product at the price government told us to sell. But they failed in their own obligation to provide the foreign exchange after we paid the Naira equivalent to the Nigerian banks at the exchange rate of N197. The government delayed their own payment until it increased the exchange rate. So, we are not supposed to bear the risks created by government’s delay,” he said.

“The government must keep to their own bargain of the contract and ensure the debt is serviced at N197 per dollar, otherwise the entire sector will die,” he added.
THISDAY gathered that due to the challenges faced by the marketers in opening Letters of Credit to pay petrol suppliers before importation, the federal government, through the CBN has re-introduced Bills for Collection under the new pricing regime, whereby marketers pay after products are imported.

Apart from the forex challenges, the marketers also contend with the issue of absence of level playing field in the downstream sector.

Speaking at a recent event organised by the Downstream Group of the Lagos Chamber of Commerce and Industry (LCCI), the Chairman of Integrated Oil and Gas Limited, Captain Emmanuel Ihenacho had urged the government to reduce the involvement of the Pipelines and Products Marketing Company (PPMC), a subsidiary of the NNPC in the downstream business.

He argued that there is no level playing field for the PPMC and the independent marketers as the activities of PPMC have placed the private marketers in a disadvantaged position.

Also speaking at the event, the Chairman and Managing Director of Mobil Oil Nigeria Plc, Mr. Tunji Oyebanji had argued at the LCCI event that the domineering role of PPMC does not guarantee healthy competition in the sector.

“If we are going to deregulate and be commercial, let us be commercial. But when you have one entity playing such dominant roles and trying to do it in such a way that will bring distortion into the market, it is a way of creating instability in the market,” Oyebanji said.
All these unresolved issues will require the continuous engagement of the minister and the stakeholders to ensure that the gains recorded through the recent price adjustment are not eroded.