The landing price of fuel has hit an all-time high of N210 per litre, forcing the Petroleum Products Pricing Regulatory Agency (PPPRA) to consider reviewing the current fuel-pricing template, say sources in the oil and gas industry.
The governing board of the PPPRA is meeting today and sources say big on the agenda, would be a review of the current pricing template, which came into effect in May.
Crude oil price has been rising in the last few weeks, following an agreement by the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC oil-producing members to cut oil production in a bid to push up crude oil prices.
The price of Brent closed at US$55 per barrel on 19 December, more than $10 above the average US$42 in May, when the current fuel-pricing template was fixed by the PPPRA at N145 per litre.
“Based on the current landing pricing, the Federal Government has to make a decision fast, on whether to officially reintroduce subsidies, or take them out completely. The government is only in this difficulty because they have always stopped short of completely deregulating the sector,” said an industry source.
The price of petrol could rise as high as N220 per litre if the new realities of the oil market are taken into consideration.
Dolapo Oni, head of energy research at Ecobank, told BusinessDay that his estimates put the landing cost at N165 per litre, “However, that was when oil price was at $52 dollars per barrel, now that it is $55, I am not surprised landing cost is now N210 per litre.”
When the current fuel price was fixed in May, it was based on an exchange rate of N285 to the US dollar. But the naira has traded around N305.5 to the dollar on the official interbank market since August, while it was quoted at N487 to the dollar on the parallel market on Monday. The CBN has an arrangement where fuel marketers are able to buy at the subsidised rate of N305 to the dollar from International Oil Companies (IOCs).
On 19 December (Monday), the Central Bank of Nigeria (CBN) asked banks to submit bids for a “special currency auction” to clear the backlog of matured outstanding dollar obligations for petrol importers and selected sectors of the economy.
But Dolapo Oni cautions that selling dollars at subsidised rates to petrol importers, in order to keep the petrol retail price at N145 per litre is an unsustainable solution waiting to crumble.
“A short term solution is to liberalise the downstream petrol sector, while increasing our refining capacity will have desirable outcomes in the long term,” Oni added.
Estimates from the PPPRA show that the country needs an average of US$500 million every month, to import refined petroleum products, since all of its three refineries are currently producing at less than 25% of their installed capacity.
The CBN has had to resort to special dollar auctions to meet the demand by fuel importers and ensure that the country does not run dry of petrol.
The Central Bank instructed commercial lenders to submit backlog dollar demand from fuel importers, airlines and manufacturing firms by 3 pmMonday, for a special dollar intervention.
Sources tell BusinessDay that the backlog is in billions of dollars and it would be difficult for the CBN to completely clear the backlog without a significant dent on its reserves which hit a new high of US$25 billion on 15 December.
Nigeria is in its first recession in 25 years, caused by low global oil prices, which have cut the supply of dollars needed to fund imports. Attacks by militants on pipelines in the oil-rich Niger Delta since January have reduced crude output, reducing dollars earned.
The dollar shortage in the OPEC member, whose crude sales make up two-thirds of government revenue, has caused many companies to halt operations and lay off workers, compounding the economic crisis.
Inflation has accelerated to an 11-year high of 18.4 percent, while unemployment rate cemented a six-year high of 13.9 percent in the third quarter of 2016.
Traders said the Central Bank plans to sell “funded forwards of two to five months tenor” dollars to the targeted sectors at an auction ahead of the closure of the foreign exchange market for the year.
The apex bank is expected to close all foreign exchange transactions this Friday ahead of its financial year-end and the Christmas period.
Two weeks ago, the bank had asked commercial lenders to submit bids for a special intervention auction targeting fuel importers, but the result of the auction has not yet been released, traders said.
Sources say that the sharp change in the landing price of petrol may have forced the CBN to cancel the initial plans to sell dollars to fuel marketers.
Africa’s largest economy has suffered from an acute shortage of jet oil used by airlines in the last few months, causing many operators in the sector to refuel from neighbouring countries, while flight cancellations by local airlines have become commonplace as a result of the shortages.
On Monday, the Nigerian National Petroleum Corporation said it had imported about 38.7 million litres of aviation fuel, which it said “represented about 26-day sufficiency”, as part of its “ensure a hitch-free air travel across the country during and after the yuletide period.”