Subsidy back, as oil price rally makes N145 petrol price unsustainable – Businessday

NNPC

Fuel subsidy is effectively back on the books of the Nigerian National Petroleum Corporation (NNPC) following the sharp rise in crude oil prices after the Organisation of Petroleum Exporting Countries (OPEC) agreed to cut production by 1.2 million barrels per day, on November 30. This effectively means that Nigeria’s current N145 per litre retail price template for petrol, set in May (eight months ago) is obsolete.

“We suspect that the importers, or at least the NNPC, are taking the hit on their books as a result,” analysts at FBN Quest said in a December 2 note to BusinessDay. This is because, “the higher spot price clearly feeds into the costs of importers of petroleum products.”

The price of Brent crude rose 6 percent to $53.53 per barrel as at midday on Friday, from $50.47 per barrel on Wednesday, when OPEC and Russia agreed to cut output to 32.5 million barrels daily, 34.7 percent of global oil demand.

The landing cost of petrol in Nigeria is N122.03 per litre, while distribution costs take total cost to N140/$, according to data from the Petroleum Products Pricing Regulatory Agency (PPPRA). This template was reached in May, when oil prices traded at an average of $45 per barrel.

But with crude prices rising by 17.7 percent to $53 per barrel from $45, the landing cost of petrol now exceeds the retail price of N145 per litre, calculations by independent analysts show.

“The Federal Government has said several times that it is not incurring any subsidy costs. Yet the devaluation of the naira in June has added greatly to importers’ costs and pushed them above the N145/litre ceiling for premium motor spirit, set by the regulator,” FBN Quest analysts noted.

The current price of N145 per litre is unrealistic and may be impossible to sustain, according to Dolapo Oni, head of research at Ecobank. “So as you celebrate OPEC’s decision and higher oil prices, set money aside for higher fuel prices,” Oni said via his twitter handle, Thursday.

In a case where government refuses to review prices upward, as it has done in the past, the result will be no different, as it would mean a return to acute fuel shortages brought on by importers’ inability to sustain petrol imports and make profit, according to Muda Yusuf, the director-general of the Lagos Chamber of Commerce and Industry (LCCI).

“If nothing is done in the immediate to review the cost template to accommodate higher oil prices; another fuel scarcity may be in the works,” Yusuf said by phone.

Nigeria has been battered by falling oil prices and a cut in production due to militant attacks on oil pipelines. Oil is the source of 90 percent of dollar earnings.

As foreign reserves plummeted, Nigeria became unable to meet the dollar requirements of fuel importers, which therefore resulted in the intense fuel scarcity witnessed in the months of March and April this year.
Forced to intercede for businesses and households reeling from fuel scarcity and higher costs, the Petroleum Products Pricing Regulatory Agency (PPPRA) template in May, increased the approved retail price of petrol by about 62 percent to a band between N135 – N145 per litre from N87.

But the price template has been due for review since July, following the naira devaluation in June and higher gas prices, according to Olaposi Williams, Chief Operating Officer (COO) for OVH Energy Marketing.

“A further increase of  crude prices to $54 per barrel would take landing costs to new heights and petrol importers would suffer higher profit losses,” said Williams.

The non-dynamic template, which failed to take into account rising oil and gas prices, as well as the naira dollar exchange rates volatility, has seen companies operating in the country’s downstream oil sector struggle with negative margins and has translated a burden of higher costs for Nigerians.

“There are a lot of avoidable crises in Nigeria’s downstream sector, which seems to be in permanent crisis mode,” Victor Eromosele, CEO of ME Consulting and former CFO of NLNG said.“The PPPRA model is flawed as the N145 per litre arrived at in May was a crisis solution. We need a sustainable model which accommodates variable components such as the rise or fall in crude.”

Only full deregulation of the downstream sector, where government no longer enforces a price ceiling, is the path to a sustainable model, according to Esili Eigbe, a director at Exotix Partners Ltd.

“By allowing the invisible hand of the market play its role, the sector will attract more investors and it would engender competitive pricing. But if this doesn’t happen, then there will always be problems,” Eigbe said by phone.
Nigeria is the largest oil producer in Africa, pumping some 1.6 million barrels a day of crude.

However, it is forced to rely on imports to meet 70 percent of its domestic refined petroleum products demand, as state oil company, the NNPC’s four refineries produce at less than 20 percent of installed capacity of 450,000 bpd.
Government’s meddling and short term fixes and interventions in the sector compound the downstream sector’s problems, stakeholders say.

Thirty percent of foreign exchange demand in Nigeria is used for fuel imports, according to data from the Central Bank.

The government meddling has led to the collapse of liquidity in the inter-bank foreign exchange market, shortage of aviation fuel, vital for linking Nigeria to the global economy and chaos in the downstream sector.