NNPC’s Subsidy Conundrum

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With the mounting losses incurred by the NNPC to subsidise cost of imported petrol, Ejiofor Alike suggests that the federal government should hands off regulation of fuel price before NNPC heads for another dark era

A new petrol pricing regime was introduced on May 11, 2016 when the federal government increased the pump price of petrol from N86.50 per litre to N145 per litre in line with the market dynamics.
In the circular with reference number A.4/9/017/C.2/IV/690, the Petroleum Products Pricing Regulatory Agency (PPPRA) had directed the marketers of petroleum products to sell petrol within a retail price band of N135 to N145 per litre.

PPPRA also reviewed other components of the pricing template in what the government had described as appropriate pricing mechanism for petrol.
For instance, while the lightering expenses was increased from N2 per litre to N4.56 per litre, the charges paid by the marketers to the Nigerian Ports Authority (NPA) and the Nigerian Maritime Administration and Safety Agency (NIMASA) were increased from 21 kobo per litre to 84 kobo per litre and 15 kobo per litre to 22 kobo per litre, respectively.

Other components, which were also reviewed upwards included: financing (64 kobo to N2.50 per litre); retailers’ margin (N5 to N6 per litre); dealers’ margin (N1.95 to N2.36 per litre); bridging fund (N4 to N6.20 per litre); transporters margin (N3.05 to N3.36 per litre) and administrative charges paid by marketers to PPPRA (15 kobo to 30 kobo) per litre.
The circular had also added that the PPPRA would continue to “monitor market fundamentals in line with the policy of appropriate pricing with a view to advising marketers on subsequent guiding price band for petroleum products at the beginning of every month.”

When the N145 per litre pump price was introduced, the price of crude oil was relatively low with global benchmark, Brent at $48 per barrel, while United States West Texas Intermediate (WTI) crude was $46 per barrel.
From a peak of $115 per barrel in June 2014, crude oil price had dropped to a 13-year low of $27 per barrel in February 2016 before it recovered to $48 per barrel on May 11, 2016.
With this low oil price, the N145 per litre pump price was a true reflection of the expected open market price of imported petrol.

Before the price of petrol was increased to N145, the drop in the price of crude oil had led to significant drop in the cost of refined products to the extent that at N86.50 pump price, the federal government had incurred little or nothing in the payment of subsidy in 2015, as the exchange rate was just N171.36 per dollar
In fact, with the international price of crude oil at $48 per barrel on May 11, 2016, the expected open market price of petrol should have been around N90 per litre at that period but for the rising exchange rate, which made it impossible for Nigerians to enjoy the benefits of the low price of crude oil.

Forex, oil price volatility
When the federal government increased the exchange rate to N285 per dollar and crude oil price at $48 per barrel, it was convenient for the Nigerian National Petroleum Corporation (NNPC) and the private oil marketing companies to import petrol and sell at N145 per litre without incurring losses.

When the PPPRA said in its May 11 circular that it would continue to “monitor market fundamentals in line with the policy of appropriate pricing with a view to advising marketers on subsequent guiding price band for petroleum products at the beginning of every month,” the idea was to constantly review the price to reflect the market dynamics and the price of crude at the international market.
At a point when foreign exchange was made available to the marketers at affordable rates, the NNPC and some private filling stations were selling at N143 per litre.
Earlier in 2015 when the exchange rate rose to N188 per dollar – the interbank rate, the Central Bank of Nigeria (CBN) still made forex available to the marketers at N171.36.

However, at a point in 2015, the exchange rate rose to N197, but there was no window provided for the private marketers, thus making the N86.50 price ceiling increasingly unsustainable in the face of rising oil price.
From an official rate of N197 per dollar, the exchange rate was further raised to N285 per dollar and the pump price increased to N145 per litre.

When the exchange rate soared to about N400 per dollar, it eroded the capacity of the marketers to import petrol and the Minister of State for Petroleum, Dr. Ibe Kachikwu had to secure the intervention of the international oil companies (IOCs), which provided forex to the oil traders at affordable rates
But the provision of forex to the marketers was not sustained by the IOCs.
With the rising price of crude at the international market and the lack of capacity of the private marketers to access forex for importation, the oil traders stopped importation of petrol in October 2017.

The private marketers said they cannot break even if they import petrol and sell at N145 with the current price of crude oil at $68 per barrel unless the federal government provides incentives or subsidy but the government no longer provides for subsidy claims in the yearly budgets.

NNPC’s huge losses as sole importer
With the inability of the marketers to import, the NNPC assumed the sole importer of petrol in October 2017 and has been incurring huge losses to maintain the pump price at N145 per litre.
Addressing the National Assembly Joint Committee on Petroleum Resources (Downstream), Kachikwu had disclosed that the landing cost of petrol, which was N133.28 per litre in 2016, is now N171 per litre.

This, he said had made the NNPC to be the 100 per cent importer of the product.
As a result of the N26 difference per litre between the current landing cost of the product (N171) and pump price of N145, Kachikwu stated that the NNPC, which had been singularly importing the product at the volume of 25million litres per day since October last year, has been incurring a daily loss of about N800-N900million.

Cumulatively, these have amounted to N85.5billion, in just three months.
He told the lawmakers that the federal government had mandated a committee chaired by him to find urgent solution, pending when the local refineries would be in good shape in the next 18 months.

He said three solutions were being considered.
“One, is for the Central bank of Nigeria ( CBN) to allow the marketers access forex at the rate of N204 to a dollar as against the official rate of N305 to keep the pump price of fuel per litre at N145. Two, is to give room for modulated deregulation where NNPC would be allowed to continue selling at N145 per litre in all its mega stations across the country while the independent marketers should be allowed to sell at whatever price is profitable to them in all their outlets. Three, to look at the direction of blanket subsidy for all the importers in bridging the gap which would be like going back to a problem that had earlier been solved,” Kachikwu explained.

There is no doubt that the second option reflected the current market dynamics as price regulation is not sustainable in the face of current realities of rising crude oil price and forex challenges.
At the beginning of the N145 pricing regime, Kachikwu had canvassed for price modulation to ensure continuous upward or downward review of the price to reflect the fluctuating price of crude oil.

However, when the crude oil price rose, the federal government could not increase the pump price for fear of political backlashes, which could impact the electoral fortunes of the ruling party.
To maintain the price at N145, the NNPC has continued to incur huge losses and yet, the N145 pump price has not been achieved as the country has continued to suffer fuel shortages, which have encouraged profiteering and all forms of malpractices.

The rising losses are not only unsustainable but will also expose the corporation financially, potentially fueling allegation of massive corruption, which had characterised the operation of the state-run oil firm before the present administration assumed office.

It would be recalled that at the peak of the subsidy regime, the former administration of President Goodluck Jonathan had budgeted N286 billion for subsidy claims in 2011 but the actual payment exceeded this budget by over N1.2 trillion because of the huge losses incurred by the NNPC to subsidise petrol and kerosene.
This had led to series of probes by the National Assembly and the executive, which uncovered massive fraud in the subsidy regime.

The federal government should nip the repeat of this experience in the bud by allowing both the NNPC and the private marketers to sell petrol at market price.
The Group Managing Director of NNPC, Dr. Baru Maikanti had reportedly said the fuel supply challenges experienced by the country were caused by combination of factors ranging from diversion of the product from depots by tanker drivers to neighbouring countries where it is sold between N300 to N400 per litre to outright hoarding of the product by unscrupulous marketers.

For other countries to sell petrol at N300 and above means that N145 is not the market price and should be adjusted upward to save NNPC to end the perennial fuel crisis and save the NNPC from the impending doom.
Deregulation will encourage marketers to import petrol and boost investment in the downstream sector for job creation, and growth of GDP.