Addressing Lingering Fuel Shortage

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With the Nigerian National Petroleum Corporation assuming the sole importer of petrol since October 2017, Nigeria has continued to face supply challenges, which can only be resolved by the resumption of importation by the private oil marketers, writes Ejiofor Alike

The issue of perennial scarcity of petrol in the country appeared to have been permanently resolved in May 11, 2016, when the federal government introduced a new pricing regime that increased the pump price of petrol from N86 per litre to N145 per litre.

The new pricing regime effectively eliminated the old subsidy regime as the N145 per litre expected open market price (EOMP) was a true reflection of the market dynamics of the forces of demand and supply.

At the N145 per litre, marketers were able to recoup the landing cost of imported product and make profit, unlike during the subsidy regime when the product was sold below the market price.
With the price of crude oil at about $48 per barrel and exchange rate of N285 per dollar as at then, the private marketers were able to bring in fuel cargoes from the international market and sell at N145 without demanding subsidy.

At a point, healthy competition among the oil traders forced some marketers to even sell at N142 per litre, which was still within the retail price band of N135-145 provided by the Petroleum Products Pricing Regulatory Agency (PPPRA) in May 2016.

However, as exchange rates soared, coupled with the rising price of crude oil at the global oil market, the high cost of refined products led to tightening supply of petrol. And when the parallel market rate hit N400 per dollar, the marketers could not access dollar to import product even though the crude oil price was still low.

The situation however improved, when the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, secured the intervention of the international oil companies (IOCs), which provided foreign exchange to the marketers at affordable rates but this intervention was not sustained.

The high cost of dollar, coupled with the recovery of crude oil prices, made it uneconomic for the private marketers to import petrol and break even at N145 official price.

Since the federal government did not provide for subsidy payment in the 2017 budget, nobody could guarantee payment of subsidy claims to the fuel importers. Thus, by October 2017, the private marketers shunned importation of petrol and concentrated on diesel and kerosene, which are deregulated products. With this development, the NNPC became the sole importer of petrol.

Before the NNPC became the sole importer of petrol, the corporation had accounted for 45 per cent of imported petrol, while the private marketers accounted for 55 per cent. But since the private marketers shunned importation, the NNPC has been struggling to bridge the gap and account of 100 per cent of the country’s fuel supply.

Facts of Supply Shortages
With the NNPC as the only importer of petrol, it was not surprising that the country started experiencing shortages in the fourth quarter of 2017. To ensure that the country was wet with refined fuel, the NNPC had in April 2017 signed about $6 billion worth of deals with local and international traders to exchange about 330,000 barrels per day (bpd) of crude oil for imported petrol.

Before the administration of President Muhammadu Buhari assumed office, the DSDP agreements were previously referred to as offshore crude oil processing agreements (OPAs) and crude-for-products exchange arrangements. Under these deals, the oil traders engaged by the NNPC were supposed to bring back petrol into the country after taking NNPC’s crude oil to the international refiners.

But in the months of October/November/December 2017, some of these companies converted their DSDP contracts into diesel and imported diesel for NNPC as they could not bring back petrol as a result of the high cost of the product in the international market.

With this development, the Nigerian market was flooded with diesel, which is also imported by the other private marketers as a deregulated product, while petrol for which the marketers relied on NNPC for supply, became a scarce product, leading to the crisis, which is yet to be resolved. Vice President Yemi Osinbajo had alluded to this fact, when he visited some depots in Lagos to monitor the fuel situation on Christmas Day.

“I think that going by what we have seen, there is what is called winter deliveries. Towards the end of the year, the premium goes up – the cost of fuel goes up in many parts of the world. Obviously, that gave rise to problems for those, who are bringing in products. We had one or two short deliveries by the importers and that accounted for some of the problems,” Osinbajo had said.

Kachikwu also told THISDAY that the federal government would review the DSDP contracts of the NNPC to blacklist some oil traders whose failure to meet their petrol supply obligations plunged the country into the fuel crisis. He said some of the oil traders failed to deliver petrol to NNPC due to either lack of capacity to deliver or for profiteering reasons.

According to him, the failure of the companies to meet their contractual obligations caused the fuel crisis, which was aggravated by the high cost of crude oil in the international market.
“I think the immediate cause of this (fuel crisis) is the increase in the price of crude, and then a lot of deliveries at obviously a loss that NNPC is doing just to keep the nation going – also not the fault of NNPC. That is what caused it. So, we need to do better planning obviously in terms of foreseeing this and trying to provide for this. And there were a lot of people, who took the DSDP programme to deliver products that failed in their deadlines – some for profiteering reasons, some for just sheer lack of capacity,” Kachikwu had explained.

Understanding the Lingering Scarcity
The Independent Petroleum Markers Association of Nigeria (IPMAN) was the first to raise the alarm on the looming petrol scarcity, when it threatened to shut down over 900 filling stations in Lagos and Ogun stations by December 11 2017. IPMAN’s grouse was that the NNPC was undersupplying petrol to its members.

Though the NNPC had debunked the IPMAN’s claims, insisting that the country had enough petrol, the scarcity of the product not only marred Christmas and New Year celebrations but has also remained unresolved, despite what seems to be the best efforts of the NNPC to boost imports.
With the private marketers shunning importation, it is increasingly evident that the NNPC alone cannot meet the supply needs of the country.

During the subsidy regime, the country suffered frequent fuel crisis over the inability of the federal government to pay the marketers’ subsidy claims. Each time the federal government defaulted in the payment of subsidy claims, the marketers would leave petrol importation for only the NNPC, thus plunging the country into fuel crisis.

Even when the NNPC has the capacity to import many cargoes, the corporation lacks facilities to store the imported petrol for distribution across the country. The corporation engages the private depots on arrangement to store its imported products but this measure is not enough to effectively resolve the distribution challenges.

With the abrogation of subsidy regime, the current crisis largely emanated from the inability of the marketers to import and sell at N145 as a result of the high cost of crude oil and foreign exchange. It is only the NNPC that has the capacity to absorb the losses arising from the sale of petrol at N145, which is below the market price.

The federal government should address these challenges by either deregulating the market to allow the forces of demand and supply to dictate the price or providing incentives to marketers to import and sell at N145. A medium/long term solution would require building refineries that would at least cater for local consumption.

Kachikwu recently told the National Assembly Joint Committee on Petroleum Resources (Downstream), Kachikwu that the federal government had mandated a committee chaired by him to find urgent solution to the crisis, 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 the 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 that 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.

With no end in sight to the rising price of crude oil at the international market, the earlier the federal government deregulates petrol price and allow the market forces to dictate the price, the better for the country.