As most Nigerians would have noticed, the petroleum downstream sector recorded a major milestone last week. It started at the end of the weekly Federal Executive Council (FEC) meeting. As is the norm, the ministers filed out to brief the press on the outcome of the cabinet meeting. One of the headline-grabbing announcements from that meeting was the one made by the Minister of State for Petroleum Resources, Mr. Timipre Sylva. He informed the expectant State House press corps that in reaction to lower crude oil prices, President Muhammadu Buhari had approved a reduction in the price of petrol. Devolving from that approval, the minister said petrol would sell at N125/litre at fuel stations. He further clarified that the federal government was “introducing a price modulation mechanism that will allow the price (of petrol) to drop or rise with the drop or rise in crude oil prices”.
To drive home his briefing, Sylva immediately issued a seven-paragraph statement, in which he said the federal government had directed the “Nigerian National Petroleum Corporation (NNPC) to reduce the ex-coastal and ex-depot prices of petrol to reflect current market realities”. In that statement, the minister added: “Also, the PPPRA (Petroleum Products Pricing Regulatory Agency) shall subsequently issue a monthly guide to NNPC and marketers on the appropriate pricing regime. The agency is further directed to modulate pricing in accordance with prevailing market dynamics and respond appropriately to any further market developments.” Less than an hour after Sylva’s statement, the NNPC complied by reviewing downwards its ex-coastal and ex-depot prices for petrol from N117.6/litre to N99.44/litre and N133.28/litre to N113.28/litre respectively. It went further to direct its “retail stations” nationwide to change their retail pump price to N125/litre from N145/litre.
By the next day, the PPPRA stepped up to the plate. In exercise of one its key statutory mandates to determine the pricing policy of petroleum products as enshrined in the PPPRA Act, it announced the new pricing regime for petrol. It said, the new price of N125/litre will guide the pricing of the commodity for the rest of March 2020. Going forward, the agency stated, it will continue to monitor market fundamentals and issue a monthly guide/expected open market price at the beginning of every month, effective April 1, 2020.
Having listened to Sylva and read through all the directives coming from the relevant government agencies, there was palpable excitement. In my mind there was no ambiguity in what the minister, NNPC and PPPRA had stated. They were crystal clear. For anyone in doubt, the minister’s briefing can be viewed on YouTube via the link provided here: https://www.youtube.com/watch?v=KkuU0PNIq5c. In effect, after decades of dilly-dallying and running away from the inevitable by successive administrations, this government had taken the bold move to deregulate the price of petrol. It also meant that when crude oil prices rise, as they surely will as the global economy recovers from the COVID-19 pandemic, the pump price of petrol will be adjusted in lockstep with the prevailing market price of crude oil. The subsidy era was finally over.
To be clear, the Buhari administration did not embrace this decision without considerable pressure. In 2016 when oil prices tanked to $30 per barrel, the president stubbornly refused to deregulate the price of petrol even with the window presented by lower oil prices. He waited till oil prices had risen in 2017 when he was forced to increase the pump price of petrol to N145/litre, and watched helplessly as the petrol subsidy bill shot through the roof. This time around, with the economic situation more critical than it was three to four years ago, his government has been forced to deregulate petrol prices. Kudos must be given to the NNPC Group Managing Director, Mr. Mele Kyari and the Presidential Economic Advisory Council (PEAC) led by Dr. Doyin Salami, who it was gathered remained unrelenting in convincing the president to make hay while the sun was shining.
But even as we adjust to the new regime for petrol pricing, there is a need for all market participants to understand the roles that they play in the pricing, marketing and distribution of petroleum products in the country. The minister, going forward, should allow the PPPRA to determine the expected open market price (EOMP) for all petroleum products consumed in this country. Although he could be forgiven for his excitement, as any politician in his position would have been just as eager to hug the limelight by announcing the new price before anyone else, the agency that should have determined and conveyed the revised price of petrol to NNPC and other oil marketers was the PPPRA, as provided in its establishment Act.
By taking over the role of the PPPRA and declaring that petrol would sell at N125/litre and subsequently mandating the NNPC to reduce its ex-coastal and ex-depot prices, he obviously forget that the NNPC was not the sole market participant in the petroleum products marketing and distribution chain. As populist as the price reduction was, unlike the NNPC that was compelled by government to absorb the losses arising from the price reduction of ex-coastal and ex-depot prices for the current market stock of petrol at its depots that was imported in January and February this year, other oil marketers that had lifted petrol from NNPC depots at N133.28/litre could not absorb similar losses. It is for this reason other oil marketers have been reluctant to adjust their pump prices at fuel stations to N125/litre. They would have to finish the old stock of petrol that they had lifted from NNPC before adjusting their meters at their dispensing stations.
Another issue that appeared to have been ignored by government agencies last week was the exchange rate to be used for petrol importation. As of last Wednesday when FEC met, while the PPPRA computed its pricing template for petrol at the official exchange rate of N307 to the dollar, NNPC was importing petrol and other products at the exchange rate of N345 to the dollar. Obviously, with the PPPRA pricing template premised on an exchange rate of N307, its computation for the product was a far cry from market reality. While in the case of NNPC that was allowed to import at N345 to the dollar, it had an undue advantage over oil marketers that could not access foreign exchange for the importation of petrol at the same rate. As a consequence of this regime, oil marketers bailed out of petrol importation and left NNPC as the sole importer of the product into the country.
However, as this article was being written at the weekend, there were indications from market participants that it is the intention of the federal government to direct NNPC and oil marketers to procure their FX requirements from the official window after the Central Bank of Nigeria (CBN) devalues the naira from N307 to N360 to the dollar today. If this is to be taken for gospel truth, then this arrangement will prove to be unsatisfactory, as the only market participant this will favour is the NNPC. The reason being that the corporation imports its petroleum products through oil swaps amounting to about eight crude oil cargoes a month. Other oil marketers, on the other hand, will not be able to get their dollar requirements met at the official exchange rate.
In order to eliminate this market distortion and create a level playing field for all operators, it will be incumbent on the PPPRA to meet with CBN officials to direct all market participants to access the Investors’ and Exporters’ (I&E) window of the market for their FX requirements. That way, the petroleum downstream sector will be truly deregulated. But a caveat must be added: Should all market participants buy their FX from the I&E window, the PPPRA effective April 1 may have to adjust upwards the pump price of petrol in line with market realities.
The implication is that unlike other countries with functioning refineries, substantial FX reserves and savings, whose citizens can enjoy the benefit of lower crude oil prices, Nigerians may not be able to enjoy the same luxury due to an empty Excess Crude Account (ECA) and malfunctioning refineries. Had the refineries been functioning, a debate as to what window to use and demand requirements for FX to import products will not even arise. Besides, additional cost elements associated with the pricing of imported petrol such as freight, lightering, NPA, NIMASA and financing charges will be eliminated, making petrol at the pump cheaper.
Nigeria, nonetheless, could take advantage of its proximity to neighbouring oil producers. It is bordered by Niger in the north, Chad in the northeast and Cameroon in the east. Owing to the proximity of northern Nigeria to Chad and Niger Republics, nothing stops the Nigerian government, through the NNPC, from entering into importation deals with both countries to supply refined petroleum products to states in the north where there is a high prevalence of poverty. Chad operates the 20,000 barrels per day Djarmaya refinery with the China National Petroleum Corporation (CNPC) while Niger operates another plant with the same nameplate capacity also with CNPC in Zinder, the country’s third largest city.
As scandalous as it may appear for Nigeria, Africa’s largest oil producer, to import petroleum products from Chad and Niger or any other country for that matter, it is the price that we have to pay for the mismanagement of the three refineries owned and operated by NNPC. It is also a cheaper alternative to truck petroleum products from our neighbours up north to northern Nigeria than to import products through the seaports in southern Nigeria and truck to the northern states. With this as an option, Nigeria will be killing two birds with one stone: Reducing the number of petroleum products trucks that crisscross the nation’s intercity highways and often enough cause devastating accidents, as well as insulating a section of the country from higher petroleum product pump prices while we wait for Mr. Aliko Dangote to complete the construction of his 650,000 barrels per day refinery in Lagos.
All in all, the immediate to long-term benefits of full deregulation of the downstream petroleum sector that includes non-subsidization of FX to a particular operator, by far outweigh the initial inconvenience that will be experienced by Nigerians. For one, it will engender competition, encourage investment in the sector, and lead to the creations of thousands of job. Secondly, NNPC will no longer have to misappropriate revenue that should have accrued to the federation for the three tiers of government to cover its cost arising from under-recoveries. As NNPC begins to cut its losses from under-recoveries, it will be better placed to revamp the refineries, insofar as there is the will and sincerity of purpose among its leadership to fix the plants. Concomitantly, the advantage of having working refineries even at 50% of nameplate capacity will not just be limited to lower prices of petroleum products at fuel outlets, but to the FX market where there will be less demand for scarce dollars to import products for Nigeria’s domestic consumption. Most crucially, deregulation will usher in transparency and shut the doors firmly against the scams that characterised petroleum products supply and distribution for years.
Legalising the Excess Crude Account
The adverse fallout of the Coronavirus on the global economy is impacting Nigeria like never before. Nigerian fiscal and monetary authorities are in a bind over what to do and have limited fallback options other than to slash spending and print money to fund cash-strapped industries and the federal government. But they would have had greater latitude had they heeded the warning of former finance minister, Dr. Ngozi Okonjo-Iweala to save for a rainy day.
In her first stint at the finance ministry, she set up the Excess Crude Account (ECA). Her boss former President Olusegun Obasanjo saw the sense in her counsel and adopted the savings culture that she had advocated. By the time of the global financial crisis of 2008-9, Nigeria had saved $22 billion in the ECA. The savings along with Nigeria’s buoyant foreign reserves were sufficient to shield the country from the exogenous shock of that crisis.
Despite its benefits, the state governors could not wait to get their itchy fingers on the savings. Citing Section 162 of the Constitution, they and the government at the centre started to plunder the ECA. When Okonjo-Iweala returned to run the finance ministry between 2011 and 2015, she made another attempt to shore up savings. The balance in the ECA rose to over $4 billion under her watch, but her attempt to improve on that amount was thwarted by the politicians that she was answerable to. At the time of her departure in 2015, the Goodluck Jonathan administration handed over about $2.45 billion to the incoming government. Today the ECA has been completely emptied, with a paltry balance of $72.2 million left in the account.
With nothing to fall back on, the naira is now under pressure as speculators hedge against the local currency and foreign investors flee. As the Central Bank of Nigeria continues to create more money for lending to the federal government and sectors of the economy, it hampers its ability to reduce the monetary policy rate for fear that too much money in circulation will put more pressure on the naira and erode reserves. But all this would not have arisen had we saved for another day.
A recommendation is for the National Assembly to step in at this juncture to pass a legislation that makes it mandatory for government to save all revenues accruing above the budget oil benchmark in the ECA for unforeseen circumstances. The legislation should be made watertight to render it impossible for the federal and state governments to withdraw from the account except in times of crises and can only be done with the emergency approval of the federal and state assemblies.
Should any governor or politician decide to challenge the constitutionality of the ECA, let the courts decide on its legality. After all, the same Nigerian Constitution gives the National Assembly the power to make laws for the good governance of the country. In my mind, that should be sufficient reason for the legislature to give legal backing to the ECA.
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