Emmanuel Addeh explains the role of the Petroleum Products Pricing Regulatory Agency in a market-based regime
In 2000, the federal government set up a 34-man special committee on the review of petroleum products supply and distribution which eventually birthed the Petroleum Products Pricing Regulatory Agency (PPPRA) in 2003.
The government listed the scarcity of petroleum products leading to long queues, low capacity utilisation and refining activities at the nation’s refineries as well as low investment opportunities in the sector as some of the factors prompting the move.
It then went about setting up the PPPRA, an agency meant to have sufficient autonomy to superintend over the various phases of a proposal which included the liberalisation of the downstream sector of the petroleum industry.
The Bill for the establishment of the Agency was finally passed in 2003, with the first Board of the agency inaugurated same year.
In essence, the PPPRA was set up to determine the pricing policy of petroleum products, regulate its supply and distribution, create an information databank and moderate volatility in petroleum products prices, while ensuring reasonable returns to operators.
The government further saddled it with the responsibility of establishing parameters and codes of conduct for all operators in the downstream petroleum sector.
Added to the above, the PPPRA was to maintain constant surveillance over all key indices relevant to pricing policy and periodically approve benchmark prices for all petroleum product.
It was also tasked on identifying macro-economic factors with relationship to prices of petroleum products and advice the federal government on appropriate strategies for dealing with them.
Currently led by its Executive Secretary, Mr. Abdulkadir Saidu, the agency also works to prevent collusion and restrictive trade practices harmful in the sector and exercise mediatory role as necessary for all stakeholders.
In March this year, the federal government said it was set to review the pump price of petrol, down from N145, the price it was sold at the time.
The Minister of State for Petroleum Resources, Chief Timipre Sylva, had then noted that the fall in the international price of crude oil had made it inevitable to lower the price Nigerians get the product at the fuel stations.
“The drop in crude oil prices has lowered the Expected Open Market Price of imported petrol below the official pump price of N145 per litre.
“Therefore, Mr. President has approved that Nigerians should benefit from the reduction in the price of PMS which is a direct effect of the crash in global crude oil prices.
“In view of this situation, based on the price modulation template approved in 2015, the Federal Government is directing the Nigerian National Petroleum Corporation (NNPC) to reduce the ex-coastal and ex-depot prices of petrol to reflect current market realities” he said.
Accordingly, the minister had explained that a monthly guiding price would henceforth be advised by the PPPRA in tandem with the prevailing market price of the product to the 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 oil market development.
“It is believed that this measure will have a salutary effect on the economy, provide relief to Nigerians and will provide a framework for sustainable supply of petrol to our country,” the Supervising Minister had said.
A day later, the PPPRA introduced a new pricing template, following the crash in the international price of crude oil.
It had explained that the plunge in the price of crude oil and petroleum products occasioned by the outbreak of coronavirus pandemic and slowing global oil demand, had led to a drop in the petrol Expected Open Market Price (EOMP) below the approved pump price cap of N145.00 per litre, indicating over 30 per cent drop below the official pump price.
Consequently, the Agency said taking into consideration all existing approved margins on the pricing template, the new pump price of petroleum had been set at N125.00 per litre, effective 19th March, 2020.
That decision in March to commence the announcement of a monthly guide for the prices of petrol has left the Agency in the public eye and subjected it to more public scrutiny, given the critical role the supply and pricing of the product plays in the country’s energy and economic needs.
Subsequently, various price bands have been made public by the Agency, with the lowest being the N121.50 price and the highest since then, being the announcement of N143.80k for the month of July.
However, while the petroleum sector has faced several challenges, the PPPRA said it has continued to effectively play the role of petroleum products price review since its inception, including midwifing the deregulation of the downstream petroleum sector.
According to the Agency, this is to address the perennial problem of fuel scarcity and other related challenges bedeviling the country.
For the time the PPPRA has been in the news, its functions appear to be clearly misunderstood by many Nigerians, with the most recurring issues bordering around the new pricing policy which has drawn mixed reactions from Nigerians.
Many consumers have questioned why they are not paying considerably less, given the relatively low crude oil price and how deregulation will affect petrol pump price when crude oil price inevitably rebounds.
But the PPPRA explained that its pricing template takes into consideration a number of factors which includes amongst others: petroleum product cost, foreign exchange (forex) and rate at which oil marketing companies (OMCs) import petroleum products.
Other associated cost components, it said, included freight rate, trans-shipment cost, statutory charges, terminal charges (storage and jetty throughput), financing and distribution margins (wholesalers/marketers, transporters, retailers, bridging fund and administrative charges.
While stressing that the agency does not fix prices, the PPPRA said that it provides a guiding price band by monitoring petroleum products prices daily and using the average price of the previous month to determine prices for the following month, to determine the appropriate cost reflective pricing that ensures reasonable returns to marketers.
“This methodology is in line with international best practices which range from bi-monthly to monthly price reviews. Nigeria adopted the monthly review model considering the average duration for importation of petroleum products into Nigeria from the closest spot market; Northwest Europe (NWE) to West Africa (WAF) is about 30 days. This period encompasses the Import Financing Process to delivery at retail outlets.”
On why it was not possible for the government to fully hands-off pricing despite deregulation of the sector, the body said the enforcement of appropriate laws by strong regulatory agencies was needed in the downstream.
“Different fully deregulated sectors of the polity operate under the guidance of national regulators. The NBC regulates broadcasting, NCC regulates telecommunications.
“NERC regulates the power sector; the banking sector is being regulated by the CBN and the same exists for operators in Nigeria’s downstream petroleum sector” it explained.
The agency emphasised that the new pricing regime is a market-reflective pricing system where it advises marketers on guiding price, stressing that although crude oil price and petroleum products prices are positively correlated, the prices of petroleum products do not increase or reduce correspondingly with changes in crude oil price.
Abdulkadir added: “The PPPRA pricing template takes into consideration a number of factors which includes amongst others: Petroleum Product Cost, Foreign Exchange (Forex) rate at which Oil Marketing Companies (OMCs) and import petroleum products.
“Other associated cost components include freight rate, trans-shipment cost, statutory charges (NPA, NIMASA), terminal charges (storage and Jetty throughput), and financing and distribution margins (Wholesalers/Marketers, Transporters, Retailers, Bridging Fund and Administrative Charges).”
On the alleged misconception that the PPPRA fixes petrol prices, he said: “the agency does not fix prices but rather provides a guiding price band by monitoring petroleum products prices daily; using the average price of the previous month to determine prices for the following month, for appropriate cost reflective pricing that ensures reasonable returns to Oil Marketing Companies (OMCs).
The PPPRA listed the advantages of the new pricing regime as encouraging marketers to resume supply of petrol, leading to further value creation in the downstream.
“This policy will foster job creation, ensure reasonable returns for investors, create healthy competition among marketers, enhance value for consumers and make funding available for other important infrastructure” it said.
While answering the question on the role of the PPPRA in an already deregulated market, the Executive Secretary noted that the deregulation of the downstream sector will be dependent on the enforcement of appropriate laws by strong regulatory agencies.
The PPPRA explained that there was nowhere in the world that deregulation means total lack of control, supervision or oversight, adding that while the market-based pricing regime is a policy introduced to free the market of all encumbrances to investment and growth.
“It should not be misconstrued to mean a total abdication of government’s responsibility to the sector and citizenry” the PPPRA boss noted.
The extant laws, such as PPPRA Act No. 8 of 2003 and the Petroleum Act, the Agency said, gives it the legislative backing to formulate policy initiatives on pricing regime, limit price gouging, create a level playing field for operators and protect consumers.
“In accordance with the above, the development of guidelines for petroleum products commercial framework has been concluded and Code of Conducts for operators is currently being firmed up to reflect the present price regime” it noted.
Abdulkadir stressed that the PPPRA had earlier emphasised that the new pricing regime is a market-reflective pricing system where the agency advises marketers on guiding price.
“It is pertinent to also note that although crude oil price and petroleum products prices are positively correlated, the prices of petroleum products do not increase or reduce correspondingly with changes in crude oil price.
“The pump price we expect to see will be a reflection of the international market prices of petroleum products that are also rising.”
It said that transitioning to a fully deregulated market had come with its growing pains, listing major challenges holding stock of products bought at higher prices, non-availability of foreign exchange for importation of petroleum products and slow depletion of stock due to the covid-19 pandemic.
On a positive note, the PPPRA said it is currently finalising the review of cost elements and profit margins on the pricing template for marketers to reflect the current market-driven pricing regime, which was last reviewed in 2016 while ensuring that consumers are not overcharged.
Earlier, in one of its explanatory notes, the agency had explained that the modulation as described in the statement introducing the new pricing regime, refers to monthly adjustment or review of pump prices in line with prevailing market conditions.
It described price liberalisation as a situation in which Expected Open Market Prices (EOMP) are completely determined by market forces, stating that under the system, petroleum products prices will henceforth be adjusted in line with market realities.