Home » OIL » Saving $261 Billion as Cost from the Tractable Storm of Full Deregulation

Saving $261 Billion as Cost from the Tractable Storm of Full Deregulation

by Ben Ndubuwa, Abisoye Shola and Jenifer Dike…………………….

As the Federal Government announced a hike in the pump price of Premium Motor Spirit (PMS) otherwise known as petrol and electricity tariff, there have been waves of opposing storms across the country. Not a few persons and groups have condemned the policy and have been warming up to ruffle the feathers of government over the hike.   

According to the announcement by the federal government on Wednesday 2nd September, the price of petrol  ex-depot was fixed at N151.56 per litre. This was against the N143.50 in the month of July and N148.50 per litre in August. As a result marketers had to fix pump price to be N162 per litre with a N10 margin to take care of operational cost.

Following the price hike, two days later beig Friday 4th September, the  Major Oil Marketers Association of Nigeria (MOMAN) gave kudos to the federal government over the new price saying that the deregulation of the sale of PMS would be beneficial to Nigeria and Nigerians in the long run.

Chairman of the association, Mr Tunji Oyebanji, said in a reaction to the outcry over the latest increment of the ex-depot price of petrol that the price increase is a historic opportunity for Nigeria to “get it right this time as a country to rebuild our economy for the benefit of all Nigerians” he said.

In reaction to this price increase, the Labour Congress (NLC) kicked against it saying that the price hike of PMS has been three times within three months. According to NLC this is an indication that the government was taking Nigerians for granted. NLC President, Ayuba Wabba, then warned that the union could no longer guarantee industrial harmony in view of this development.

He said Nigerians and the NLC were shocked by the price increase,   “coming at a time when many Nigerians are passing through very peculiar and precarious times.

“It’s like Nigerians are being taken for a ride; the increase in price of petroleum is like adding salt to injury” he said.

According to Ayuba only yesterday Tuesday 3rd September, that the federal government also hiked the tariff of electricity. “To compound it, they also reduced the interest rate on savings which affected mostly the poor and the vulnerable.

“While rejecting this in the strongest terms, I think Nigerian government is taking Nigerians for granted” he said.

The congress noted that the government had betrayed the trust of Nigerians and left them vulnerable to economic ravages.

Supporting the position of the NLC, Trade Union Congress (TUC) said they are consulting with their counterparts in civil society to go on strike. While NLC, TUC and others were kicking against the hike, there were pocket of protests reported in Osun State. The protesters are said to have given the federal government a five-day ultimatum to rescind the decision to increase the price of petrol.

The Manufacturing Association of Nigeria (MAN), also lend their voice to the increase. According to acting Director-General, MAN, Ambrose Oruche, the poor and small businesses that depended on the  PMS to power their generators would be hard hit.

He said it was important for the government to introduce measures to cushion the effect of the deregulation in the sector.

“To reduce the impact, government should do more in ensuring power generation is enough and distribution is efficient, and ensure that people get at least 20 hours of light in a day to reduce dependence on the PMS. Government should find a way of compensating the SMEs to stay in business through tax rebates or grants to remain in business and stay competitive” Oruche said.

Meanwhile, this outburst from the public, a couple of months back was different when on Wednesday 18 March, this year, the federal government announced the reduction of the pump price of PMS from N145 to N125 per litre there was a sigh of relief and calmness among Nigerians.

The reduction came against the backdrop of the crash in crude oil prices globally. This was at the peak of the lockdowns and the government was also busy trying to assist Nigerians with palliatives.

The reduction of PMS Price then was seen by some Nigerians as a form of palliatives and had wished that the price of petrol could remain at N125 per litre. But the government maintained that this reduction was as a result of the crash in crude oil prices globally due to the Covid-19 pandemic.

While consumers and Nigerian were relishing the price reduction, petroleum products marketers were battling with low sales as a result of the lockdowns and restrictions in movement. This reduction further brought discomfort to the marketers as some of them complained that their retail outlets were still having volumes of old stocks bought at prices high than the reduction. According to them this had led to losses.

 “Our industry has been impacted severely just like every other industry. As you know our industry thrives on movement of people and goods and services and once the whole world is shut down that means the demand for our products is severely impacted in fact figures shows that sales in the month of April were down about 70 percent on normal monthly performance” the marketers complained.

It was at the height of this quagmire that the marketers were told by the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Engr. Mele Kyari, that the subsidy is now a thing of the past and that government is not going back to it. The Minister of State for Petroleum Resources, Timpre Sylva also made some comments to the effects that the downstream has been fully deregulated.

As these pronouncements came from both the Minister and the NNPC boss, the marketers got worried because details about the deregulation were sketchy. “First and foremost we believe that if we are indeed fully deregulated, then there would be no question of government still being the one to fix the price, just like every other product  be it  telecommunication or food, it is the market forces that is suppose to determines the prices.

Secondly, many of the institutions that supports the current regime are still in existence, this include the Petroleum Equalization Fund (PEF) and this was created by legislation and it’s still in place and there is of course the Petroleum Products Price Regulation Agency (PPPRA)  which is still the institution that is charged with the responsibility of setting prices on a periodic basis so with all these institutions still in place we are a bit confused as to whether indeed we are fully deregulated or we have just gotten to a situation where government has decided that it will no longer subsidize price” Oyebanji had said.

These concerns were further echoed by some stakeholders in the industry. According to them, there is a whole lot more that needs to be done to ensure that this policy of full deregulation is successfully implemented. They noted that it was not the first time that the government had threatened or attempted to deregulate the downstream sector by way of petroleum subsidy removal.

An attempt to do so in 2012 was greeted with stiff resistance from civil society, in a coordinated protest that almost brought down the government of the day. According to them this government had attempted to do so by not budgeting for it in 2017, but eventually found an ingenious way of not implementing it through the sleight of hand of the NNPC. However, now the government has succeeded in removing it from this year’s revised budget. According to the minister over N1 trillion has so been saved from the removal of the subsidy. This financial gain from subsidy removal has been commended by the industry stakeholders.

However, they noted that there were other hurdles that needed attention to full deregulation. These among others include the institutional and legal framework that must be changed. Industry stakeholders insist that changes must be made in these two key areas to ensure that government never go back again to the era of petroleum subsidy.

Stakeholders are calling on the government to fast track the passage of the Petroleum Industry Bill (PIB). Secondly, there is the need to scrap the Petroleum Products Pricing Regulatory Agency (PPPRA) and the Petroleum Equalization Fund (PEF). PPPRA was founded in 2003 and its job among other responsibilities, include the monitoring and regulation of the supply, distribution and prices of petroleum products. The PPPRA basically sets prices of petroleum products using a template designed by the agency to determine maximum prices of products.

 Stakeholders are insisting that in a deregulated market, the PPPRA obviously do not have any role to play or at the minimum, would have no hand in the determination of the prices of petroleum products. Why would the PPPRA be the one that sets the cost of crude in dollars? Also is the Freight Rate, Lightering Expenses, Insurance, NPA and NIMASA charges, (which are also set in dollars), Jetty Throughput, Storage Charges, Financing Cost, all amounting to a total landing cost. In addition are other costs and also the distribution margins which takes care of the marketers operational cost. All these are passed on to the consumer who now pays more at the pump.

A breakdown of some of these cost showed that Admin charge is N1.23; National Transportation Allowance(NTA) N3.89; Bridging Fund N7.51; Marine Transport Allowance N0.15; Retailer N6.19 all these are per litre of PMS imported into the country.

When all these are added up they are passed on to the consumer. For instance in total it amount to the sum of N12.78 per litre on the ordinary Nigerian in the street. This translates to a humongous N716 million a day and for a year it is about N261 billion for the 56 million litres Nigerians are meant to be consuming daily.

This huge amount can be saved as cost from this tractable Storm of public outcry in well managed, proper and full deregulation of the downstream. Also given that there is no monopoly of importation by NNPC and that all the marketers have access to foreign exchange at official rate. With PPPRA and PEF out of the way and forex availability at official rate, these costs will not be passed to the consumer this no doubt will engender healthy competition that will drive down the pump price of PMS. In addition there will be rush to invest in the downstream sector.

If on the other hand government merges PPPRA and PEF into a new body to be named “Authority” and allow it to play same role of the former two institutions in which these avoidable and unjustifiable costs are passed to the consumers then no end to public outcries, protest and raise of waves of storms against  the government.

This is because as it   stands now there are issues of forex accessibility and what rate among the marketers. At what rate do marketers source their forex and how accessible is this forex to them?

Asked whether oil marketers had resumed the importation of petrol, the National President, Petroleum Products Retail Outlets Owners Association of Nigeria (PETRON), Billy Gillis-Harry, replied, “How can we import when we do not have access to forex” he said.

“We have storage tanks everywhere and so we can import but the problem here is that at what amount are we going to access the dollar? How are we sourcing it, are we to source it at the black market rate Or are we sourcing it at the CBN rate” he wondered.

Given the nation’s dwindling forex earnings due to the fall in crude oil price during the lockdowns it is now difficult for the marketers to source forex for import and the responsibility is now on NNPC get PMS into the country. The question then is can this sustain the full deregulation stakeholders including the marketers are clamouring for? And will this “near-monopoly” by NNPC engender competition that will and supposedly bring down the current price of PMS which consumers have kicked against?

MOMAN through its Executive Secretary, Mr. Clement Isong responded by saying that having a dominant player in the downstream petroleum sector, with full access to foreign exchange at the CBN rate, has created challenges in the implementation of the deregulation policy.

“Marketers are still unable to access the foreign exchange required to import petroleum products and compete on a level playing field with NNPC. As you know, competition drives efficiency and this increased competition will lead to lower prices at the pump. Now that it appears that we are headed towards a fully deregulated market, this is one of 

the aspects that should hopefully improve.

MOMAN said the reduction in foreign exchange earnings has put a lot of pressure on the CBN as it tries to manage the exchange rate. The private sector has borne the brunt of this unavailability of foreign exchange and the mechanism the CBN has chosen to manage its distribution. “It is a pity that the nation’s refineries are not working but already, the policy direction is yielding fruits as the private sector is beginning to invest in refineries with foreign partners.

 “The on boarding of the world class Dangote refinery and other modular refineries should help to improve this current challenge as they will be able to transfer some of their cost advantages to the Nigerian market. With this sort of increased investment in the industry, we would see improved logistics, improved infrastructure and increased 

foreign exchange revenue to the country as we would become net exporters of refined petroleum products. But for all this to be implemented, the right policies have to be in place and of these, price deregulation is the most important.

 “We are for once, heading in the right direction. The refineries will compete. The marketers will compete. Quality and services will improve. The consumer, the economy and the country will be the ultimate beneficiaries” Isong said.

On the plan by the government to merge PPPRA and the Petroleum Equalization Fund (PEF) to form one entity called “Authority” that will be the regulator for the downstream.

The MOMAN Executive Secretary told FINANCIAL ENERGY REVIEW that the engagements with the government has revealed a new approach where the regulator will see itself as an enhancer, a developer and a supporter of the industry and to properly achieve this objective, the role of this new regulator would need to be defined.

MOMAN continued by saying that their opinion is that this regulator should have a similar role to the CBN in the banking industry or the FCC in telecoms. Its role would be to regulate the sector through constant engagements with the industry players, identifying areas that will bring optimization and better customer experiences to the buying public such as improved technology.

“The regulator would consist of technocrats from diverse sectors but with relevant private sector industry experience. The duty of price fixing or price equalization will no longer be relevant as we would snow be operating in a fully deregulated market where the forces of demand and supply control petroleum pump price” Isong advised.

Professor Wumi Iledare, Ghana National Petroleum Corporation’s Chair of Petroleum Economics at Institute of Oil and Gas Studies, IOGS, in the University of Cape Coast, Ghana, said that any sole seller of any commodity is a monopoly and as such, it must be regulated. But prices at the pump are not a monopoly and so must not be regulated with respect to prices at the end users.

“Regarding NNPC, I think they have a competitive advantage because of it’s being vertically integrated across the value chain. So the exchange rate pressure is minimized. So they can sell at a social optimum price, which is less than the fair market value price for a monopoly. This makes the whole sale price inefficient!” he said.

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