Why further fuel price reduction may not be feasible, by Farouk 

Ahmed Farouk is the Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPPRA). In this interview with COLLINS OLAYINKA of our Abuja Bureau, he explained germane industry issues being addressed by the agency since he assumed duties last year. Excerpts.

WHAT have been the challenges so far since you assumed duties last year?

The most formidable challenge has been the reluctance of the deposit money banks to finance product importation. Sincerely, the Central Bank of Nigeria has encouraged the banks to keep issuing letters of credit to marketers. Despite this challenge, we have kept the country wet with products in the last one year. We are very encouraged with the disposition of the apex bank over this matter.

Which processes led to the N10 reduction in the price of fuel and why did Nigerians not get much more reduction?

The price of crude oil hovered around $114 per barrel in June and around $47  by December 2014. We then realized that we got to a point where we had parity, which means that we were no longer paying subsidy anymore. Subsidy payment as at June was about N56 per litre. When we reached point of parity and even over the recovery of negative N10 per litre, government then decided to do something about the pricing even though the average over recovery was around N7 per litre. Questions have been raised about why government did not reduce the price earlier. We did not reduce the pump price earlier because of the volatility of the market. We could not just jump into conclusion without looking critically at the trend in the international market. Government effected N10 reduction because the price could stay within that zone. It could go slightly lower or slightly higher. Government did not want to overdo it in order not to come back and say it is over subsidizing.

Industry sources believe this is the right time to deregulate the downstream sector. Why is the delay in doing this?

The market is still very volatile. As we speak now, the price has gone up slightly to $56 per barrel. This scenario has put the subsidy level at about N11 per litre. I believe that given the constant change in scenarios, government will take appropriate decision on deregulation of the sector at the right time.

Why is the reduction in the global oil market not affecting the price of diesel?

Well, on the price of diesel, you know the product is fully deregulated. Therefore, it is the market forces that are always interacting to determine the price. The landing cost of diesel as at last week was about N108 per litre. The reason the price is high at the pump stations is because of the Central Bank of Nigeria (CBN) monetary policy. The naira was devalued by about eight per cent, which means that instead of the naira going for about N168 per dollar, it is much more than that and this has to reflect on the price of diesel at the pump. The PPPRA, major oil marketers, depot owners and independent marketers had a meeting with the Governor of CBN last week Monday, sourcing for foreign exchange. The CBN said it could not finance importers of other products except petrol. It therefore means that diesel importers have to source their foreign exchange from commercial banks. The difference between inter-bank and CBN rate is about N20 on every dollar. Even though the landing cost of diesel is N108 per litre on the PPPRA template, that cannot be applicable to those marketers that sourced their foreign exchange at the inter-bank because PPPRA uses CBN dollar rate. Additionally, some of the marketers also patronize the parallel (black) market, which adds more to the cost. So, instead of having diesel at N108 landing cost, it is about N128 per litre without other costs and profit margins. That is why diesel costs about N140 per litre.

Does this scenario apply to kerosene?

Kerosene is also deregulated but government absorbed the differential. The landing cost of kerosene as at last week was N111 per litre. Government has given a directive that kerosene be sold at N50 per litre and then absorbed the N61 being the differential.

Does PPPRA now process subsidy claims on kerosene?

Yes, the PPPRA also processes subsidy claims on kerosene. The PPPRA has not gotten a formal directive from government not to process subsidy on kerosene. You will recall that pronouncements have been made on the issue in the forensic audit carried out recently. The fact is that even though there was that memo supposedly written to stop subsidy on kerosene by a former President, it was never gazetted. Nigeria has average consumption level of 11 million litre of kerosene per day and the Nigerian National Petroleum Corporation is responsible for it.

How can fuel importation regime be protected against sharp practices?

When I came in last year, things were already sanitized. What we did was to improve on what was on ground. From the 2012 investigations, a lot of measures were put in place to ensure that the processes were transparent and credible. In addition to adopting stock-in and stock-out system, we are also working with the Economic and Financial Crimes Commission (EFCC), the Police Special Fraud Unit to address fraudulent situations. There have been a lot of cases that are in courts and PPPRA has been invited as a witness. Through this process, over N4 billion have been recovered from these fraudulent practices. Again, the PPPRA is also insisting that any vessel arriving must provide the original bill of laden and other necessary documents from the loading port. The reason for this is for us to be able to write to loading ports to confirm whether such vessel is from the specific port. This system has discouraged multiplicity of documents and round tripping.

  Let me stress that both imported and locally refined products are certified by the PPPRA at the point of transfer. Certificates are issued at the refinery points. It is these certificates that are used in evaluating what the refineries produce. Our surveyors who certify the quantity supervise what arrive from the offshore. There are many agencies of government that are there to ensure compliance with the regulations.

How does this affect the ordinary Nigerian in respect of the pump price because it is expected that products internally refined should be cheaper than the imported ones?

Well, the process is basically the amount of subsidy that is paid on products. Expectedly, government will not pay the same amount of subsidy on the two different products. So, that differential is felt in the amount of subsidy that is paid. It does not affect the pump price at all. Both products are still the same in terms of the price of crude oil and refining costs. There are some elements in the landing costs that imported product has that the locally refined one does not have. The NNPC does not enjoy additional financial costs that are associated with imported products on products that are internally refined.

Why are the refineries not working at installed capacities?

The thing with the refineries is that it is not that they are not working, but the problem is vandalism of the pipelines. Crude is supposed to be transported to the refineries but this cannot happen because evacuation is made almost impossible due to pipeline vandalization. For example, Port Harcourt refinery that has a short distance of Bonny and Port Harcourt, we lose about 30 to 40 per cent of crude that is transported through the pipelines. When the cost of the losses are calculated, it is even better for Nigeria to import than refining locally. That is the crux of the matter because of efforts at cutting costs. This is because the NNPC regardless of whether the crude is stolen or not, is billed for that amount of crude. The Port Harcourt can produce up to 70 per cent; Warri refinery can also go up to 70 per cent and Kaduna refinery can do 60 per cent. So, the refineries can do about 60 per cent capacity on the average.

Should Nigerians still expect further reduction in the pump price?

Further reduction in the pump price is not feasible as at now. The reason is that crude oil price has gone to $57 per barrel and the subsidy payment has gone to N11 per litre. So, if government had gone ahead to reduce the pump price below N87 per litre, it will be having financial challenges by now. The simple reason is that while the price at the international market has gone up a little bit, the amount of cash inflow into government coffers has gone down. But at N87 per litre, government can still maintain the price for much longer period. The open market price now is N98 per litre.