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Why new petrol regulation won’t achieve downstream deregulation

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Though the Federal Government backed its determination to exit payment of subsidy on Premium Motor Spirit (PMS) with a regulation, which removed price cap on the product, stakeholders in the petroleum industry insisted that the country is only moving in circle and remains far from full deregulation of the sector.

Against insinuation that government has given the market freedom on pricing of the product, experts, who spoke with The Guardian, yesterday, noted that the prevailing development only reinforces the current pricing regime, where Petroleum Products Pricing Regulatory Agency (PPPRA) still sets prices, a move, stakeholders said, remained price control.

While government has been under pressure from local and international stakeholders, including financial institutions to fully deregulate the downstream, the government in 2017, introduced a price modulation system, which fixed petrol prices based on a template.

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While the aim was to save the Nigerian National Petroleum Corporation (NNPC) from the burden of under-recovery in the downstream sector, the system failed, as NNPC eventually became the sole importer of the product, bearing huge under-recovery.

Seeing that the economy was at crossroads and funding the national budget extremely elusive, the country, in March this year, announced discontinuation of petrol subsidy and that the sector had transited to full deregulation.

In a document titled, ‘Market Based Pricing Regime for Premium Motor Spirit (PMS) Regulations, 2020,’ Executive Secretary, PPPRA, Abdulkadir Saidu, said the price of PMS would be determined by market forces.

However, many stakeholders told The Guardian that the move would end up as a hoax, if there were no strong legislation to properly deregulate the market and possibly repeal the law that set up PPPRA and Petroleum Equalisation Fund.

With over N10.7tr spent on subsidising petrol between 2006 and 2019, as well as promises not kept in terms of exiting the scheme, the stakeholders feared that without proper legislation, government could reverse its decision, should prices start going up, since market variables, which cause upward or downward price, are beyond local politics.

A professor of Petroleum Economics and Management at the University of Cape Coast, Ghana, Wunmi Iledare, who explained that PPPRA and PEF have no role in a deregulated downstream market, said, “Great stride, but another Executive Secretary can come tomorrow with another President and use a section of the Act to issue another order. Let us not celebrate illegality.”

Iledare also questioned the agency’s power to issue such regulation, as the Executive Secretary was only empowered to advise the Minister of Petroleum on petroleum product pricing.

According to him, PPPRA cannot deregulate and exist. And if marketers can sell products at market price, dictated mostly by crude oil price, exchange rate and margin, PPPRA and PEF may have no role.

“Only the President and NASS can deregulate to pass the test of time. The window of opportunity to do it is closing very fast. I am really getting frustrated by ministerial appointees using the President as a cover for doing nothing,” he said.

Iledare said oil and gas regulatory framework is amorphous and ineffective in the country because of too many overlaps in responsibilities and accountability.

While noting that the passage of the Petroleum Industry Bill is critical to addressing some of the loopholes in the sector, he said the country should stop paying too much attention to the present and rather focus on the future

“Thus, there must be an Act to deregulate or an annulment of any existing institutions controlling prices of petroleum products. You cannot have price equalisation regulation and deregulation at the same time,” he noted.

Chairman of Major Marketers Association of Nigeria (MOMAN), Tunji Oyebanji, said with the current outlook in the sector, a simple statement on deregulation is insufficient.

He noted that the law setting up PPPRA still remains in force, authorising it to set prices, but that when prices start going up, government would again come under pressure not to increase prices or set them at uncommercial levels.

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He said: “Private people will stop importing and then we are back to subsidies again, with NNPC being the sole importer. If the prices are determined by the market, reaction and changes will differ by marketer per location.

“There will be no big bang announcement for people to rally against. It is better to do this when prices are low. All government need do is monitor against price gouging, which it can do through a bankers’ committee like meeting with market associations with sanctions for recalcitrant ones.  Of course, there are also details like access to forex, among others.”

Adeola Adenikinju of the Department of Economics, and Centre for Petroleum, Energy Economics and Law, University of Ibadan, who lauded government’s move, noted that there was need for more than price deregulation to include full liberalisation that would allow for free entry and exit into the market.

He said neither private companies nor the NNPC should enjoy exchange rate preferences to allow for full competition, while adding that companies that are able to meet quality specifications should be allowed to bring in the products without administrative licensing requirements.

“PPPRA should be scaled down significantly, given that the market will now perform much of their existing functions,” he said.

The Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN) said the new regulation was a welcome development, as it would benefit the economy.

The National President, PETROAN, Dr. Billy Harry said it is not yet uhuru for the industry, since the regulator remains in charge of pricing.

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An energy expert, Ameh Madaki noted that there was more to deregulating the downstream sector than just removing price caps, as real competition should be introduced.

“Currently, only NNPC imports PMS into the country. So, the eventual pricing has to be tied to the ex-depot price stipulated by NNPC, which is not optimal. If all marketers get involved in product importation or local refining becomes a factor in the pricing structure, then and only then can we start talking seriously about deregulation,” Madaki stated.
 
According to him, the undue focus on PMS to the detriment of AGO, DPK and lubricants suggests that only PMS is of interest to PPPRA, which should not be so.

He noted that the impact of price gouging and cartelism in the pricing of the other products in the name of deregulation has left Nigerians unduly exposed and at the mercy of marketers.

“It is doubtful if PPPRA on its own has the legal competence to issue the guidelines it just issued on the deregulation of downstream sector. Its role is advisory, and such guidelines and regulations with far reaching consequences can only be issued by the Minister of Petroleum Resources,” he said.

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