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Fuel price adjustments: How deregulation without competition undermines downstream sector

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The latest adjustment to the pump price of Premium Motor Spirit (PMS) better known as petrol, has raised more questions than answers, as well as concerns about government’s sincerity regarding the deregulation of the downstream sector, as well as the protection of the masses against price gouging.

While the Minister of State for Petroleum Resources, Timipre Sylva, last Monday, assured that Nigerians would get used to the deregulation of the pump price of petroleum products just as they have become in the case of kerosene and diesel, the reality of inflation tells otherwise.

The concerns about the country’s fuel pricing technique, border on uncertainty and unintended consequences of such decision on the already burdened Nigerian consumer.

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Earlier in November, when crude oil was trading in the region of $37 per barrel, Nigerians expected that prices would be adjusted to reflect the realities as done on a monthly basis. However, a delay ensued till the price jumped up to around $43.

In line with the monthly templates hitherto adopted by the Petroleum Products Pricing Regulatory Agency (PPPRA), consumers were hoping that fuel prices would be adjusted for this month (November) to a retail price band of N143-N145/litre, which was the case when oil traded within the same margin in June.

When oil traded between $40-$42 per barrel in June, the PPPRA announced a new retail price band for oil marketers for the month of July. It was within the price range of N140.80 and N143.80.

Indeed, at $37.31 per barrel for the country’s Bonny Light and $37.46 for Brent Crude as at the end of October, Nigerians were hoping that the price of petrol would drop to the July benchmark, or even lower for this month.

But with the naira depreciating further, chances of a lower pump price became a mirage, as the Pipeline and Product Marketing Company (PPMC) opted for a higher band.

Tracing Recent Fuel Price Movement
ON November 11, the PPMC, one of the downstream subsidiaries of the Nigerian National Petroleum Corporation (NNPC), hiked the ex-depot price of PMS, also known as petrol, by N7.50 per litre to N155.17 per litre from N147.67 per litre previously.

In a memo from the Manager Marketing of the PPMC, Tijani Ali, to the Executive Director, Commercial, EDC, of the PPMC, the NNPC subsidiary said the new price would come into effect from November 13, 2020.

The ex-depot price is the amount at which the PPMC sells the commodity at the depot to retail outlets owners and fuel marketers across the country. This means that at N155.17 per litre, marketers would be dispensing the product to motorists at between N167 and N175 per litre, from Friday, November 13, 2020.

The PPMC also put the ex-coastal price of the commodity at N130 per litre.

Typically, the PPPRA publishes PMS price templates in Nigeria. The last template published via its website was on March 6, 2020.

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For April 2020, there was no template, but a clarification memo on the expected price band N123.50 – N125/litre.

In May 2020, the PPPRA released a memo on market-based pricing for PMS implying that marketers have freedom to determine products’ price, adding that it would continue to provide guidance on market trends.

The agency’s executive secretary, Abdulkadir Saidu, had earlier said that under the new arrangement, marketers are now solely responsible for determining retail fuel prices in the country, based on market fundamentals.

In April, Sylva pointed out that with the deregulation policy, a fuel price modulation mechanism would be established to determine prices.

The minister said the government would no longer be directly involved in fixing fuel prices, but that the private sector would be allowed to take over the process through the marketers.

The arrangement, he said, would allow the government to focus on its traditional role of monitoring and enforcing compliance with regulations to avoid profiteering by the marketers.

In June 2020 the PPPRA advised on a PMS price band of N121.50 – N123.50/litre via a memo dated May 31, while in Aug 2020, the PPMC announced a new pump price of N138.62/litre.

Basically, the PPPRA did not publish any PMS pricing templates for six months.

Is PPMC The New PPPRA?
IN September 2020, President Muhammadu Buhari submitted the revised Petroleum Industry Bill 2020 to the National Assembly.

A part of the bill states that the proposed Nigerian Upstream Regulatory Commission would be responsible for the technical and commercial regulation of upstream petroleum operations, while the new Nigerian Midstream and Downstream Petroleum Regulatory Authority shall be responsible for the technical and commercial regulation of midstream and downstream petroleum operations in the petroleum industry.

Inference from the proposal has been described as one that technically scraps the PPPRA with the creation of the new agencies, which would, going forward, carry out the PPPRA’s functions.

With the PPPRA ceasing to submit its monthly templates and the PPMC assuming the position, Nigerians are wondering if the PPMC is the new PPPRA pending a review of the bill by the National Assembly.

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While the PPPRA always advised a rate band via its template, the PPMC would rather announce a specific rate as witnessed in the November memo.

There are, however, concerns over the PPMC’s Price Proposal Template, as it introduces new cost items like demurrage provision, inspection, discharge loss, loss recovery, and coastal margin.

According to an oil and gas analyst, Kunle Durojaiye, the recent increase in PMS price for November, based on the PPMC template, can be said to be driven by increased freight cost from N5.04 to N12.54/litre, almost thrice the September/October cost, noted as Direct Sale-Direct Purchase (DSDP) winter premium, increased lightering expenses from N4.57 to N6.17/litre and product (crude) cost $/MT decreased from N114.73 to N111.35.

Durojaiye, who expressed other concerns with the PPMC template, cited the demurrage provision of N2.50/litre, when lightering expenses already included a-10 day coverage for demurrage.

Furthermore, a discharge loss of N0.11/litre was also queried when lightering expenses also included a 0.3% factor for losses incurred in transferring product across coastal vessels.

“Loss recovery of N2/litre. This is confusing. First, lightering expenses, then discharge loss, then loss recovery? What loss is being transferred to the customer here that has not been accounted for already? Clarity needed,” he added.

Commenting on the PPMC’s statutory collection of N12.78/litre, he pointed out that while the collections tally with PPPRA’s distribution margins (transporters, bridging fund, MTA, and admin charge), such margins were fixed under PPPRA, but the PPMC shows it as variables between September and November.

He then raised questions seeking clarity on government’s pricing policy, regulatory framework and pricing template that guides the activities in the downstream sector.

For success in a post-deregulation era, the Chairman of Major Oil Marketers Association of Nigeria (MOMAN), Tunji Oyebanji, argued that a fair and transparent market, sound legislation, consumer protection, self-regulation and corporate governance just to mention a few, were of utmost importance.

He noted that the downstream sector remains challenged by the absence of private sector investment, poor state of industry and support infrastructure, lack of clarity/transparency in polices and regulations, and trust deficit by the Nigerian public and consumers.

Oyebanji, therefore, called for removal of state monopoly operated by the NNPC, and her downstream companies in the supply of products to the domestic market.

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The prevailing practice where marketers rely on the ex-coastal and ex-depot prices determined by the NNPC inhibits competition since, he argues, all players are rewarded equally despite the scale of internal efficiencies.

Stakeholders Chart Pathway To Tackle Deregulation Conundrum
THE Lagos Chamber of Commerce and Industry (LCCI) said the way out of the pricing and deregulation conundrum is to accelerate the process of domestic refining of petroleum products and creating a competitive market framework.

LCCI Director-General, Muda Yusuf maintained that a deregulated pricing regime is typically volatile, oscillating with global oil price.

Dr. Yusuf said: “However, deregulation without competition would not give desired outcomes. We are still immersed in a monopolistic structure even as we claim to have deregulated the petroleum downstream sector.”

He argued that the economy and the citizens cannot get the benefits of deregulation under the current arrangement where the NNPC is still a monopoly in the supply of petrol.”

Yusuf, who expressed regrets that private sector players have no access to forex to import petrol, while the refineries are still comatose, canvassed the need for the government to urgently put appropriate structures in place for the deregulation regime to achieve its objectives, stressing the need to have a level playing field for all actors in the sector.

The LCCI DG observed that if otherwise, the deregulation policy would face a major risk of being derailed.

“We would be back to the subsidy regime with all the attendant inefficiencies and corruption,” he said, even as he also advised on the need to scale up investments in mass transit transportation systems to cushion the effects of petrol price increases on domestic prices.

According to him, the power sector recovery programme should also be accelerated to reduce the dependence of Micro, Small and Medium Enterprises (MSMEs) on petrol-powered electricity generators.

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He argued that these two areas of intervention would reduce the adverse impact of petrol price volatility on small businesses, and the welfare of the citizens.

On its part, the Manufacturers Association of Nigeria (MAN) noted that the review in fuel price would further spike inflationary trend.

According to the acting Director-General of MAN, Chuma Oruche, the country is already battling cost-push inflation and the hike in fuel prices would further affect Nigerians’ cost of living.

NECA’s Director-General, Timothy Olawale, said the increase called for transparency in the deregulation process, as it has generated concerns among Nigerians.

He wondered how the fuel price should go up at a time when there is a decline at the global market, which ordinarily should necessitate a downward review in the pump price.

According to the NECA boss, it was imperative for the government to demonstrate a high level of transparency in the deregulation process.

Olawale said: “A deregulation system that inspires confidence among Nigerians will go a long way in assuaging the concerns being expressed by Nigerians.

“We implore the government to, as a matter of urgency, fast-track the implementation of all pro-poor policies to cushion the effects of COVID-19 and #EndSARS protest on businesses and the generality of Nigerians.”

The Executive Secretary/Chief Executive Officer, Major Oil Marketers Association of Nigeria (MOMAN), Clement Isong, earlier explained to The Guardian that the international price of refined products and exchange rate were the two major components that determine the pump price of petrol.

According to him, the importer of refined petroleum products of note today remains the NNPC/Petroleum Products Marketing Company (PPMC) as they are the only ones with access to foreign exchange, and they use the exchange rate indicated to them by the CBN to determine their cost price in naira.

“The PPMC will set their ex-depot price based on these two parameters. Based on the information within the public purview today (Platts and I&E exchange rate window), and the current large volume of PPMC pre-ordered stock floating in vessels within our coastal waters, we expect only marginal, or limited price changes if any at all in the PPMC ex-depot price.

“As marketers improve their efficiencies, automate their processes and adapt their marketing strategies, you will find some marketers being able to reduce their pump prices to remain competitive, or manage their relationships with their bankers, equity shareholders and/or business financiers,” he added.

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The Independent Petroleum Marketers Association of Nigeria (IPMAN) informed The Guardian that marketers were willing to reduce the price of petrol, but noted that the ex-depot price of the NNPC remains the same.

However, for the Vice President of IPMAN, Abubakar Shettima, it was normal for price of products to reduce when crude oil price declines, especially as the country has transited to a deregulated market.

When oil traded at below $40 per barrel, the spokesperson of the NNPC, Kennie Obateru, noted that it could take a while for the reduction in the crude oil price to reflect in the pump, maintaining that the current product was ordered based on the old price of crude.

He noted that the corporation would not hesitate to reduce the price as soon as other prevailing factors, including the exchange rate favour such move.

Obateru had noted that over two billion litres of PMS are currently in stock in the country, which is expected to guarantee steady supply, and at least 60-day-product supply sufficiency.

A mineral/energy resource economist, and former president of the Nigerian Association for Energy Economists (NAEE), Wunmi Iledare, said prevailing factors in the country, especially the exchange rate, perception of public policy, and incoherent conversation on deregulation would continue to affect the pump price of petrol.

Iledare, who said that the current situation should not create worry for consumers, added that the uncertainties in the country were changing faster than the decline in crude prices.

“Nonetheless, as competition increases with improved domestic refining capacity, things will stabilise, especially with significant reduction if PMS frees demand on forex,” Iledare said.

Also, a Professor of Economics at Babcock University, Segun Ajibola, said the absence of pricing model in the country does not create transparency in the determinant of the pump price.

“In the absence of a pricing model, the pricing regulators in Nigeria are left to the rule of thumb in determining what price and when to implement it. We also need to know how often the pricing review is conducted to regularly benchmark current international price of crude,” Ajibola noted.

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According to him, as conversation rages on the transition to a deregulated market, these are areas that Nigeria needs to work on to create a meaningful nexus between the international price of crude oil, and the local price of fuel.

The director of Centre for Petroleum Energy Economics and Law, University of Ibadan, noted that petrol price won’t immediately drop as crude oil price drops.

He explained: “Some of the transactions are based on long-term contracts. However, if crude oil prices remain in the low-price territory, then petrol prices should adjust.”

PricewaterhouseCoopers’s Associate Director, Energy, Utilities and Resources, Habeeb Jaiyeola, pointed out that foreign exchange has a significant influence on the retail price of fuel beyond the crude oil price at the international market, adding that what is being sold is old stocks purchased over two months ago.

He, however, noted that under the deregulated sector, forces of demand and supply should drive price at the pump.

Jaiyeola said he also expects a level of competition among marketers as the case should be in a deregulated market.

“This will, however, be a gradual development. The PPRA despite allowing a free market needs to up its game in monitoring the market to ensure that marketers do not take advantage of fixing prices.

“We are expecting to see prices that are profitable for marketers, and also that are reasonable for Nigeria. There is a lot more that determining the landing cost,” he said.

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