In 2012, former President Goodluck Jonathan tried to remove fuel subsidies but the government was faced with a massive protest and criticisms from labour and organised civil society. Opponents to Jonathan’s government said he lacked the moral capital to implement the removal because of a corruption-riddled government at the time. Many players in the downstream sector were accused of monumental corruption. Within six months in office, Jonathan’s government has blown over NGN 1.6 trillion on petrol subsidy.
Following a meeting between top government officials, leaders of the national assembly and labour unions to discuss the current petrol scarcity, the minister of state for petroleum, Ibe Kachikwu, announced a new price ceiling for petrol of N145 per litre. He noted that the cause of the current scarcity, which has persisted for several months, is the inability of petroleum product importers to source the required forex at the official rate given the decline in the nation’s foreign reserves, amongst other issues
FBNQuest’s Oil and Gas Analyst, Uwadiae Osadiaye explained that Given that around 50% of national petrol consumption was previously met by the private sector, the inability of this group (mainly independent marketers) to source forex at the official rate led to an unprofitable venture for many marketers.
According to Osidiaye “The NNPC has had to carry the supply burden alone, sourcing its fx from the central bank with much difficulty. However, this strategy has not succeeded in meeting the national demand of around 45 million litres of petrol per day. We note that price modulation is still the preferred pricing mechanism for the government. Given that price ceilings are still set by the government we cannot conclude that yesterday’s announcement ushers in full blown deregulation. Price ceilings will be set in tandem with market realities. When crude oil prices rise, the PPPRA’s price ceiling will also be increased and vice versa.”
In defence of the government, several attempts have been made by the NNPC to remedy the situation, such as its crude forward sales program and its attempt to encourage upstream exploration & production (E&P) companies to supply forex to major marketers.
Given that the queues at petrol stations remain, yesterday’s announcement suggests that the FG may be seeking a long term solution to forex shortages. The government stated that petroleum product importers are now free to import petrol, subject to existing quality specifications and other guidelines issued by regulatory agencies. Also, oil marketers will be allowed to import petrol on the basis of forex procured from “secondary sources” and the PPPRA template will reflect this in the pricing of the product.
“We believe the likely implications are, firstly, quarterly import allocations by the PPPRA may cease to exist and marketers would be allowed to import products as each firm determines. Secondly, the PPPRA’s product pricing template’s fx assumption would now reflect the fx rate at the parallel market” Osadiaye explained.
He continued “The second point is the real game changer and should see the re-entrance of many industry participants, mainly the independent marketers. The policy change also suggests that the PPPRA would have to monitor two variables going forward, crude oil prices and fx rates at the parallel market, as opposed to only oil prices previously. We expect increased pressure on parallel market rates to be a major fallout of this decision. Late yesterday, the PPPRA announced a new price band of N135-145 per litre for non-NNPC imports, with total cost-to-pump at around N138/l. The PPPRA did not disclose the foreign exchange rate which was adopted.