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Bright Side of Petrol Price Deregulation

June 8, 2021

For several decades, successive governments in Nigeria have attempted, albeit unsuccessfully to liberalise the downstream sector of the country’s oil industry, especially as it relates to the pump price of fuel. In this report, Emmanuel Addeh writes that though still a sensitive topic, there could be a bright side to the phenomenon

Every attempt at freeing the pump price of petrol in the country has always been met with stiff resistance from Nigerians. While those who perpetually oppose the practice have made frantic efforts to convince others of the “evils” of deregulation, its proponents have also continued to push their own side of the argument.

Essentially, deregulation as it concerns the downstream sector, simply relates to the opening up of that part of the industry for healthy competition, where prices, as it were, reflect market realities.

For its advocates, while it is not a ceiling price system where either over-recovery or under-recovery are managed, it does not also connote unfettered practices by marketers, where there are no rules and no regulatory oversight by government authorities.

To put the enormity of the policy in proper context, from 2006 to 2015, the federal said that it spent over N8.9 trillion on subsidy payment alone, funds that would have been ploughed into more progressive ventures like rail lines, which the government is now borrowing to revive.

On March 19, last year, when crude oil prices were at their lowest, the Minister of State, Petroleum Resources, Chief Timpre Sylva, announced that the federal government was withdrawing from fixing the pump price of fuel.

However, the practice was short-lived. When crude oil prices began to rise in the international market, Nigerians who had enjoyed the development when petrol pump price was just above N120 began to feel the pinch, thereby arousing a backlash.

In a Frequently Asked Questions (FAQs) session, which followed the complaints by Nigerians, the Petroleum Products Pricing Regulatory Agency (PPPRA) , in trying to address the reservations of those who expressed dissenting opinion, argued that the low crude oil prices at the time, presented the opportunity to address the lingering challenges associated with the subsidy regime and free up vital funds required to develop in other key sectors of the economy.

Added to that, it noted that the new initiative is expected to stimulate private investment and growth in the downstream sector and encourage the resumption of products importation by oil marketing companies, translating to more job creation as many depots and facilities that were dormant would then become active.

Indeed, many countries of the world, both developed and developing, that have come to embrace the advantages of deregulation, removed all artificial restrictions decades ago. However, Nigeria has had to roll back the policy each time there has been a backlash.

In proffering an answer, the PPPRA explained that in a deregulated market, prices should respond to market forces , where , essentially, prices will be lower when there is a surplus in supply and higher when supply is limited, noting that more so, competition among the players in the deregulated market will ensure that prices remain reasonable.

In addressing the question of whether the policy will not make the masses poorer by making transportation, food and other goods and services more expensive, the agency argued that on the contrary, regulation of the downstream sector is one of the reasons for the stagnation and impoverishment of the populace.

It stressed that apart from Lagos, Abuja and Port Harcourt, people rarely buy petroleum products at official prices, insisting that in some rural areas, most times the products are adulterated and bad for engines.

“Deregulation will change all that and even reduce the cost of transportation and food in the long run,” it maintained.

Removal of subsidies will allow additional investment in local refining, engender more competitive pricing among operators, forcing down prices and ensuring that companies place a tight rein on production cost such that wastes that could have been passed on to consumers in form of high prices are eliminated.

However, there’s also the contention that whatever goes up in Nigeria, never comes down.

To this, the response of the authorities has always been that use of LPG/CNG as Autogas in Nigeria, which the government is currently pushing, will help to cushion the effect in case of situation of high oil price and offer the consumer an option to choose from. Although, it’s taking off rather slowly, several companies have been embarked to drive the development, especially in the areas of CNG, LPG and natural gas retailing for the domestic market.

LPG as alternative to petrol?

With a proven natural gas reserves of over 203 trillion cubic feet (tcf) and 600 tcf potential reserves, natural gas, a cheaper and cleaner fuel than petrol
A mixture of propane (C3H8), propylene (C3H6), butane (C4H10) and butylene (C4H8), LPG shares CNG’s eco-friendly feature. The economics of it appears even more enticing. While LPG fuelling stations are less expensive as it is said that 15 Autogas refueling stations can be installed for the price of one CNG station, LPG vehicles are also said to have a get better range.

In addition, and while the CO2 savings offered by LPG are slightly lower than the 25 per cent offered by CNG, it is considerably cheaper to convert a vehicle to LPG, as a car owner will fuel vehicles half as many times as usual or only needing to service them twice a year because of less internal wear and tear.

Consequently, embracing LPG is necessary because Nigeria will benefit greatly from having more fuel options, especially ones that take advantage of its extensive gas reserves and create competition in the petroleum sector.

But in all, both CNG and LPG systems are cheaper and eco-friendlier in cars than other forms of fuel, whether diesel or petrol, combust cleaner, reducing particulates and nitrogen oxides emissions.

Between subsidy and financial leakages

There’s the argument that when the federal government pays subsidy, it doesn’t only impact the rich that have a retinue of cars or use petrol for other reasons, it also encourages smuggling beyond the borders of Nigeria to surrounding neighbouring countries. Indeed, the argument is that keeping the price of petrol artificially low through fuel subsidy discourages additional investment in the oil sector. For instance, while many licences have been offered to a number of businessmen, only a few have dared to begin work since the possibility of recouping their investment under an artificially low price structure, remains very low.

Experts believe that removing subsidy will invigorating the petroleum sector; making it more attractive for private investment to succeed, free up funds for more socially beneficial investments that will improve the quality of life of the masses and put the country back on track to meet its development goals.

Who gains from subsidies?

It is not out of place to contend that those who consume the most fuel or benefit disproportionately from subsidy are the rich, rather than the masses. In addition, oil smugglers also benefit significantly from the fuel subsidy by enriching themselves through smuggling of products to neighbouring countries to the detriment of the Nigerian economy.

The position of the government has always been that if subsidy is removed, Nigerians in the mid and long term, will see additional private investments in the entire downstream value chain, thereby leading to a more vibrant downstream sector and economy.

In voicing its support for the liberalisation of the sector the PPPRA says that it leads to, “improved efficiency, uninterrupted product availability and proper functioning of the entire value chain.”

In addition, it noted that downstream sector where refining, supply, and distribution of petroleum products are self- sustaining and self-financing is only possible in a liberalised market.

Leaving Nigerians at marketers’ mercy?

For those who oppose deregulation, one of the arguments that freeing the sector will lead to racketeering, a case in which oil marketers will be given the leeway to do whatever they like. But the PPPRA thinks differently.

“To ensure the sustainability of the policy, the PPPRA would continue to serve as watchdog to the entire downstream sector in line with its mandate and also collaborate with relevant agencies to ensure strict compliance to extant regulations to make the country’s downstream sector become the hub of activities in West Africa.

“The PPPRA , being the regulatory agency for the sector will continue to carry out all its mandates as enshrined in the establishment Act of the Agency, which includes: to determine the pricing policy of petroleum products; regulate the supply and distribution of petroleum products; create an information databank and moderate volatility in petroleum products prices, while ensuring reasonable returns to operators,” it notes.

In addition, its functions will remain to establish parameters and codes of conduct for all operators in the downstream petroleum sector; maintain constant surveillance over all key indices relevant to pricing policy and periodically approve benchmark prices for all petroleum products and prevent collusion and restrictive trade practices harmful in the sector.

Furthermore, government argues that it will channel the money realised from the deregulation of the downstream sector into critical infrastructure like specialised hospitals and addressing issue of power generation and transmission.

Monies freed from subsidy payment can also be channelled to construction and rehabilitation of schools and colleges as well as revamping the agricultural sector to ensure food sufficiency in the country.

NNPC‘s unsustainable intervention

Before the resumption of what the national oil company prefers to call under-recovery, there was the hope that the NNPC was perhaps on its way to recovery, even as its Group Managing Director, Mallam Mele Kyari, was upbeat that after the release of the 2018 and 2019 audited financial statements, the corporation will return to profitability ways.

But with the recent pronouncements from the corporation, its inability to make any remittances to the Federation Account, it is obvious that that projection could be in jeopardy.

In March, Kyari, opened up on the state of affairs, revealing that at the time, government was subsidising petrol with about N120 billion monthly.

He said while the actual cost of importation and handling charges amounted to N234 per litre, while the government had been selling at N162 per litre, therefore leaving the corporation to bear the difference.

He said the NNPC could no longer afford to bear the cost, saying Nigerians would have to pay the actual cost sooner or later, arguing that market forces must be allowed to determine the pump price of petrol in the country.

“Today, NNPC is the sole importer of petrol. We are importing at market price and we are selling at N162 per litre today. Looking at the current market situation today, the actual price could have been anywhere between N211 and around N234 per litre.

“The meaning of this is that consumers are not paying for the full value of the petrol that we are consuming and therefore, someone is bearing that cost. As we speak today, the difference is being carried on the books of the NNPC and I can confirm to you that the NNPC may no longer be in the position to carry that burden and because we can longer afford to carry it on our books.

“As we speak today, I will not say we are in subsidy regime but we are in a situation where we are trying to exit this under-price sale of petrol until we come to terms with the full value of the product in the market.

“Petrol sells across our borders anywhere around N300 per litre and in some places up to N500 to N550 per litre. Our current consumption is evacuation from the depots about 60 million litres per day; we are selling at N162 to the litre, and the current market price is around N234, actual market price today.

“So, the difference between the two, multiplied by 60 million x 30 will give you per month. I don’t have the numbers now. This is a simple arithmetic that we can do but if you want exact from our books, I do not have it at this moment but it is somewhere between N100 billion and N120 billion per month. I don’t have the exact number,” he said.

With the figures reeled out by the national oil company, it is obvious that something has to give at the end of the day and it’s obvious that the national purse has continued to suffer the drainage. Will anything change soon?

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