A Review of the Nigerian Energy Industry

Petrol scarcity looms over delayed subsidy payment, devaluation

23 February 2015, Lagos – Nigerians have enjoyed relative stability in the supply of Premium Motor Spirit across the country for some time now, but may be in for a difficult time in the coming months due to a combination of factors, Stanley Opara writes

IPMAN-fuel pumpLast Wednesday’s decision of the Central Bank of Nigeria to fix the exchange rate of the naira to the dollar at 198 and the initial devaluation of the currency as well as rising petrol subsidy arrears have forced some oil marketers in the country to reduce the stock of petrol they supply to the market.

The marketers, who are predicting a crisis situation soon, especially with the non-payment of the subsidy arrears by the Federal Government, have moved to constrain product supply in order to minimise the loses that might occur if the arrears were further delayed as a result of uncertainties surrounding the forthcoming general elections.

Our correspondent gathered that the recent rebound in global oil prices, especially the Brent crude, was not helping the situation as the subsidy arrears had continued to rise just as interest on loans borrowed from banks by the marketers to finance fuel importation.

The Chairman, Nigeria Union of Petroleum and Natural Gas Workers, NUPENG, Lagos Zone, Alhaji Tokunbo Korodo, told our correspondent in a telephone interview that the marketers might soon be in trouble because of the current market realities.

He advised the government to think about paying the subsidy arrears in the interim, as non-payment of the debts remained a threat to the business of the marketers as well as the product supply arrangement currently in place.

Korodo said, “I foresee a big problem for oil marketers as a result of the devaluation of the naira, with the additional issue of many politicians scrambling to come back to power. In fact, most politicians have neglected their official duties and are very busy campaigning.

“Government should think about the payment of the subsidy arrears as failure to do this remains a threat to the business of oil marketers as well as the supply of the product. This is very important so that we do not end up creating bad blood.”

Despite the recent reduction in the pump price of petrol from N97 to N87 per litre, the Federal Government, according to the Petroleum Products Pricing Regulatory Agency, still pays a subsidy of N14.77 per litre of petrol as of February 19, 2015.

When the pump price reduction was effected on January 16 this year, the agency claimed that the government was paying N2.84 as subsidy on every litre of the product consumed.

To this end, Korodo said the rising subsidy level was of serious concern to players in the downstream sector of the oil industry, adding that the government could, henceforth, solely import petrol, while the marketers would distribute the product.

Data from the PPPRA website last week showed an increase of 6.9 per cent in the subsidy payable by the Federal Government to oil marketers in the space of five days.

The agency put the total cost of PMS for February 16 at N102.82 per litre, with a subsidy of N15.82 per litre.

While on February 9, the total cost of a litre of the product was put at N101.79, with the subsidy pegged at N14.79 per litre.

Subsidy on PMS stood at N12.27 per litre on February 3 as the PPPRA put the Expected Open Market Price (total cost) of the product at N99.27 per litre, up from N95.47 on February 2, and N88.23 on January 29. The subsidy was N8.47 per litre on February 2.

The PPPRA put the combined product cost and freight charges at N76.88 per litre on February 16. The same was N75.90 per litre on February 9, up from N73.46 on February 3 and N69.79 a day earlier.

The landing cost, which is the sum of the product cost, freight rate, traders’ margin, lightering expenses, Nigerian Ports Authority fees, financing cost, jetty depot throughput charge and storage charge, increased to N87.33 per litre.

The landing cost was put at N79.98, N83.78 and N86.90 per litre on February 2, 3 and 9, respectively.

The Major Oil Marketers Association of Nigeria recently said the devaluation of the naira would have a negative impact on the pricing of petroleum products.

It also called for adequate margins that would cater for rising overhead expenses in the downstream petroleum business.

The marketers had also accused financial institutions for developing cold feet towards the financing of products’ importation because of rising debt profile, among others.

A former Chairman, Independent Petroleum Marketers of Nigeria (Western zone), Mr. Olumide Ogunmade, also told our correspondent on the telephone that the devaluation of the naira would affect supply of petrol because the capacity of the marketers to import the product would be low.

He said the economy was currently in a bad state and that the downstream sector of the oil industry would likely get its own share of the problem.

Ogunmade, who doubted the ability of the Federal Government to fully settle debts incidental to foreign exchange differentials, said the exposure of oil marketers to more business risks was inevitable.

The former IPMAN boss said one of the consequences of the recent development was product supply squeeze, which he explained would end up constraining petrol supply if not addressed holistically.



– The Punch

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