Fuel pricing regime enters new phase

03 January 2016, Lagos –  The federal government has opted to introduce a quarterly review of prices of petrol used in the country to reflect extant realities in the international crude oil market.

Fuel pumpRather than deregulate the downstream petroleum sector as advised by experts, the government decided to introduce what it termed as “price modulation” mechanism.

It indicated that through this mechanism, it hopes to amongst other objectives keep the pump prices of petrol within the reach of Nigerians, and also allow for the interplay of market forces especially in a low crude oil price period.

Pricing Template Review

Being mindful of the sentiments attached to deregulation of the downstream petroleum sector and removal of subsidy on consumption, the cost which it can no longer bear with its dwindling revenues, the government through the Petroleum Products Pricing Regulatory Agency (PPPRA) decided to review the pricing template for petrol sales in the country and also keep it on a flexible band to meet with market realities.

It is with this new flexible template that operators in the sector would conduct their operations. Marketers who have been approved to import and sell petrol in the country are expected to abide by this template, which unlike before will be subjected to quarterly review to reflect the flexibilities that the international crude oil prices occasionally throw up.

This is the first time that the country would perhaps adopt such mechanism in managing its downstream petroleum sector.

Through the PPPRA, the government on Tuesday disclosed new pump prices, which will guide the sale of petrol in Nigeria starting from January 1 to March 31, 2016 under the revised pricing template.

But within the new pricing template, the government approved for use, two different pump prices-one for the retail outlets of the Nigerian National Petroleum Corporation (NNPC) and another for retail outlets operated by private business concerns in the downstream petroleum sector.

The Executive Secretary of the PPPRA, Farouk Ahmed, told journalists in Abuja that the NNPC is expected to sell petrol at N86 per litre to customers at its retail outlets, while other operators would sell at N86.50k to their customers.

He noted that both open market prices respectively indicate a N1 and 50k drop from the current official pump price of N87 per litre which will seize from existing on December 31, 2015.

Farouk also noted that the announcement follows the approval of the Minister of Petroleum Resources, Dr. Ibe Kachikwu, for the implementation of the revised template.

Apart from the new prices, the PPPRA also disclosed that it has approved for importation three million metric tonnes of petrol in the Quarter-1 (Q1), 2016 import allocation, out of which the NNPC was granted 78 per cent of the total allocated volume for the period, while the balance of 22 per cent would be supplied by other oil marketing companies.

In calculating the new pricing template, Farouk explained that a couple of elements which hitherto contributed immensely to the cost of importing and distributing petrol in the country were shaved off to arrive at the prices the government said was reasonable and good for it.

According to him, the elements that were affected by the price review included traders margin which was revised downwards from N1.47 per litre to zero; lightering expenses, from N4.07/litre to N2.00/litre; charges by the Nigerian Port Authority (NPA), from N0.77/litre to N0.36/litre; jetty throughput charges, from N0.80/litre to N0.40/litre; storage charge, from N3.00/litre to N1.50/litre; bridging fund from N5.85/litre to N4.00/litre and ex-depot price, from N77.66/litre to N77.00/litre.

Other elements such as retailers margin were however reviewed upwards from N4.60/litre to N5.00/litre; transporters, from N2.99/litre to N3.05/litre; dealers’ margin, from N1.75/litre to N1.95/litre. Farouk stated that in line with the price modulation mechanism, the government would constantly review these elements and come up with new prices on a quarterly basis, meaning that new prices will now come in from time to time, reflecting market fundamentals.

Products’ Availability

Kachikwu had in response to questions on deregulation and subsidy removal, insisted that the government was more in tune with getting products available to Nigerians at all times and at affordable prices.

He had explained that he was more interested in meeting up with that mandate from the government,  adding that finding reasonable and scientific methods to get through the process was more important to him than dwelling on the debate over subsidy and deregulation.

He said at one of such occasions that: “First let me say that we are expending too much energy on semantics. There are two critical issues here, one is should the federal government continue to fund the gap that we see – this huge N1 trillion, and I think everybody is on the same page that as much as it is we need to get out of it.

“Where we have a disagreement is if we get out of it, should we sell products at certain price or should you let free markets to roll in so that you can skyrocket prices?”

“The president is very emphatic on this, he says for now, he expects that products should be about N87.

Market Trends

He has also given approval for us to be able to look at market trends and make adjustment as need be, so when you keep asking me if subsidy has been removed, I ask what is subsidy? At today’s price, there is no subsidy and that is why I have gone away from the use of the word subsidy and have continuously said that I am more in the page of price modulation. How do we look to fluctuate the market to reflect market dynamics?

“I don’t want to get caught into this subsidy or no subsidy, money provided in the budget or not. I think what is critical is too fold: one is that the amount that we spent in the past on providing what you might call monetary subsidy is huge, we have never been able to account for it and the amount of corruption there nobody has been able to account.

“The reliability of that and the affordability of that is an issue, we need to get away from it whether or not you believe in subsidy

“Would you therefore free the price so that people can sell at whatever prices? Not likely, we will like to see some level of modulation where prices can relate to what market dynamics is and that is what we are doing,” Kachikwu explained.

However, Farouk in his explanations on the pricing template said: “Accordingly, the ex-depot price of PMS shall be N77.00k per litre, while the pump price shall be N86.50k per litre in line with the prevailing market trend.”

“The key thing here is that with the revision, the open market price has come down slightly. The new pump price is N86.50k, down from N87 per litre, effective from January 1, 2016.

“However, for NNPC import, because an element of the template which is the financing cost is not captured in the NNPC template, therefore NNPC import is slightly lower, the NNPC price will be N86 per litre, meaning that if you go to NNPC retail stations, you should buy at N86 per litre and then N86.50k in other stations,” Ahmed added.

He further explained that the whole idea was to instill competition and stability in the downstream petroleum sector.

He noted that the template would change from time to time. “Another important point is that this is not static as there will be a quarterly review of the price template. However if there is a major shift, the minister may call for a review either upwards or downwards depending on the market.

“But for now, at least for the first quarter, this price remain for three months, from January to March,” he added.

Ahmed also noted that there is supposed to be a pricing advisory committee made up of industry technocrats and which would sit down from time to time and advise the PPPRA on price movements.

He however added: “But the PPPRA will still sit down and do its work, the committee will advise it on any drastic movement in price.”

Speaking further, Farouk said: “The open market price is N86.29k, if you do the calculation, that means there is an element of over recovery and what we will do now is that we will go back to the marketers and bill them for the recovery.

“With regards to NNPC, their arrival is N85.93k but they are selling at N86, so there will also be element of over recovery, however, we are comfortable with the numbers.”

Speaking more on the review, he explained that: “In order to encourage investments in retail outlets, we slightly increased the provisions in the retailers; transporters; and dealers’ margin.

“In terms of distribution margin, we have also revised down the bridging fund and increased the retailers; dealers and transporters margins.”

Transparency

Kachikwu had in his explanation of the pricing modulation mechanism, stated that the measure would push to enthrone some level of transparency and stability in the supply of petrol across Nigeria.

“My commitment, and I think that is what the president’s commitment is, is one: provide products all the time so that there is efficiency, and provide it at the least possible price that you can and let it have some relationship with what the trends are.

“And when the prices begin to get up, and we have an interest in both because we want the price of crude to obviously rise and begins to affect the selling price of local products, we will look at those trends and then begin to see how we can adjust our pricing.

“We are not going to be fluctuating prices day to day, we are going to take like an average and I think that today when you look at prices, we have no subsidy but prices remain low and that is what we need to do.
It is the honesty in being able to sell products to Nigerians at affordable prices that make sense and relating it to the market and also the honesty when you get to a point that the prices do not reflect the market trends, being able to do something about it unless we want to continue to fund it,” he stated in his explanation.

-Chineme Okafor, This Day
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