Fuel scarcity… an unending scourge

22 March 2016, Lagos – Fuel scarcity and long queues at filling stations are no longer strange to Nigerians. Hardly can a quarter pass without the harrowing experience of buying petrol above the approved pump price, with many stations dispensing a little as high as twice the official price. Will Nigeria ever outgrow this anomaly? EMEKA UGWUANYI takes a critical look at the perennial fuel shortage and possible way of ending what is fast becoming a national embarrassment.

fuel scarcity queue-in-lagos

Fuel queue in Lagos

With over 26,716 filling stations and more than 123 depots spread across the country, and having started crude oil refining since five decades, Nigeria, as Africa’s largest oil producer and world’s sixth, should have nothing to do with the importation of refined petroleum products importation and persistent fuel scarcity.

As a prominent member of the 13-member Oganisation of Petroleum Exporting Countries (OPEC), Nigeria should be a reference point to other oil producers in Africa. But, unfortunately, the ‘giant of Africa’ still battles to meet its internal energy needs. It depends on huge external supply, importing about 75 per cent of its local fuel consumption needs.

The inability to refine in-country has also been responsible for enormous subsidy payments and recurrent fuel scarcity.

According to a data obtained from the Department of Petroleum Resources (DPR), the country had 26,716 filling stations as at 2013. Out of the number, Major Oil Marketers Association of Nigeria (MOMAN) members comprising Mobil Oil, Total, Oando, Conoil, Forte Oil and MRS, own 2453 stations. Their counterparts in the Independent Petroleum Marketers Association of Nigeria (IPMAN), own 24,226 and the Nigerian National Petroleum Corporation (NNPC) 37. The data also showed that there were 129 depots owned in the ratio of 83:24:22 among the independents, majors and NNPC respectively.

The first refinery began operation in Port Harcourt some 51 years ago. It had a nameplate capacity of 60,000 barrels per day (bpd). In 1976, the Kaduna refinery was inaugurated with a capacity to refine 60,000 bpd and later upgraded to 110,000bpd. The Warri Refinery followed in 1978 with a refining capacity of 100,000 bpd and later upgraded to process 125,000bpd in 1987. The Port Harcourt’s second refinery was inaugurated in 1989 with an installed capacity of 150,000bpd.

A private refinery, built by the Niger Delta Petroleum Resources Plc. has capacity to refine 1000 barrels of crude per day.

So, with 50 years of refining experience and a combined capacity to produce 446,000 bpd, where exactly did Nigeria get it wrong?

Of its contemporaries in OPEC cartel, Nigeria remains the only member of the cartel that imports fuel for domestic consumption. The long queues often triggered by perennial scarcity are also peculiar to it.

Successive administrations since the return to democratic rule 1999, have battled without success to find an enduring solution. Not even the yearly Turn Around Maintenance (TAM) of the refineries could guarantee local production. Yet, several billions of naira had gone down the drain under the guise of reactivating the refineries.

Attempts by some administrations to deregulate the downstream sector and discourage government’s control of the oil industry have been unsuccessful. Such efforts have been met with stiff opposition and protests by the coalition of labour and civil society groups.

Unending problem

To IPMAN’S National Operations Controller, Mr. Mike Osatuyi, the perennial fuel scarcity is due to lack of planning on the part of the government, saying that it has degenerated into a grave systemic problem.

According to him, the government has been sincere in addressing fuel scarcity. He alleged that the right people have not been put in right positions, and when they are hired, the government has not made the environment conducive for them to operate.

Alluding to lack of foresight in planning alongside population growth and improvement in the standard of living, Osatuyi said the Federal Government has failed to provide for the future.

According to him, no concerted effort has been made to build a new refinery to meet up with the rising population since the last refinery was built 26 years ago.

“Even if the refineries have been working at installed capacities, common sense should have informed the government there was the need to make additional provision for the people 26 years after, he added.

Describing as appalling the abandonment of existing refineries, Osatuyi said: “The refineries were neglected to rot.”

Since 2000, the fuel scarcity challenge has been a recurring decimal as Nigerian depends on the importation of products to meet domestic needs.

Records show that in 2003, every litre of petrol consumed in the country was imported. As a matter of fact, a staggering $3 billion was spent between 2000 and 2014 on TAM.

The IPMAN’s spokesman said the figure could have been embarrassing if last year’s expenditures had been added.

“No government makes progress when it has no well-articulated and implementable plans for short and long term matter issues. He also noted that the recent allocation of 78 per cent importation of national fuel need to NNPC alone is a policy somersault because the Corporation lacks storage and distribution facilities”, Osatuyi said.

He said the insufficient fuel supply has left the NNPC with no option but to ration what is available.

Records have also shown that the most efficient, prudent and cost-saving method of fuel distribution all over the world is through the pipes.

But, with the collapse of the pipeline system in the country – no thanks to vandalism, NNPC subsidiary – Petroleum Products Marketing Company (PPMC) has not been able to supply fuel from the depots to end-users at regulated prices.

Is fuel subsidy regime gone for good?

The prevailing situation may frustrate government’s plan to end the contentious fuel subsidy regime. Besides the threat it poses to lives and properties, transporting fuel from the depots to filling stations in trucks is uneconomical.

It also breeds corruption and encourages sharp practices in the sector as many trucks, laden with products are often diverted. The failure of government to fix the refineries, ensure safe pipelines for transportation of crude and refined products to and from refineries to all parts of the country have compounded consumers’ travails.

Hiding under regulatory failure and laxity, oil marketers engage in all forms of practices to undermine the system. They sell petrol above approved pump price, hoard and divert products allocated to them despite the margins and subsidies the government pays. And the Department of Petroleum Resources (DPR), the oil regulator is helpless.

In Kwara, the DPR was recently in a supremacy contest with IPMAN members. Under the watch of DPR officials, who sealed some filling stations for selling above regulated price and under-dispensing products from the pumps, IPMAN members unsealed the erring stations.

Industry watchers described the development as a confirmation of the regulator’s shortcoming in the enforcement of compliance and the application of the rules.

Across the country, including Lagos and Abuja, most of the filling stations belonging to IPMAN members sell product far above the regulated price. Some of the errant filling stations are affiliated to the major marketers’ and even branded in NNPC colours.

The regulator turns blind eyes to the ongoing abuses even when such anomalies are reported. Allegations abound that some of these defaulting stations are owned by DPR and NNPC staff members, or their cronies.

The Nation learnt that whenever there is a gap or delay in the supply chain due to late arrival of cargoes at the port, workers at the depots will unofficially raise depot price of a litre of petrol from N77 to N100, or above, depending  on the severity of scarcity.

Owners of the depots have repeated claim ignorance of such sharp activities at their facilities. But, investigations show that such development accounts for the biting scarcity and rooftop prices.

As a result of inadequate supply and allegations of sharp practices, many of the independent marketers no longer get supply from NNPC. They pay more than the official price at the depots to get loaded. They have bribing their way through to get their trucks loaded without delay. When these expenditures are factored into the cost, they have no option than to sell at above regulated price of N86.50 per litre, to make profit and remain in business.

NNPC as sole importer

For almost a year now, the NNPC has been the sole importer following major marketers’ decision to shun importation to protest their unpaid ‘controversial’ subsidy debts.

The corporation imports and engages the marketers in the supply chain to sell products at their retail outlets across the country. The NNPC lacks enough storage and distribution facilities to meet the consumption needs of the nation.

When NNPC supplies to the marketers, it adds some margins to them (marketers) for making use of their facilities. But, to make more profit, some of the marketers divert products across the borders and to other parts of the country where they sell almost the twice the approved pump price.

Memories of 2012

Subsidy scam

In the aftermath of the 2011 fuel import row and subsidy scam, which made the Federal Government to spend over N2 trillion on subsidy reimbursements, local companies, especially the independent marketers, were found culpable.

To avert a reoccurrence, the Federal Government through NNPC, decided to reinforce its retail division, focus on the majors and cut off supply and issuance of import allocation to many independent marketers. But, the problem lingers till date.

By May 29, last year, when the administration of former President Goodluck Jonathan left office, apart from billions of naira paid to major marketers, MOMAN members were still being owed over N300 billion in unpaid subsidies, interests on bank loans, and differentials in foreign exchange (forex).

In November last year, the government approved the payment of N413 billion to clear the outstanding subsidies, yet scarcity continued.

The NNPC, under the management of the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, reels out daily the number of trucks loaded with petrol at the depots and their destinations, all in an effort to show improved transparency. But, there are no measures yet to ensure the trucks get to their destinations.

Wielding the big stick

Last week, the NNPC moved to end festering fuel shortage in major cities by wielded the big stick, cutting off allocation to IPMAN members, except few credible ones such as NIPCO, Ascon, Capital Oil and Folawiyo.

The focus is now on MOMAN members as the NNPC believes IPMAN members are major culprits in fuel diversion and hoarding.

But, the fundamental problem of fuel scarcity remains unresolved. Hence, buck-passing has been the game among players in the sector in times of scarcity. The NNPC blames the marketers for product diversion and hoarding. The marketers and depot owners insist the corporation has not given them enough supply and that they cannot get forex to import on their own.

Prior to the forex crisis, major marketers claimed they were unable to import because of their outstanding subsidy payments. But, the excuse has changed to their lack of access to forex. They argue that it would be unprofitable form them to import products and sell below landing cost. They are renewing their clamour for deregulation of the sector. But, will deregulation end fuel scarcity?

Way forward

The long-term solution to the perennial fuel shortage is deregulation. But, without proper monitoring, the policy may trigger a breakdown of the sector as marketers are likely to engage in profiteering. The short-term measure is massive importation to ensure the country is wet with petrol. Vested interests in the downstream sector of the oil industry will work to frustrate the interim measure. This interest is part of the reason monitoring and compliance is very low or non-existent, hence the thriving sharp practices in the sector.

To MOMAN’s Executive Secretary, Mr. Obafemi  Olawore, as long as the NNPC remains the sole importer, it might be difficult to adequately meet national demand because the corporation does not have enough facilities to drive distribution.

According to him, the NNPC imports about 78 per cent of national demand and that is putting pressure on distribution because of logistics constraints. He, however, expressed optimism that the importation ratio of 78:22 per cent for NNPC and other marketers respectively may be reviewed next quarter.

Olawore stated that the only way out of these problems is for the government to be courageous enough to deregulate the downstream.

The spokesman of Mobil Oil Nigeria Plc., the products marketing arm of ExxonMobil in Nigeria, Mr. Akin Fatunke, corroborated Olawore’s position. He said that besides allocations from the NNPC, Mobil Oil and Total imported their own cargoes.

According to him, fuel scarcity is caused by the gap or delay in supply.

“There was a short delay in delivery of cargoes recently, and the ripple effect of that delay is the current scarcity and long queues we see all over the place,” he said

Fatunke also noted that due to forex issue, all the private companies, apart from Mobil and Total have not been importing.

He insisted on the deregulation of the nation’s downstream oil industry as the way out.

His words: “With the clout and policy thrust of the present government, we thought the industry should be controlled by market forces of supply and demand, especially now that the prices of crude are fairly low. Government at certain points should intervene but the operation of the downstream should driven by market forces especially in the face of foreign exchange scarcity.”

He also urged the government to make the downstream sector a standalone unit of the oil and gas industry, in operation and regulation and not lumped together with the upstream and midstream sectors.

Fatunke said: “When made to be a standalone unit, it would be able to police smuggling and diversion of products and other irregularities. With deregulation, private companies would be able to build refineries in Nigeria and more local and foreign investors will come into the downstream sector.

“The government should also know that it has no business being in business of the downstream. The government should have the courage and will to enthrone level playing field for players in the sector and allow economic forces come into play.”

The Managing Director/Chief Executive Officer, Niger Delta Petroleum Resources Plc., Dr. Layi Fatona, said: “There must be a focused and firm implementation of multiple small to medium sized oil and gas processing facilities, such as refineries, tied strictly to producing assets.”

According to him, oil companies that have crude producing fields should have at least a small refining facility attached to it. That is the only way to ensure sustainable increase in in-country refining.

To IPMAN’a National Operations Controller, Mr. Mike Osatuyi, the Petroleum Resources minister has failed.

He said: “It was difficult to meet national consumption efficiently when the NNPC was importing less than 50 per cent of the consumption, now it is importing 78 per cent, what does he expect?”

He, however, described the appointment of Mr. Ahmed Farouk as PPMC’s helmsman, as perfect if he is given the enabling environment to operate.

Osatuyi said: “He (Farouk) will change the face of petroleum products marketing and distribution. Ahmed knows the industry inside out. NNPC should stop the monopoly it practices because it is not in the interest of the economy and Nigerians.”

On the remedial solution to stem recurring fuel scarcity, the NNPC is in fresh talks with some foreign refineries for exchange of crude oil for refined petroleum products (swap) deals.

Although the contracts have not been signed, the corporation has shown optimism that the deal, when sealed, will take away the queues from filling stations.

According to a report, the swap deals will be with seven refining companies – ENI, Essar, Litasco, Total, Cepsa, Societe Ivorienne de Raffinage (SIR) and Vitol, refining arm Varo, with local oil companies as partners, to take oil in exchange for petrol.

“Nobody wants to see people spend two hours on fuel queues,” Kachikwu said on his Twitter handle, adding “We are working on long-term solutions.”

Under preliminary agreements, each refiner will ship about 90,000 tonnes of petrol in exchange for 950,000 barrels of crude oil. The arrangement will see the NNPC swapping 330,000 bpd of crude, which is well above the 210,000 bpd initially agreed last year with four refineries.

The swap arrangement will see Litasco with MRS as the local partner exporting estimated 60,000 bpd; Cepsa with Oando (60,000 bpd);  Varo with Calson (60,000 bpd);  Societe Ivorienne de Raffinage with Sahara (60,000 bpd); ENI with Oando (30,000 bpd); Essar with Shoreline, (30,000 bpd) and Total with Total Nigeria (30,000 bpd).

The new agreements are billed to kick-off next month with crude loading programmes.

Price modulation principle

The fuel price modulation mechanism adopted by the government is another time-bomb waiting to explode. It is an initiative that can be best described as secret deregulation. For now, the implication is hidden because the low price of crude at the international market.

By the time, crude prices soar to $60 per barrel and above, petrol price in relation to the modulation principle, will shoot up to about N100 per litre and may hit as high as N140/150 per litre should crude prices appreciate to $90 and $100 per barrel.

The implication is that such price increase will certainly be unacceptable, and expectedly, organised labour and civil society groups will mobilise Nigerians to the streets and what the government has on its hands will by the January 2012 scenario, when the anti-fuel subsidy removal protests brought the economy to its knees.

So, the Federal Government has indirectly removed subsidy and that is the reason. Already, there is no budgetary provision for fuel subsidy in this year’s Appropriation Bill.

Price modulation mechanism provides an automatic way of adjusting the regulated retail price of fuel in order to minimise or eliminate subsidy.  But, it must be noted that the main component that determines the Open Market Price (OMP) of fuel – the price at retail outlets – is cost and freight.  Therefore, the central challenge facing the price modulation system is the extreme volatility of cost and freight price of fuel.

Repeatedly, the government has stated that fuel subsidy is unaffordable and unsustainable and therefore should be reduced or completely erased. As a step to realising this objective, the government has been implementing the price modulation method by reviewing the Petroleum Products Pricing Regulatory Agency (PPPRA) template in December last year. The template will be due for review quarterly.

The challenge, however, is that oil price has begun to appreciate slightly above $40 per barrel. How the government will convince Nigerians that petrol price has gone up again to N87 or more per litre will be another litmus test for Kachikwu, who doubles as the Group Managing Director (GMD).

However, there is a distinction between reviewing the cost components of the template (storage, and distribution margins), among others, and adjusting the retail price.

With the oil price ramping up, the government may not be able to keep the price of petrol at the regulated prices of N86 and N86.50 per litre for so long without upward review or without substantial subsidy payment.

Frequent price adjustments are important because the cost and freight change daily. Therefore, it is a good idea for the retail price to be adjusted at least monthly, or even more frequently.  The reason for this is that if price adjustments are only done quarterly, because of changes in world prices, they are much more likely to be large, and it is doubtful if the public would accept such frequent and substantial adjustments in price.

However, if the government fails to make these adjustments, the size of the subsidy could grow and if the government wants to minimise subsidy, the best approach is frequent (at least monthly), small adjustments.

A key principle of good practice is to engage in extensive dialogue and communication with stakeholders in the industry before a major change.  A national dialogue around the price modulation principle will be of immense value.

Once these principles are broadly accepted, designing the actual formula to meet the principles is relatively straightforward and will be seen as a response to a set of agreed principles, rather than a formula unilaterally imposed by the government.

 

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