Nigeria: Our fuel price hike story – Kachikwu

*Dr. Ibe Kachikwu speaking on the recent fuel price increase.

*Dr. Ibe Kachikwu speaking on the recent fuel price increase.

15 May 2016, Lagos — Minister of State for Petroleum, Dr. Ibe Kachikwu, is optimistic that, in six months’ time, petrol price, under the new dispensation, will take a downward trend from the N135 – N145 per litre band. Kachikwu tells the fuel price hike story in this interview.

What the Federal Government has just announced, is it deregulation or liberalization of what?
I try not to get involved in the semantics of those. The reality is that we are freeing up the economy, freeing up the business. The ultimate of what we are headed for is that everybody should be able to do the business, bring in the business. People want to have an argument about what to call it but at the end of the day, the basic objective is what was achieved with diesel or kerosene, which is that government will have less control over the business and individuals will be free to compete and Nigerians would reap the benefit.

The issue is that for diesel, we know no agency is fixing the price for it; so the question is: why is there a price cap for petrol?
The reason is that we are starting from a point where, because of the sensitivity of PMS, you want to be sure that, at the initial stage, you want to be sure of how you do your pricing. Ultimately, we would let the market dynamics take place.

At N145 for PMS, some marketers are insisting that this is no deregulation?
With diesel, it’s consumption is nothing compared to PMS and the sensitivities are different. What we’ve done is an upper cap. We have not told anybody what price to sell. We believe that efficiencies would tell people at what price to sell. We have a price band of N135 to N145. But the reality is that those are guidelines.

It’s going to depend on how you get your forex, how efficient you are through the entire chain of the business because if you are interested and involved in the tankage, the distribution, the logistics, you have greater efficiency and that will impact your pricing. We sat down after a very long conversation with those who play in the sector to look at the PPPRA template. For every item that the PPPRA has used guidance for, those issues were covered. Ultimately, as the market stabilizes – mind you, the NNPC is still a player – and don’t forget that this is a transition period and, at the end of the day, there is a social responsibility that the product, which is not just like the diesel which has a selective consumption, is everywhere for Nigerians. We would help transit that period but you will see that as the market dynamics take hold – and this is going to be pretty fast – because there are lots of Nigerians who are active players who have been prevented by government intrusions. As they get better and it gets to a point where the market has stabilized, we begin to pull back a bit in terms of determinants of pricing.

Part of the concerns Nigerians still have is how they are going to cope with this because agencies like the PPMC, DPR, the PEF, and, despite the price of N87, people were still buying the product for over N100. What is the guarantee that the pricing guidelines would not be flouted again and then you have the product going for over N200?
Then, the reality was that the difference you saw then is part of what we are trying to address now. Lots of arbitrages because, at the end of the day, NNPC provides the product, largely subsidized, and then people took advantage and sold at the wrong prices. Now these people are going to be bringing in their own products. And even when NNPC brings in its products, it will sell at those prices, so there will be no opportunity for these short-term arbitrages.
Those benefits, now, will come from your own skill sets and efficiency. What has happened, really, is that we have provided an opportunity for people to take advantage of government’s liberalization of the environment so that the advantages people were taking before, which never really percolated down to the Nigerian masses, are no longer there. The loss factor government used to bear, the inefficiency that comes with the inability of the government to cover the whole spectrum, but people are making vast sums of money while the environment is challenged. And the reality is that if you left the environment free for people to perform and trade, you will be amazed at what will happen to the pricing. I will almost take a bet with you that, in six months’ time, you will be amazed what will happen to the N145 price – because it will be going downwards.

Nigerians want to know at what price the NNPC and its affiliates will be selling, especially for the products that come from the refineries here in Nigeria?
In terms of what NNPC will sell for, we will compete with everybody else at the new price. What I expect is that within the cities, we will try to stay as close to the competition as much as possible because you do not want to have a massive gap with the emergence of queues at NNPC stations which was the case with the old price of N86.50. You’ll be astonished how much time people will spend at the stations just because of that 50kobo difference – and this is understandable. Within the cities, you will probably won’t have much of a difference between the marketers – N1/N2. But as you go into the hinterlands, NNPC stations would want to stay at about N135 than the N145 band. In terms of what the refineries would sell for, the refineries will become competitive and one of the reasons refineries have not worked well in this country is because PMS is largely subsidized. Nobody wants to invest in refineries because, at the end of the day, when you put in all the capital investment and government tells you what you’re going to sell for, most times it doesn’t take into consideration the market issues; the little that we produce today and, for the first time three of our refineries are working albeit at very low capacity levels, we would like to see that upgraded. The little we produce, which is less than 10million liters a day, we will sell at competitive prices for the first time and those products would be bought by everybody – NNPC, major petroleum marketers and all the other players.

You made reference to the issue of forex as being one of the challenges. What happened to the arrangement of preference in getting forex for the marketers?
We’ve since stopped that because the fundamentals are these: We’ve moved from a position where the government earned between $110/$117 a barrel, to an average of about $40 a barrel which is about 70% drop in supply of forex. Two, with the problems of vandalization, militancy and the like, we are losing about 500,000 to 600,000 barrels a day and, as a matter of fact, we are now down from production of 2.2million to 1.4million barrels a day; so in terms of volume and in terms of value, we are far away from where we were before. There is, largely, very substantial diminishing income, so government cannot therefore make, as a priority, the downstream sector to continue to get forex to import. That’s practical reality because you don’t give what you don’t have. I want Nigerians to understand that we feel the pain and we have tried to avoid it since we came in, in October last year. We’ve done everything we can. We first went on to the issue of the subsidies that we inherited – which were based on 50/55million liters per day. But we said these numbers were bloated. And we did our findings and came up with a figure of 45million liter consumption a day. And that was the first attempt at subsidy and then we came to the second pint of saying we are not even going to have subsidy again. We are going to exit it because there was so much fraud involved in it. And from January to March, if you look at our books, there were no subsidies. The price modulation helped us to achieve that, but in April, the bleeding started when the price of oil went forward and we couldn’t find the forex we needed, subsidy came right back. Luckily, because of the first three months of proper management, we were able to cover the subsidy in April. And so that helped, but as you continue, if you do not take the steps that we have taken now, the massive subsidy will continue.
So the reality is that the forex you’re looking for is not even there. It’s not just that somebody is not giving you forex, it is that the capacity to find and have forex has substantially diminished and a lot of work is going on to try and recover that – pipeline repairs, the existing cash calls which we are working on. We are doing a lot of work in trying to bundle up forex. We’ve struggled, queues continue to go and now they are back. And it will continue to happen unless we address the issues. As emotive as it is, we do share the sympathies and pain but, as a responsible government, we’ve got to take decisions and try and solve problems. That’s the reality and we’ve come to see that if you free up Nigerians to find sources of fund, they will find those secondary sources, they will import the products, the burden on NNPC will reduce, and the country will have peace and subsidy will go away permanently. The extra earnings that will go into NNPC will be used to repair the refineries and infrastructure in the country.

People are now talking about the ripple effects on the average Nigerian. Are there palliatives for the short, medium and long term for Nigerians if you say you feel their pains?
First, let me say that we had this debate about palliatives and I think one of the things we do wrong sometimes is that when we initiate these policies because we are trying so hard to sell what ordinarily should have been right, we begin to throw palliatives at people. And at the end of the day, the government ends up not delivering. So what I’ve advised on this is that, firstly, how did we come to the pricing of N145? It’s a simple conversion of using forex ($) at N285. It is from nowhere but it is the secondary source that people buy forex from, versus the N320 which is the black market; so if you add it up and divide, you come to about N141/142 and so, at that price, there isn’t much gap for palliative. It’s simple, go out and source for your funds, import and come and deliver. For the NNPC, obviously, there would be some earnings because the NNPC could have sold for less than this; so the earnings from that can be deployed as the Federal Government wants into infrastructure. In terms of palliatives, there are lots of palliatives in the budget because there are projects that would impact, positively, on the lives of Nigerians. It is not on the basis of petroleum products pricing that government would be providing palliatives, the government is cognizant of the fact that it’s business is to provide palliatives to Nigerians and that is what we are doing. This is still early days, we would look at the earnings by NNPC and deploy where necessary for the benefit of Nigerians. Let me just add this, most state governments are owing workers’ salaries for up to four months.
And this is because, as income drops, funds become scarce and it impacts on states. The first palliative is that, as we continue to block leakages and improve on our efficiencies to tackle some problems that we met when we came in, the states should begin to get more money from the Federation Account. Once that is achieved, there would be an easing of the burden. NNPC would also become more efficient achieving more returns on investment because of competition. In the case of diesel today, NNPC’s participation is less than 10% because most of it has been taken over by private businesses. There’s so much work to be done and so much money is needed. With what we are doing now, there would be so much money freed for the government to deliver more for the people because we are there to serve the people. So, I will rather look at palliatives from the 2016 Budget point of view than attempt to sell this, using palliatives.

What would happen to the 445,000 barrels that NNPC gets?
In terms of the 445,000 barrels that NNPC gets, today, cumulatively, that comes to about 14 cargoes and about four or five of those go into the refineries – when the refineries were not working, we sold that and put the money into the Federation Account. We would like to see a situation where the refineries are kept working, not because they are the most efficient now but it is good that we keep them working because, in terms of strategic reserves, they are very helpful – Kaduna can take care of the North, Warri and Port Harcourt can distribute towards the west and east respectively, rather than the massive 1,500 trucks moving every day.

To Nigerians
We want to appeal to Nigerians that we are doing our very best. We came in to meet problems and we have been working tirelessly to ensure that things get better. We hope that Nigerians see the honesty of what we are doing are not trying to lie to Nigerians or embellish the issues. We want Nigerians to trust us.
Kachikwu spoke on Channels Television programme, SUNRISE DAILY

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