How series of missteps forced government hands on fuel deregulation

The seed for the current fuel price increase was sowed in the early days of the President Muhammadu Buhari administration where a series of missteps made then eventually forced the government’s hands now in the form of a disorderly deregulation of the downstream petroleum oil sector.

Nigeria’s Minister of State for Petroleum, Emmanuel Kachikwu two weeks ago announced the government’s decision to increase the price of gasoline by 67 percent to N145 ($0.73) per liter (0.26 gallon).

The move was made as a means of averting an even larger fuel shortage and financial crisis.

BusinessDay has gathered through interviews with several top officials in the oil and gas sector that there was a lack of a clear path of action by the government in the face of gathering storm clouds.

Chief among the governments first misstep was the lack of a foreign exchange policy, which quickly ballooned a legacy debt problem into a foreign exchange (FX) supply problem for fuel importers.

“When the new government was sworn in, there were outstanding subsidy payments of about N400 billion, owed to marketers. The government got a supplementary budget passed and paid that off in November,” said one source.

“The government thought they had some breathing space because oil prices were coming down. However, as oil prices fell, FX availability became a serious issue and the lack of a policy to address it the meant the black market rate started climbing.”

The lack of FX meant that very soon national oil company, NNPC alone was importing the bulk of the premium motor spirit (PMS), sold in the country.

“NNPC alone bringing in PMS was a problem as they lacked the logistics and capacity to supply the whole country,” said another source at the NNPC speaking anonymously.

The government’s attempt to bridge the gap by getting international oil companies (IOCs) in the upstream oil and gas sector to provide foreign exchange for oil marketing firms largely failed.

In the meantime, fuel shortages continued in Nigeria as international traders and local marketers backed away from imports.

Another major misstep sources tell BusinessDay was the outright cancellation by the new administration of offshore processing and crude swap deals for refined oil products signed between state-oil firm NNPC and oil traders.

The deals, initiated by Buhari’s predecessor, were designed to supply gasoline for crude as Africa’s top oil producer relies on imports for the bulk of its domestic consumption.

Nigeria allocated 210,000 barrels per day of crude to swap for products in 2015 as its four oil refineries are mostly non functional.

“It is sometimes assumed that everything the old government did was bad but it is not as clear as night and day. While some of the swaps were controversial, the government should have renegotiated the deals with only those companies that performed satisfactorily to the terms of the agreement,” a third source told BusinessDay.

“The supply of gasoline involves a complex chain from the refineries mostly in Europe to the final consumer. When the swaps were scrapped, it led to a gap in supply that showed up a couple of weeks later in the form of shortages and a spike in prices in the black market.”

BusinessDay learnt that turn around maintenance (TAM) by European oil refineries coincided with this period, also compounding the unavailability of petrol and making the former retail price of N86.5 per litre unprofitable for most oil marketers.

Sources tell BusinessDay that when the Minister of State for Petroleum mentioned earlier in year that petrol shortages will end in the month of May, it was a tactic admission that deregulation was coming.

“Most people didn’t want to accept it then, but the reality was facing the Minister in the face about the mess the sector was in,” said the second source.

Sources say the problem shortages and higher prices for petroleum products may still not yet be over.

At least 75 ships with two and a half million tonnes of fuel were awaiting importers on the high seas, as Nigerians can’t find the dollars they need to pay for the cargoes, according to ship tracking data and fuel traders.

“As long as you are importing products, you are vulnerable if you don’t fix the forex problem,” the first source said.

PATRICK ATUANYA