Oil prices have crashed to levels last seen in decades and demand has dropped globally too by at least 20 percent on the back of the Coronavirus pandemic. Refiners are feeling the heat, shuttling refineries as profit margins drops significantly but this presents an opportunity for Nigeria to fix its downstream petroleum sector.
Market data shows that gasoline and jet fuel margins have plunged to their lowest levels in years on the back of weak demand and crude oversupply. Worse still storage facilities are full. Refineries in India and Europe are shutting down. Italy’s API said it would close operations temporarily at its Ancona refinery, which has capacity of 85,000 barrels per day (bpd). In India, top refiners Indian Oil Corp and Mangalore Refinery and Petrochemicals declared force majeure, with MRPL in the process of shutting down its entire plant.
Nigeria is buying petrol cheaply and can afford to lower retail price of petrol and now Mele Kyari, head of the Nigerian National Petroleum Corporation (NNPC) is announcing an end to the wasteful petrol subsidy programme that has crimped the economy for about two decades only it is not his remit.
As the boss of the state-oil firm, the NNPC GMD is hired by the government to manage its commercial oil business not to frame public policy. The Petroleum Ministry headed by Muhammadu Buhari and the Petroleum Products Price Regulatory Agency (PPPRA), are qualified to speak on policy according to extant laws but they have remained silent. This is unwise and evidence a government that is shoddy, unprepared and not in sync.
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We agree with Kyari that subsidy is elitist because it is the elites that benefit from it. We are just flummoxed that this is coming from someone working for a statist government. As Kyari said, there are many things wrong with the under-recovery and it not just that it leads to oversupply, it engenders corruption. The NNPC under recovery programme significantly reduces revenue from sale of oil, distorts markets in the West African sub region and encourages smuggling.
The NNPC’s GMD did not provide coherent framework on how the plan would be operationalised. This is because he clearly lacks the powers to make it happen. We have called for a full deregulation of the petroleum downstream sector but this government like the others have consistently ignored this counsel. Now, backed into a corner by falling oil earnings, it is beginning to see that its ideas are obtuse.
For the avoidance of doubt the minister of petroleum resources or his deputy should announce government’s policy on the downstream sector and provide clear guidance on whether it wants to fully deregulate the sector or liberalise effectively as it had failed to do.
A full deregulation allows market forces to determine prices and government’s role is limited to regulation. It will get improved tax returns, remove inefficiencies and allow private companies who more effective to run things. Liberalisation will mean it will still maintain a control price band and put a cap on profits, get reduced tax income, allow private operators but could intervene when oil prices rise and begin subsidising again on account of political pressure.
The minister has to make it clear why there needs to be a controlled price for petrol when diesel, aviation fuel and other products do not have any. What would be the role of independent marketers going forward? What is the roadmap for the petroleum downstream sector in the long-term when oil prices recover? How will the government manage the expectations of the public for cheap petrol when oil prices recover and landing cost exceeds N120/litre?
The labour unions have argued that it is immoral to remove petrol subsidies while the nation’s refineries lay comatose. Their argument is valid. Now Kyari has said that the refineries would be handed over to private operators but has yet to clarify how this model would work. Similar arrangements in the past have failed, it remains to be seen what is different this time around but the downstream sector cannot work effectively unless the challenges with the refineries are resolved.
We call on this government to urgently publish a policy framework for the downstream sector of the petroleum industry. The current realities in the market show that the characteristic Nigerian government shoddy policy making, which essentially makes it up as we go, will no longer suffice.
