BusinessDay

How COVID-19 disrupts demand for Nigeria’s petroleum

The effect of COVID-19 pandemic, occasioned by a nationwide lockdown, and some old perennial challenges are unsettling the consumption pattern of Premium Motor Spirit’s (PMS) popularly called petrol in Africa’s biggest oil-producing country.

Nigeria is witnessing a demand disruption of petrol, one of the major components in the country’s energy mix, as businesses such as manufacturers, airlines, restaurants, schools, among others reduced their demand for fossil fuel due to slower economic activity as a result of COVID 19 pandemic.

Consumption of energy products such as petrol is one of the most efficient yardsticks for measuring the growth of industrialisation in most countries. For Africa’s biggest econmy, its petrol consumption is below heights attained before COVID 19.

In the first three months of 2020, Nigerians were guzzling an average of 1.8 billion litres of petrol monthly which was a 56percent increase compared to the corresponding period of 2019, and then COVID-19 struck forcing the government to impose a 35 days lockdown starting March 30 2020.

This led to a 100 percent decline in the second quarter of 2020 to an average of 1 billion litres compared to an average of 2 billion litres in the corresponding period of 2019.

 

As the economy activities began to pick up, total volume of petrol supplied increased to an average of 1.3 billion litres in the third quarter of 2020 although still not enough compared to an average of 1.4 billion litres supplied in 2019.

Most analysts say the 2020 decline in petroleum supply was as a result of decline COVID-19 which took its toll on the Nigerian economy in 2020, after the government imposed widespread nationwide lockdowns in Q2-2020 to contain the virus, halting all forms of congregational economic activity.

“The reduce energy consumption by most major consumer as a result of COVID 19 and the March 2020 announcement of deregulation in the downstream made the price of Nigeria’s products unattractive in the neighbouring countries,” Kelvin Atafiri, industry analyst with Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector said.

Nigeria, Africa’s top crude oil producer imports most of its refined fuel due to the moribund state of its refineries. Some 10-20percent of Nigerian fuel is then smuggled to neighbouring countries, according to the Major Oil Marketers Association of Nigeria, as petrol is heavily subsidised in the country.

“Smugglers had devised other dubious ways of transporting fuel to neighbouring countries despite the border closure, however with the announcement of deregulation the market was no longer attractive to them,” Atafiri said.

 

Charles Akinbobola, an energy analyst at Lagos based Sofidam Capital said it’s difficult to estimate petrol consumption patterns due to peculiar challenges surrounding smuggling and lack of full deregulation of the downstream sector.

Although there are no 2020 third quarter’s figures yet, data from Nigerian National Petroleum Corporation (NNPC) showed total volume of petrol supplied in October stood 2.3 billion litres which is a 53 percent increase compared to 1.5 billion litres consumed in October 2019.

“In the end, we are seeing fuel subsidies gradually come back because it takes more to get rid of a bad relationship than just saying that it’s over. You need to change the locks, throw away the key—and move on,” Akinbobola said.

He noted that the “locks” part of this is to just stop fixing fuel prices. “The government has already tried to implement a price adjustment formula. It doesn’t work because it requires constant political commitment when world oil prices rise.”

By March 19 this year, the Nigerian downstream oil industry would be marking its one-year anniversary of what the Federal government described as its full deregulation.

Like every government before it, the federal government through the ministry of petroleum and the agencies it oversees gave several reasons why deregulation was the way to go.

“Deregulation means that the government will no longer continue to be the main supplier of petroleum products, but will encourage the private sector to take over the role of supplying petroleum products,” minister of petroleum, Timipre Sylva, said while defending the policy last year.

He pointed out that in line with global best practices, the price of petroleum products will be determined by market forces, stressing that henceforth, the government’s regulatory function will be similar to that played by the Central Bank of Nigeria (CBN) in the banking sector.

10 months after, that policy is yet to as the federal government through NNPC remains the sole importer of these products and still calling the shots in the industry as to who should import or how much marketers should sell the products they manage to get.

Although for 2020 and 2021, the federal government had no budget for petrol subsidy, most stakeholders say rising price of Brent at the international and Nigeria’s static petrol price proves the market remains largely distorted and manipulated.

The decline in consumption among other factors made 2020 one of the most challenging years for players in the oil and gas downstream sector.

This development has affected the inflow of investment into the sector as Total Plc, 11 Plc, MRS, Ardova and Conoil major downstream players suffered revenue declines and margin drops as most analysts expect their 2020 books to be one of the worst years in modern history.

The consistent decline in foreign direct investment means Nigeria’s economy went into free fall in Q2 2020 as the coronavirus pandemic worsened and tumbling international oil prices poisoned an already difficult situation.

By the end of the second quarter the country’s gross domestic product (GDP), a measure of economic output, shrunk by -6.10percent before recovering in Q3 2020 by -3.62percent.

The two-quarters of negative GDP growth nudged the economy into an official recession with job loss rates rising and inflation rate scampering.

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