Although the Federal Government announced the removal of price cap on petrol which would allow oil marketers sell at a price they desire, however, there are still challenges that will hinder the full implementation of deregulation in the downstream sector.
Seeing that the economy was at crossroads and funding the national budget extremely elusive, Petroleum Products Pricing Regulatory Agency (PPPRA) announced last week that the price of PMS would be determined by market forces henceforth.
The new regulation by PPPRA suggests all marketers can import PMS and are now at liberty to determine the pump price of petrol without any sanction by a government agency, however, there are challenges.
Problem of multiple exchange rate
For most oil marketers, Nigeria cannot fully have a deregulated downstream market if there are still multiple exchange rates and windows in Nigeria which creates a lot of distortion in prices hurts businesses and encourages corruption as it is susceptible to manipulation.
“A major hurdle oil marketers have to cross is the lack of FX liquidity. Given the recovery in oil prices in recent days, and the FX rate in the more liquid parallel transfer market, it might be unprofitable for marketers to import and retail PMS at the current price (N121.50 – N125) by Q3 2020,” Omotola Abimbola, an industry analyst at Chapel hill said.
Abimbola noted that if the NNPC continues to import based on the official FX rate of N360, marketers may continue to rely on NNPC for supply, except the CBN creates a special window for oil marketers to obtain FX at the same rate (back to FX subsidy?).
Nigeria maintained a plethora of exchange rates or “windows” with the official rate at N306, whereas the rate on the Importers and Exporters (I&E) window was seen by investors and business leaders as the more independent.
“There is a need for clarity on what exchange rate applies. Will oil marketers have the same access to the exchange rate as NNPC? If no, then the NNPC will continue to be the country’s sole importer of petrol,” Yinka Ademuwagun, an analyst at United Capital tweeted.
Existence of PPPRA
For full implementation of Nigeria’s downstream sector, most stakeholders have also questioned the existence of PPPRA, the organisation tasked with the pricing policy of petroleum products.
Some analysts say the government agency is not necessary under a deregulated environment, except for quality control.
Professor of Petroleum Economics and Policy Research and former president of the United States Association for Energy Economics (USAEE) Wumi Iledare says deregulation cannot just be by executive presidential order or ministerial newspaper pronouncements.
“It must be supported by a National Assembly amendment of the Petroleum Act and/or perhaps, a total dissolution of PPPRA Act, and the Petroleum Equalisation Fund (PEF) to send a signal that the end to subsidy era is gone. The existence of PEF and PPPRA is antithetic to downstream liberalisation and deregulation,” Iledare said.
Dual role of NNPC
Some industry players have also raised concern on the dual role of NNPC as a player and regulator which they say is eroding past gains when there was robust private sector involvement in the industry.
“NNPC operations are disproportionately concentrated on oil marketing and downstream functions, which offer the best opportunities for private benefit,” Iledare concluded.
