• Thursday, March 28, 2024
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Devaluation, rising Brent as litmus test for FG’s commitment to end subsidy

downstream oil sector

The gradual improvement in oil price and double currency devaluation are expected to test Nigeria’s current resolve to jettison fuel subsidy in the coming weeks.

For the second time in five months, the Central Bank of Nigeria (CBN) devalued the naira by some 5.8 percent to N381 per dollar following the crash in oil receipts, Nigeria’s major foreign exchange earner. The CBN first devalued the official rate in March when it moved from N306/$, where it had been for over two years, to N360/$.

For most market watchers, a double devaluation of Nigeria’s currency and a gradual increase in international oil price to $43 imply an increase in the landing cost, which would mean a looming further increase in the price of petrol and might bring back narration of under-recovery, popularly called fuel subsidy.

Although, Timipre Sylva, minister of state for petroleum resources, last week restated that the price of petrol would be determined in line with global best practices. However, steady recovery of oil prices and devaluation of naira will test the present government’s resolve on deregulation.

For most downstream stakeholders, the statement by the minister is a familiar one, as petrol pump price was hiked from N87/litre to N145/litre on May 11, 2016, and many assumed this signalled full deregulation. This wasn’t the case however as the subsidy regime was still in place. The exchange rate factored into the landed cost of fuel was between N280 and N285/$.
“It is still impossible to tell if there is an end to the subsidy regime, as a return in the fortunes of the crude oil market would mean an increase in petrol prices, which would be met with stiff resistance by consumers,” analysts at CSL Stockbrokers Limited, Lagos (CSLS), a wholly-owned subsidiary of FCMB Group plc say.

“This is not really full deregulation yet. However, coming weeks will expose the true situation of things,” says Ayodele Oni, energy lawyer and partner at Lagos-based Bloomfield Law firm. “As long as they have a role to play in pricing, I don’t think it is completely deregulated,” he states.

A sharp decline in global crude prices, triggered by the global pandemic, completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of petrol in mid-March.

As international oil price settled around $42, Petroleum Products Pricing Regulatory Agency (PPPRA) announced a new petrol pump price band of N140.80 and N143.80 per litre for the month of July after initially fixing N125 per litre in March, which was reviewed downwards in April to N123.50.

“We no longer fix prices. We use the average of the previous month’s market fundamentals to set the margins for the next 30 days, taking all market factors into consideration,” PPPRA’s general manager, Olasupo Agbaje, said last week while shedding lights on the new PMS pricing regime.

Beyond the issue of higher landing cost, the deregulation of the downstream oil sector remains an important free-market reform required to ease pressure on government finances as well as boost profitability of the operators in the downstream sector.

Most listed Nigerian downstream players have seen margins pressured over the years with the price of their biggest revenue source (sale of petrol) remaining largely fixed. This has forced them to explore other areas to invest while many other companies have either been acquired or liquidated. This has limited investment in the sector.

“If you, as an investor, had invested in one of the quoted companies on the NSE involved in the downstream oil sector, your investment over 10 years would have turned negative,” Adetunji Oyebanji, chairman, Major Oil Markers Association of Nigeria, said during the recent Nigeria Petroleum Downstream Consultative Summit held online.

Oyebanji noted that over the last 10 to 15 years, virtually all the multinational players involved in the downstream had divested and exited the downstream oil sector in Nigeria.

Three of the seven oil marketing firms listed on the Nigerian Stock Exchange (NSE) posted a total loss of N1.57 billon in the three months ended March 31, 2020, while two saw their profits fall by N3.58 billion.

Total Nigeria plc, a subsidiary of French oil major, Total, and the only international oil company still operating in the downstream sector of the Nigerian oil and gas industry, posted a loss of N163.22 million for the quarter ended March 31, 2020, down from the N474.09 million loss recorded in the same period a year ago.

Its unaudited financial statement showed that its revenue dropped to N70.24 billion in the period under review from N77.42 billion in the same period in 2019.

MRS Oil Nigeria plc reported the biggest loss in the quarter under review, as its loss rose by 45.21 percent to N1.06 billion from N730.64 million in the same period a year ago. Its quarterly revenue rose year-on-year to N17.87 billion from N13.51 billion, according to its unaudited financial statements obtained from the NSE.

Eterna plc made a loss of N358.2 million in Q1 2020, compared to a profit of N341.4 million it recorded in the same period last year. The firm’s revenue plunged to N17.54 billion in the period under review from N60.47 billion in Q1 2019.

Ardova plc, formerly Forte Oil plc, saw its profit after tax tumble by 85 percent for the three months ended March 31, 2020. The firm said its after-tax profit dipped to N497.44 million in the quarter from N3.32 billion in the same period a year ago. Its unaudited interim financial statements, however, showed that quarterly revenue increased year-on-year to N52.05 billion from N42.56 billion.

11plc, formerly Mobil Oil Nigeria plc, saw its profit after tax plunge by 37 percent for the three months ended March 31, 2020.

Its after-tax profit fell to N1.28billion in the quarter under review from N2.04billion in the same period a year ago, while profit before tax dipped to N1.91billion from N3.02billion.

“Even some of the entities that bought over those assets have themselves divested. If all these don’t tell you that there needs to be some radical change in the industry, I don’t know what else tells the story beyond all these things,” Oyebanji said.

Oyebanji, who is the managing director/chief executive officer of 11plc, said, “ we would encourage the government to really take the bold steps, not only by getting out of the issue of subsidy, but going the whole hog by fully deregulating the industry.”