The Petroleum Products Pricing Regulatory Agency’s removal of the price cap on Premium Motor Spirit (petrol) may be a step towards deregulation, only that it could be undermined by the agency’s decision to continue setting prices for the commodity.
The removal of price cap on a litre of Premium Motor Spirit (PMS) was contained in a market-based pricing regime for the commodity released by PPPRA.
According to the regulation signed by Abdulkadir Saidu, executive secretary, PPPRA, the Market-Based Pricing Regime for Premium Motor Spirit (PMS) using the Pricing Template of the PPPRA removes the existing price cap per litre for PMS and institutes a market-based price for the commodity.
This seemingly signals a desire to allow the market determine price, but the next paragraph unravels the plan.
“The price of Premium Motor Spirit advised by the agency shall be the guiding retail price at which the product shall be sold across the country,” said paragraph 3, section 2 of the regulation dated March 20.
Also, in a clarification statement on Sunday, the PPPRA explained that its recently published regulation on official deregulation of petroleum pump price does confer on marketers the power to fix prices for the product as they deem fit, but rather guiding prices would be advised by the PPPRA according to market realities.
The agency said it would monitor market trends and also advise the NNPC and oil marketing companies on the monthly market-based guiding price, which would include the indicative retail price at which the product should be sold across the country.
“For the avoidance of doubt, it is instructive to state that no private individual or group has the mandate to fix prices of petroleum products; however, the statutory regulatory body is saddled with the responsibility of advising guiding prices,” said the statement signed by Saidu.
Relying on this regulation, the Federal Government claimed it has deregulated the sector, but many in the industry disagree.
“This is not really full deregulation,” said Ayodele Oni, energy lawyer and partner at Lagos-based Bloomfield Law firm. It is another step closer to deregulation and at best a partial deregulation, he said.
“As long as they have a role to play in pricing, I don’t think it is completely deregulated,” he said.
The regulation would suggest that marketers are free to import and sell petrol, but in reality, their efforts will be ruined by Nigeria’s multiple exchange rate windows which create price distortions, hurt businesses and encourage corruption.
“A major hurdle oil marketers have to cross is lack of FX liquidity,” Omotola Abimbola, an industry analyst at Chapel Hill, said. “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 current price (N121.50-N125) by Q3 2020.”
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?).
Therefore, industry operators are not excited about the new regulation because in practice, little else has changed. The possibility of attracting investment will be stymied by government price controls. One marketer said that as long as the PPPRA continues to set prices, it cannot be full deregulation.
The Nigerian government’s attachment to petrol is stronger than a junkie’s addiction to cheap crack.
Though it has burnt over $63 billion on subsidies between 2006 and 2018, it still has no desire to wean itself of this addiction. Gradual recovery of oil prices will test the government’s resolve on deregulation.
Apart from the wasteful subsidies, the Nigerian government loses billions in revenue because it does not tax consumption of the product. At the daily consumption rate of 55 million litres per day, according to the regulators, VAT of 7.5 percent on every litre of petrol costing N121.5 will generate over N501 million in revenue daily, a big boost to a government staring down at a fiscal crisis.
According to operators, full deregulation includes allowing the market fix prices. This means that marketers will sell based on the cost of buying refined products outside Nigeria, cost of freight and port charges. It demands dismantling systems that aided the subsidy regime, like the Petroleum Equalisation Fund, and the restructuring of the PPPRA which was created to midwife a deregulated downstream sector but has managed to side-step this function to maintain a tenuous grip on relevance.
However, some governments provide a price guidance to protect consumers and in Nigeria, oil marketers have not always been altruistic, which makes a case for government intervention. In 2012, many were sanctioned for fraudulently accepting government payments even though they did not deliver petrol.
Dan Kunle, an energy finance expert, said the PPPRA’s action could forestall the formation of a cartel by oil marketers to exploit Nigerians through price manipulation.
But providing guidance on prices is not the same as setting prices. The South African government provides guidance using the average price of fuel for the previous month to arrive at new prices because it refines its own petrol. This provides marketers certainty in holding stock.
It is not the same in Nigeria. On most days the refineries do not refine enough petrol to power their own generators. So the PPPRA is forced to set prices bench-marking it against international crude oil prices, fraught with volatility.
It takes three weeks for petrol orders to reach Nigeria and by then oil prices would have moved. This fuels uncertainty for marketers because the next pump price set by government could be higher or lower than the actual cost, so many will hold limited stock to hedge their risk. They are not consulted before these prices are fixed.
The consequence is that the Nigerian National Petroleum Corporation (NNPC) will continue to be the sole importer as long as it gets preferential access to cheap dollars, but if it gets dollars at market rate, it will reduce how much it remits to government from the sale of crude oil to fund petrol importation.
The removal of price cap may allow operators sell above recommended price but then again, that is what already obtains as most filling stations in Lagos, Abuja and a few city centres sell at the government-controlled price.
