AS the furore over the new pump price of premium motor spirit, PMS or petrol heats up, the Petroleum Products Pricing Regulatory Agency, PPPRA, has said the recent increase was inevitable, given the acute shortages the market was thrown into for more than two months.
Not to mention the fact that militant attacks in oil-rich Niger Delta, have cut Nigeria’s crude production to 1.65 million barrels per day, from the 2.2m b/d anticipated in the 2016 national budget, leading to attendant huge losses and constraints in funding the budget. Scarcity was further compounded by the inability of fuel importers to access foreign exchange, Forex/FX, at the official exchange rate of N197/$1.
This is even more so as the PPPRA estimated that theNigerian National Petroleum Corporation, NNPC, was losing about N12.5 billion monthly for being the sole importer of the scarce commodity. Last Wednesday, the Federal Government, through the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, unceremoniously announced up to 80 pecent increase in the pump price of petrol from N86.50/Litre to N145/L, a development that drew a lot of criticisms from Nigerians in all walks of life.
Specifically, the PPPRA argued that there was a need to liberalise the foreign exchange, FX market, as the fuel subsidy regime remained “(un)sustainable in the face of flagrant disregard by the marketers of the set PPPRA ceiling price of N86.50k/ltr.”
Price hike
In discussion points with journalists,PPPRA offered the following reasons for increasing petrol pump price: *Pricing trend in the past 1 year demonstrates that citizens in areas other than Lagos and Abuja have consistently paid 20 - 50% more for fuel purchased at the pumps.
*Survey by NBS (National Bureau of Statistics) indicates that apart from the Federal capital and Lagos, citizens continue to pay for fuel at an average price of N150/ltr.
*The survey establishes that the subsidy benefits only a few (urban – metropolitan / few higher income groups) as opposed to the larger citizenry. *Expectedly market trend indicates that the current approved pump price of N86.50/litre for PMS does not assure marketers of over-recovery if crude oil price continues to trade above $40/bbl. Thus, an unrealistic price in view of market realities.
*As of today, 80percent of the downstream operators are still unable to carry out their business due to unavailability of Foreign exchange at the prescribed (Central Bank of Nigeria) CBN rate. PPPRA’s pricing template, as approved, only recognises prevailing CBN Interbank rate which averages N197/$ in Quarters Q1 and Q2. Investigations revealed that the alternative source of FX available to Marketers is the autonomous market rate which presently averages N285/$1 2016.
*Therefore, to explain the prevailing high prices in certain states, marketers who source FX independently of CBN in order to carry on participation in PMS supply will continue to sell at prices that enable them achieve full cost recovery.
*As such, the false assumption that the current ceiling price adequately covers cost needs to be addressed by providing marketers an alternative to the primary FX market (CBN). The consequence of disregarding this solution will lead to the unsustainable development of NNPC maintaining the role of sole supplier to the detriment of federation revenues.
NNPC losses
The Pricing Agency further noted that the two months of scarcity was at a huge premium to the Federal Government, especially the NNPC, which it said bore the burden of import 100 percentdue to the FX challenges faced by other marketers licenced to import petrol. It said: “For a Corporation historically known to be inefficient and unprofitable, NNPC maintains 100 percent responsibility of fuel importation at subsidised pricing using Crude oil as a means of exchange. Estimated loss for NNPC is approximately N12.5bn/month.
“To sustain supply, NNPC extended its crude source for products importation from outside the traditional refinery requirement of 445BbLs/day for petroleum products imports, to the use of federation cargoes further reducing the ability of the government to earn FX.
“Similarly, at an import bill of $600m/month for PMS, CBNs liquidity to support the importation of PMS is challenged in the face of dwindling crude oil for exports. The limited crude oil output caused by the spate of renewed vandalism and sabotage of oil infrastructure in the Niger Delta ( now 420,000bbls/day lost) and increased participation of NNPC in products supply continue to imply limited ability to earn FX for the Federation and potential crippling of the economy.
“An immediate solution is the reduction of this crude to products control by NNPC in order to free up crude for federation revenue. Also the movement of marketers to the autonomous FX market will make available approximately $600m of FX via CBN to be used in other sectors of the economy.”
N13.79/L subsidy
PPPRA further noted increases in crude price above $40/bbl band at the International oil market had wiped out the over-recovery of the past months when prices were lower, leading to subsidy levels of about N13.79/L as at April 29.
According to the Agency,”The Federal Government continues to incur N13.79/ltr under recovery, while states fail in their fiscalresponsibilities.
“Growing subsidy differential is a threat to state debt profile. As at 29th April 2016, under-recovery of N13.79/litre was recorded in the price of PMS, thus the need to urgently address the trend, as Government has no budgetary provision for subsidy payment in the 2016 Appropriation Bill. “Deductions from (Federation Accounts Allocation Committee) FAAC payments of N13.61bn recorded monthly while State debts accrue to N34bn/month. If subsidy was removed, a deduction of the estimated subsidy claim will reduce governmental exposure and support States in their fiscal obligations.
“Clearly continuation of under recoveries in any form for PMS limits the ability of the Federation to deliver its statutory functions such as power generation, security, education, health etc.”
Pricing framework
In defence of the new pump price regime, the PPPRA in a, “New Framework for Petroleum Products Supply, Distribution and Pricing – May 2016,” made available to Vanguard at the weekend, insisted that unavailability of forex and inability of open letters of credit, LCs, “forced marketers to stop product importation and imposed over 90% supply on NNPC since October 2015, in contrast to the past where NNPC supplied 48% of the national requirement.”
Apart from pointing out that NNPC neither had the resources nor designed to carry such import burden, thereby creating glitches in funding and remittance gaps into the Federation Account, PPPRA also noted that “There is no provision for subsidy in 2016 budget.” As such the N13.79/L subsidy accruable has no appropriation to cover it.
Against this backdrop, PPPRA argued that “In the absence of available forex lines or crude volumes to continue massive importation of PMS, it is clear that unless immediate action is taken to liberalise the petroleum supply and distribution, the queues will persist, diversion will worsen and current prices will spiral out of control.”
Petrol prices worldwide
The PPPRA went further to justify the increases as it benchmarked pump price of petrol in Nigeria to other countries of the world as shown in the table above.
Presumed benefits
Despite the widespread criticisms against the new pump price, PPPRA identified the benefits accruable from the exercise, which include:
*Elimination of subsidy, estimated at N1trillion in 2015 and N16.5billion from April till date;
*Ensuring 100% FAAC payment on allocated 445,000 bpd and potential additional revenue stream, which can be tailored towards palliatives;
*Elimination of fuel scarcity through products availability nationwide;
*Reduction of hoarding, smuggling and diversion substantially and price stability;
*Encouraging potential investments of up to $3billion in refineries and retails, and;
*Provision of more revenues to government to address social and infrastructure needs and a host of others.
Whether these benefits will be bought into by Nigerians, particularly some of the labour unions, notably, the Nigeria Labour Congress, NLC, and the Trade Union Congress TUC, as well as other civil society groups is left to be seen in the days ahead.