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Energy

Understanding the deregulation of the downstream Oil and Gas sector in Nigeria

The aim of this article is to shed some light into some key areas of the deregulation system as it currently operates.

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Analysis: NNPC and its refining losses 

The clamor for the deregulation of the downstream oil and gas sector of the Nigerian economy has been on for so long that it sounds like a broken record. This is because over the years, successive efforts by various government administrations have been unsuccessful in delivering a fully deregulated downstream market that should be based on the basic economic principle of DEMAND and SUPPLY.

However, just before the lockdown in March of 2020, brought about by the global pandemic (COVID-19), the downstream oil and gas sector regulators announced the implementation of the deregulated system of the sector promising that the pricing of petroleum products will now have to follow the dictates of the international oil market pricing mechanism as well as the forces of demand and supply to determine the retail price of Premium Motor Spirit (PMS) popularly known as petrol.

For the first time, as far as can be remembered, the pump price of petrol at many petrol stations in the country dropped from the N145/liter to a price range of between N123.5/liter and N125/liter. The news was received with excitement by the public and the players in the industry as the case for deregulation had finally began towards resolving the long-aged challenges of a subsidized market. This excitement seems to have been short lived as over the next several months, the price of petrol has gradually increased peaking at the highest price since the commencement of the short deregulation journey at N168/liter even when international market prices dropped.

In an article by Chike Olisah of Nairametrics of October 2, 2020, with the headline PPMC may crash fuel price”, there were indications that of a downward review of the ex-depot price for October. However, this has not been the case. With the continued increase in the pump price of petrol, many have continued to ask what the real benefit of deregulating the downstream oil and gas sector of the Nigerian economy will bring to them. This is coupled with the fact that many Nigerians believe that the players in the sector are responsible for this continued increase and are the only ones reaping the benefits of deregulation by setting higher prices every month and lining their pockets with fat margins from successive price increases.

This is far from reality and the need to understand the workings of the sector would better create a more robust discussion amongst the people and the players in the sector which would ultimately bring about the gains of a fully deregulated market that would see huge investment opportunities in the sector which would translate to increased cross-sector opportunities for other parts of the economy leading to increased wealth creation and invariably expanded revenue generation opportunities for the government through direct and indirect taxation of the increased wealth been created within and around the operations of the oil and gas sector.

The aim of this article is to shed some light into some key areas of the deregulation system as it currently operates and also provide some insight into some of the items which contribute to the cost build-up used in arriving at the ex-depot price range that is announced monthly by the regulatory authorities.

  1. It is important to note that the responsibility for importing PMS into Nigeria remains that of the government through Nigerian National Petroleum Corporation (NNPC)
  2. All products distributed across the country through the various private marketing and distribution companies are directly sourced by these companies from NNPC through its downstream operator Petroleum and Pipeline Marketing Company (PPMC).
  3. As it is today an amount N8.22/liter is charged as direct cost for the importation of PMS which is currently the sole responsibility of NPPC for Jetty Throughput charge, Storage Charge and Wholesalers Margins. (See below extract of the PPPRA pricing template table)
  4. There is an additional distribution cost in the amount N12.78/liter which are direct distribution charges collected as part of the ex-depot price on the following Admin Charge, Transporter Allowance, Bridging Funds and Marine Transport. (See below extract of the PPPRA pricing template table)
  5. An amount of N6.19/liter is allocated as the Retailers Margin. It is from this amount that many players within the sector will be expected to run their business operations as well as retain enough towards the huge infrastructure development investments in the industry.
Landing Cost ElementsCost/LiterExplanatory NotesBasis for Cost Element
Jetty Throughput Charge1.61This is the tariff paid for the use of facilities at the Jetty by Marketers, to discharge and move products from the Jetties to storage depotsFixed
Storage Charge2.58Storage Margin provided for cost of product storage and related charges by the depot owners.Fixed

 

Wholesalers Margin4.03Allowable margin for suppliers of petroleum products.Fixed
Other Distribution CostCost/LiterExplanatory NotesBasis for Cost Element
Admin. Charge1.23Statutory Administrative Charge collections for downstream sector commercial regulation.Fixed
Transporters Allowance (NTA)3.89Allowance for local transportation (Within the PEF(M)B Zones).Fixed
Bridging Fund7.51Statutory provision for ensuring uniform pricing of PMS nationwide.Fixed
Marine Transport Average (MTA)0.15Fund for transportation of PMS to Floating mega stations in Riverine area.Fixed
Retailers Margin6.19Allowable margin for retailing of petroleum productsFixed

The above cost denominated in the local currency constitute the lesser charges which are paid by players involved in the Marketing and Distribution aspect of getting PMS to the point of sale into our various means of transportation across the country. Other significant cost are included in the cost elements for calculating the per liter price of PMS one of such is the Nigerian Port Authority (NPA) and the National Maritime Administration and Safety Agency (NIMASA) charges though denominated in the local currency are paid in foreign currency, further eroding the margins available to retailers as most times foreign exchange (FX) is sourced from the autonomous FX markets at rates which are usually above the official Central Bank of Nigeria (CBN) rates. This is because oil and gas transactions do not fall in the category of items for which FX can be made available exclusively by the CBN.

http://pppra.gov.ng/wp-content/uploads/2015/01/2020-Petroleum-Products-Pricing-Template.pdf

With the pump price of PMS at N168/liter I November before the reduction as a result of dispute resolution agreements with organized Labor Unions, the Cost of Sales (COS) which represents the direct cost attributable to bringing PMS to the point of sales is estimated at about N161.81/liter which represents 96.32% of the total cost to marketing and distribution companies. This implies that such companies based on the pricing template only have a gross margin of about 3.68%. It is from this margin that these marketing and distribution companies are expected to cover overheads (salaries and wages, repairs and maintenance, taxes etc.) and make additional investments in infrastructure development.

When you consider the numbers In the quest to achieve the dividends of a deregulated downstream oil and gas sector in Nigeria, all players must work together to ensure that deregulation is full, thereby allowing for the forces of DEMAND and SUPPLY to determine the right prices for PMS across the country. Though this would bring about varying pump prices for PMS across the country, one thing that we believe is that it would create the needed competition that will lead to increased partnerships, investments, and operations by players in the industry, as more downstream operators in order to be able to maximize their wealth creation opportunities would have to ensure greater and better efficiencies within the Supply Chain Value.

A fully transparent deregulated downstream oil and gas sector means that all players within the sector are given equal opportunities to import petroleum products, whilst the regulators continue to monitor to ensure that players play within the rule and regulations set out for them to operate in the sector. Government and the private sector players must create the right and adequate financial model that would ease the access to the required FX needed to meet the dictates of the demand and supply mechanisms of the system, thereby creating the needed growth that would lead to increased investments in the sector.

What we see now is an imperfect market operation where there seems to be a monopoly wholesale market, which is creating the disequilibrium currently experienced within the market thereby leading to a lopsided pricing mechanism, invariably resulting in the continued increase in the pump price of our PMS. Our O’levels economic theory of demand and supply though being applied currently is hindered by the reality that there still is a monopoly of supply which has not reflected the true effects of deregulation. As such, rather than experiencing the dividends of deregulation from the up and down price movements, what we currently have are consumers paying additional costs from the inefficiencies created by the monopolistic supply system. This has resulted in increased pricing without a corresponding increment in the levels of investments needed to take the sector to the next level.

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As we continue to fine tune our journey to full deregulation of the downstream oil and gas sector, what is becoming obvious is the fact that all players in the sector must allow the real forces of demand and supply become fully applicable in order that we may truly reap the dividends of deregulation. In a situation where there still exists a pseudo monopolistic market, then the only deregulation we will experience is one where the market disequilibrium is not truly corrected, rather we will continue to be bridled with the inefficiencies of the market and increased cost to the consumers. PMS prices will perpetually be on the rise which has always been the bane of the average Nigerian as such the popular saying “when prices go up in Nigeria they never come down”. The saying will prove incorrect where all the players embrace complete and transparent deregulation where the forces of DEMAND AND SUPPLY are the scales used to balance our precious downstream oil and gas market.

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Uade Ahimie is a chartered accountant and corporate governance implementation expert, with almost 3 decades of working experience in oil and gas downstream and upstream, energy, banking and consulting.

He is also a member of the Nairametrics Editorial Board.

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Energy

NERC issues order to DisCos on replacement of faulty, obsolete meters

NERC has issued a directive to DisCos on the structured replacement of faulty and obsolete meters for their customers.

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Electricity, Buhari moves against Discos and agents that collect money for prepaid meters

The Nigerian Electricity Regulatory Commission (NERC) has issued a directive to the electricity distribution companies (DisCos) on the structured replacement of faulty and obsolete meters for their customers with effect from March 4, 2021.

This is to remove the bottlenecks that had previously impeded the rapid deployment of meters to unmetered customers and the receipt of complaints from metered customers in fourth-quarter 2020, that they had been served meter replacement notices by DisCos when all stakeholders were preparing for the National Mass Metering Programme (NMMP).

The directive from NERC is contained in Order No. NERC/246/2021, Titled, “In the matter of the order on structured replacement of faulty and obsolete end-user customer meter in Nigerian Electricity Supply Industry (NESI),” issued on March 4, 2021.

The commission noted that over 7 million customers are currently unmetered as indicated by the customer enumeration data. It also estimates that an additional 3 million meters are currently obsolete and due for replacement.

NERC pointed out that the existence of unmetered customers contributes to the threat affecting the financial viability of the NESI as unmetered customers expressed their displeasure with the estimated billing methodology.

The statement from NERC partly reads, “The Commission notes that over 7 million customers are currently unmetered as indicated by customer enumeration data. It is also estimated that an additional 3 million meters are currently obsolete and due for replacement.

“The existence of a large population of unmetered customers contributed to threats affecting the financial viability of NESI as unmetered end-use customers expressed deep dissatisfaction with the estimated billing methodology.

“The revenue assurance objectives of DisCos have also been challenged by being unable to properly account for the utilisation of electricity by end-use customers”.

Following the review from both the metered and unmetered customers, NERC issued the following order;

  1. DisCos shall grant priority to the metering of unmetered customers under the National Mass Metering Program.
  2. DisCos may replace faulty/obsolete meters under the National Mass Metering Program but these replacements must be done in strict compliance with the Metering Code and other regulatory instruments of the Commission.
  3. DisCos shall inspect meters of metered end-use customers and the replacement notice shall contain the following –
  • The date of the inspection
  • Name, designation and signature of the officer that inspected the meter.
  • The fault identified in the meter.
  • The date for the installation of the replacement meter
  1. The Commission shall be copied on all replacement notices issued to end-use customers for the purpose of conducting random reviews of the replacement
  2. New meters must be installed upon the removal of the faulty/obsolete meter and under no circumstances shall the customer be placed on estimated billing on account of the DisCo’s failure to install a replacement meter after the removal of the faulty/obsolete meter.
  3. The customer and DisCo representative shall jointly note the units on the meter being replaced and the customer must be credited with these units within 48 hours after the installation of the meter.
  4. Customers shall only be billed for loss of revenue where the DisCo establishes meter tampering, by-pass or unauthorised access as contained in NERC Order/REG/ 41/2017 on Unauthorised Access, Meter Tampering and Bypass.
  5. Activation tokens shall be issued to customers immediately after replacement of the faulty/obsolete meter.
  6. DisCos shall file monthly returns with the Commission on the replacement of faulty/obsolete meters along with their proposal for the decommissioned meters.

This Order may be cited as the Order on the Structured Replacement of Faulty/Obsolete Meters of End-Use Customers.”

What you should know

  • NERC was mandated in the Electricity Power Sector Reform Act to maximize access to electricity services, by promoting and facilitating customer connections to distribution systems in both rural and urban areas and establish appropriate consumer rights and obligations regarding the provision and use of electricity services.
  • Meters serve as a revenue assurance tool for NESI service providers and a resource management tool for consumers that receive services with the Meter Asset Provider (MAP) Regulations coming into force on April 3, 2018.

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Columnists

Why NNPC should be commercialised

A commercialized NNPC with more committed employees would mean better accountability and transparency in its operations.

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NNPC reports explosion at OML 40 facility

The Nigerian government is seeking efficient ways of positioning the country on its path to recovery and the petroleum industry which contributes about 90% of its exchange earnings would undoubtedly be critical on this journey.

The long-awaited Petroleum Industry Bill (PIB) which seeks to regulate the entire Nigerian Petroleum Industry and repeal a host of existing legislation is paramount in transforming the industry and introducing more efficiency particularly in its government-owned parastatals. The PIB has gained more traction in the current administration and is now awaiting deliberations by legislators.

A key highlight of the PIB is commercializing the State-run behemoth, Nigerian National Petroleum Corporation (NNPC). This move would see the NNPC incorporated as a Limited Liability Company and be known as NNPC Limited. This company would conduct its affairs on a commercial basis without resorting to using government funds.

While this might seem like a bold move by the government, it still should not come off as a surprise…

Owing to the fall in crude oil prices from over $100/barrel to below $50/barrel levels in 2020, Nigeria’s exciting story with crude oil slowed down but has picked up in recent months. The country’s heavy dependence on the volatile crude oil market and its ineptitude in diversifying during its “oil-rich” days have now thrown its growth story in jeopardy. The once 3rd-fastest growing economy with foreign reserves in excess of $40bn now wallows in rising inflation complemented and a weakened currency.

Why do we need to commercialize NNPC?

A core theme with a number of government-owned parastatals is the plague of inefficiency and obscurity in the way they are run. To give an idea of the NNPC’s lack of transparency, the corporation only published the group’s audited financial statements for the first time in its 43 years of operation in 2020. It’ll be right to commend this administration is pushing for transparency but you can go on to imagine what went on during those opaque years of operation.

As expected, the results were not impressive. The corporation reported a recurring loss, albeit 70% lower in 2019. The significant reduction in losses may prove the government’s will in improving the operations of the NNPC, however, comments on the report noted that “material uncertainty exists that may cast significant doubt on the Group and Corporation’s ability to continue as a going concern.”

Moving down to the State-owned refineries with a combined capacity of 445,000 bpd, capacity utilization well below 20%, and recurring annual losses in excess of ₦150bn, we can agree that the condition of these refineries is utterly worrisome. Despite the government’s annual budget for Turn Around Maintenance of these refineries, they have now been shut down with plans to undergo a Build, Operate, and Transfer (BOT) model.

Chief among the NNPC’s problems is corruption. A number of investigative reports have explained how subsidy payments, domestic crude allocation, revenue retention practices, and oil-for-product swap agreements are smeared with corruption. The Senate has initiated countless probes and new management seeking transparency has been introduced by the President, however, it just seems like the rot has eaten too deep into the system.

What does commercializing NNPC mean for the country?

The government-managed NNPC has proved to be inefficient and riddled with corruption. A commercialized NNPC with more committed employees would mean better accountability and transparency in its operations. The possible introduction of more shareholders would strengthen the amount of funding available to the NNPC and further shift the burden of being the sole-financier away from the government.

Exploring an NNPC IPO

An Initial Public Offering (IPO) would see the NNPC’s shares traded on Stock Exchanges and position the corporation to raise much more funding, build trust and endear to the international community. While this might seem like a daunting task, Nigeria can perhaps take a cue from Saudi Arabia whose National Oil corporation; Saudi Aramco began raising capital for its IPO in December 2019.

The Saudi Crown Prince; Muhammad bin Salman (MBS) announced a valuation of $2trn enticing the world’s largest investment banks, appointed a new set of leaders on the board of the corporation, and executed a highly engaging local marketing strategy. Although the valuation figure was brought down to $1.5 – $1.7 trillion by financial advisors, Saudi Aramco successfully achieved its IPO raising nearly $26 billion for 1.5% of Aramco’s value.

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NNPC’s fundamentals might not support an IPO currently as investors might be wary of the high level of risks involved but we can’t deny the immense opportunities an IPO would present not just for NNPC’s transparency and performance but Nigeria’s economic reform.

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In Conclusion

The recurring performance of the corporation with several corruption allegations, inefficiency, and unclarity is indeed worrisome. It is time to have the NNPC turn over a new leaf and operate on a commercial basis. This would afford the government the ability to deploy funds into other segments of the economy and have the NNPC focus on being a commercially viable entity.

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