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.
- It is important to note that the responsibility for importing PMS into Nigeria remains that of the government through Nigerian National Petroleum Corporation (NNPC)
- 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).
- 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)
- 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)
- 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 Elements||Cost/Liter||Explanatory Notes||Basis for Cost Element|
|Jetty Throughput Charge||1.61||This is the tariff paid for the use of facilities at the Jetty by Marketers, to discharge and move products from the Jetties to storage depots||Fixed|
|Storage Charge||2.58||Storage Margin provided for cost of product storage and related charges by the depot owners.||Fixed
|Wholesalers Margin||4.03||Allowable margin for suppliers of petroleum products.||Fixed|
|Other Distribution Cost||Cost/Liter||Explanatory Notes||Basis for Cost Element|
|Admin. Charge||1.23||Statutory Administrative Charge collections for downstream sector commercial regulation.||Fixed|
|Transporters Allowance (NTA)||3.89||Allowance for local transportation (Within the PEF(M)B Zones).||Fixed|
|Bridging Fund||7.51||Statutory provision for ensuring uniform pricing of PMS nationwide.||Fixed|
|Marine Transport Average (MTA)||0.15||Fund for transportation of PMS to Floating mega stations in Riverine area.||Fixed|
|Retailers Margin||6.19||Allowable margin for retailing of petroleum products||Fixed|
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.
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.
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.
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.