The Nigerian Fuel Scarcity Palaver 2.0 — Unbundling the Myth of Showman Ibe

So The Sartorial One decided to come “clean” on the issues behind the worst fuel scarcity crisis in the history of Nigeria and chose to do it in style as he is wont to do. Nigeria’s Minister of State for Petroleum Resources and Group MD of NNPC Ibe Kachikwu (the one who will not learn magic) recorded a video to explain his version of the issues that have led to the current situation, the creativity that he and his team have brought to bear (go Ibe!) and what needs to be done to address the issue over the long term. You can see the video here….Showman Ibe does have the gift of gab and if this job is a stepping stone to a governorship, senate, or even the highest office in the land that should stand him in good stead.

However in trying to explain away the issues as he sees them, Kachikwu raised questions that make some of the assertions he makes untenable. There remains a sense that a lack of commercial nous highlighted in the first piece in this series (see here), is a key stumbling block for the Sartorial One. A review of the questions raised by Kachikwu’s attempt at clarifying issues brings this even more clearly to the fore.

Outstanding Subsidy Payments

Kachikwu’s central theme is that marketers stopped importing petrol and left the task for NNPC alone, moving NNPC from a 45% provider to over 80% and now almost 100% by March 2016. According to him, this was caused by non payment of subsidy bills (between N500–600Billion) to the marketers for over a year by the time he came on board as Group MD NNPC in August 2015. To be clear, Kachikwu was saying that the government of Nigeria (under both Presidents Jonathan and Buhari) had made no subsidy payments since August 2014, perhaps even longer. This position breaks down when one recalls that the former Minister of Finance and Coordinating Minister of the Economy Dr. Ngozi Okonjo-Iweala made unrefuted claims in May 2015 that some payments had been made to marketers and what remained unpaid were claims for foreign exchange and interest rate differentials, see here. Also see here and here for confirmations by Major Oil Marketers Association of Nigeria (MOMAN) and Depot and Petroleum Products Marketers Association (DAPPMA) that some payments were received.

What is clear however is that there were outstanding payments due to the oil marketers when government was handed over to the Buhari administration on May 29, 2015. Marketers claimed N200Billion, a figure disputed by Dr. Okonjo-Iweala see here. Prior to handover the marketers had gone on strike to force the former government to pay off all outstanding as President-Elect Buhari was on record as saying he does not believe there is any subsidy being paid and it was all fraudulent. Marketers were therefore understandably worried they might not get paid under the new government. After President Buhari came to power, the country went into a long transition process while the new helmsman took his time to come to terms with the state of the nation as well as form his government. His first major appointment was that of Ibe Kachikwu as Group MD NNPC in August 2015 and then his ministers were appointed in November 2015.

All through this time the government made no attempt to address the issue of outstanding subsidy payments which kept increasing as the marketers continued to provide products under the old arrangement such that by end of September the outstanding subsidy payments were now in the amount of N413Billion. Marketers had become cash strapped and coupled with the full implementation of the Treasury Single Account (TSA) initiative which took a lot of liquidity out of the banking system making it difficult for banks to lend, importation of petroleum products took a downturn leading to scarcity. The Buhari admin would finally send a Supplementary Appropriation bill to the National Assembly to make the subsidy payments which was passed at end of November 2015 with payments made in December 2015.

In the midst of this, Kachikwu introduced Price Modulation as an antidote to subsidy payments and revised the Petroleum Products and Pricing Regulatory Agency (PPPRA) template taking out traders’ margin which disincentivized marginal players who only import for sale to marketers and NNPC. In addition a price reduction was announced as a result of price modulation, taking advantage of lower oil prices which in a country with a history of violent reaction to increase in petrol prices was clearly an ill advised move. By January 2016 PPPRA announced that NNPC will be responsible for importing 78% of required product for first quarter, a situation that further compounded the scarcity issue as NNPC clearly didn’t have the capacity (they have since reversed this to 41% for quarter 2). Suffice to say Kachikwu and his boss (who also doubles as Minister of Petroleum Resources) should raise up their hands and take responsibility for the financial constraints of marketers, creating a domino effect that has led to a deepening fuel scarcity and significant negative effect on the economy and the people.

Foreign Exchange Availability

Kachikwu further supported his position stating that by the time payments were made in December 2015, marketers could not access foreign exchange to import petroleum products. This position is quite an incredible one to take as one of the key reasons why Nigeria is currently embroiled in a foreign exchange crisis is because the Central Bank of Nigeria (CBN) chose to implement a Demand Management policy since June 2015 to ration its foreign exchange, so it will be available for essential imports such as petrol! To then turn around and say CBN is unable to provide foreign exchange to marketers to import petrol beggars belief and requires an indepth look at the situation…..perhaps even raises a challenge to CBN’s claim of having $27.8Billion in foreign reserves.

Nigeria allocates 445,000 barrels of crude oil per day for local consumption, this is essentially meant to be locally refined but we all know the story behind our refineries in Nigeria. Ideally this stock should be sufficient to cover daily local demand which is said to be between 30–40 million litres (445,000 barrels should produce about 32 million litres of petrol i.e. 19 gallons per barrel and 3.78 litres per gallon). If we even assume that NNPC uses this to fulfill its 50% quota of local demand and the remainder should come from importation by marketers, we are talking about 20 million litres per day worst case scenario. At current price of about 50cents per litre in the US, that is $10Million per day required by marketers for purchase of petrol, add 30% for transportation, taxes, etc so we have $13Million per day required by importers. Each month, importers will therefore require about $390Million for importing petrol, lets round up to $400Million.

Without considering the fact that the CBN says it has $27.8Billion in foreign reserves, CBN statistics database shows that $1.3Billion came into Nigeria in January 2016 and $1.22Billion in February 2016. In January 2016 $972Million went out via interbank sales, the amount for February 2016 was $676Million. If importers who should be at the head of the queue for foreign exchange from CBN required less than $800Million to import fuel in January and February and could not get it as stated by Kachikwu, who got the $1.6Billion CBN sold via interbank? Where did the money go? Consider that according to Nigerian Bureau of Statistics (NBS), fuel is the largest item imported, almost 20% of total imports!

Why has it taken Kachikwu 8 months to understand and then address this issue with the CBN to ensure that marketers could access the foreign exchange required to import fuel and ensure product availability? Why is this still an issue as Kachikwu says, which has then required him to get “creative and innovative” by getting oil majors to provide foreign exchange to their downstream sister companies? At what rate are oil majors expected to provide this foreign exchange given that official rate is N197 : $1 while parallel rate is N320 : $1? Between the CBN Governor and the Minister of State for Petroleum there is certainly a lot of explanation to do as this 4 month fuel scarcity and the attendant hardship suffered by the people appears more and more to have been avoidable.

What to do?

Deregulation remains the elephant in the room and Kachikwu seems unable to address that as his hands are tied by his boss who believes petrol should be cheap for the people as a national resource. Even the price modulation process has been tainted by the inability to “modulate” prices upward now that oil prices have taken an upward swing and pushed up the price in the PPPRA template above the regulated price. Trouble looms ahead as Kachikwu has asked marketers to source their foreign exchange requirement which means the exchange rate in the PPPRA template will be untenable, a situation that will definitely require subsidy payments and bring us back to square one. Without addressing the pricing issue there will be no lasting solution to the fuel scarcity crisis and in a nation where most of the country are used to buying at much higher prices than the regulated price, it really makes no sense to continue holding on especially when NNPC continues to show a lack of capacity to provide products and/or enforce the regulatory regime.

Ibe Kachikwu will do better to address the core issues and push for a lasting solution especially after this much suffering by the people, rather than trying to engage in spin. If he truly has ideas that can move this process forward and keeps hitting a brick wall in his boss then he should walk away therefore making a strong statement that might be a better sacrifice for Nigeria in the long run. It’s time to trade in showmanship and really ensure that his rolled up sleeves are not just metaphorical.