The Nigerian Fuel Scarcity Palaver — The Making of Ibe The Magician

Discussions about Premium Motor Spirit (PMS or better known as petrol) often take a national dimension and this has been the case for the last 30 years. This is primarily because Nigeria operates a regulated market with price set by government through what used to be an opaque process until 2001 when the Petroleum Products Pricing Regulatory Agency (PPPRA) was set up. PPPRA mandate was/is to determine and publish prices following the liberalization of the market, as a first step on the path to full deregulation (PPPRA set its first price for PMS at N26 per litre effective 1 January 2002). However given the fact that price was being set by PPPRA (i.e. government) and not the market, the pricing of petrol remained an emotive issue. Each time government sought to raise prices in response to market conditions there would be push back from organized labour and the general public leading to strikes and economic shut downs until a compromise was reached. In no time, the pricing of petrol would be elevated into a political tool and this came to a head during the early days of the Jonathan administration.

Legacy Issues

By the time President Jonathan came to power in May 2010, petrol price was N65 per litre and had been so since June 2007. President Obasanjo had raised the price to N75 from N65 (price since August 2004) on the eve of his departure ostensibly to give the incoming administration a good base to start from as the price had been eroded by rising cost of oil (some say he did it to cause trouble given his nature). However the populist President Yar’Adua did not want to start on a controversial note and therefore reversed the price to N65 soon after taking power. The big challenge however was the fact that Nigeria was by now heavily reliant on importation of fuel, a legacy of the Obasanjo years. Refineries had fallen into disrepair; burgeoning demand due to the resurgence of the middle class, the booming economy and parlous state of power supply meant that huge volume of petrol needed to come in from outside the country and therefore at global market prices. Rising oil prices made this a difficult situation for government as with prices set for the end user, the government had to pay the difference between cost (including profit for importers and marketers) and the set pump price. This became known as Subsidy and this word would become one of the most important in the Nigerian Lexicon.

#OccupyNigeria

As oil prices continued to rise, President Jonathan and his team decided to address the issue of Subsidy early on in his first term of office after winning a “popular” mandate in 2011. In his New Year broadcast in January 2012 (7 months into his term), Jonathan announced the full removal of subsidy on all petroleum products with price going up from N65 to N141 at the first instance. Mass protests and complete shutdown of the economy forced the government to back down and the price was reversed to N97 with Subsidy remaining in place at between N45 to N55 per litre. It became a chicken and egg situation as the protesting public were asking that government fix or build refineries to remove the issue of importation, however the huge subsidy cost meant that government could not afford to do this out of its own means while private investors were reluctant to come into a regulated market where price change was not based on market forces. And so the price remained at N97 per litre until February 2015 when the Jonathan government reduced price to N87 in response to the sharp fall in oil price and perhaps as a last ditch attempt to entice voters for the elections. The rest is history, enter the new Buhari administration on 29 May 2015.

Price Modulation

The Buhari administration came in on a wave of public clamor for a positive change in governance and improvement in the management of public finances. While coming in at a period of low oil prices means revenues are much lower than in recent past, it also means that cost of imported petrol has crashed such that by December 2015 the Minister of State for Petroleum Ibe Kachikwu stated that government was no longer paying subsidy, see here. Kachikwu announced a “Price Modulation” strategy which was designed to adjust the price of petrol in line with market movement while ensuring the government would no longer have to pay subsidy i.e. the final end to fuel subsidy in Nigeria, see here. A new PPPRA template was developed to redistribute some of the charges while increasing margins for importers and marketers slightly. At end of December 2015 Kachikwu announced new fuel prices, of note was the reduction in the price of petrol from N87 to N86 for NNPC and N86.50 for private marketers, see here.

Enter Fuel Scarcity

However, all is not well across the land. Nigeria has been under worst fuel scarcity crisis in its history, with fuel queues seen throughout the nation over the last 3–4months. Petrol is being sold at higher than the price published by PPPRA, sometimes more than double the price. The fuel crisis is further exacerbated by the worsening power situation as the populace have to make do with self generated power fueled largely by petrol. To make matters worse, Kachikwu announced recently that the fuel scarcity would continue for another 2 months as there are many issues such as FX availability and the fact that NNPC had effectively become the sole importer of petroleum products, see here. A number of questions come to mind; why is it difficult to ensure availability of fuel at a time of global oil glut and low oil prices? How can this be fixed and in the shortest possible time?

Understanding the Commercial Issues

There is a sense that Ibe Kachikwu doesn’t fully understand or appreciate the downstream sector value chain. Subsidy payments were such a big part of the sector such that business models were developed on that basis. What this meant is that Banks also built financial models on this, lending to importers because they could guarantee their funds through the bulk subsidy payments coming directly to them. With the stoppage of subsidy payments (a correct decision albeit a fortuitous one), there is a lot of rethink being done as the model becomes riskier. Throw in the liquidity tightness caused by TSA implementation, Banks are not as able to provide financing to importers as they did in the past which has forced NNPC to pick up the importation slack. Kachikwu and his team should have seen this coming and worked with CBN to provide guarantees so that importers could continue to import and sell to marketers. FX availability should not be an issue as CBN prioritizes importation of fuel and this is one of the reasons for the unwillingness to devalue the Naira. Importers approved and verified by NNPC should have access to FX from CBN as and when necessary.

The other issue is pricing. In a no subsidy environment, the margins are not attractive enough in an environment where cost of credit is in double digits. Kachikwu’s first attempt at price modulation was tainted by the populist stance of this government leading to an unnecessary reduction in price of petrol. It made more sense to raise price back to the N97 at the start of the year taking advantage of the prevailing goodwill for the new government, which has now been severely eroded. While the Buhari FX policy makes it near impossible to deregulate the downstream sector in an import environment, the government must begin to prepare for a situation where devaluation will be a fait accompli and the way to go is begin to raise petrol prices. Price of petrol should immediately go back to N97 per litre and there should be a N5 per litre increase every quarter for the next 4–8 quarters to bring price to a place where it would be more resistant to shock from rising oil prices or devaluation or both. While one expects organised labour to make noise, given the untold hardship facing the nation they might find themselves all alone on this if government goes on the charm offensive and engages the populace directly. Enforcement should also be improved. Under no circumstance should any marketer sell at a price different to that determined by PPPRA, Kachikwu and his team at DPR need to get their act together working with law enforcement agencies to crack down hard on those acting contrary.

Ibe needs to learn Magic….and fast!

Ensuring availability of petroleum products is neither rocket science nor magical, especially not at a time of excess supply and low prices. However, it takes more than sartorial elegance and gift of gab to make things happen…..there is the need for a commercial mindset and Kachikwu appears to be shorthanded in this area. It is important that he steps up to the plate and ensures a quick turnaround to the current situation as condemning Nigerians to another 2 months of hardship is absolutely unacceptable. If he is in anyway desirous of leaving a good legacy then now is the time to act intelligently, knowledgeably and decisively.