Saturday, May 14, 2016

Understanding forex crisis and the fuel price hike

By Michael Eboh

The decision of the Federal Government to hike the price of Premium Motor Spirit, PMS, also known as petrol, to between N135 to N145 per litre and liberalizing the product's importation,    has     thrown up a number of issues and has brought efficiency in the Nigeria's petroleum industry to the fore.

Some of the issues raised include the timing, the long and short term effects of this hike and the inherent systemic weaknesses among others.

President Muhammadu Buhari and Dr. Ibe Kachikwu, Minister of State for Petroleum Resources, had, in their early days in office, rejected calls for fuel price hike, vowing not to increase the hardship of the people, especially with the challenges faced by the petroleum industry and the economy in general.

The Federal Government also promised to fix the refineries and the pipeline network, increase the country's refining capacity and secure oil facilities, as these were the conditions agreed upon with  the organised labour and other stakeholders before any price increment is effected.

Today, the refineries are still in a dysfunctional state, pipeline sabotage remains the order of the day, while the country continues to  refines less than five per cent of its local fuel consumption. Meanwhile, the Federal Government  just increased the price of petrol.

This action has left Nigerians at the mercy of market forces, in spite of the seeming less-than competitive market economy, that  favours monopoly with  cartels here and there.

Why now?

The Federal Government had, since the collapse of crude oil price in the international market, been inundated with calls for the deregulation of the sector and the removal of petrol subsidy, but government stood its ground, especially as the low crude oil price eliminated subsidy payment.

The Federal Government, in response to the calls for subsidy removal, commenced a price modulation mechanism, whereby it would adjust petroleum prices in line with current realities. However, with the gradual rebound in the price of crude oil in the international market and the gradual return of subsidy into PMS pricing, government announced a new price range.

In announcing the new price range and why the decision was reached at this time, Kachikwu said the  inherited difficulties of the past and the challenges of the current times imply that we must take difficult decisions on these sorts of critical national issues.

Also, the Petroleum Product Pricing Regulatory Agency, PPPRA, said the decision to undertake the hike in price was as a result of the rise in crude oil price and prevailing high cost of importation which had brought back the subsidy regime since April 2016.

The PPPRA stated that due to the decline in government income related to the low crude oil price and limited crude oil output, there is neither funding nor appropriation to cover subsidy payment in the 2016 Budget.

Though the new price hike does not qualify for deregulation, experts said the fact that the Federal Government still had to set a price range qualifies the action as market liberalization, which is the relaxation of government regulations.

Consultations

The Federal Government claimed the decision was arrived at after far-reaching consultations and deliberations with  the organized labour, the leadership of the  Senate and the House of Representatives, Nigerian Governors Forum and oil marketers.

While oil marketers have  expressed their support for the hike, the organized labour  is kicking  against it, promising to stage protests against the hike.

It was revealed that the organized labour and the Federal Government did not actually reach a compromise on the hike, hence the labour's  decision to protest.

Impact

The new PMS  price range will have an across-the-board effect, as everyone, irrespective of status or position, would be affected, one way or the other, by the increase.

Specifically, the Nigerian Association for Energy Economics, NAEE, confirmed that the hike would have a negative impact on the cost of living of Nigerians and would heighten economic hardship.

However, the categories of individuals to be affected the most are the unemployed and individuals with fixed income and also low income earners.

Refineries and pipeline rehabilitation

Stakeholders are of the view that the burden of the hike in  price will linger until  government builds or encourages the building of additional refineries, fix and secure the pipeline network, repair existing refineries and strengthen the economy.

Until the refineries work optimally and until the pipeline network are fixed and adequately secured, Nigeria would continue to  be at the mercy of the volatility in the price of crude oil.

State of refineries

Kachikwu had, after the  price hike, stated that the country's refineries are producing at 50 per cent of their installed capacity and efforts are on to boost their capacity to about 90 per cent.

The inability of the refineries to function at  full capacity has  been mainly due to s years of neglect. There is also the issue of persistent vandalisation which  hindered supply of feedstock to the refineries, as well as hampered the transportation of refined products to locations across the country.

Licenses to build refineries

NEW FUEL PRICE—Minister of State, Petroleum, Dr. Ibe Kachikwu, briefing newsmen on the new fuel price, yesterday, in Abuja.

NEW FUEL PRICE—Minister of State, Petroleum, Dr. Ibe Kachikwu, briefing newsmen on the new fuel price in Abuja.

However, to fix the challenges of low refining capacity, the Federal Government had issued licenses to three firms to build three refineries in the country under the co-location arrangement. The refineries are to be built in the same location and premises with the existing refineries and also share facilities with the existing refineries, thereby, helping to eliminate the cost of building support facilities, like pipeline, to the new refineries.

The Department of Petroleum Resources, DPR, also gave licenses to firms to build 25 refineries in the country. Giving a breakdown of the licenses issued, the DPR said three  were issued for conventional refineries, with two of them being Licenses to Establish (LTE) and one  Approval to Construct (ATC).

19 licenses were issued to firms wanting to build modular refineries, with 16  being  LTE and three  ATC.

The companies awarded licenses to build  the refineries, according to the DPR are Amakpe International Refinery Incorporated; Resource Petroleum & Petrochemicals International Incoporated; Hi Rev Oil Limited; Azikel Petroleum Limited; Dangote Oil Refinery Company; Kainji Resources Limited; Masters Energy Oil & Gas Limited; Cross Country Oil and Gas Limited and Waltersmith Refining and Petrochemical Company Limited.

Others are Grifon Energy Limited;Sifax Oil and Gas Company Limited; Capital Oil and Gas Industries Limited; Aiteo Energy Resources Limited; RG Shinjin Petrochemicals Limited; Epic Refinery & petrochemical Industries Limited; Frao Oil Nigeria Limited; All Grace Energy Limited; Green Energy International Limited; Petrolex Oil & gas Engineering Limited and Fresh Energy Limited.

The rest are Chyzob Oil & Gas Limited; Eko Petrochem & Refining Company; Associated Worldwide Company Limited and Energia Limited.

Of the total licenses issues, 19 are yet to commence work, while  six are at various stages of completion.

In the area of pipeline vandalisation and sabotage of oil installations, the Nigerian National Petroleum Corporation, NNPC, had engaged the services of the armed forces to secure the facilities, while it  also  engaged communities to protect facilities in their various jurisdictions.

It is expected that when the co-located refineries are built and when the Dangote refineries come on stream, and also when the pipelines are fixed, the country would stop fuel importation and would, in the long run, be a major exporter of refined petroleum products.

Particularly, NAEE was of the view that  if all the existing refineries are working at about 80 to 90 per cent capacity, the price of petrol may drop to between N115 and N125 per litre.

Gains of price hike

Ahead of that, the Federal Government had also identified the gains of the new price regime to include that it would  solve the unending fuel crisis by ensuring availability of products at all locations of the country.

Specifically, the PPPRA argued that the new price regime would reduce hoarding, smuggling and diversion substantially, and also stabilize price at the actual product price; ensure market stability and improve fuel situation through private sector participation.

It added that the new price will  create labour market stability, especially as it has the potential to create additional 200,000 jobs through new investments in refineries and retails, while also preventing potential job losses of nearly 400,000 jobs in existing investments.

Also President of NAEE, Mr. Wumi Iledare, stated that the complete deregulation of the downstream sector of the petroleum industry, would help infuse efficiency and ensure that the sector experiences the urgently-needed transformation that had eluded it for a long time.

He disclosed that the setting of a price ceiling is not consistent with deregulation, especially as the petroleum sector is not a natural monopoly where market price will not guarantee normal returns for producers.

He said, "We are of the opinion that the subsidy has to go for the nation to fully harness its natural resources potential. NAEE opines, however, that allowing market forces to determine prices will remove expectations of government interference in the sector and allow market players to take necessary risks and investments."

Iledare further explained that the removal of subsidy would limit the negative impact of the major fiscal and financial burden on the country; reduce the fraud and rent-seeking behavior in the sector and increase government access to funds to develop infrastructure.

He added that subsidy removal would decrease smuggling activities especially to neighbouring countries; increase free market operations; spur the rehabilitation and revamping of local refineries and reduce the declining  standard of living of Nigerians in the long run.

However, in his analysis of the new price regime,  Uwadiae Osadiaye, a researcher with FBN Quest, the investment arm of First Bank Nigeria Holdings, said the policy will bring an end to the PPPRA's quarterly import allocations, as marketers would  be allowed to import products as each firm determines.

Osadiaye also stated that the PPPRA's product pricing template's foreign exchange assumption would now reflect the foreign exchange (fx) rate at the parallel market, saying:  "This point is the real game changer and should see the re-entrance of many industry participants, mainly the independent marketers.

"The policy change also suggests that the PPPRA would have to monitor two variables going forward, crude oil prices and foreign exchange rates at the parallel market, as opposed to only oil prices previously. We expect increased pressure on parallel market rates to be a major fallout of this decision.

"However, we expect more competition in the second half of 2016, given that independent marketers are likely to re-enter the market now that importation is economically viable. Nonetheless, if foreign exchange supply agreements with the International Oil Companies (IOC) remain, at the official rate, major marketers could have a pricing advantage.

"Given the supply gap we still expect pump sale prices within the PPPRA price band on average. This could lead to gross margins expanding nicely."

Meanwhile, in spite of attempts by the Federal Government to assuage the discontent of Nigerians concerning the price hike, the stark reality is that we may be at the mercy of the vagaries in the price of crude oil in the global market.

To this end, it is possible that fuel price would be further hiked in June, if the price of crude oil continues to rise. Therefore, until Nigeria refines about 90 per cent of its local PMS consumption, put at about 40 million litres daily, we may continue to be faced with fuel challenges.


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