Monday, June 22, 2015 8:59AM / FBN Capital Research
The international newswires reported over the weekend that the transition committee appointed by the ruling All Progressives Congress (APC) has recommended fuel price deregulation and the privatisation of the four NNPC refineries. We have often called for such measures and hope for economic, developmental and fiscal reasons that the coalition will “tough it out” in the face of inevitable protest.
There are several credible proposals on the drawing board from both Nigerian and international investors for the construction of greenfield refineries. We are sceptical that these will come to fruition as long as the subsidies are in place.
The current fuel scarcity has been caused by delays in the payment of refunds to importers of petroleum products. The delays can be traced to a combination of bureaucratic red tape, the FGN’s fiscal pressures and the incidence of fraud, which necessitates some forensic audit of claims.
Deregulation over time could lead to some competition between private-sector refineries. It would bring to an end the unorthodox arrangement whereby one corporation is the sole domestic refiner of crude and a leading importer of refined products.
The fiscal rationale for deregulation is no less strong than the economic. The cost of subsidy payments exceeded N2.2trn in 2011 before the FGN halved the subsidy on premium motor spirit (PMS, petrol) in January 2012 after failing to remove it altogether. In 2014 it was projected at N970bn in the budget.
The Petroleum Products Pricing Regulatory Agency shows the total cost of PMS imports at N136.4 per litre (l) as at 18 June, consisting of the N120.9/l landing cost plus legitimate extras. This amounts to a subsidy of N49.4/l relative to the retail price of N87, or N540bn over a full year.
We play down the savings because the FGN would probably have to give Nigerians something back if it was to effect a change often tried and failed.
As for the refineries, we wonder what value, if any, they would fetch from the private sector, and whether their 1970 technology makes economic and operational sense. Over the years the NNPC has launched several programmes of turnaround maintenance, the most recent in the past two weeks in anticipation perhaps of such a recommendation to the ruling coalition. Capacity utilisation in the refineries’ history, however, has generally been below 30%.