Nigeria’s Proposed PMS Pricing :Matters Arising

Oil & Gas
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Friday, January 05, 2018 3.20PM / Proshare WebTV 

The December, 2017 fuel crisis across Nigeria, was unprecedented as it took its toll on the nation with long fuel queues, increase in transportation costs and the reality that many had to spend the holiday looking for the “Petroleum Motor Spirit”, also known as fuel. 

This occurred at a period Nigeria was experiencing a remarkable surge in crude oil price (currently above $60 per barrel) and stable production in the oil-rich Niger-Delta zone. 

The rise in crude oil price increased the receipts for Nigeria, boosting the revenue base of the country across the Federal, State and Local governments. 

President Muhammadu Buhari in his new year broadcast decried the fact that certain elements were bent of inflicting hardship on Nigerians, through the fuel crisis and promised to address the issue from the roots. 

To provide a pathway to solving the perennial fuel crisis, the Senate Committee on Petroleum Resources hosted key stakeholders in the industry, to discuss and agree on a strategy that will tackle the crisis. 

Minister of State for Petroleum Resources Dr Emmanuel Ibe Kachikwu first started by debunking claims that the Federal Government was planning to hike the PMS price in the country. 

In addressing the fuel crisis, Kachikwu highlighted that the major challenge was the disparity between the landing cost of N171 and the actual pump price of N145, which according to him was not sustainable to the petroleum marketers. 

He proposed two options, first an agreed Forex window with the Central Bank of Nigeria for the marketers and Second a “Plural” price approach which will see the state oil company the Nigerian National Petroleum Corporation retain the N145 price, while marketers sell at a different price. 

This is an 18-month proposal that will be carefully looked to explore the best case for the market.

In view of the two models, here are the matters arising; 

FX Approach
The forex approach with the support of the Central Bank of Nigeria for the downstream sector, if adopted  as a model will widen the gap between the official and the parallel market. It will put also exert pressure on the nation’s foreign reserve which is about $38bl. 

Plural Price Approach
If the Plural price approach which the Minister of State, Petroleum Resources said is “theoretical” is adopted it will not exert any further pressure on the foreign reserves. It will create a fragmentation in the PMS price, making inflation in the country more volatile. 

Political Consideration
It is pertinent to note that the 18-month Emergency Period to Address Pricing beginning from January, 2018 will elapse on the month of August, 2019. This is an indication that considering the pre-election year, political consideration may have come to play over market consideration. 

An increment in the pump price in the country this year will spike the price of commodities, increase transportation cost and in overall adversely impact the socio-economic landscape, which will erode the confidence in the All Progressive Congress Ruling 12 months to the elections. 

Economic Perspective
On the back of this ongoing development, the option is either a widening in deficit in the 2018 budget, or a reduction in capital expenditure in attempt to stick to the initial quantitative budget value of N8.6trl. 

The Nigerian government and stakeholders must give top priority to revamping the moribund refineries in the country and encourage the new refinery projects, that are currently being embarked upon. 

It is unfortunate that one of the leading oil producers in the globe, cannot meet its domestic consumption, with regards to PMS and Aviation fuel.  

Proshare Nigeria Pvt. Ltd.

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