Thursday,
May 21, 2020 / 11:34 AM / CSL Research / Header Image Credit: Independent Newspapers
According to local media reports, private oil
marketing companies (OMCs) have now joined the Nigerian National Petroleum
Corporation (NNPC) in the importation of petrol. This was based on information
from the Petroleum Products Pricing Regulatory Agency (PPPRA) that permits had
been given to several OMCs to start importing petrol alongside the NNPC. The
General Manager, Corporate Services, PPPRA, Kimchi Apollo, revealed that the
agency recently issued Quality Management (QMs) which empowers OMCs to import petroleum
products.
Prior to this development, the NNPC has been the sole
importer of petrol for over two years. The steep devaluation in the local
currency in the wake of the 2015/16 oil price crash as well an increase in
crude prices that ensued thereafter led to a surge in the landing cost of
petrol. The reluctance of the government to adjust the retail price of petrol
to align with market realities made it unprofitable for OMCs to continue to
import petroleum products. As such, NNPC had to step in to continue to supply
the market. This however came at a huge cost to the nation, as NNPC reported
subsidy payments as "under recoveries" being the excess of the
landing cost of petrol over the price sold to OMCs. According to the Nigerian
National Petroleum Corporation (NNPC), the federal government paid N752bn as
petrol subsidy in 2019, equivalent to 62% of the amount spent on capital
expenditure in the year (N1.2trn).
Although, we believe the decision of the PPPRA to
allow OMCs import petrol directly will improve the thin margins of players in
the downstream sector, we note that the gains could be short lived and eroded
when oil prices trend higher, if the federal government maintains control over
the retail price of petrol. Based on our pessimistic case, OMCs will hands off
the importation of petrol if the rebound in oil prices pushes the landing cost
of petrol to a discount of c.10% from the current retail cap of N125/litre.
We recall that on 18 March 2020, the Federal
Government (FG) announced a reduction in the retail price of Premium Motor
Spirit (PMS) to N125/litre from N145/litre, following the revision of its
Ex-Coastal price to N99.44/litre (Previously; N117.6/litre) and Ex-Depot price
to N113.28/litre (previously; N133.28/litre). This came on the heels of the
global pandemic which led to an unprecendented decline in oil prices and by
extension reduction in the landing cost of petrol. Subsequently, the Group
Managing Director of the Nigerian National Petroleum Corporation (NNPC), Malam
Mele Kyari, noted that the country will no longer pay for under-recovery or
subsidy on petrol, a move that we believe signals the liberalisation of the
downstream sector. However, we are uncertain on the reaction of the government
when landing cost of petrol rises as oil prices recover in the international
market.
Related News
Signup with Facebook
Signup with Twitter
