OMCs to Resume Importation of Petrol

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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.


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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.


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