Downstream Oil & Gas Sector - Liberalisation of Fuel Market, a Game Changer

Oil & Gas
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Thursday, May 12, 2016 8:18 PM / Vetiva Research 

 

Highlights  

·         PMS to retail at N135 – N145 per litre, up from N86.50

·         Shortage of FX a key consideration in policy shift

·         Product importation open to market forces

·         Positive rub off on Downstream Majors  

In a long awaited move, the Nigerian Government announced yesterday (11 May 2016) that after a meeting with various stakeholders, it is liberalising the downstream market to address the persistent fuel shortages that has rocked the country for the past year. The new framework means petrol (PMS) will immediately retail at a band of N135 – N145 per litre, and any Nigerian entity is now free to import the product subject to existing quality specifications and other guidelines issued by regulatory agencies.  

In addition, Petroleum Marketers are now required to procure FX from autonomous sources and accordingly, the Petroleum Product Pricing & Regulatory Agency (PPPRA) template will reflect this in the pricing of products. The Government expects that this move will lead to improved supply, competition and eventually drive down pump prices, as well as encourage investments in refineries and other parts of the downstream sector.  

The move would also mean that the NNPC’s crude for refined products swap deals will no longer be required after the expiration of current contracts in March 2017 as the market develops.  

We expect to see adjustment in current FX framework

According to the communique from the Minister of State for Petroleum Dr. Ibe Kachikwu, challenges with procuring FX significantly affected marketers’ ability to import petrol in recent times. Thus, by liberalizing the market, the Government expects importers to find ingenious ways to procure FX from autonomous sources and improve product availability.  

In arriving at the recommended band of N135 - N145 per litre, an exchange rate of NGN285/USD was adopted. Whilst the liberalisation of the market is a positive development and big step toward full deregulation of the sector, we express worries about the current FX framework undermining this effort.  

We recall that on average, FX demand for fuel imports account for about 30% of weekly sales at the interbank market. Our sense is that due to shortage of USD receipts, the CBN (through commercial banks) may no longer be willing to continue fully funding fuel imports via the official window. The question we now ask is can autonomous sources sufficiently meet the significant FX demand for fuel imports?  

We are aware of the arrangement between Majors and related upstream companies but anticipate that as other independents enter the market, the currency could come under pressure outside of the official window and expect the premium between both markets to further widen – we liken this to a pseudo-devaluation or possibly, the takeoff of a formal two-tier FX market.  

In our view, if FX availability had been the major hindrance in fuel importation up until this point, without a requisite adjustment in the current FX framework, it is unclear how this new structure will sufficiently eliminate fuel queues at retail stations across the country. Based on this, we expect the CBN to roll out new FX guidelines soon.  

A Game Changer for Downstream Majors

For years, Downstream Majors had lobbied for the deregulation of the sector in a bid to rid themselves of huge subsidy receivables that had stifled profitability. We think the liberalisation of the sector will allow Majors leverage economies of scale to dominate the fuel import market.  

We note that in the revised pricing template of the PPPRA, retailer, transporter and dealer margins were increased from N5.00, N3.05 and N1.95 to N6.00, N3.36 and N2.36 respectively.  

Following from this, we expect to make upward revisions to our coverage Majors TOTAL (TP: N208.77 BUY), MOBIL (TP: N150.46 SELL) and OANDO (UNDER REVIEW). We expect consensus ratings on FO (Not Covered), Conoil (Not Covered) and MRS (Not Covered) to be revised upward as well.  

 

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