November 18, 2020/Proshare
by CSL Research
In September 2020, the Minister of State for Petroleum Resources, Timipre Sylva announced that the government will now take a backseat in the regulation of the price of petrol, noting that market forces and crude oil price would continue to determine the cost of the product. This announcement implied the beginning of a long craved market reform, total deregulation of the downstream oil sector. Indeed, true to the words of the minister, the price of PMS has been revised almost on a monthly basis in line with fluctuations in international crude prices as well as other market determining factors. In the past five months, the price of petrol has been revised four times, rising from N121.50-N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N165-N170 in November.
However, despite the perceived full deregulation of the downstream oil sector, the sector has been plagued by its deep-seated monopolistic structure. The Nigerian National Petroleum Corporation (NNPC) remains the primary importer and distributor of petrol to petrol stations in the country. We recall that in 2018, NNPC became the main importer of petrol as it became unprofitable for private Oil Marketing Companies (OMCs) to import the product due to higher crude prices coupled with steep devaluation of the exchange rate. This remains the case despite the total deregulation implemented by the Federal government as well as the granting of Quality Management (QMs) to OMCs which gives them permission to import petroleum products. The reason for this has been the lack of access to FX for many of the OMCs.
That said, we note that the FX shortage is a national economic issue following the slump in crude prices which has pressured FX earnings all through the year. As a result, CBN has been forced to ration whatever FX it has available in a bid to safeguard the nation’s FX reserves. According to data from FMDQ at the close of trading yesterday, total FX inflow into the I&E window from January till date (Nov 17 2020) stood at US$15.8bn compared with US$30.0bn within the same period in 2019 (Jan 1, 2019 – Nov 17, 2019). This evidences the depth of FX crunch faced by importers.
Nevertheless, we think its is imperative for the CBN to begin to reconsider its rationing methodology to accomodate the FX demands of OMCs who have to import petrol. Failure to provide necessary FX would ultimately derail the deregulation policy which would hinder achievement of the key objectives of deregulating the sector such as eliminating market distortion, fostering healthy competition in the sector as well as encouraging investments in privately controlled refineries which would further support product availability and overall economic growth.
