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Volatile oil markets and NNPC products pricing burden

By Sonny Atumah

In discussing transformation in contemporary Nigerian National Petroleum Corporation, NNPC, Alvin Toffler’s Adaptive Corporation is always a guide that in real life, the decision-maker must continually adjust to those consequences, and, in doing so, deviate from the clear course laid out in advance.

Toffler’s view may fall through in NNPC that even the best strategies seldom take into account more than a few of the consequences that flow from them.

We hailed and commended the near magic strategies the NNPC adopted in tackling the recent fuel scarcity in Nigeria with flush volumes that led to twice and sometimes thrice the monthly volumes between December and February.

NNPC
NNPC

We appreciated the issues of sabotage that came with it. The use of other ports outside Lagos especially in Calabar, Port Harcourt and Warri assisted in bringing the situation under control. Collaboration with the governors assisted the regional distribution centres created to hold individual marketers responsible. The collaboration with security agencies as well as the logistic support in repairs of Mokwa-Jebba Road and the Ikot Ekpene-Calabar Road was wise for trucking of products.

All these were articulated and executed in the NNPC Fuel Supply War Room. The War Room recently wound down provided a pool of experiences and lessons learnt, towards improving NNPC supply and distribution of products. We are happy it was over but it came with a cost to the nation. The volatile crude oil market and appropriate pricing of products would continue to be the issue. It has been a burden for the NNPC that has been left to be the sole importer of premium motor spirit, PMS.

Pricing policies are the methods and directions in which the government, companies and other agencies seek to influence the price of commodities. The two basic components that affect product pricing are costs of manufacture and competition in selling. It is unprofitable to sell a product below production cost and unfeasible to sell at a price higher than that at which comparable product is being offered. Experts believe product prices are determined by a variety of factors such as the economy, weather and competition between retailers and from other fuels. All things being equal we would have been discussing what determines appropriate pricing and market margins for petroleum products in terms cost of crude, cost of refining, tax, and refining margins.

But where the costs are for freight, lightering expenses, NPA and NIMASA charges, financing, Jetty Thru’Put and storage charges are added, it becomes expensive for petroleum products imported. At a cost and freight, C+F of US$540 or under per metric tonne, and at an exchange rate of N305 to a dollar, when government modulated price in 2016, with a ceiling of N145 per litre at the pump it was sustainable. But with the present C+F of US$693 per metric tonne, at the exchange rate of N305 to the dollar, NNPC managers may be magicians to be in business because it translates to N184.20 per litre of PMS. With a devalued currency Nigerians are paying more and one wonders its cost at N360 to a dollar.

The semantics of under recovery or subsidy by the NNPC is what we may live with for a while. This is also against the backdrop of crude oil we sell (our Escravos, Qua Iboe and Bonny light) at a price of between US$67–US$68 per barrel.  At an exchange rate of N305 to a dollar, it translates to between N128.52–N130.44 a litre. Beyond the US$70 mark, it is refiners that could determine whether it is expensive to crack or refine crude locally; excepting that refined marketable petroleum products are from streams of a variety of crude oils.

Feedstock (crude oil) prices are influenced by demand factors, actions by OPEC and governmental regulations. To crack crude oil, product prices have to be determined. Refinery margins (the difference between raw material costs and product revenues expressed on per barrel of crude basis) can vary depending on the refinery. Refineries transform crude oil via an appropriate number of different processes into marketable petroleum products in programmed quantities and qualities for onward dispatch by sea, inland waterways, rail and road, and product pipeline to the consuming markets.

Having analysed gaps in the refining industry, refining locally is still the best option. The NNPC GMD, Dr. Maikanti Baru had revealed ongoing efforts to secure 3rd party financing to revamp our refineries. The NNPC final selection of financiers to secure funding to start the rehabilitation of the refineries towards 90 per cent capacity utilization per stream day by the end of 2019 is awaiting NNPC’s board approval.

This is part of what influences the final investment decision, FID. But Nigerians are looking at the timelines that are becoming tighter to meet product demand. Those financiers are showing interest in our brown field refineries means that we are making some headway in long term corporate finance decisions to manage our assets and capital structure. It is the commencement of the process of transformation which means that we are heading towards real liberalisation of the industry.


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