The downstream arm of the country’s petroleum industry has been on the downward trend in the past few years due to regulation of petroleum products pricing by the Federal Government.
As a result of poor margins on investment in products coupled with inability of players in downstream to import as the refineries owned and controlled by the Nigerian National Petroleum Corporation (NNPC) are down, it is only the national oil company that serves the nation’s fuel needs.
The oil marketers, who are experts in the area and whose core business is fuel distribution and sales, cannot import fuel because the price and margins on it are fixed by the government and if they import, they wouldn’t be able to recover their cost.
It is as a result of this situation that it is the national oil company that has been the sole importer of products, especially premium motor spirit (PMS) in the past few years.
On why the oil marketers shun importing fuel, the Chairman of Major Oil Marketers Association of Nigeria (MOMAN), Mr Tunji Oyebanji, who is also the Managing Director/Chief Executive Officer of 11 Plc (formerly Mobil Oil Nigeria Plc), who spoke to The Nation on the sidelines of the just-concluded Nigeria International Petroleum Summit (NIPS) in Abuja, said it would be difficult for their members to import and sell at a regulated price.
Any marketer that imports and sells at the current regulated pump price would not be able to recover the cost of importation let alone making profit, he added.
To him, anybody investing in the industry should get adequate returns on his investment, otherwise the person would close shop.
To make the marketers participate and play well in the downstream sector, the government should enthrone the right investment atmosphere or environment.
What that means is that the pricing has to be right to enable the person recover his investment and make some profit. If the government can’t create that kind of environment, the investment in many cases will not be there.
Those who have made such investments will sell the products where they can recover their investment. No investor makes investment with a view not to make returns on his investment.
‘’Also when I say right environment, I mean legislative environment, creating a free economy for operating the business, not a situation where everything is regulated – the price, how much supply you get, the margin you earn on it.
Everything is determined by the government. Such policy doesn’t promote efficiency and doesn’t attract investment because if your cost continues to go up and you cannot recover your investment, you will not continue to make such investment. By environment, I mean all those things that a business needs to thrive,’’ he added.
The MOMAN chief also addressed the concerns of some stakeholders that with Dangote Refinery coming on stream as well as some modular refineries and those of the government’s owned refineries, hopefully being rehabilitated, whether they will have enough space to operate.
To him, the more functional refineries Nigeria has the better for the country because that will make it to have enough for consumption and export.
“When the industry operators say Nigeria will become net exporter of fuel, that happens when Nigeria’s local production exceeds its demand locally. With that situation in place, it becomes a net exporter of fuel.
So, all things being equal, if Dangote Refinery comes on stream, if the NNPC refineries are repaired and working and the modular refineries also working, there is a likelihood that Nigeria will have more products available than we can consume locally and that means there will be an opportunity for us to export refined products, but that is, all things being equal.
But are those refineries actually going to come back on stream as they said, when will Dangote Refinery start to work, is it 2020, 2021 or 2022? All these have to be in place to make Nigeria self-sufficient and have enough to export.
Also note that some of the modular refineries don’t produce all the basic petroleum products. Some produce more of AGO (diesel) than PMS, so these have to be taken into consideration.
Even if the NNPC refineries fail to come on stream, Dangote Refinery alone can address the downstream needs of the country to a large extent because the capacity is significant and more than all the NNPC refineries put together. However, the demand need is also growing.
“Recently, the borders were closed and it became clear that some percentage of Nigeria’s fuel whether imported or locally refined has been finding its way across the border.
So, if you have blocked that loophole, and Dangote is not going out there again, maybe Dangote will meet all the demands.
But if your pricing regime remains the same and one day, you reopen the border and people resume smuggling of the product across the border because your pricing is not competitive, it means the products refined by Dangote supposedly for local consumption, will also be finding its way across the border.
That is why it is an economic issue, ultimately, to set the correct and appropriate pricing for the product such that there will be no significant advantage in trying to smuggle the product across the border.
“If there is this continuous imbalance, whereby a product is selling N145 per litre here and above N300 per litre across the border, naturally the product will find its way to where it will earn higher returns.
All of these are interwoven and for me if we don’t solve the basic fundamentals and the problem of setting the appropriate price, we will just be spending so much energy in policing borders and checking smuggling.
That is why at every depot, there are officials of the Department of Petroleum Resources (DPR), Petroleum Equalisation Fund (PEF) and Petroleum Products Pricing Regualtory Agency (PPPRA), among others.
Every one of them is guarding to ensure product doesn’t find its way to the wrong place; whereas if you price appropriately, there will be balance and no need for diversion or smuggling.”
On infrastructure deficit and price competitiveness, he said the most efficient way of distributing product is through pipelines, whereby products are piped to every part of the country, no trucks on the road and no issues.
However, to build pipeline is capital intensive, he said, adding that the investment Nigeria made in pipeline network, if we are to make it today, it will be significantly higher.
“Finding the money to do that may be difficult. It can only be done with private sector involvement. But you cannot call private sector to be part of it, if they can’t recover their investment.
They have to go to bank to get loans and if they cannot show proof of recovery and ability to repay, they won’t get the loans.
That is the reason many licensees couldn’t build refineries because they couldn’t get loans from banks until Dangote decided to take the risk of building one as a businessman,” Oyabanji said.
On what MOMAN is doing to make downstream proposals bankable, he said: “We have continued to canvas for the creation of deregulated environment.
Deregulated environment does not mean there will be no regulation in terms of quality and operation. When we talk of deregulation we mean the commercial side of things.
What we want is for the government to tell Nigerians that fuel subsidy is not sustainable because the bill is too much and it prevents it from investing in other sectors of the economy, such as hospitals and school.
Therefore, we have to make a choice and government states the programmes on which the subsidy will be used if it is stopped.
“With that, the government will have to set up a committee comprising stakeholders, which include the labour groups to monitor the programmes to ensure their success.
The subsidy removal and the alternative programmes can be done in stages, but Nigerians will be carried along on whatever is being done by the government.
There are also alternative fuels to PMS, such as compressed natural gas (CNG). If the government can encourage usage of CNG, which is a cleaner fuel to use that will be nice to drive deregulation.”
He noted that building refineries is capital intensive, which is the reason marketers are not building one even on stand alone or in partnership.
He said: “I don’t know if you join the capital of marketers together whether it will be up to one tenth of the cost of Dangote Refinery.
Therefore, raising that kind of money is a big challenge, especially in a regulated environment. For us marketers, if in the interim, the government believes that the time is not right to allow appropriate pricing, among others, it will be good it allows us more margins so that we can make more and invest in other areas of the value chain of the downstream.
At present, our margins have been fixed since 2016 and inflation goes up every day and a lot of our equipment is imported and bought in dollars.
“The financial results of downstream oil companies last year were on the negative because it is difficult to make returns on investments.
This is one of the reasons many of the international oil companies (IOCs) divested from the downstream. Indigenous firms can survive on the small margins but the multinationals cannot because they have international standards to operate with.”
Source: The Nation