Fuel pricing: Kachikwu’s desperate options

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By Henry Boyo

Thankfully, more fuel stations are gradually reopening for “normal” business, while the severe social agony and angst instigated by the recent acute scarcity, has significantly eased, with the reported improvement in the Nigerian National Petroleum Corporation’s fuel stock.

Nevertheless, Nigerians may not sleep with both eyes closed yet, as another scarcity with its usual trail of dastardly distortions may just be round the corner. Indeed, on January 4, 2018, the Minister for State for Petroleum Resources, Ibe Kachikwu, readily admitted, at a public hearing of the National Assembly that the NNPC did not have the capacity to comprehensively sustain 100 per cent supply of Nigeria’s fuel requirement, which is variously estimated at between 35 and 40 million litres daily.

The minister obviously dashed any hope that the billions of naira repeatedly spent to revamp existing refineries between 2015 and 2017 would produce a modest steady output to supplement imported fuel. Conversely, the same refineries now apparently operate in fits and starts, while total output may be presently less than 10 per cent of capacity despite Kachikwu’s earlier liberal adulation of the local engineering team that had reportedly successfully revamped the refineries to raise production above 50 per cent of their installed capacity in 2016.

Nonetheless, at the recent public hearing the minister suggested that “non-performance of refineries” was due to factors, which are primarily fraud-related and a lack of holistic maintenance programme. Regrettably, however, the minister did not report what steps were taken to investigate and punish the perpetrators of fraud or to indeed, reduce the degree of fraud in these public refineries, which have, possibly, gulped up more money for serial “Turn Around Maintenance” than would probably be required to build new, more efficient facilities.

According to Kachikwu, “it got to a point where I started wondering whether as we repair this, somebody was going out there to destroy, so that contracting can be done”. Surprisingly, however, despite media reports of billions of dollars spent by various administrations for maintenance, the minister noted that “over the last 10-15 years, we have not done a serious, conclusive Turn Around Maintenance of these refineries”.

In retrospect, Kachikwu had, in fact, told reporters in Abuja on December 15, 2015, that “fuel price would no longer be fixed” while he also noted that “the price of crude would henceforth determine what petrol price will be”. Incidentally, Kachikwu’s statement on fuel price “deregulation”, was made at a time when crude oil price was expected to remain below $40/barrel going forward. Invariably, the extremely volatile fuel scarcity “season” in December 2017 blew apart the NNPC’s earlier permutations and assurances of stable and sustainable fuel price.

Inexplicably, therefore, instead of celebrating increasing dollar income from much higher crude oil prices above $60/barrel (especially when the budget 2018 benchmark is a modest $45/barrel), with the complement of steadily climbing reserves above $40m, the reverse is actually the case, as increasingly higher crude prices have, unexpectedly, induced a landed cost (not pump fuel price) of N171/litre, even when N145/litre remains the regulated selling price. Sadly, subsidy payments, which Kachikwu had described as an “issue of irresponsibility”, in December 2015, have now probably returned big time to haunt him.

However, the minister confirmed at the latest public hearing in 2018 that the acute fuel scarcity suffered in December 2017 was primarily the result of major factors such as “diversion of products, low speed of clearing of petrol imports from the ports and a lack of sufficient fuel’ reserves”. Kachikwu also revealed that the disparity between the present actual landing cost of N171/litre and the current regulated price of N145/litre has resulted in a daily loss of N800-900m to the NNPC since October 2016. Consequently, according to the minister, the Executive arm of government “is currently working on modalities to permanently resolve the petrol crisis”.

Towards this end, the minister confirmed that government has lately set up a committee “to find ways out of the pricing problem until the refineries become functional in 18 months’ time”. Well, it is arguable that if a sustainable fuel pricing strategy remained elusive after almost 36 months of this administration, it may seem simplistic and overoptimistic to hold our breath that a workable solution will be found before the expiry date of the present administration next year. The clearly embattled minister also confirmed that government’s latest committee on fuel price actually met “a few days ago”. Going forward, however, the new committee will reportedly focus on three strategies that may provide a sustainable solution to fuel price dilemma.

The minister’s first option is “for the CBN to allow all marketers access to forex at the rate of N204/$1, as against the official rate of N305 so that petrol pump price can remain unchanged at N145/litre”.

The observation of this writer is that this option has not been well-thought-through as it will surely introduce a “bigger time” subsidy, not only through the back door, but this time, with an increase in subsidy above N100/litre on each dollar sold to marketers. This is in contrast to the presently controversial and clearly less oppressive subsidy estimate of N26/litre, on the regulated N145/litre price.

Instructively, however, a casual investigation will reveal that petrol price presently hovers around $1/litre in neighbouring ECOWAS countries, thus any significant disparity with Nigeria’s market price will obviously encourage mass cross-border smuggling of petrol and will thereby provide additional unofficial subsidy to economies in our ECOWAS subregion, despite an increasingly suicidal burden of higher fiscal deficits and rising public debt in Nigeria.

The second option that Kachikwu’s committee would consider is “to give room for modulated regulation, where petrol would sell at N145/litre in all NNPC outlets nationwide, while independent marketers could sell their imports at whatever price that is profitable from their own distribution outlets”. Obviously, this option of modulated regulation is distinguished from the NNPC’s earlier self-acclaimed highly “commonsensical” concept of subsidy modulation which paraded a regulated price of N145/litre, which is underpinned by the expected net positive receipts from fluctuations in crude prices and the related landing cost of fuel.

Nonetheless, this new concept of “modulated regulation” is also a no brainer, as it is clearly a deliberate ploy by the NNPC to gradually reduce its participation in fuel imports, so that, ultimately, private marketers can sell at much higher prices with modest profit in a competitive market space without any subsidy. Inevitably, however, rising crude price will sustain higher  fuel prices and trigger inflation rates that will deepen poverty nationwide. Modulated regulation’ as an option is ultimately a camouflage for full price deregulation which will invariably pump fuel price nearer $1/litre(or N305/litre) to predictably spiral inflation out of control.

The third option in Kachikwu’s offensive is the adoption of a blanket subsidy for all importers. In reality, this option is another way of keeping the existing abrasive pricing model intact, so there’s really no new benefit, except rapidly increasing subsidy values and higher fiscal deficits, induced by higher subsidy payments to all fuel importers. Clearly, this price option would underwrite the death of Nigeria’s economy.

Ultimately, the NNPC’s hope for low sustainable fuel price appears to be squarely placed on the completion of Aliko Dangote’s 650,000 barrel/day Lekki refinery in 2019.

Instructively, however, Dangote has never hidden the fact that fuel supplies from his mega refinery in the Lekki Free Trade Zone would be sold in dollars, as is currently the case with payments for all fuel imported into Nigeria.  Consequently, in 18 months from now, rather than the respite promised by Kachikwu, the pain and agony from inevitable, and more intermittent fuel scarcity despite the related bloated subsidy values and collateral of rising fiscal deficits and increasing debt burden, will sadly remain Nigeria’s albatross.

Ultimately, however, government would have to bow to the reality that rising fuel prices is more a function of exchange rate than crude oil price.

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