Petrol pump

Any effective deregulation of PMS prices would need to deal with the Nigerian factor, in terms of profiteering, price collusion, pump price manipulation and product hoarding to create artificial scarcity. Perhaps, no other factor would determine the successful deregulation of PMS prices more than Nigerians themselves.


The debate for the subsidisation or deregulation of petrol prices has been an endless one in Nigeria. The reoccurrence of fuel queues during the Christmas period re-awakened the debate for the full deregulation of the downstream petroleum industry, particularly PMS pump prices. To be clear, the price of other fuels such as kerosene, jet fuel and diesel are not fixed anymore and government incurs no subsidy elements, as far as we know, on them.

The deregulation and subsidy debate is not unique to Nigeria alone. As an example, the deregulation debate has been raging in India since 2003, when the first attempt to deregulate the prices of diesel and petrol was done.

What Does “Deregulation” Mean?

So what do people mean by “deregulation”? Frankly, it means different things to different people. To some, it means that government and marketers should pass the full cost of importing and distributing PMS directly to the pump price. Some people go as far as interpreting it to mean scrapping the Petroleum Products Pricing Regulatory Agency (PPPRA) and any pricing template. Some would equate it to mean that the Nigerian National Petroleum Corporation (NNPC) should stay completely off the importation, sales and distribution of PMS and hand it over to marketers who would determine the pricing of the PMS they import. The bottom-line is that deregulation, to most, means the removal of PMS price caps by government and subsequent increases (and decreases) in the retail price of PMS to reflect the price of crude oil and the foreign exchange rate. Perhaps a better word than deregulation would be “liberalisation” of PMS retail prices.

We must state that deregulation or price liberalisation is not the absence of price regulation. Other than developed economies such as the USA, Canada or the UK, most countries have some form of regulation on the retail price of PMS and/or diesel. For instance, petrol pump prices are regulated by governments in South Africa, Ghana, and several countries in Europe, Asia and South America. The Indian government recently liberalised petrol prices in 2017, but at the same time maintains some form of price regulation and also has the ability to step in should the retail prices of petrol and diesel escalate beyond their “political tolerance level”.

Petrol (or PMS) is the lifeblood of the Nigerian economy. No other energy source affects all Nigerians and has an immediate adverse effect for all – rich and poor. Thus, it is inconceivable that there would be no form of government regulation of the pump price of petrol.

Global Pricing of Retail PMS

As a background, there are three basic forms of retail fuel pricing globally:

• Ad-hoc retail pricing: Prices are highly subsidised and set irregularly, with no transparency and any form of price adjustment mechanism. This is common in low income, oil producing countries;
• Formula based retail pricing and adjustments: Prices are published on the basis of a pricing methodology/formula. An example is South Africa;
• Liberalised pricing system: The market set the prices based on a formula.

Nigeria moved from the ad-hoc pricing of petrol under past military regimes to a formula based pricing, with the establishment of the Petroleum Products Pricing Regulatory Agency (PPPRA), which developed a pricing template. While the PPPRA pricing template tracks the changes in the variables, the pump price of petrol is effectively fixed by government. Any price movement has to be approved by government.

The Domestic Pricing System for PMS

Globally, as with every other commodity that is imported, there are two main constituents of the retail price of PMS, namely: (i) external factors and (ii) internal factors.

The external factors are dollar based and include the price of PMS in world markets, international shipping and insurance costs, and the US$/NGN exchange rate. The internal factors are naira-based and include marketers’ margins, transport costs, storage costs, port charges, government taxes and levies.

Long term, there should be full deregulation, leading to dynamic price change reflective of changes in external and internal factors. This is where there is a daily price change based on key price variables in the pricing methodology – price of crude oil, shipping costs and margins. India just started this…


The external factors move constantly and account for most of the movements in PMS retail prices. Both the world market price of oil and the exchange rate are outside the control of the downstream industry. Movements in the naira-based elements (internal factors) are subject to government control.

The Downstream Petroleum Sector and PMS Market In Nigeria

The PMS market suffers from distortions in the market structure, such as government control of the prices, high dependence on PMS imports, almost zero domestic refining capacity, constrained availability of foreign exchange (dollars), high and unstable exchange rate, and high cost of local financing. Also, uniform pump price across the country despite the fact that transportation costs differ, high smuggling, high costs of operation and very low operational efficiencies of the various players.

In addition, the downstream petroleum sector is plagued with poor distribution infrastructure. The extensive pipeline system built in the ’70s is almost non-functional and subject to vandalism and sabotage. The movement of products across the country is by road transport. There are no railways or inland water transportation means to move white products from coastal areas to the hinterlands and up-country.

There is also low investment in the downstream sector. Investments have been mainly in the construction of tank farms and private jetties. Sadly, most of the tank farms are located in Lagos and Ogun States, resulting in congestion in and out of these tank farms. There are a few functional tank farms in Calabar, Warri and Port Harcourt.

Lastly, the state of our federal and state highways affect the efficient distribution of PMS across Nigeria.

Deregulation of PMS Prices Under An Import Regime

Until the Dangote refinery is operational and in the absence of any meaningful plan by the NNPC to revive its existing refineries, Nigeria would continue to rely on PMS imports. That means it would need to effectively manage the external factors that affect PMS prices, such as the international price of crude oil, shipping and insurance costs and exchange rate vagaries. Whilst there was an attempt to deregulate PMS prices in May 2016, the external factors have again caught up with domestic PMS prices to necessitate the NNPC subsidising the retail cost of PMS as stated by the NNPC group managing director in December 2017.

We propose the following working rules to achieve an effective deregulation of PMS retail prices in Nigeria in the short to medium term:

Import Price Parity

Any deregulation of PMS prices should be based on an Import Price Parity (IPP) pricing principle i.e. what it would cost a Nigerian importer of petrol to buy PMS from an international refinery at quoted spot prices from a reputable commodity exchange (Platts, Angus, Bloomberg, etc), transport the product from that refinery, insure the product against losses at sea and land the product on Nigerian shores. It should not matter if the refinery gate is onshore Nigeria.

Transparent Price Review Methodology

In the power sector under the MYTO methodology, electricity tariffs are reviewed semi-annually (minor review) every year, and every five years (major review). Minor electricity tariff reviews occur semi-annually and adjusts for changes in macro-economic benchmarks such as changes in exchange rate, inflation rate, changes in gas prices (denominated in dollars) and other macro-economic variables. The assumptions/benchmarks in the MYTO model are reviewed during major electricity tariff audits and should occur every five years.

Borrowing from the MYTO electricity tariff review methodology in the power sector, the PPPRA should adopt a transparent price review methodology where the prices of PMS are reviewed and adjusted periodically, based on changes in certain key assumptions/benchmarks in the PPPRA pricing template. The review of PMS prices should be done at a scheduled period to reflect changes in these assumptions/benchmarks. We suggest the review period is done either quarterly or semi-annually, to reflect the Import Price Parity Principle.

The PMS pricing template should have key benchmarks and thresholds which should be the basis for review and adjustments in PMS pump prices. When market changes to these benchmarks exceed the threshold values, retail PMS price would be adjusted at the next (quarterly) review period, either upwards or downwards. We propose that market changes to the benchmark, within the threshold values, should be borne by the NNPC as an under-recovery (subsidy) or over–recovery (profit) and should not be passed onto customers.

The PPPRA should look at the pricing template with the objective of (i) creating operational efficiencies within the importation process using PMS pricing, and (ii) reducing or eliminating/waiving certain government taxes, levies and inherent subsidies (for instance the Petroleum Equalization Fund) in the event of high PMS pump prices occasioned by external price factors…


We suggest that major reviews of the benchmarks and threshold assumptions underpinning the PPPRA PMS pricing template should be carried out every five years, with the objective of reviewing Marketers’ margins and other cost factors (CAPEX, government taxes, etc) to align with inflation and stimulate investments in the downstream sector.

Adopting a periodic price review will achieve price stability in the short term and improve product supply. Under-recoveries are passed to the market, while customers get the benefit of over-recoveries. Note that even with periodic reviews of PMS pump prices, there would always be an element of under-recovery (subsidy) to be borne by the NNPC. However, under this model, the size of the subsidy can effectively be controlled and is absorbable by the NNPC.

This is not a new model and it is the core of the formular-based pricing adjustment method. In India, prior to May 2017, PMS pump prices were adjusted every two weeks. In South Africa, PMS and diesel prices are adjusted every last Wednesday of each month.

Introduction of Different Grades of Petrol

Nigeria seems to be the only country that offers only one grade of PMS. Most countries have at least two different grades of PMS, usually the regular grade and the premium grade. One way to effectively deregulate PMS prices is to introduce different grades – regular and premium petrol. Regular petrol can be sold at regulated price, while premium petrol is sold much higher. The advantage of having different grades of petrol is that marketers can offset any under-recovery in regular PMS pump price against a higher pump price for premium petrol.

Optimisation of the Existing PPPRA Template

The PPPRA should look at the pricing template with the objective of (i) creating operational efficiencies within the importation process using PMS pricing, and (ii) reducing or eliminating/waiving certain government taxes, levies and inherent subsidies (for instance the Petroleum Equalization Fund) in the event of high PMS pump prices occasioned by external price factors, and increasing or introducing new taxes and levies where possible when these external factors are lower. The long term objective is for the PPPRA to use the pricing template to effectively regulate the retail price of PMS without impacting either the external factors that affect domestic PMS prices, or the distribution margins of marketers.

Reconstitution of the PPPRA

One can be forgiven if it seems that the PPPRA is an agency of the NNPC. Thus the PPPRA should be re-constituted into an impartial body outside of the control of the NNPC and the Ministry of Petroleum Resources, to carry out periodic PMS price review and adjustments, and subsequent price changes, so as to prevent the manipulation of price by either the NNPC or independent marketers. 
In addition, PMS price changes approved by the PPPRA should be audited by independent auditors appointed by the minister of Petroleum Resources.

Other Recommendations For Effective Deregulation of PMS Retail Prices

Improving the distribution of PMS

Importing PMS is just one half of the business. Effective distribution of PMS is the second most important half. Constant availability of petrol across Nigeria is an imperative to effective deregulation and would reduce incidences of scarcity and product hoarding. Consequently, we recommend the following:

Develop alternative means of transporting petrol beyond the roads

NNPC should immediately work towards the efficient distribution of petroleum products across the country. Beyond rehabilitating the pipelines and depot system, the NNPC should put in place incentives to develop other means of transportation of petroleum products across Nigeria, which should include utilising existing railway networks and major inland waterways. It should focus on the use of barges or other marine vessels to move petroleum products along the the River Niger and River Benue.

Develop PMS Distribution Hubs under a PPP structure

NNPC should look at creating Petroleum distribution hubs in strategic locations across Nigeria. Petroleum tankers can be encouraged to do short hauls to designated petroleum distribution hubs to either discharge or pick up PMS. Adopting the Petroleum distribution hub model reduces marketing and bridging costs on PMS and makes petrol much more available to retail stations in the hinterlands where the product is sold far higher than the approved pump price because of the difficulty in getting the product to these locations.

The Petroleum distribution hub model would also solve the congestion problems in Apapa, as fewer tankers would need to travel to Apapa to pick up products and truck it for hundreds of kilometers. Lastly, the petroleum distribution hub model increases the storage capabilities of the NNPC and makes the Corporation better able to manage events of product scarcity due to external factors. It would also aid the tracking of tankers from the hubs to their final destinations due to the shorter distances the tankers have to move products.

The NNPC can also directly implement the Direct Sale, Direct Purchase (DSDP) arrangement or similar alternative refining arrangement with Dangote Refinery to refine the NNPC’s domestic crude allocation of 450,000bbls. This should result in huge cost savings for the NNPC on freight, insurance and other logistic costs associated with the DSDP arrangement.


Beyond existing NNPC depots, suggested petroleum distribution hubs can be sited in Epe, Sagamu, Lokoja, Asaba or Onitsha, Benue/Nassarawa (along the River Benue), Ughelli, Yenagoa, Ilorin, Kano (and major towns along the existing railway network) etc. The petroleum distribution hubs can be developed under a PPP arrangement with the state governments (for land) and the private sector. To improve the investment returns, these petroleum distribution hubs can also double as truck stops or tanker bays.

Putting in place palliatives to reduce dependency on petrol consumption

Organised labour is always a stakeholder to contend with when deregulating PMS prices. Any pump price increase would definitely have adverse inflationary effects, thus there should be palliatives to cushion or blunt such adverse economic effects.

Past palliatives such as the SURE-P, Petroleum Trust Fund (PTF) and others in the wake of previous pump price increases, have proven to be short term and ineffective. These schemes have also been plagued with allegations of mind boggling corruption and nepotism.

Our opinion is that any palliative arising from a deregulation of petrol prices should be more of NNPC using the savings to develop a robust petroleum distribution network, as described above.

The best palliative is for government to improve on the conditions of our highways and deliver critical railway infrastructure that would move people and goods within cities and across Nigeria, thus reducing the dependency on road travel and petrol consumption.

In this regard, the Lagos State and the Abuja light rail projects are very critical infrastructure to ease or reduce socio-economic pressure from future pump price increases arising from deregulation. It is projected that almost half of the total PMS consumption in Nigeria is in Lagos. Thus the federal government must do everything to support the Lagos State government to deliver the light rail project in 2018. Ditto for the Abuja light rail project.

Lastly, the government should use any saving from deregulation to support the power sector via funding the Power Sector Recovery Plan (PSRP) and providing further guarantees and low cost debt financing to the power sector. A significant demand of PMS is from self-generation of power via petrol engine generators.

Impact of Dangote Refinery on PMS Retail Pricing

The 650,000bopd capacity Dangote Refinery situated in Lagos is billed to commence operations by 2019. The advantage of Dangote’s refinery is that it will improve domestic supply and reduce reliance on fuel imports, thus reduce the impact of external factors (with the exception of any fluctuations in the price of crude oil) on domestic PMS retail prices. It would reduce the pressure on our foreign reserves and exchange rate as marketers can now establish naira L/Cs instead of dollar L/Cs.

The NNPC can also directly implement the Direct Sale, Direct Purchase (DSDP) arrangement or similar alternative refining arrangement with Dangote Refinery to refine the NNPC’s domestic crude allocation of 450,000bbls. This should result in huge cost savings for the NNPC on freight, insurance and other logistic costs associated with the DSDP arrangement. This, in turn, would lead to a reduction or stability of PMS pump prices. We do not envisage that the NNPC would sell its domestic crude to Dangote either for free or on a discount per barrel as being speculated.

Hopefully, at some point, the NNPC would have either fixed its refineries or find a solution that would make the moribund refineries functional again and further increase our domestic refining capacity.

Deregulation of PMS Prices In the Long Term

Long term, there should be full deregulation, leading to dynamic price change reflective of changes in external and internal factors. This is where there is a daily price change based on key price variables in the pricing methodology – price of crude oil, shipping costs and margins. India just started this and the experience has seen fuel prices rise every month since the introduction. Daily price revisions of PMS will make the retail prices more reflective of the current market conditions.

For the downstream market to attain this position, the distribution infrastructure has to be improved and all the palliatives discussed above put in place. The daily (upward) fluctuations in PMS retail prices would have very devastating socio-economic consequences if the palliatives are not already in place before its introduction.

We are at least a decade from attaining this market.

Conclusion

Any effective deregulation of PMS prices would need to deal with the Nigerian factor, in terms of profiteering, price collusion, pump price manipulation and product hoarding to create artificial scarcity. Perhaps, no other factor would determine the successful deregulation of PMS prices more than Nigerians themselves.

Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached on orionomon@outlook.com.