In this interview conducted via email, the Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPPRA), AbdulkadirSaidu, reveals exactly why the oil industry was deregulated.
He said the pump price Nigerians will expect to see will be a reflection of the international market prices of petroleum products.
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He also said although crude oil and petroleum products prices are positively correlated, the prices of petroleum products do not increase or reduce correspondingly with changes in international crude oil price.
Some Nigerians have been asking for clarity since PPPRA announced the removal of petroleum subsidy and deregulated the sector. Can you explain what it means?
The new pricing regime is a market-reflective pricing system where prices are determined by market fundamentals.
Under this regime, the PPPRA advises marketers on monthly guiding price of products.
On March 19, 2020, during the period of slowing global demand for crude and petroleum products, the Federal Government introduced the new price regime to ensure a competitive and more efficient PMS market that guarantees reasonable returns to operators and ensures consumers pay appropriate prices in line with market reality; unlike the regulated regime where government subsidises pump prices when product prices in the market become higher than the approved price cap.
The new pricing regime encourages marketers to resume importation of PMS, leading to further value creation in the downstream.
It is also expected to ensure transparency and enhance participation of operators in the sector.
You deregulated and still fixed prices, why?
The agency does not fix prices but rather provides a guiding price band by monitoring petroleum products prices daily; using the average price of the previous month to determine prices for the following month for appropriate cost-reflective pricing that ensures reasonable returns to Oil Marketing Companies (OMCs).
This methodology is in line with international best practices which range from bi-monthly to monthly price reviews.
Nigeria adopted the monthly review model considering the average duration for importation of petroleum products into Nigeria from the closest spot market; North West Europe (NWE) to West Africa (WAF) is about 30 days.
This period encompasses the Import Financing Process to delivery at retail outlets.
How sustainable is market-based pricing system?
A deregulated oil sector is the best practice the world over for several reasons such as improved efficiency, uninterrupted product availability and proper functioning of the entire value chain.
A downstream sector where refining, supply and distribution of petroleum products are self-sustaining and self-financing is only possible in a liberalised market, where importation of PMS is attractive for other players and removes any subsidy burden on the government.
To ensure the sustainability of the new regime, the policy guidelines for Petroleum Products Commercial Framework (PPCF) have been developed and the agency is collaborating with the Office of the Attorney General of the Federation on gazetting of the regulation.
In addition, the agency is at the concluding stage of the development of a code of conduct for operators in the sector.
What is the impact of the current forex liquidity crisis on the importation of petroleum products?
Under the market-based pricing regime, products prices will be determined by market forces.
This explains the recent downward and upward movements in the guiding pump price band of PMS, which reflects market realities.
In the business of petroleum products importation, forex rate, which is one of the components of the pricing template, plays a significant role in determining the guiding pump price of petroleum products.
Hitherto, marketers were unable to participate in the importation of products, leaving the burden to government, due to their inability to access sufficient forex.
It is, therefore, important to stress that forex availability to importers is very essential in enabling marketers procure the products and sell at Expected Open Market Price (EOMP).
To this end, the agency is engaging with the Central Bank of Nigeria (CBN) to ensure availability of the required forex for the importation of petroleum products and the modality for marketers to access forex at the applicable window.
Some experts say basing petrol pump price on rise or fall of international crude price will mean Nigerians will pay through their noses when crude prices rise. Is it exactly so?
The sector currently operates a market-reflective pricing system.
In the deregulated system, petroleum products prices will naturally be adjusted to reflect a true picture of market fundamentals at any particular period (high or low).
The pump price we expect to see will be a reflection of the international market prices of petroleum products.
It is pertinent to note that although crude oil price and petroleum products prices are positively correlated, the prices of petroleum products do not increase or reduce correspondingly with changes in crude oil price.
If this is so, will there be any measure to cushion the impact of the increase on Nigerian consumers?
Efforts are being put in place to develop alternatives to PMS by deepening the utilisation of LPG/CNG as autogas in Nigeria.
This will come into fruition in the medium-term and will help to cushion the effect in case of situation of high oil price.
This will also offer the consumer an option to choose from.
Already, several companies have indicated interest in autogas development, especially in the area of CNG, LPG and natural gas retailing for the domestic market.
Others are seeking partnerships with existing retail outlet owners for co-location and development of multi-fuel facilities.
Meanwhile, existing OMCs have expressed willingness to expand their facilities to include autogas dispensers.
In the meantime, strict compliance to the price band at retail outlets will be ensured through effective monitoring and enforcement.
Have you thought of what the implications of petrol pump pricing deregulation will be on the micro and macro economies of the country?
The new initiative is expected to stimulate private investment, healthy competition and growth in the downstream sector.
It will also create confidence in the minds of investors in refining business, encourage the resumption of products importation by OMCs, translating to more job creation as many depots and facilities that were dormant would now become active.
These are hallmarks of an emerging downstream sector that is investment-friendly, consumer-centred, where supply and distribution of petroleum products are self-financing and self-sustaining.
In addition, the trillions of naira that would have been spent subsidising PMS could be injected into other key sectors such as agriculture, education, health, power and infrastructure.
There will also be focus on the provision of social safety nets for the poor who bear the brunt of the COVID19 pandemic.
How will deregulation encourage competition and guarantee steady fuel supply?
Since deregulation began, a considerable increase in the level of OMCs’ participation in PMS importation has been recorded.
In recent years, OMCs withdrew from product importation, but since the Federal Government’s pronouncement on March 19, 2020, over 536,000 metric tonnes of PMS has been directly imported by the OMCs.
Additional investment in local refining is gaining traction and is expected to engender more competitive pricing among operators.
Competition has a way of forcing down prices and ensuring that companies place a tight rein on production cost such that wastes that could have been passed on to consumers in form of high prices are eliminated.
This will lead to seamless product supply and proper functioning of the entire distribution network.
Some industry experts have said price deregulation has made the roles of your agency, PPPRA, marginal. They call for scrapping of the agency. How relevant is PPPRA?
First, it is important to state that there is nowhere in the world that deregulation means total lack of control, supervision or oversight.
While the Market-Based Pricing Regime is a policy introduced to free the market of all encumbrances to investment and growth, it should not be misconstrued to mean a total abdication of government’s responsibility to the sector and citizenry.
The PPPRA was established to operate in a deregulated sector; midwifing the deregulation is only the beginning of our effort to create a self-sustaining sector and not cause for the agency to be scrapped or made redundant.
The government’s role in a deregulated economy remains providing consumers with a shield.
As a matter of fact, the agency will become stronger under a deregulated system; carrying out its enshrined mandates such as superintending the deregulation process, ensuring that participants operate within acceptable limits and protecting consumers in a more inclusive downstream.
The deregulation of the downstream sector is dependent on the enforcement of appropriate laws by strong national regulators; as is obtainable in other sectors like telecommunications, broadcasting, banking and finance.
We assure the public that the agency, in keeping with its regulatory role, will continue to closely monitor activities in the market and ensure transparency in line with international best practices.
