Following reports that the Petroleum Products Pricing Regulatory Agency, PPPRA has issued permits to several Oil Marketing Company’s OMCs to start importing petrol alongside the Nigerian National Petroleum Corporation NNPC, a firm has said gains from such an initiative could be short-lived.
The Firm, CSL Stockbrokers Limited posited that while there might be a slight improvement, the gains will be short-lived and eroded when oil price trends higher.
“Although we believe the decision of the PPPRA to allow OMCs import petrol directly will improve the thin margins of players in the downstream sector, we note that the gains could be short-lived and eroded when oil prices trend higher if the federal government maintains control over the retail price of petrol. Based on our pessimistic case, OMCs will hands off the importation of petrol if the rebound in oil prices pushes the landing cost of petrol to a discount of c.10% from the current retail cap of N125/litre,” the firm stated.
Recall that The New Diplomat had previously reported that PPPRA had granted private oil marketing companies (OMCs) import permits to join the NNPC in the importation of petrol. NNPC’s General Manager, Corporate Services, PPPRA, Kimchi Apollo, revealed that the agency recently issued Quality Management (QMs) which empowers OMCs to import petroleum products.
Prior to this development, the NNPC has been the sole importer of petrol for over two years. The steep devaluation in the local currency in the wake of the 2015/16 oil price crash as well as an increase in crude prices that ensued thereafter led to a surge in the landing cost of petrol. The reluctance of the government to adjust the retail price of petrol to align with market realities made it unprofitable for OMCs to continue to import petroleum products.
As such, NNPC had to step in to continue to supply the market. This, however, came at a huge cost to the nation, as NNPC reported subsidy payments as “under-recoveries” being the excess of the landing cost of petrol over the price sold to OMCs. According to the Nigerian National Petroleum Corporation (NNPC), the federal government paid N752bn as a petrol subsidy in 2019, equivalent to 62% of the amount spent on capital expenditure in the year (N1.2trn).
Now, the firm has questioned the wisdom in granting OMCs permits to import fuel.“We recall that on 18 March 2020, the Federal Government, FG announced a reduction in the retail price of Premium Motor Spirit, PMS to N125/liter from N145/liter, following the revision of its Ex-Coastal price to N99.44/litre (Previously; N117.6/litre) and Ex-Depot price to N113.28/litre (previously; N133.28/litre). This came on the heels of the global pandemic which led to an unprecedented decline in oil prices and by extension reduction in the landing cost of petrol.
Subsequently, the Group Managing Director of NNPC, Malam Mele Kyari, noted that the country will no longer pay for under-recovery or subsidy on petrol, a move that we believe signals the liberalization of the downstream sector. However, we are uncertain about the reaction of the government when the landing cost of petrol rises as oil prices recover in the international market”, the firm added.