23

Mar

WILL AGONISING FUEL QUEUES EVER END? 07032016

2016-03-07

WILL AGONISING FUEL QUEUES EVER END?
BY HENRY BOYO

Crude oil assets have empowered many rich countries to become more socially secure while erstwhile ubiquitous, relatively poor desert States have also become stupendously rich. It is therefore,  inexplicable, that despite Nigeria's ranking as a major oil producer, our economy is still, literally in shambles, with a tattered currency and a crushing unemployment rate above 25 percent; worse still, we ironically, continuously expend almost 50 percent of our total export revenue on fuel imports from some of those refineries and countries which also buy our crude oil.

Regrettably, despite the regular recurrence of fuel scarcity, with the attendant severe public discomfort, and ravaging economic dislocation, there is no assurance that this tortuous cycle will ever end. However, if the inefficient, and wasteful sporadic operations of existing government refineries is anything to go by, any serious proposal for government to build and operate more refineries may just be a death wish.

Although, it has been speculated that public/private sector partnership refineries will guarantee efficiency and best practice management, serious investors may, however never emerge, if fuel price remains regulated. Furthermore, if government's plans to collaborate with private investors have still not advanced beyond M.O.U, then, it will be unrealistic to expect steady fuel supply from local refineries before 2019.

There is also the suggestion, that several small modular refineries can be established very quickly nationwide; evidently, this may only be feasible if pipelines are already laid from oil wells in the South/South to designated refinery sites, in widespread locations, before modular refineries become practical and cost effective propositions. Nonetheless, the concept of modular refineries may not attract private sector interest, if fuel price is regulated. Nigerians may readily recall that the approval given in 2012 to a Nigerian/American consortium, to construct 6 modular refineries within 30 months, has regrettably also failed to compel performance; indeed, more than 20 other licensees have also curiously remained inactive.
The preceding narrative suggests that the possibility of establishing more refineries to augment fuel supply and possibly also earn additional export revenue may not materialise soon, at least not until fuel pricing is deregulated. Nonetheless, our hope for fuel sufficiency may still be spurred by the steady progress of the multibillion dollar Dangote Lekki refinery. Dangote's refinery, will process about 650,000 barrels per day and produce a variety of products, which include over 55million liters of gasoline daily; this output exceeds our current domestic daily petrol requirement of over 40m litres. Anyhow, Dangote's refinery may not come on stream until 2018, so fuel supply will inevitably still largely remain import based and will therefore continue to severely deplete our foreign exchange reserves. 

Incidentally, although the eventual commissioning of Dangote's refinery will improve fuel supply, it may not, unfortunately, significantly reduce the heavy depletion of our foreign exchange reserves. The location of this gigantic project in an Export Processing Zone, connotes that product prices will be denominated in foreign currency. Indeed, the Project's Sponsor has never hidden the fact that, in addition to personal equity, foreign loans, which would be serviced and repaid in foreign currency were also secured to fund the projects; thus, Dangote's Refinery will not sell its fuel in Naira and then queue to buy dollars from CBN before servicing its external loans; indeed if such restrictive trade terms prevailed while the Naira exchange rate continues to slide, this multibillion dollar investment may become a nightmare for its owners.

So, invariably, fuel supply may still predominantly depend on NNPC imports for some time, and therefore fuel scarcity and the attendant social anguish and economic distortion will unfortunately also remain abiding with NNPC's monopoly; unexpectedly, however, private sector marketers may ironically be comfortable with NNPC as sole importer, if fuel supplies and allocations are optimal and equitable; obviously with NNPC monopoly, private marketers will gladly avoid the heavy financial burden which often results when subsidy refunds and exchange differentials are not promptly settled, while high interest bank loans with oppressive penalty clauses prevail. Thus, Fuel merchants are presently, probably, more comfortable with simply paying Naira to lift supplies directly from NNPC to service their own petrol outlets and earn a modest profit margin without much sweat, as this process,  also, drastically reduces both the tenor and the high interest paid on loans that marketers incur on fuel imports. 

Nonetheless, although NNPC's monopoly may reduce the very heavy debt burden fuel marketers owe to banks below the present estimated 40 percent of total available credit, sadly however, commercial banks will probably still choose to re-invest the resultant "surplus" funds, in governments' bills and bonds, in order to reap easy money, rather than supporting the famished real sector with funds at reasonably lower cost. 

Conversely, however with monopoly of imports, NNPC operations and  cash flow will inadvertently become challenged, as over 50 percent of its forex earnings will also have to be dedicated to payment for its bloated fuel imports. It is not yet clear how this system is currently playing out, particularly with the mandatory requirement for the Corporation to also domicile its funds with CBN, in compliance with the T.S.A system. The question is, since the sales income from petrol and kerosene comes into NNPC coffers in Naira, at what rate will the Corporation repurchase dollars and also account for unavoidable subsidies and exchange rate differentials, when it has to pay for its fuel importation?

In the above event, government may have to approve a special dollar denominated annual budget so that NNPC can directly settle its fuel imports and avoid recourse to the risk inherent in funding subsidy gaps and procuring dollars from CBN. Unfortunately, a dollar budget may once again also be a recourse to the controversial and allegedly corrupt crude swap deals.

It would seem from the preceding narrative, that there is no easy quick fix solution to the challenge of fuel supply and scarcity without price deregulation. Nevertheless, deregulation will invariably also fail if the Naira exchange remains weak. Thus, government's apparent inability to deregulate is actually due to the apprehension that such a policy position will not be sustainable, if Naira's unending slide is not arrested. For example, if systemic Naira surplus and acute dollar demand pressure compel Naira devaluation below N300=$1, the commercial or deregulated pump price of fuel will immediately spike above N140/litre and make removal of fuel subsidy very unpopular; invariably, further Naira depreciation below N300=$1 will expectedly also increase fuel price way beyond N140/litre.

Conversely, if for example, the Naira appreciates to N100=$, deregulated fuel price will fall below N50/litre, i.e. well below the controlled price of N87/litre, to support sustainable deregulation of the downstream market and also accommodate a sales tax; furthermore, with deregulation, more fuel marketers will join the band of importers to induce competitive pricing and render improved services, so that, ultimately NNPC may withdraw and focus on more specialised subsectors of the oil industry. Additionally, with competitive fuel pricing in place, investors will also hasten to establish refineries and actively participate in taking advantage of the huge lucrative market opportunities.

Unfortunately, with the eternal presence of systemic surplus Naira in the money market, not even higher crude prices and increasing dollar revenue will save the Naira exchange rate from further depreciation; however, a more competent management of naira liquidity by CBN will gradually redress the money market imbalance in favor of the Naira and thereby steadily induce a stronger naira exchange rate that would reduce prices and support and sustain deregulation of fuel pricing. Instructively, Naira liquidity can be successfully managed if Naira allocations are not substituted every month for dollar denominated government revenue.

SAVE THE NAIRA,SAVE NIGERIANS!!