Download will agonising fuel queues ever end?

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.