What a fuel-less Nigeria could do to solve its perennial scarcity problems

Nigeria’s fuel supply challenges require a market-driven approach

Nigeria’s recurrent slippage into periods of fuel scarcity in recent years further buttresses the fact that very little has changed within the downstream market despite efforts by the petroleum ministry. The current fuel scarcity, although not as severe as that which occurred in the same period in 2015, when businesses had to shut down due to lack of availability of various fuels, including diesel, has raised several issues around Nigeria’s fuel supply.

Nigeria has very low fuel supply reserves. As at 3 March 2016, the country had only about 15 days of supply in reserve (excluding reserves at filling station tanks and private depots). The country needs to build up reserves of more than 90 days, which may require imports or the NNPC’s solution – pump all the products from the refineries into storage.

Nigeria’s fuel distribution is a logistic nightmare. The country’s pipeline infrastructure for distribution of petroleum products is the victim of constant vandalism. Consequently many lines are shut down and the depots they supply are no longer in use. Instead, the country depends on trucks for distribution of nearly 90 percent of its petroleum products.

Gasoline pricing is everything but uniform across the country. This is largely because it is regulated instead of market-driven and thus, unreflective of true costs per litre due to several cost elements ignored in the computation. Marketers are unable to lift purely at the ex-refinery gate prices due to costs associated with security, unions/association, street urchins, exchange rates, etc.

The refineries are unable to sustain high levels of capacity utilization due to the frequent attacks by militants/vandals on their feedstock crude and product evacuation pipelines. They have not seen proper turnaround maintenance from the Original Equipment Manufacturers (OEMs) since the 80s and are victims of frequent shutdowns due to strikes and industrial action.

Finally, due to the low price of gasoline in Nigeria relative to those of its peers in West Africa, there is a significant amount of fuel diversion and smuggling at the borders. Consequently, imports into neighbouring Benin and Togo have slowed considerably while Nigeria’s consumption and imports continue to grow.

While security remains an underlying factor causing many of the above challenges, these issues also indicate a major policy and infrastructure gap. There is clearly a need to return to the use of pipelines to distribute petroleum products across the country as these are cheaper and easier to manage, compared to petrol tanker trucks and truck drivers. However, the twin problems of vandalism and age of the existing pipelines create a major obstacle in that regard. While tackling vandalism would require deploying more military presence to the Niger Delta and Lagos, replacing old and problematic pipelines will also require huge capital investment from the NNPC via the PPMC, a Petroleum Investment Management company. Both are requirements the government may find particularly challenging considering the focus of the army on ending insecurity in the North at the moment and low revenue due to drop in oil prices.

No real solutions can be deployed to counter these issues until the government adopts a market-driven approach to fuel pricing. The feared repercussions of a market-driven fuel price are at best short-term in nature. The reality is prices are already market driven to a large extent, especially in parts of the country where supervision of pump prices are already weak. Thus in the far north, you tend to see fuel prices at nearly N50 above pump prices during normal times and about N100 more during periods of fuel scarcity; at regular filling stations. Thus, the people meant to be protected from paying high prices via the government controlling prices, are in essence already paying these prices. This is also reflected in the inflation figures for the country, which have continued to rise and are now in double-digits for the first time since July 2013. The higher fuel prices food sellers and transporters have had to incur have been transferred to food and transport prices, raising the general prices for other items in the consumer price basket.

A market driven solution would consist of full deregulation of gasoline sales in Nigeria. This would allow the refineries to sell at a price that would enable them recoup cost and make reasonable profit to cover maintenance and repairs. This would also allow anyone who wants to import gasoline to do so after receiving an import license from the government. Gasoline imports would attract a duty/tax, which it currently doesn’t. Government would also require the imported fuels to meet a standards/specification check, which can be conducted by private testing companies. While prices are likely to rise at first, the low barriers to entry would ensure that prices quickly return back to reasonable levels over the short to medium term. NNPC, the state-owned oil company, with its depots and pipeline would technically be the best positioned to lead the market; however, it would have to expand its retail outlets. This would give the government the opportunity to set market prices through NNPC retail outlets, which would be able to sell at the cheapest prices using their network of pipelines and depots. If NNPC outlets are selling at lower prices than most marketers and also control a significant market share by ownership of the most retail outlets, they would defacto set prices for the market as other marketers would be forced to look for ways to make their products cheaper or differentiated with other service add-ons.

The market system could potentially backfire if marketers collude and impose really high prices on the populace, especially in parts of the country plagued with distribution problems. Furthermore, the security situation in parts of the country could create real difficulties in bridging the supply gap for certain parts leading to no investment in depots and retail outlets and keeping prices really high in those regions long term. However, under normal circumstances, these problems will correct themselves as marketers overcrowd the more secure markets in the south and eastern part of the country. As profit margins reduce, marketers will be forced to spread across the region into other regions and find ways to reduce the security risk of those other regions. More importantly, government can deploy funds that would have gone into subsidies or imports to resolve these security and infrastructure issues instead.