Sunday, 21 January 2018

Is Someone Flying A Kite For Another Fuel Subsidy Regime?

In the wake of this fuel scarcity, contrived or real depending on who is doing the talking, it would appear that the end-game, for those behind the mask, might just be about instituting another regime of fuel subsidy. The plan seems to ‘orchestrate’ or ‘showcase’ another round of fuel scarcity at a highly opportuned time in order to fly the kite of a price hike, which they know will be politically suicidal and economically questionable, which once rejected can then serve as basis for putting in place a subsidy regime through which the payment of a ‘differential’ between a profitable price for importation and the present retail price can be institutionalised, even possibly factored into the budget by the ever-responsive legislative arm.

It is instructive that Minister Kachickwu has found it necessary to issue a statement refuting reports that he had hinted at a possible price hike during his presentation before the Senate committee. Perhaps, some in the media did not quite properly read his body language thinking his ‘suggestion’ that the ‘pricing issue’ be addressed to “free the marketers to do their thing” only meant one thing – a cost-reflective price hike. They must have missed out on the part where the minister said three options were being considered, one being that of a concessionary forex regime to be able to maintain the current price regime.

But some people are definitely up to something we all need to pay attention to. President Buhari alludes to sabotage in some quarters in his January 1st speech. It would be great to see what the team he has charged to ‘get to the root of the matter” comes up with. We have been told how what we have in place right now has led to the bulk of responsibility for products supply falling on the NNPC. That being unsustainable, we are told it is responsible for the supply shortage that we are presently witnessing. We have been told that the landing cost is about N171 now, and how unprofitable it then must be for private operators to be expected to bring in products that will be retailed at N145.

So, the narrative out there is something like this: The private operators had been bringing in products but with the increasing cost of importation, they pulled back, leaving it to NNPC, which unable to meet up with demand, triggered a supply shortage and the eventual fuel scarcity we have witnessed. But, this is exactly what I do not quite understand. Which private operators have been bringing in products only to stop doing so in the last quarter of 2017 leading to the supply shortage? I thought we had long moved past that. I might be wrong, though. Even the N800 billion subsidy the Major Oil Marketers Association of Nigeria claims the federal government owes it is part of the outstanding from the previous regime, so what has that got to do with present supply shortage? A lot of the talk seems not to have been directed at what I think is the major issue at stake. Even Minister Kachikwu, articulate as he has been, has not quite addressed it frontally.

As far back as 2016, the NNPC had instituted what it calls the direct sale of crude oil and direct purchase of products (DSDP) contracts, a sort of swap through which it exchanges about 300,000 barrels per day from the 445,000 barrels per day, which it receives, with some companies for imported products – petrol, diesel, kerosene. For the year 2017 round, following an intense bid which involved 224 bidders, 39 companies were said to have been initially chosen but another account claimed that the list was eventually pruned to 10, with each of the 10 oil traders/refineries partnering local Nigerian companies to win 33,000 barrels per day allocations in exchange for products.

The advertised requirements for qualification to participate in the exercise, even with the categorisations, were such that one would expect that companies deemed successful would have no problem meeting up with their obligations. The categories are:

a. A bona fide end user who owns a refinery with the capacity to process Nigerian crude grades and/or retail outlets, preferably with established Nigerian presence or partnership;

b. An established and globally recognised large volume pPetroleum product trading company, preferably with established Nigerian presence;

c. An indigenous company engaged in Nigerian oil and gas, downstream activities with trading of petroleum product expertise;

d. In case of a consortium partnership, both foreign and local companies must meet the criteria listed above and, present legal documentation validating the partnership;

e. Foreign companies would be required to demonstrate evidence of a local Nigerian partner(s) that meet criteria listed in (c) above only as part of its submission.

This is the point where it becomes confusing. Minister Kachikwu was behind the introduction of the DSDP deals which many acknowledge might not have been perfect but have indeed saved the country money and resources which the minister himself put at at USD$1 billion. So, is the DSDP no onger working, or there are some private operators who are supposed to still bring in products into the market..?

Among others, companies were expected to have a minimum turnover of $500 Million (or the naira equivalent) and net worth of $250 million (or the naira equivalent) for the financial year ending at 2015. Also, details of the applicant’s volume of premium motor spirit (PMS) and other petroleum products traded in tabular form over the last four years (2013,2014,2015 and 2016) in the following regions

(a) Africa

(b) Asia and the Far East

(c) North America

(d) South America

(e) Europe

Also, storage facility or evidence of valid throughput agreement with depot/tank farm owner detailing size, location etc. of the facility were supposed to have been provided.

These are huge transactions with the 2016 DSDP contracts said by the Natural Resource Governance Institute to have consumed 252,083 barrels of oil valued at USD$3.4 billion between February and November 2016, through which most of the demand for gasoline and kerosene for that year was met. So, with the 2017 deals valued at USD$6 billion for the 330,000 barrels per day deals, what could have possibly gone wrong with the DSDP that could have led to the supply shortage witnessed?

This is the point where it becomes confusing. Minister Kachikwu was behind the introduction of the DSDP deals which many acknowledge might not have been perfect but have indeed saved the country money and resources which the minister himself put at at USD$1 billion. So, is the DSDP no onger working, or there are some private operators who are supposed to still bring in products into the market apart from those expected through the DSDP, which one would have thought would meet the country’s demand, especially with NNPC left with over 100,000 barrels per day for local refining and possible exchange, as well?

Which private operators have been bringing in consignments and are no longer doing so because landing cost is now higher that retail price? Same ones who have signed on to the DSDP or others who are now pushing for NNPC to handle 30 percent, so they can handle 70 percent?

We are told that NNPC has been subsidising the cost of products it is bringing in to be able to maintain the price at N145 per litre. How is that so? At what rate is NNPC allocated the 445,000 barrels per day it receives and at what rate does it exchange same with these companies? If NNPC and these companies are benefiting from the rise in the international price of crude, how can it then be that it would also claim to, at the same time, be experiencing loss for bringing in refined products? Should one not cancel out the other? Or is NNPC buying crude locally at international price, for local refining and its DSDP arrangement? Should that be the case? Who is really subsidising who, in this arrangement?

One does not know what to make of what is playing out there. Strange that the narrative is dancing away from the DSDP arrangement that ought to be the crux of the matter to pricing, deregulation and the need for private operators to do their thing. Even with the DSDP, the concern by the Natural Resource Governance Institute is telling.

This business has always been oily and the opacity neither helps us nor NNPC and the petroleum ministry should it ever have a genuine case to make. Aaron Sayne of the Natural Resource Governance Institute acknowledges there has been some improvement in how things were done under the previous administration and how they are being done now, yet he has his concerns. “Overall, NNPC’s new transparency and due process commitments for its oil sales contract awards, while welcome, are not strong responses to the governance problems they presumably are meant to address.

For the second year, top officials opened bids live on television. This is a nice nod to openness, but what happens after the bids are in matters far more from a governance perspective, and that stage of the process remains behind closed doors. This year’s invitation to tender also called on companies to attach more supporting documentation to their bids than in prior rounds. Some of this material—annual reports, tax certificates, corporate filings and the like—could help NNPC judge companies’ industry bona fides, assuming officials had the time to sift through it. But it would not tell them much about the integrity of bidders’ business practices, or the risks of doing business with them from an anti-corruption perspective.”

One does not know what to make of what is playing out there. Strange that the narrative is dancing away from the DSDP arrangement that ought to be the crux of the matter to pricing, deregulation and the need for private operators to do their thing. Even with the DSDP, the concern by the Natural Resource Governance Institute is telling.

DSDP contractors still control the flows of information and accountability around these large and valuable but niche deals. NNPC still publishes only high-level figures for the crude lifted and products supplied, and whether the contract holders have supplied enough fuel is determined during closed-door, periodic reconciliation meetings between the parties. This leaves the parties to the agreements essentially free to police themselves. The terms of the DSDP deals also remain undisclosed.

So, who knows exactly what is expected of the other in this arrangement, apart from the parties involved? Have these companies been lifting crude oil? Have they been bringing in products and meeting the other conditions as spelt out in the contracts? If not so, why is that the case? What is the link between the DSDP arrangement and the supply shortage experienced? For, how can we comprehensively address the issue when we cannot be sure we have all of the oily and meaty parts on the table? All we see now is a kite flying in the wrong direction. Someone needs to bring it down.

Simbo Olorunfemi works for Hoofbeatdotcom, a Nigerian Communications Consultancy and publisher of Africa Enterprise. Twitter: @simboolorunfemi

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