Skip to content

Dithering over deregulation

May 5, 2009

A changing demand structure abroad is driving oil economics. The world is awash with inventories and Europe is being dieselised. The US consumes the bulk of our crude while Europe refines the crude that is imported into the country. Global oil markets are changing.

Platts, the world’s largest energy information provider, which daily assess prices for refined and crude oil, has some interesting things to say about these changing dynamics. The US, which consumes 50 percent of Nigeria’s oil crude export, demand for petrol slumped as the recession kicked in.

Since then, its inventory of refined sweet light crude (Nigeria’s type of crude) has been on the uptick. Chinese toy factories that guzzled fuel have shutdown. Both China and the US are aggressively exploring alternative (renewable) energy sources.

Indecision, inaction and ineptitude
Last year, Platts noticed an abnormality: petrol was cheaper than crude oil. The cause: demand destruction in the US, the impact of ethanol substitution and growing strength in global diesel. All this seems but a blip on Nigeria’s radar screen. Unattended to, efforts at ensuring steady supply of petrol, via importation, will be nothing more than a drop in the ocean.

Major marketers have refused to import petrol leaving NNPC as sole provider for the past five weeks. NNPC, though, insists that it can meet demand. Importing 37 new cargoes of petrol will douse demand; but only temporarily. Besides, it takes two to three weeks to ship it from Europe to petrol stations.

Dithering over deregulation isn’t helping matters either. Government’s decision to resume paying subsidies, to ease the growing tension of scarcity, though based on PPRA’s ‘new’ template, is delaying the inevitable. Wary marketers are not convinced. Consumers are bearing the brunt.

Plans to probe NNPC and oil companies over past subsidies are so far inconclusive – auditors are being fished for. Similar to investigating match fixing while allowing the teams and referee involved continue as is. The more things change the more they remain the same.

A pipeline fire at Arepo – which feeds Mosinmi and Ejigbo depots petrol from NNPC’s jetty at Atlas clove for onward delivery to Ibadan and beyond, and the rationing of available fuel – pending new imports by NNPC, is the cause of the present fuel shortage. Others opine that it’s sabotage by vested interests. All told, trading blames is a recurring decimal of an unsolved equation; but just the peak of Nigeria’s fuel shortage-iceberg.

Crude awakening
Even if global inventories decline, Europe, where most of Nigeria’s refined oil is sourced, is pushing stringent regulations and tax incentives. Demand and supply patterns for car, bunker and heating oil are thus changing. Diesel is the default driving fuel in Germany, Europe’s bellwether of fuel consumption. Cracks ie, price of a barrel of diesel compared to a barrel of crude oil, remain strong.

A barrel of diesel costs about $40-$50. Primarily driven by demand – more than 50 percent, and growing, of the European car fleet is diesel powered – and inadequate refining capacity, at least in Europe. Consequently, refineries in the US and Asia are taking advantage of these new changes.

Also petrol blended with ethanol, to reduce C02 emissions, relatively weakened petrol consumption in the US. The blend is currently limited to 10 percent; there are talks of increasing it to 15 percent. In addition, demand for regular octane petrol (Africa, Nigeria included, imports a substantial amount) is dwindling in Europe. Premium or high octane petrol is the preferred choice.

A declining European market means storing regular petrol is less viable. Accordingly, storage in Amsterdam and Rotterdam, the EU’s hub for refining, storing and loading petrol, has declined. Where does that leave Nigeria? Can it sustainably source refined from abroad given these changes?

Fire fighting
Nigerian ports, accustomed to catering for 10 percent of imported fuel, now have to contend with nine times that amount. Compounded by port capacity, the country’s souring importation bill and congestions induced by overlapping functions of agencies. No wonder local distribution of oil costs more than shipping it from abroad.
With local refineries grounded by the spectre of enshrined inefficiency, meeting local demand for fuel is at the mercy of foreign demand patterns legislative inaction and executive indecision which is stagnating market reforms. Just as well for vested interests; in their view preferment trumps competition.

Evidently, despite investments by marketers eg, in terminals, tank farms and distribution trucks, uninterrupted fuel supply at equal prices, throughout the country will remain a sham. With key distribution infrastructure eg, jetties and pipelines, under the tight grip of the price setter, regulator and competitor; incentives to seek a lasting solution runs contrary to the immense benefits of the status quo.

Government’s dallying over the deregulation of the downstream sector may scuttle private initiatives to build local refineries. Indigenous investors and marketers, more in tune with global dynamics and the pining local demand for refined oil, are venturing ahead. Sadly, these plans for Greenfield or modular refineries will not thrive under a regime of price regulation.

Downstream deregulation will not only attract investment comparable to telecoms sector, it will introduce competitive prices besting what is currently available. Especially if implemented along with upstream reform, gas infrastructure private investment and power sector liberalisation.

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: