…Petroleum market is in an unusual state of turmoil and uncertainty
…Europe is a major importer of diesel and 65% of its imports comes from Russia
…Market forces should determine the price of petroleum products in the market
-By Felix Douglas
Petroleum products prices have been mutating for the past two months in Nigeria with scarcity in some cases and crude oil have risen up owing to prevailing Russia-Ukraine conflict.
The Major Oil Marketers Association of Nigeria (MOMAN) had a Workshop with Energy Correspondents in Lagos to give vivid explanations about petroleum products pricing which transcend the country.
The Guest Speaker, Mr. James Gooder, Vice President, Crude and African Markets, Argus Media, explained issues around petroleum products pricing.
He said Russia is one of the three largest producers of oil in the world alongside the United States and Saudi Arabia. But due to the invasion of Russia over Ukraine, there is unwillingness to buy Russian oil especially in Europe and the US.
Notwithstanding, the global market is recovering from the demand shock of Covid-19 that affected economic activities.
Gooder asserted that if Russian oil is shut out of the global market, there will be competition, apart from oil, the eastern European country is a major exporter of diesel particularly other oil products and this is tightening the market. Currently, the market is in short supply of diesel and oil.
West Africa relies on imported products but lacks sufficient regional refining capacity. In a global market, product flows are directed by price. Nigeria is competing with other destinations for products. Even if Nigeria had sufficient refining capacity, it would still be in a competitive market and exposed to import parity prices.
The market is in an unusual state of turmoil and uncertainty and Nigeria is an integral part of the world market and thus exposed to the same trends.
Diesel is driving the oil complex, Russia is a major exporter of diesel. Crude is expensive but diesel is at a strong premium while prices are highly volatile and unpredictable.
According to Gooder, Nigeria’s Bonny Light is good for making valuable products like Premium Motor Spirit (PMS), jet fuel but with the removal of Russian oil from the spot market for international crude oil in many parts of the world, Bonny Light price recently has become stronger with $2 above Brent. This means the market for Nigeria crude export is viable for the domestic market.
Although Russian crude is in the international market on previous contract terms, it is still finding its way like Iranian crude despite sanctions.
On the market structure, Gooder observed that prices for short term delivery are much higher which suggests that there is no profit made for keeping crude and oil products in storage. It is better to sell when the price is high.
Where is supply coming from?
Europe is a major importer of diesel and 65% of its imports comes from Russia, it is impossible to remove the gap. Some countries have shun Russia oil due to sanctions imposed on the country. Nigeria and other West African countries import European fuels.
There is pressure on gasoline which is a by-product of refining to produce diesel. The rising tide of diesel and crude prices affected other petroleum products such Liquefied Petroleum Gas (LPG), jet fuel and gasoline. Products flow are directed according to price.
“Nigeria is not an Island and even if Nigeria were to be self-sufficient in refining including Dangote and other refineries like NNPC brought to capacity to the point that the country produces all the products that it needed, it would decide whether to sell or not into the domestic market.”
Gooder revealed that another important growing market is LPG and Nigeria has done a lot in terms of its flow into African market. LPG is part of Africa energy transition. “When Europe talks about energy transition it emphasises on decarbonizing but energy transition in Africa is moving to cleaner fuel.”
MOMAN on its part believed that the backbone of distribution is based on diesel from transport to energy costs. This affects both PMS and aviation fuel distributions.
Total distribution margin under the current PMS pricing template accounts for 11.5% of pump price despite significant increase in costs. Operators are struggling along supply chain to get PMS out of nuzzles into cars which is difficult to sustain.
Responding on the issue of what drives profit for marketers, former MOMAN Chairman and Managing Director of 11PLC, Mr. Adetunji Oyebanji, said the focus is growth of profits when measured with value of naira.
He stated thus: “Can you really say oil marketing companies have posted any significant returns in real terms? Looking at the exchange rate in the last five years, you will discover that the profits have been declining.”
“The situation for oil marketing companies is not rosy. The numbers look as if marketers are making money but in real terms viewing it from economic stand point the situation is worsened.”
On regulatory compliance and siting of petrol station, Oyebanji gave further details that the rule states that it should be sited 400 meters apart from others. “But unfortunately, as you go across the country, where petrol station has been licensed, they are sited very close to each other.”
“I have been to a place in Nigeria where petrol station were sited in both sides of the road just about 2 miles long.”
Unfortunately, the operators get licence from regulatory agency which is part of the challenges operators confront in the downstream sector.
Dr. Billy Gillis Harry, National President Petroleum Product Retail Outlets Owners of Nigeria (PETROAN), made it known that the association endeavors to make retail outlet to be responsive, efficient and provide reasonable services to the public.
He said PETROAN is doing business at a dare cost and hardly retail owners can smile to the bank. They sell at N190, N200 or N165, but the cost of landing to petrol station is high while the margin they bear cannot help them to be in business in the future. The marketers are running at a loss.
“It is time for us to come with a more comprehensive analysis on the real issues of petroleum products.” the business is dynamic but volatile.
According to Harry, there is need for information and critical analysis to be presented to the Nigerian National Petroleum Company Limited (NNPC), legislators and the public. PETROAN is ready to work with other associations such as MOMAN, Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN) and Independent Petroleum Marketers Association of Nigeria (IPMAN), to make its service effective for the Nigerian public.
On the implications for the margin of PMS, he said it is fluctuating, it appears to be N6 but in reality is not. Even if margin is reduced, it will create more problems for operators in the chain.
“We do not encourage the government in any way to start discussing it but rather we should be thinking of how market forces should determine the price of petroleum products in the market whether it is gas, aviation fuel, PMS, Automotive Gas Oil (AGO) or Dual Purpose Kerosene (DPK), whatever petroleum products that will use for energy, we need to review these issues.”
The issue of margin should be increased not reduced, it has to be properly analysed by stakeholders not an arm chair decision.
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