Fuel Prices too low to ensure stable Supply in Nigeria

By Chinedu Okoye 

Background:

In light of demands on NNPCL to increase stabilize the supply and possibly reduce Fuel pump prices a critical evaluation and analysis of the situation became imperative and we make the following submissions taking a wholistic view of the situation.

Laying on logical reasoning and broad based data, we do not forsee a scenario where fuel prices stay at these levels or go lower and stability returns to the market. This is because for NNPCL to increase supply it has to invest a considerable amount. This is not feasible if fuel is continued to be subsidized at current levels.

Leveraged Future Output:

NNPCL has already leveraged 5% if it's future production to Afrexim Bank, or 90k barrels per day for a 5 year period. With current daily production at 1.7 million barrels per day even if it meets the 450k barrrels per day requirement, the company would be selling 26% of daily output to Dangote in exchange for Naira.

This means 31% of future oil revenues have been discounted (5% sold for $65 dollars per barrel) and dedollarized (26% or 450k barrel target sale to Dangote Refineries, will be settled in Naira). With less than 70% available to be sold to the international market and IOCs, it is safe to say that conditions for a continued subsidy (ie keeping pump prices at these levels) would be a hard ask for both entities.

Why N700/litre is too Low:

It is estimated to cost the government N5.4 trillion in subsidies to keep fuel prices at current levels as opposed to N3.6 trillion in 2023. However in dollar terms it's costing $3.6 billion as opposed to $7.83 billion (at N460 exchange rates), for last year. 

Since the global average pump prices hasn't changed more than a cent ($1.30 to $1.29). Exchange rate depreciation is the main reason why Naira pump prices are higher as subsidies are tied to the dollar price of petroleum. 

Since oil is a major source of foreign exchange, selling a quarter in Naira exposes NNPCL as a company (and by extension Nigeria) to exchange rate risks. 

Whilst some it cannot be eradicated per say, the discounted and dedollarized sales places a clear limit on how much the government can subsidize fuel. Since businesses have to factor in costs, there is also a level below which it isn't viable for the refinery to operate.

Both entities will have to sell at a price that compensates for possible FX losses and a price not too far from the global average if they are to stay afloat.

Using N1500/$ exchange rate, the Naira equivalent of the global average is N1950/$1. Even though this is a general number, it gives a clear picture on how far the subsidized price could be from a break even price. For even if you put the price at a dollar, it will still cost N1500 per liter of petrol. There will most likely be an official increase to at least N1000/liter if supply of both crude to the Refinery and PMS to oil marketers, is to stabilize.