April 18, 2016 - 10:20 PM EDT
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Exploiting Best Strategy to Get Fuel to End-Users

Ordinarily, regulated petroleum retailing shouldn't be too attractive to businessmen considering the modest margin of profit that it brings coupled with the low turnover filling stations record when PMS is sufficiently available at the official pump price. However the hope that fuel scarcity will somehow never go away permanently as well as the weak regulatory framework in the downstream sector has attracted many rent-seekers to petroleum retailing business in Nigeria.

The DPR in its report on total number of retail outlets in Nigeria shows that Independent Petroleum Marketers Association of Nigeria (IPMAN) owned 24,226 filling stations as at December 2013 while the six Major Oil Marketers of Nigerian (MOMAN) - Con-Oil, Forte, Mobil, MRS and Total own 2,453 and the NNPC Retail own 37 Mega Stations (one in Abuja and each of the 36 states).

Many had hoped that the Pricing Modulation announced by the Minister of State Petroleum in January 2015 that removed subsidy on PMS (saving the Federal Government billions of Naira) and reduced some of the cost components in the PPPRA PMS Template will finally stabilise fuel supply. However the perennial shortages of PMS at the official price have given rise to a thriving black market - clear evidence that regulators are finding it difficult to counter fuel diversion by marketers.

Accepted that the scarcity of PMS in the first quarter of 2016 is affected by dollar scarcity that has made NNPC to shoulder 100% of imports through crude oil swaps of its allocated 445,000 barrels that the minister says only meets 50 to 55% of importation, however the major issue is the fact that some depot owners and retailers have refused to comply with the PPPRA Pricing Template of N76.50 Ex-Depot (for collection) and N86.50 Retail Price - retailers claim that they buy PMS from depots at N155 per litre that they in turn sell as high as N175 per litre and up to N250 per litre in the black market.

The failure to enforce fine, confiscate products or withdraw licence of defaulting depot owners and retailers that sell above official prices have exposed the weakness of DPR in regulating the downstream sector as it clearly lacks the manpower to monitor over 27,000 filling stations that it has licenced. Intervention by NNPC Retail through its single Mega Station per state has fallen inadequate and the affiliation arrangement with independent marketers has also failed - even the ambitious plan to build additional stations per senatorial district can't adequately penetrate the market enough to ease the pressure.

It is understandable that the minister wants to restore orderliness and efficiency in the downstream via reactivation of the existing refineries to supply fuel for local consumption and utilization of the 5,000 kilometres pipelines network to the 22 PPMC depots that could store strategic reserves rather than the reliance on trucking for continuous distribution across the country - a system that gulps billions of Naira in bridging payments to transporters, subjected to potential disruptions whenever drivers go on strike, adds pressure to already burdened road network, cause accidents and pollute the environment.

As the minister pushes for restructuring of the sector, there is a need for a short-term strategy that will ensure that PMS gets to end-users at the official pump price as well as ease the pressure on the government to enable it concentrate on the far reaching reforms in the petroleum sector. Although the fuel retailing business has many players (over 27,000 as of December 2013) and more opening every day, in practice the market is more of an oligopoly with six major marketers (Con-Oil, Forte, Mobil, MRS and Total) and a few big independent marketers that presently dominate the market.

The minister should involve the majors that have the advantage of corporate governance, internal control and audit structure that can ensure that fuel is supplied through their depots and integrated 2,453 filling station network across the country - with brand name and reputation to protect, the majors will take sanctions and fines of non-compliance more serious. The minister should also incorporate the most dominant independent marketers in each zone (cluster of states) who by extension also own majority of trucks used in bridging petroleum products across the country (an oligopolistic threat that requires some form of regulation).

On a lighter note, the minister should endeavour to leave dealing with the press to the Public Affairs Division as his interviews although sincere are almost always twisted and misconstrued - adding more pressure on the government and potentially distracting the minister from the rigorous restructuring exercise.

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Source: Equities.com News (April 18, 2016 - 10:20 PM EDT)

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