Friday, 22 May 2020

Petrol: OMCs to resume importation of Petrol

Petroleum Products Pricing Regulatory Agency says that permits had been given to several OMCs to start importing petrol alongside the NNPC.

According to local media reports, private oil marketing companies (OMCs) have now joined the Nigerian National Petroleum Corporation (NNPC) in the importation of petrol. This was based on information from the Petroleum Products Pricing Regulatory Agency (PPPRA) that permits had been given to several OMCs to start importing petrol alongside the NNPC. The General Manager, Corporate Services, PPPRA, Kimchi Apollo, revealed that the agency recently issued Quality Management (QMs) which empowers OMCs to import petroleum products.

Prior to this development, the NNPC has been the sole importer of petrol for over two years. The steep devaluation in the local currency in the wake of the 2015/16 oil price crash as well as an increase in crude prices that ensued thereafter led to a surge in the landing cost of petrol.
 
The reluctance of the government to adjust the retail price of petrol to align with market realities made it unprofitable for OMCs to continue to import petroleum products.


As such, NNPC had to step in to continue to supply the market. This, however, came at a huge cost to the nation, as NNPC reported subsidy payments as “under-recoveries” being the excess of the landing cost of petrol over the price sold to OMCs. According to the Nigerian National Petroleum Corporation (NNPC), the federal government paid N752bn as petrol subsidy in 2019, equivalent to 62% of the amount spent on capital expenditure in the year (N1.2trn).

Although we believe the decision of the PPPRA to allow OMCs import petrol directly will improve the thin margins of players in the downstream sector, we note that the gains could be short-lived and eroded when oil prices trend higher, if the federal government maintains control over the retail price of petrol. Based on our pessimistic case, OMCs will hands off the importation of petrol if the rebound in oil prices pushes the landing cost of petrol to a discount of c.10% from the current retail cap of N125/litre.





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