Energy Transition, the PIA, Petroleum Pricing and the Way Forward for the Downstream Sector

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In a few days, Nigeria will launch its Energy Transition Plan, which is expected to present template for, mostly, the private sector players to step up and make a difference and be pioneers in creating new markets, in view of the opportunities coming with the newly passed Petroleum Industry Act (PIA).

One of the major highlights of the Nigeria Energy Transition is: To mobilize investors and the private sector by showcasing concrete projects to deliver the transition goals while creating significant market opportunities.

The question is, how does the Energy Transition Plan affect petroleum pricing in the downstream sector of the Nigerian economy?

As we all know, Downstream operations involve all oil and gas processes that occur after the production phase to the point of sale.

The players in this sector include vendors and refiners of petroleum crude oil and natural gas processors, who bring usable products to end-users and consumers; in other words, the marketers and dealers who bear the brunt of the pricing dynamics of petroleum productsHow does Nigeria’s new world of energy transition, which is encapsulated in the Petroleum Industry Act (PIA), affect petroleum products pricing?

For some reasons, petroleum pricing has, over many years now, presented a recurring sore point in the petroleum value chain, the height of which is strike actions by marketers and workers in the various sectors of the oil industry.

Many times it affects petroleum subsidy calculations – in many confusing ways. Maybe for the reasons of the confusion outcomes; and, or as forerunner to the arrival of the PIA, last October the federal government scrapped the Petroleum Products Pricing Regulatory Agency (PPPRA) and two other energy regulatory bodies.

As provided by the PIA, two new regulatory agencies, Nigerian Upstream Regulatory Commission (NURC) and the Nigerian Downstream and Midstream Petroleum Regulatory Authority (NMDPRA), were created to perform the roles of the defunct DPR, PPPRA and PEF.

The NMDPRA is the authority currently responsible for the regulation of the midstream and downstream petroleum operations in Nigeria, which includes technical, operational, and commercial activities.For the PIA, minister of state, petroleum resources, Mr. Timipre Sylva, said the passage of the PIA into law after spending over 20 years in the process, cleared the coast for investors to invest in Nigeria’s oil and gas sector.

He said government is expecting a lot of growth and development in the oil industry, with the introduction of the energy plan and the PIA.

He confessed that the oil industry had been stagnated for a long time because of the absence of the PIA. Over the years the Nigerian downstream petroleum sector has witnessed incessant changes in the domestic pricing of petroleum products.

Despite the strategic position of the country in the global oil industry, efficient pricing of the locally consumed petroleum products has become a huge challenge.

At some point petroleum products prices have been altered as government strategic policy initiative to generate sufficient funds for a nation-wide infrastructural development.

At least, so the federal government claims.However recent increases has been attributed to the higher oil prices at the international oil market.

The minister said, “So a lot of companies, a lot of investors took a sit-down-and-watch approach. The PIA has clarified the legal framework around the sector and the agencies are in place.

I don’t see anything now stopping investors from coming.

“And we are very lucky to have very competent industry people with proven experiences. So, we believe that they can hit the ground running and Nigerians should brace up for exponential growth in the oil and gas sector.

“Nigerians should expect massive deliverables in the sense that the PIA has ended the regime of uncertainty in terms of the governance of the industry,” he said.

In a nut shell, the Petroleum Industry Act, 2021, which was signed into law in August 2021, introduces significant changes to the legal and governance framework, administrative processes, regulatory and fiscal terms, and host community engagements in the oil and gas industry.

Petroleum marketers have often complained of rising landing costs, which often provided grounds for protestations, defiance and unilateral increases in pump prices.

Yet most of the landing increases were attributable to global oil trends. For instance, in January this year, when petrol landing cost rose to N282/litre, oil had hit $90 per barrel in the global market.

Pronto, marketers raised diesel to between N355 – N360Observers said the upturn in global crude oil prices had pushed the landing cost of Premium Motor Spirit (petrol) imported into Nigeria to over N282 per litre.

The further rise in the landing cost of petrol means increased subsidy as the pump of the product remained steady at N162-N165 per litre.

The landing cost of petrol rose to N282.29 per litre on January 20 as the international oil benchmark, Brent crude, jumped to $89.75 per barrel that day from $77.24 per barrel on December 31, 2021.

Two days after, Brent rose further to $90.22 per barrel as of 5.19 pm Nigerian time, its highest level since 2014.

The energy regulators in Nigeria insist that the rise in global oil prices to record highs continues to push the subsidy cost being incurred by the federal government.

Within the period, marketers increased the of Automotive Gas Oil, also known as diesel, to N355-N360 per litre.

As at January 14, diesel increased further to N350 per litre in some filling stations in Lagos.

Observers say an energy transition that does not contain effective mechanisms for the transformation of Nigeria’s four existing refineries, including modular refineries, would make nonsense of the Petroleum Industry Act.

In other words, if Nigeria is able to build or rehabilitate its refineries, then a number of costs – be it landing cost or foreign exchange costs – that add up to influence petrol pump computations will no longer be there.

As Nigeria usher in the Energy Plan, as well as the implementation of the new PIA, residents in Nigeria expect a demonstration of good purpose that will produce pocket friendly petroleum product pricing, and this can only be achieved with a self sustaining, oil production system.

Diesel is mostly used by businesses, especially manufacturers, to power their generators amid a lack of reliable power supply from the national grid.

Many vehicles transporting goods and people across the country also use diesel.Last December, the Nigerian National Petroleum Corporation said it spent a total of N1.16 trillion on petrol subsidy from January to November.

The subsidy, even as the NNPC prefers to call ‘value shortfall’ or ‘under-recovery’, resurfaced early last year as the government left the pump of petrol unchanged at N162-N165 per litre despite the increase in oil prices.

Following the crash in oil prices early in 2020, the federal government had removed petrol subsidy after reducing the pump of the product to N125 per litre from N145.

The NNPC, which has been the sole importer of petrol into the country in recent years, claim to be bearing the subsidy cost since it resurfaced. The NNPC said the average oil was $62.22 per barrel, whereas the landing cost of petrol was put at N189.61 per litre.

Based on the PPPRA template, which they later jettisoned, the expected pump price of petrol rose to N305.29 per litre on January 20, 2022 from N299.94 per litre on October 8, 2021.

The expected retail price of N299.94 per litre and the then pump price of N162 per litre indicated a subsidy of N143.29 per litre as January 20, 2021.

With daily petrol consumption put at about 60 million litres by the NNPC and a subsidy of N143.29 per litre, daily subsidy amounts to N8.60bn, officials int the NNPC said.

Other cost elements that make up the landing cost include lightering expenses (N4.81), Nigerian Ports Authority charge (N2.49), Nigerian Maritime Administration and Safety Agency charge (N0.23), jetty throughput charge (N1.61), storage charge (N2.58), and financing (N2.17).

The pump price is the sum of the landing cost, wholesaler margin (N4.03), admin charge (N1.23), transporters allowance (N3.89), bridging fund (N7.51), marine transport average (N0.15), and retailer margin (N6.19).

“Nigeria’s daily demand for refined crude oil was estimated at 442,000 bps in 2018, which still comes below the proposed initial capacity of 540,000bpd. Many other modular refineries are also expected to come on stream. Beyond a possible reduction in the landing cost of petrol, achieving self-sufficiency in refining petrol will help conserve the country’s scarce FX.”


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