INTERVIEW! How fuel subsidy stalls economic growth- MD, Petrocam Nigeria Limited

Mr. Patrick Ilo

Unreliable refineries, reliance on imported products, weak infrastructure and shortage of gas – the oil sector is challenged. The Managing Director of the Nigerian arm of Petrocam Trading Company, Petrocam Nigeria Limited , Patrick Ilo, in this interview with THE NATION newspaper, speaks on the industry’s challenges.

What is your assessment of the global oil market?

The industry, like any other, is growing and requires time and commitment of every stake-holder in the country to see to the rightful implementation of the policies that are put in place by both the government and the private sector in order to strengthen it. Globally, the oil industry, has experienced difficult times, as evident by the falling prices of crude  since 2008.

Nigeria had its own share of the problems. International prices of crude oil was at its lowest point at a period, as crude oil was exchanged for as low as $20 per barrel, a development, which has constrained the spending of the Federal Government.

Though the global oil industry experienced some breakthroughs in 2017 and greater parts of 2018, as international price of crude between $65 and  $74 per barrel, the feat was shortlived as the price began a downward journey. However, with patience, perservance and absence of volatilities in the market, the price would pick up again and oil producing countries, including Nigeria, would be better for it.

What is the likelihood that Nigeria’s crude oil production will hit 2.5 million barrels per day or more?

The probability is high and the reasons are not farfetched. The major reason lies in the peaceful nature of the oil producing Niger- Delta region. Once Nigeria exceeds the cap period placed on it and Libya, by the Organisation Petroleum Exporting Countries(OPEC). The decision by the Federal Government, to restore peace in the region through engagements with stakeholders, especially communities, where oil is produced came in handy.

At present, Nigeria’s daily crude production is in the region of between 1.75 million and 1.8million barrel of oil. It would be a different ball game for Nigeria, whenever it increases daily crude production.

How much does it cost the government to import fuel into the country?

To answer the question would be difficult, as I’m not in the government to know the amount spent on importation of fuel. Petrocam is a private entity and as a result of this, I’ m a private operator. However, the landing cost of fuel is in the region of N175 per litre or more. This is the cost at which fuel is brought to the country. The government has been magnanimous to import fuel at N175 per barrel and directed marketers to sell at the regulated price of N145 per barrel.

How can Nigeria overcome the problems of importation?

The country can fix its refineries, build new ones and pay the outstanding of the debts owed marketers, by the Federal Government, in form of unpaid subsidy arrears. The government has licensed some private operators to build modular and traditional refineries, which would refine crude oil at higher capacity. This is done in a bid to stop the problems recorded through the importation of fuel. The problems include funding, rising foreign exchange, inability by the Federal Government to fully deregulate the oil and gas industry. Above all, the government must try and pay the debts it owes marketers.

What would happen to marketers if the government is unable to clear their arrears?

Inability of the government to pay the subsidy arrears owed marketers, is going to have dire consequences on their operation. The effects are multidimensional. First, many businesses that are either owned or partly owned by the fuel marketers would die natural death. The reason being that marketers get the bulk of their capital from their fuel imports and inability to get money to finance their operation would kill their businesses. Mind you marketers neither have their own refineries nor enjoy any financial backings outside the country. It is the money, which  they generate from the sales of petroleum products that keep them going and the moment that source is closed, it means the end of their operation.

Also, marketers would experience a drop in the sales of fuel once they do not have enough capital to create new businesses or sustain the ones they are doing. Besides, the issue would lead to increase in the interest rates charged by banks.  Often times, financial institutions capitalise on the demands made by companies in need of loans. The moment a bank realises that clients are in dire need of money, what the banks do is to look at the portfolios of the firm and provide the firm with facility needed for operation. Once the portfolio is big enough, banks would increase the rates at which its giving out loans to the company in question. Conversely, if the prospective loan seeker has a small portfolio, the bank may not increase the lending rate. But in most cases, banks respond to the needs of their clients, by increasing the lending rates.

What are the benefits of the full deregulation of oil and gas?

The benefits are many and varied. First, a fully deregulated oil and gas sub-sector will open up opportunities for operators to improve investments and create new ones. For operators who have opened retail outlets, it would be easier for them to introduce some innovative measures, with a view to improving their businesses. Measures such as introduction of Point of Sales (PoS) and other strategies for their customers came in handy. The measures include, but not limited to production of   their own lubricants, as part of winning more customers.

Secondly, a fully deregulated market would engender competitions among operators. The issue would bring more players into the industry. Once more operators are doing the same business, as in the case of selling fuel to consumers, the tendency to compete with one another is high. Of note is the issue of Kerosene and Diesel, the two products that are not regulated by the government, and this has resulted in the huge prices commanded by the two products.

So, in the event that the government fully deregulates the sub-sector, more people would go into importation and sales of the products. The more the number of operators in the business, the more the competition and by extension, the lower the prices of those products. This would bring about what I called Demand Push, Supply Push syndrome. This means the more the demand placed on fuel by consumers, the higher the supply of the product in the market.

Thirdly, full deregulation would bring about investments in refineries. Marketers, like any other businessmen, are more comfortable with cheaper products to expensive ones. Once the marketers know that they can get refined petroleum products locally and cheaper, they would certainly pool resources together to invest in either modular or bigger refineries. They know full well that the refineries,  no matter how small their capacity,would get fuel to sell. This would make them to invest in refineries. When this happens, the country would depend less on imported fuel.

But payment of subsidies is good sometimes, as it makes marketers incur fewer expenses.

There is no doubt about that. The payment of subsidies to marketers has saved them from incurring some cost. By paying subsidies, the government is indirectly defraying the cost  which marketers incur on importation of fuel. The only period, in which marketers complain about subsidy, is when the government fails to pay it. A typical example is the face-off between the government and the marketers over the issue of unpaid subsidies.

But the price of fuel is still very high, despite the payment of  subsidies?

Marketers do not own vessels that brought the product to Nigeria. They hire vessels and pay them. The cost of shipping fuel is often times high and needs to be factored into the cost of doing business. Why would the price of fuel not be high, except the price is deregulated like that of PMS, which is N145 per litre. Even those consumers are still complaining. Look at the unregulated products such as kerosene and disesls. You would observe that the two products are being sold between N210 to N225 per litre.

Some stakeholders are calling on the government to cancel subsidies and fix the refineries?

It would be good, if the government would listen to such calls and do the needful, by cancelling subsidies paid to marketers. The payment of subsidies is a drain on the pockets of the government. Imagine in a situation, where government is paying billions of naira as an arrears on the subsidy owed the marketers. The government has neglected infrastructural development for subsidies. Roads were left untarred, hospitals are dilapidated and many other infrastructure programmes were unattended to, following the decision by the government to pay subsidies owed marketers. This is not good enough for the economy that is grasping for breath.

Are there countries that have implemented full deregulation?

Yes, there are countries. Dubai and Canada are some of the countries. Different people can be selling fuel at different prices. I can sell fuel at a price, which I think is good for me; so also any other person. The most important is that people are looking for areas where they would be given the best services to identify with.

What are the other benefits? How economical are the calls by marketers that Vitol and other foreign firms should invest in refineries in Nigeria?

Once the industry is fully deregu-lated, investors would come into invest in refineries, knowing full well that they are going to make their profits. Deregulation is preventing investors from investing in refineries in Nigeria and once the government fully deregulates the sector, it means that the coast is clear for operators to invest in refineries and other facilities that would strengthen activities in the industry. When crude oil is refined locally, the refiners would minimise losses and they would sell their products at prices that are beneficial to the people that is consumers, in the sector. But as long as the price cap is on the petroleum products are still there, due to absence of full regulation of the sector, the price of fuel would remain high.

What are the factors hindering fuel importation?

The problems are many and varied. First is the scarcity of foreign exchange in the country. Inability of firms to get enough dollars has hampered their operation. For instance, the rising cost of naira to dollar has denied operators in the oil sector, especially marketers the opportunity to import fuel into the country. The development has provided the Nigerian National Petroleum Corporation (NNPC), which has the opportunity to access enough dollars to be the sole importer of fuel in the country. Being a Federal Government owned institution and a regulator for that matter, the job has been easier to control importation.

Does that mean that NNPC has barred other companies from importing fuel?

No, NNPC did not stop anybody from bringing fuel to Nigeria. As I said earlier, forex and the rising landing cost of fuel problems affecting importation. The landing cost is in the neighbourhood of N175 per litre of fuel or more, while the regulated price of fuel is N145 per litre. Based on this, the landing cost of petroleum products is higher than the pump price of the product, because of the subsidy regime. Recall that the Federal Government has pegged the price of petrol at N145 per litre, a development, which means that nobody must sell the product above that price. This implies governmet that bring fuel into the country would be selling at a loss, going by the landing cost of N175 and N145 retail price of the product in the country. The government has been magnanimous enough by directing NNPC to supply fuel to everybody. The Product Petroleum marketing Company (PPMC) gets fuel from NNPC and sells it to marketers. It is only kerosene and diesels that are not regulated a development that allows Nigerians to import them into the country.

Is NNPC not part of the problems?

No. NNPC is not part of the problem. The Corporation should not be blamed for the offence it has not committed. The issue of importation is not economically viable for the operators, due to the huge foreign exchange and landing cost, which many operators unable to bear.

How did Petrocam begin in Nigeria?

Petrocam is a South African firm, with specialty in the trading of crude oil and other commodities in Africa. Established in 2004, the firm has traded in oil with some notable companies in Africa. Due to successes recorded in its activities, the firm decided to expand its operation to Ghana, Nigeria and other countries in Africa. This resulted in the establishment of Petrocam Trading Company Limited in Nigeria.

Initially, Petrocam Nigeria was trading oil with local and international oil companies in Nigeria. To play a more active role in the country, the firm invested in the downstream sub-sector of the oil and gas industry, by opening retail and distribution outlets in Lagos. One area, in which Petrocam has performed well was when the Nigerian National Petroleum Corporation (NNPC) introduced an idea known as Direct Sales Direct Purchase (DSDP), in order to ensure availability of fuel entry.  This culminated in the opening of retail outlets, by Petrocam, in Lagos state.

How many firms were approved by NNPC to engage in DSDP?

Petrocam and 10 other firms were licensed by the Federal Government, to participate in the Direct Sales and Direct Purchase model.

What are the names of the multinational oil companies in DSDP?

The number of the firms approved to participate in the scheme was 11, including Petrocam. However, it is not ideal for me to mention their names on the pages of the newspapers.

What is the Unique Selling Point (UPS) of Petrocam?

The unique selling point of the firm lies in its ambience. The firm has a beautiful and uniform structure. The firm’s structure is different from any other operators; so also the services it renders to the people. The firm built its outlets facing the equator in order to generate its own electricity, through solar means. Through this, the firm is able to store kilowatts of electricity annually, in order to render its services effectively to the people that are buying fuel and others. For instance, the firm provides electricity free to residents of the streets adjoining, where the outlets are located. We believe that filling station is about services, trust and we have never shied away from them.

How many stations have been set up by Petrocam?

The firm has built seven fuel stations in Lagos. The stations are in Idimu, Aja, Epe and other areas of the state. The retail outlet was commissioned recently, and the firm is planning to build three more stations in early 2019, in order to bring the figure to 10.

Do you partner with refining companies abroad?

What we do is that we give crude oil to refiners to process it into petroleum products, before we ship them to Nigeria. However, when crude is refined locally, marketers would stop relying on importation. They would have access to fuel, without paying landing cost on the product.

Does Petrocam operate a tank farm, where fuel is accessed for onward distribution to consumers?

No, Petrocam does not own a tank farm. The reason is not because the firm does not have the  financial wherewithals to build a tank farm. It is just that the company does not believe in operating a tank farm, before it can perform creditably in the downstream sub-sector. What Petrocam does is that it uses tank farms owned by other operators and has no regret over it.

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