New CBN FX guidelines to rejig petroleum downstream sector

Industry operators say the Central Bank of Nigeria’s (CBN) new foreign exchange (FX) guidelines, which will see the naira float against the dollar, will introduce a level playing field in the petroleum downstream sector by removing constraints in accessing FX and allowing for greater participation in the sector.

BusinessDay enquiries reveal that operators are happy with the policy, but there are fears price may overshoot the N145 per PMS price cap, even as they stress that they will watch developments keenly to see how it unfolds.

“I think what will happen now is that the business will get FX, but obviously the price of petroleum products will go up. N145 will no longer be feasible if FX is sourced at rates higher than N285 benchmark used,” Chika Onuegbu, chairman, Trade Union Congress, Rivers State chapter, said.

Akin Fatunke, manager, public/government affairs, Mobil Oil Nigeria plc, said those industry practitioners were waiting till Monday to get a full picture of the guidelines and what exchange rate the CBN will announces for the naira.

“But this development should free up the sector and make things a bit more realistic in terms of planning and working capital going forward,” Fatunke said.

Analysts say the new guidelines will bring stability in the petroleum downstream sector in the long run, where FX constraints saw the Nigerian National Petroleum Corporation (NNPC) importing over 35 million litres of petrol daily over the past two months to augment shortfalls arising from independent marketers’ inability to import products on account of FX scarcity.

“Based on our estimates, the current fuel price can accommodate dollar prices up to N285. Thus, if the exchange rate settles above this price, we might see a situation where fuel marketers start to ask for higher fuel prices. But on the flip side, if they settle lower, then the market will profit from it and move on. We might even see more investment in the downstream market,” Dolapo Oni, Ecobank head of energy research, said.

“Ultimately, I think the onus is now on the petroleum ministry to follow the example of the CBN, and also fully deregulate the petroleum market and let marketers set prices. This will encourage investments in the market and boost supply,” Oni said.

Chijioke Mama, energy analysts, shares the same view but sounds a note of caution, saying, “The full impacts of the new policy will unfold in the coming weeks, but there are some detours in it such as the promise to allocate dollars at a fixed rate to industries government deems strategic.”

He further said, “If the petroleum downstream is included,(and it should), then the effects may be minimal, otherwise, we know that importation of petroleum products is already stifled by forex scarcity and higher exchange rates; if this trend continues it may become tough for importers to secure forex and even tougher to make profit at the N145 per litre price ceiling of PMS.”

BusinessDay reported recently that constraint in getting FX had set in a survival of the fittest struggle in the downstream sector of the petroleum industry. While the major oil marketers secure FX through their affiliation with International Oil Company (IOC) partners, independent oil marketers without such arrangements struggle to get FX at the parallel market where rates are as high as N350/$1.

Ibe Kachikwu, vice minister of Petroleum Resources while announcing the liberalization of the petroleum downstream sector in May, had used an exchange rate of N285$1 to arrive at a price ceiling of N145.

Independent praised the move but they said it was not deep enough to solve the problem as it makes it difficult for them to make a profit when they source forex from parallel market with rate higher than the one used by the CBN.

“Government said they base the cap on PMS at N285/$1, if I get it at N350/$1 are you expecting me to sell my product at N145? That’s why we are saying we need foreign exchange, we are trying to be creative in sourcing for forex, we are speaking with probable financiers but for us to be able to sell within the band provided by the government, we must be able to source at the same rate the government was able to source it,” said Olufemi Adewole, executive secretary of Depot and Petroleum Products Marketers Association of Nigeria (DPPMAN).