Nigeria's oil refineries are currently operating at well below capacity.

The Nigerian petroleum marketing sector is part of the downstream oil industry. It involves the import, export, sale and distribution of petroleum products such as premium motor spirit (PMS), household kerosene (HHK), automotive gas oil (AGO), liquefied petroleum gas (LPG) and low-pour fuel oil (LPFO). Petroleum products dominate Nigeria's energy consumption mix, averaging 77% of the total over the last five years. Natural gas is beginning to show a material market share, accounting for 8% of the total in 2007.

Demand for petroleum products has been driven by economic growth, increase in vehicular traffic, and inadequate supply of electricity. At eight million BTU (British thermal units) per capita, Nigeria’s energy consumption is relatively low, compared with the 40.5 million BTU per capita average for our sample emerging market countries. According to the government, Nigeria requires 10,000 MW of power, but the maximum supplied via the national grid is only 3,000 MW. The lack of progress in developing Nigeria’s electrical power supply has led to a growing proportion of energy supply being privately generated via PMS- and AGO-powered generators.

The industry is supplied through imports and locally refined products by both the major and the independent marketers. The major marketers accounted for 70% of products distributed in 2008, according to data from the Nigerian National Petroleum Corporation (NNPC). They include the state-owned NNPC Retail, multinational petroleum marketing companies such as Total, Mobil and Chevron, and the largest indigenous operators, African Petroleum (AP), Oando and Conoil. The independent marketers comprise a large number of indigenous operators.

Domestic supply is through the nation’s three refineries, Warri (WRPC), Kaduna (KRPC) and Port Harcourt (PHRC), which process crude oil allocated by the federal government. Due to lack of maintenance and bureaucracy, the local refineries continue to operate well below their estimated capacity. In 2008, the average capacity utilisation of all three refineries was 22%, with an average over the last five years of 25%. Efforts have been made by the government over the years to encourage private sector investment in the sector. The previous administration granted licences to private companies for the construction of private refineries. The government later revoked these licences, citing non-performance, as the construction of the proposed refineries had not proceeded as expected.

Inadequate local supply necessarily makes Nigeria highly dependent on imported petroleum products. We estimate that imports account for close to 70% of total satisfied demand. The importation of PMS and HHK into Nigeria is regulated by the government, which has tried to encourage private sector participation through the issuance of import quotas, based mainly on importers’ and marketers’ storage and distribution capacity. Subsidies are paid to the importers where the cost of sourcing is higher than the price which has been set by the primary governmental agency responsible – the Petroleum Product Pricing Regulator Agency (PPPRA). Major and independent marketers collaborate to source refined petroleum products from different parts of the world. As private sector participation has grown in the government’s scheme, NNPC's share of imports has fallen from over 90% in 2006 to 65% for PMS and 83% for HHK in H1 2008. The indigenous companies, Oando, AP, and MRS, have grown their share at the expense of the multinationals who have been deterred by the incessant challenges the scheme presents, such as delayed payment of import subsidies by the government.

Subsidies

The Petroleum Subsidy Fund (PSF): This is a pool of funds from the national budget set aside for the stabilisation of the domestic prices of petroleum products (PMS and HHK) so that volatility in international crude and products prices does not translate into high volatility in prices of fuel at the pump. For the period to July 2008, a total of N277 billion had been disbursed as subsidy compared with N260 billion and N280 billion in 2006 and 2007 respectively.

The Petroleum Equalisation Fund (PEF): The fund was established in 1973 to ensure that petroleum products are sold at uniform prices throughout the country, given the discrepancy between fuel pump prices in different regions at the time, especially in the northern part of Nigeria. Losses are occasioned by the cost of transporting petroleum products from depots to filling stations.

Conclusion

The fixed pump price of PMS and HHK and the various subsidy schemes are contributory factors to the challenges of supply in the country. Even in the current regulatory environment, PMS and HHK are sold above the government’s recommended retail price in parts of Nigeria where supplies are more difficult to obtain. Aside from bureaucracy among the different government agencies charged with regulating the industry, corruption, a weak transportation system and product pilfering across the supply chain are significant challenges that still exist. Industrial action by trade unions are also contributing factors, but at times, these are symptoms of the real underlying issues the industry is facing.

CSL Stockbrokers Limited (CSLS) is a wholly owned stockbroking subsidiary of First City Monument Bank and a member of FCMB Capital Market Subgroup. CSLS is one of the oldest stockbroking firms in Nigeria and was licensed in September 1977 by the Nigerian Stock Exchange to deal in securities quoted on the Exchange.

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