Listen to the latest Driving Discussions podcast, this time spotlighting the impact of Covid-19 on Nigeria's fuel market and beyond.
Join James Gooder, VP Business Development, Europe and Josefine Ahlström, VP Business Development, as they explore the status of coronavirus in Nigeria but also the potential impact of the recently announced subsidy lifting in the domestic Nigerian domestic market.
Josefine: And welcome to another podcast in Argus series, Driving Discussions - Focus on the Fuels Market. And today we are looking at Nigeria, where we will discuss the impact from the coronavirus on this Africa's largest fuel market, but also the very significant changes for the Nigerian market that was announced last week. My name is Josefine Ahlstrom, VP Business Development for Europe here at Argus, and with me today is my colleague, James Gooder, also VP Business Development, who will tell us more about these exciting developments. Welcome, James.
James: Hi, there.
Josefine: And so, James tell us, so how has the coronavirus hit Nigeria? I understand there is a lockdown in the country. I mean, to what extent is that and has it already hit the domestic fuels demand, like, what've seen here in Europe, for example, on gasoline, which has been quite dramatical?
James: Right. Well, I should start by saying I'm not currently in Nigeria. I'm in North London, though I do often visit Nigeria. It's not easy to get there or anywhere at the moment. The coronavirus is in fairly early stage in Nigeria, and hopefully, it won't grow to the extent that we've seen in other places. But as far as we know, there have only been 343 cases officially reported and 10 deaths. Now, of course, that's not good, but compared to what we see in Europe and the United States and Asia, that's relatively low, though, unfortunately, what we've seen is that the countries that are behind the, kind of, infection curve do see those rates rise. And Africa and Nigeria, in particular, of course, very large population of almost 200 million and very densely populated cities, particularly in Lagos and other...the large cities, so there is a risk that the disease will spread. Though I have to say during the Ebola epidemic, Nigeria was very efficient at testing and putting controls in place, checking people's temperatures coming in and out of the country, and so on. So, they do have experience in containing these kinds of outbreaks.
Though, as you say, there is a lockdown in place, but currently of Nigeria's 36 states, only Lagos, Ogun, which is just north of Lagos, and the Federal Capital of Abuja in the center of the country are officially in lockdown. That's been in place for a fortnight. We just heard that's been extended for another couple of weeks. So, it's quite possible that the extent of the COVID-19 spread will grow given these limited measures. The effects on the fuel markets, of course, is going to be significant. There's a lot of fuel consumed in Nigeria, and it's Africa's largest fuels market. We did see that the imports of gasoline dipped quite significantly around the time of the imposition of the lockdown in Lagos in late March. But since then, we've seen imports increasing, actually, because listening to some of the statements from the general managing director of NNPC, the state's oil company, his name is Mele Kyari, and he's been telling people that the priority of NNPC is to make sure that fuel is available across the country. So, there's still imports coming in, the ports remain open, and we're seeing significant volumes of fuel heading into Nigeria.
Josefine: So, Mr. Kyari as well is talking about the NNPC priority on making sure there's supply for the country of fuel, but I understand he also announced some very significant structural changes to the Nigerian fuels market. So, what is it that have been said? And also can you provide us a bit on the background of why they have decided to go ahead and what they are planning to do?
James: Absolutely. Well, in some ways, a surprise announcement that we heard last week was that Nigeria plans to remove fuel subsidies. Now, some of the fuels have already been deregulated like diesel and so on, but gasoline, or petrol, or PMS, petroleum motor spirit, as it's known in Nigeria, has been regulated for decades, and the price has been fixed by the government. And when the international market prices have been above that fixed rate, then the companies supplying it have been subsidized to the extent that they've had to overpay. Now, what we've been told is that those subsidies have been removed and will never come back. There will be zero subsidies for the future. And in many ways, it's an ideal time to do that, because we've seen oil prices crashing around the world. The current import price for Nigeria is significantly lower than the level of fixed price, which has currently just been reduced to a band of ₦123.5 to ₦ 25 per liter, and the imports cost is around ₦90, so it's significantly lower. Now, because that subsidy has been removed, it gives a scope for prices to be reduced further as and when possible. And so, what the advantage for the driver at the moment in Nigeria, the consumer, would be that they don't...they see only a benefit of this removal of regulated pricing. The risk, of course, is that when prices rise again, a few consumers might feel the pinch. When the last time this was attempted in 2012, there were protests, and riots, and violence, and the project was abandoned.
Josefine: But do you think also... There's been quite some smuggling going on. What will be the impact on that?
James: Well, that's... One of the reasons that Nigeria has had to import so much to meet its own demand and that of its neighbors, because, of course, with a very low, subsidized price, the temptation is irresistible to take that subsidized fuel and smuggle it over the border into Nigeria's closest neighbors but also as far afield as places like Chad and Mali and elsewhere. And so, a lot of this fuel has just been imported and smuggled straight through. If, as they have suggested, they move to a market-based pricing regime, that should equalize prices with other parts of West Africa that have to import at international rates and pay all the...just the cost, the cost of moving that to consumers. And then, what you have, and what Mr. Kyari of NNPC has said that they want to encourage, is a situation, where there's competition amongst importers, distributors, and retailers, and those with the lowest prices and the best service will win market share. At the moment, NNPC has been the sole importer for some months partly because other importers have struggled to get hold of credits and partly because of the use of the crude oil for refined products swap program or direct sale, direct purchase program, which has allowed a certain amount of product to be brought in exchange for Nigerian crude oil exports. But the idea is that if you can link prices to the international market, then there won't be this temptation to smuggle subsidized fuel and deprive the Nigerian consumers.
Josefine: So, what you're basically saying, it's...that it will affect the way supply is coming into Nigeria, how the local markets operate, and then going for a deregulated and liberalized market, and it seems then to be quite...maybe, even a political masterstroke to introduce it at this time when the prices are so low on the international fuels market. Is that a too strong statement? Do you think that's correct?
James: No. I think you're absolutely right, Josefine. It is the perfect time to do this. As I said, various attempts had been made in the past, but the timing was never quite right, and it involved raising of prices for the consumer. At the moment, deregulation, the removal of subsidy means that the market is cheaper. There is also a charm offensive underway to make the case that by subsidizing petrol, what you're effectively doing is you're subsidizing the middle and upper classes because it's only really those kinds of people that can afford to drive a car in Nigeria. So, these subsidies are not going to the people in society that need it the most. It's a much better use of taxpayers' money, the argument goes, to spend it on healthcare, on infrastructure, roads, education, those kinds of things, than to subsidize people with two, or three, or four cars. So, I think as long as that message is reaching the people in Nigeria, and also, that the price of oil remains low in international markets for long enough that consumers get used to a fluctuating price at the pump rather than a fixed price for months and months, then I think it could prove to have been a very opportune time to do this.
Now, of course, nobody knows what the price of oil will do from one minute to the next in this very volatile time, but it's fair to say that the market for crude oil internationally, it's hugely oversupplied at the moment with demand under pressure from the lack of economic activity and mobility because of the coronavirus crisis, and also heavy overproduction by OPEC, and Russia, and others. Now, those countries have come together over the weekend to come up with an agreement to reduce output, heftiest reduction we've seen ever, but still, many people say it's too little too late and that prices will remain under pressure for much of this year, if not beyond. So, I think if over the course of the next couple of quarters at least up to the end of the year we see Nigerian consumers get used, as I say, to prices fluctuating rather than being fixed, then any protest will be minimal, especially if they can make the case that benefit to the society at large is going to be the saving of what is a huge amount of money. I mean, it costs almost a trillion naira to subsidize the gasoline price every year, that's about $2.5 billion, and that's money that could be much better spent elsewhere.
Josefine: Well, it seems like they are very, very active at the moment because I understand it's not only, I mean, making sure they secure the supply, lifting the subsidies, but there's also some of the work underway to address, I mean, the refining sector in Nigeria, which has been under capacity for a very long time, that there are plans there to turn that around as well.
James: Absolutely. I mean, the refineries in Nigeria have about 445,000 barrels a day of refining capacity, but it rarely is used much above 10% of that capacity because of years of neglect and underinvestments in those refineries. Now, there is a plan to reinvigorate them, to upgrade them. In fact, they've all just been closed down completely for upgrading work to continue. But another thing we've heard from the NNPC is that there is a plan to encourage foreign or external investments in those refineries by moving to the, kind of, operation and maintenance contracts that have been used quite successfully by that country's LNG producer, that's Nigeria LNG. And they have similar arrangements with foreign oil companies to run and maintain their facilities for a share of the profits, of course. And if that same commercial model can be brought in, then we could see the refining sector begin to return towards its nameplate capacity, though it will take some time. Of course, the other thing in Nigeria is that there is a new refinery being built just outside of Lagos by the Dangote Group. This is going to be a very large refinery, 650,000 barrels a day, so larger than the whole of the rest of the refining fleets combined. Now, that is not finished yet. It's unlikely to be finished this year, but work continues and that will have a big impact on domestic production of fuel for not just Nigeria but for the whole region.
Josefine: So, I mean over to the topic that is close to both of our hearts, that is how to fairly price the gasoline here? So, what is your view on that? I know what it is, but I think it would be good to share that with our listeners. And really why do you think that it would make the most economical sense for NNPC and for the Nigerian consumers in the end?
James: Sure. Well, as you suggest, this is something that we've been talking about for some time. And essentially, the way things work at the moment is that most of the supply that comes into Nigeria is imported, as we've said, and of that, the biggest proportion is from Europe, which is obviously not too far away geographically, has a huge surplus of gasoline as Europe has become more of a diesel-focused consumer base, and so, that gasoline has to go somewhere. And the benchmark price in Europe for the past almost two decades has been the Argus Eurobob Oxy index, which is based on a very active barge market in the Amsterdam-Rotterdam-Antwerp area. Now, anywhere else in Europe, where gasoline is priced, it tends to be with reference back to that price. And also, there's a healthy and large derivatives market around it, so that people who are exposed to that price can hedge that exposure and they can manage their price risk that way and take a view on where the market is going.
Now, that is the default benchmark for the Atlantic Basin with Eurobob, but where it is imported into Nigeria, for various historical reasons, a different index, the 95 octane barge price is being used. That price is not based on the same amount of liquidity. I was just looking back over the course of this year to date, I think you were telling me that last year we had 3.7 million tons of Eurobob trade that factored into our assessment. And so far this year, it's been well over 800,000 tons, even though consumption and liquidity is down, that's 6 times greater than the amount of trade we see feeding into the 95 octane barge price. And what that means is that we have a very liquid participatory reference in Europe setting the price at the origin of the flow into Nigeria, and a very illiquid, and often, very volatile price at the far end of that trade that can jump from a premium to Eurobob of $10, up to $50, up to $60. It could be more, up to $200 at times. So, what happens is you have the same molecules, the same product being priced against two different indexes at two ends of the same arbitrage trade. It's rather, like, buying something in dollars and selling it in pounds, which is fine if both ends of the trade can see the exchange rate and agree upon it but that's not what is happening here.
So, our argument is that for a transparent and fair gasoline pricing to take place into Nigeria, then the Argus Eurobob price should be used at both ends of the trade. Then, the importers, the buyers in Nigeria would be able to see at what level that product has been valued at the beginning of the trade. Then, a fair margin can be established for the trader, for the importer, for the distributor, and the retailer, and ultimately, the consumer will get a fair price for the gasoline. That will become even more important in a deregulated market, where the consumer is exposed to those fluctuations in international benchmark prices. So, rather like in crude oil, everybody has agreed in the Atlantic Basin that the benchmark ought to be dated Brent, and all the other grades are priced with reference to that at a premium or discount. We would say that the gasoline price of Eurobob is like the dated Brent of gasoline and that it should be used wherever that product is being traded.
Josefine: So, basically, there's no reason why Nigeria should have a different way of pricing than where...what the practice is, where the gasoline is basically coming from, is that correct then?
James: Exactly, exactly, for the sake of transparency, and fairness, and clarity. And, also, as I said, like, the more sophisticated the market becomes, and it is becoming more sophisticated, you have a lot of private enterprises in Nigeria, who are now able to get into the paper markets to hedge their exposure through these benchmarks. The easiest way to do that is to use the prevailing index. You can't hedge the 95 price, but you can hedge the Eurobob price. So, if you wanted to lock in your margin of a forward period, you can do that very easily if you're using the standard benchmark.
Josefine: So, I guess to make the, sort of, final comment on this, James, what you're saying, that if Nigeria is looking to transform into a properly opened, deregulated market, where the spot price is set by supply and demand in the region, then having such a sort of pricing mechanism, that would then help them to make sure they have a transparent way of pricing and they can follow the market? Is that what you're saying?
James: Yeah, exactly. Like, transparency in the end will be good for everyone, or at least everyone who is involved in these markets from beginning to end, really. If you have that transparency, if you have fairness, and people can see where the price is coming from, then it will make it much easier to make the kind of judgments further downstream about how this product should be sold. As we've seen in other African markets that are on this route to deregulation, Ghana, just down the road from Nigeria, of course, has a kind of guide price that is published by the government, but companies that are able to be competitive and sell below that have found that they increased their market share. So, it's good for competitive and efficient companies and it's good for consumers. And ultimately, it's good for the international traders, who may, sometimes, be able to win on the kind of volatile spread between these two indexes, but they cannot hedge their exposure to that spread. So, there are times when they'll win, there are times when they'll be out of pocket. For the sake of the efficient market and fairness to the consumer, it makes much more sense to have a common basis.
And then, the next step, as we've discussed with our friends in the region, is to be able to publish and use a regional benchmark at a differential to the wider international price, so Eurobob plus or minus an adjustment to take account of the fuel quality in Nigeria, and the specific logistical costs and challenges that that country faces. So, it's a two-step process. First of all, start using the international benchmark that is lingua franca for this kind of trade, and then, we'll be able to establish what is the actual landed price in Nigeria to be able to give an even deeper level of transparency for that market.
Josefine: Thanks, James. That sounds very exciting. And we, from Argus, of course, are going to follow and, sort of, commit to help Nigeria to transform into these open and deregulated prices with our pricing of the natural fuels market. So, it's exciting times. And thanks, James, again for that. And for any of the listeners also, if you would like to track the immediate fallout on the coronavirus on the commodity markets, not just in Nigeria, feel free to head over to our dedicated hub page, which is on our website, so on argusmedia.com/coronavirus. And many thanks for listening today. Bye-bye.