Federal government has yesterday removed fuel subsidy and temporarily pegged the petrol price ceiling at N145/litre. This fiscal policy has long been expected and it is aimed at freeing the revenues badly needed to finance critical budgeted needs of the economy.
This action has ripple effects in all areas of our national life but I have decided to narrow it down to its effects on the banks’ customers and the banks’ loan books.
SITUATION BEFORE THE REMOVAL
Within the last six months and weeks prior to the removal of the subsidy, NNPC has been importing most of the nation’s daily petrol needs of circa 45million litres due to the inability of oil marketers to source enough dollars from CBN through their banks or from other sources at good rate.
Delay in payment of incurred and due subsidy to marketers also created a huge hole in banks which made their bankers to refuse to extend further credit until their exposures are wound down.
The inability of NNPC to timeously provide and distribute the daily requirements is responsible for the queues in Lagos, Abuja and other price sensitive areas as products have been very available in South East where motorists are ready to pay up to N170 per litre.
NNPC accesses petrol through three major means:
1. Local Refineries: NNPC sends crude oil to our local refineries which refine and sell fuel to marketers for distribution.
2. Swap Arrangement : Here NNPC gives crude oil to refineries abroad who would refine and ship fuel to NNPC. The refineries only ships to NNPC, the agreed amount of fuel while retaining certain quantity as payment for refining the crude. The fuel is sold to marketers by NNPC.
3. Importation from International Oil Market: NNPC also imports from same market as the oil marketers to augment supply gap. But the corporation has been unable to bridge this gap widened by inability of major marketers to import. Hence the incessant queues.
HOW DOES NNPC FUND IMPORT?
If NNPC has to import, they have two options:
1. Utilise Part of Crude Sales Proceeds in dollars to pay the suppliers of fuel, sells the product to the marketers in naira and refunds the federation account in naira at conversion rate agreed with CBN;
2. NNPC can source FX diirectly from CBN to pay foreign suppliers of refined products.
SHUTTING OUT OF FX DOORS TO MARKETERS
FG in announcing the removal of the subsidy shut out oil marketers from accessing FX from CBN or official window to import refined products.
This is a deft fiscal move that will result in two outcomes:
1. All local major oil marketers like Forte Oil, MRS and Ascon have been shut out of importation as their needs for FX to import cannot be sourced from the shallow parallel markets. They will now become major distributors to NNPC who would be left as lone provider of refined products.
2. Foreign Major Oil Marketers like Total and Mobil would get their upstream sister companies to make available a portion of their share of Crude Sales revenues in dollars to finance their imports. This approach is limited to the local currency needs of the upstream arm since the retail sales are in naira and they may have difficultly in changing it into dollar to repatriate to their home countries. Hence they would still rely on product supplies from NNPC to service their filling stations.
3. The local oil major marketers and even the the fringe players under the umbrella of Independent Marketers will rush to build their own refineries for cost optimisation and control. This will create employment and increase our foreign reserve accretion.
RESULTANT STRUCTURE OF PETROL SUPPLY CHAIN
NNPC shall import and distribute to almost all oil marketers and its 350 filling stations nationwide.
Marketers would be rated and are allocated products to achieve the national strategy of constant and steady availability of fuel for Nigerians.
While some marketers with good credit rating would be required to pick products at NNPC depots or hired facilities on credit and pay after 30 days, some may be required to post a bank guarantee before products lifting while the rest would be required to pay cash in advance and collect products days later.
I project that many Major Oil Marketing Coys shall now be designated as Major Key Distributors of Petroleum Products so entitled by the wide network of the retail outlets.
Many fringe players frustrated by inability to receive products in time for sales in their filling stations shall willingly sell or lease out their stations to NNPC who has already developed its retail capabilities over the years.
Expect to see in the coming months your once familiar filling station adorning the brilliant colours of NNPC Mega Station. It is change induced.
THE STRUCTURE OF FX SUPPLY IN THE ECONOMY
Following the fall of crude oil prices internationally, reduced crude volume available for sales due to militant activities and the poor sales due to reduced oil demand by our former trusted buyers, there has been a reduction in the dollar revenues accruing to FG.
Also, the refusal of the FG to devalue the local currency and scarcity or lack of dollar liquidity have scared away many foreigners from investing in the economy through inflow of the much needed FX . They fear their inability to source dollars from the CBN or banks to repatriate their funds at will.
Also, most exporters of goods and services in Nigeria are not willing to bring back their export proceeds officially into Nigeria as some of them are not even allowed to utilize same funds to import some items CBN excluded from accessing FX official market. They now bring only what they need while preserving the balance offshore as capital protection device.
The combination of the factors above have made the “other sources” also known as parallel market very shallow.
This “other FX sources” the FG has commended oil marketers to go source their FX for import cannot meet the dollar need to import a cargo of 90,000 metric tons of PMS by one major oil marketer.
They have been asked to clap with one hand.
Therefore, all loan demands for petrol dealers in Nigerian banks shall be in local currency. The capacity to import now lies with NNPC. Other players have been emasculated.
SUGGESTED LOAN STRUCTURE
Deriving from the emergent market structure, the loans or facilities suitable for the marketers would now be:
1. Overdraft with 30days transaction cycle. The size of the facility would depend on the amount of products NNPC would be willing to allot the customer on a daily basis.
Customer draws the facility to settle product costs with NNPC. The banker should covenant over 100% turnover of total amount drawn every 30days. Cash pick ups at point of sales is usually the collateral for grade A customers. Tangible collateral is necessary for local players because of who we are.
2. Bank Guarantee: The banks should put a bank guarantee credit line for players so designated by NNPC. These guarantees should not be tenored for more than 45 days but with availability for one year. Turnover should be assessed every 30 days to guard against diversion.
REALITY OF IRRECOVERABLE BAD LOANS
In many banks there exist current loans to marketers borrowed to finance the importation of fuel. Though sales proceeds in naira have been lodged in the banks, FG has not paid the subsidy portion to clean up the loans. The implication is that the debit interest on the unpaid subsidy has now increased the loan size.
The federal government is also supposed to reimburse the marketers the loan interest incurred by the marketer in his bank due to delayed payment of subsidy and FX differential (ie the difference in exchange rate between the date of paying the offshore suppliers and the date the subsidy value is received and CBN released FX to repay the correspondent bank who refinanced the suppliers on behalf of the marketer). Government is owing arrears of these.
If the government fails to pay these past due obligations, the emasculated marketers would never be able to service or extinguish these loans already going delinquent in the books of banks. This will give the marketers negative credit rating and may prevent the banks from extending further credit even in the new dispensation.
POSSIBLE CORRUPTION AT PPPMC/NNPC
The good old days are back for heads of depts at NNPC as marketers with good public relations standing would always get quicker attention than those that rely on due process.
LEASING OF TANK FARMS OR DEPOTS
Under this regime, NNPC would rent or purchase big and idle depots in the wharfs to enable it dispense and distribute its products.
The depot owners who were the major marketers and who are no longer able to import fuel would be left with an option of renting their storage, loading and discharging facilities to NNPC.
WHY NNPC MENTIONED PRICE CEILING OF N145/L
To an innocent financial person and an economist, the pegging of the price at N145/litre may appear antithetical to deregulation because you don’t control the price of a commodity if u deregulate, we are taught.
But by shutting out other independent players from accessing official FX window had made NNPC the only supplier of refined products in Nigeria, hence the fixing of pump price will enable it bring in or produce fuel at profit hence putting a stop to a trading loss which has been a resultant hallmark of its interventionist activities in maintaining products supply in the national interest.
They project that they would still be profitable even if it has to deliver fuel to the remotest part of the north from Lagos.
The removal of fuel subsidy presents a great opportunity for banks in project finance especially in modular refineries near the raw material source.
This regime would also reduce banks’ dependence on foreign lines as most facilities needed shall be short term working capital financing in direct or contingent forms.
Many investors in fuel refining would besiege Nigeria to take first mover advantage as MTN did in early 2000. The foreign direct investment will be routed through local banks and this will generate growth in foreign currency deposits.
With this new policy, new market leaders will emerge and hitherto dominant ones will fizzle out as NITEL. Only the market intelligent players shall survive. Expect also the tumble in the shares of petroleum products distributing coys.
Today’s environment demands that every banker horns his/her skills in readiness for the great opportunities about to occur.
The cheese has moved!
ABOVE PHOTO: Managing Director of Capital Oil and Gas, Ifeanyi Ubah, a major beneficiary of the sleazy oil subsidy regime and a major player in the downstream oil sector