http://www.fxmallam.com/commentary/nigerian-government-can-solve-crises/

The Nigerian National Petroleum Corporation (NNPC) has put the national daily consumption of petrol at 40 million liters per day. The ‘barrel of crude’ equivalent is 478,068. That is to say that 478,068 barrels of crude should be able to supply the demand of petrol every day in Nigeria. Nigeria’s peak production and the 2016 budget is based on 2.2m barrels of crude daily. Basically 22% of Nigeria’s peak capacity can take care of the Nation’s demand.

Even with the diminished supply due to militant pipeline attacks, Nigeria’s capacity is 1.6m and demand is 30% of that locally.

Currently, according to NNPC, Nigeria’s refineries have the capacity to take care of only 17% of the total demand. There are discussions to increase the capacity of Nigeria’s refineries through public means (NNPC) and through private investments most notably that of Nigeria’s wealthiest individual, Aliko Dangote. Dangote’s refinery is projected to refine 650,000 barrels per day and is currently scheduled to come online in 2018.

The Problem

In simple terms, the current problem is that, the lack of FOREX has caused NNPC to lift the cap on fuel prices from N86 to N145. Many have called this subsidy removal but that is simply not the case. What has happened is that since the Central Bank is (at least they claim to be) unable to supply the requisite dollars to pay suppliers at N200 per $1, they are leaving it to marketers to buy at the parallel market. NNPC estimates that marketers would be able to source US Dollars at N290 per $1 and by adjusting the cap, they can sell and make a profit.

The issue with that is twofold; a drastic increase in pump prices which among many effects will boost inflation and hurt the pocket books of the average Nigerian. You could make the argument that due to fuel scarcity, market forces have already caused pump prices to go up.

The second problem is that the pressure on forex rates will increase because now that markets will be sourcing for dollars through the parallel market, it would increase demand and force prices up. By my calculation, it will cost roughly $6b annually if all of Nigeria’s fuel supply were to be sourced externally.

The Solution

Nigeria has a long term solution in the works. If NNPC can boost capacity to 25% from 17% of demand and Dangote’s refinery comes online as scheduled with the ability to supply 130% of demand; and even with accounting for population growth, you can see that we could be heading towards a market driven solution in the long run.

However, we need a short term solution. Here’s my solution –

Crude Swaps for 100% of demand made entirely by NNPC. Stay with me. Crude swaps would eliminate the need for FOREX to source products. NNPC can then sell products for a minimal profit to marketers and allow markets to set their own prices. When those marketers compete with each other, it will regulate prices without subsidy and minimal price gouging.

What of the loss of revenue the FGN will sustain? Simple, with a foreign reserve of $26b, we would be budgeting $12b over a two year period. Moreover, the FG wouldn’t actually be losing money, they would just be converting USD to petroleum and then to Naira because they would be selling the petroleum swapped at a profit.

What of corruption such as that sustained in such deals during the past regimes? According to Nigeria Extractive Industries Transparency Initiative, Nigeria lost $966 million to crude oil swap deal between 2009 and 2012. So that’s a real concern and a real threat to this plan. However, this is a new regime which has promised to tackle corruption. Also, the loses aside, this actually worked quite well in the past. But back then, no one was paying attention to back room deals. We are not so oblivious now.

Conclusion

Such a move will leave the $20b estimated that Nigerians from the Diaspora to serve other forex demands. Others will come from Foreign Direct investments and whatever sources they currently come from since the FG has limited its supply.

I am sure much smarter people can offer even better solutions and some might even disagree.

What we can all agree to is that we need both short and long term solutions. What we can agree to is that we need to be having these sorts of discussions to come up with those solutions. What we also need is the political will to do something to ease the pressure on Nigeria citizens at the pump and in their pockets.

It appears that other long term plans may be in place to help Nigerians economically in the long run such as the Naira/Yuan swap agreement. But we have to provide short term solutions to allow Nigerians survive to the point they can also benefit from these long term plans.

Hmmmm

Really?

It's one man's opinion.

Pennywise solution, if trade by barter is wht you refer to, its been well discussed in SS1.

Anyway, nice thought.

FxMallam:

Crude Swaps for 100% of demand made entirely by NNPC. Stay with me. Crude swaps would eliminate the need for FOREX to source products. NNPC can then sell products for a minimal profit to marketers and allow markets to set their own prices. When those marketers compete with each other, it will regulate prices without subsidy and minimal price gouging.

With the fall in oil price, i think this is the next best alternative.
Fantastic article.

Dudeweedlmao:


With the fall in oil price, i think this is the next best alternative.
Fantastic article.

Thanks!

The government should should set up pragmatic and realistic measures to end this.

I tried finding fault with this your idea, but i honestly couldnt. Lol. Brilliant idea!

What of corruption such as that sustained in such deals during the past regimes? According to Nigeria Extractive Industries Transparency Initiative, Nigeria lost $966 million to crude oil swap deal between 2009 and 2012. So that’s a real concern and a real threat to this plan. However, this is a new regime which has promised to tackle corruption. Also, the loses aside, this actually worked quite well in the past. But back then, no one was paying attention to back room deals. We are not so oblivious now.

Brilliant piece there. The whole foundation of you proposals is based on the ability of this government to block what were hitherto leakages. If av be thinking it to crude swap with a moderate loss to refiners should entice them towards refining n giving back to us without us having to pay them the increasingly scarce dollar.

The Nigerian National Petroleum Corporation (NNPC) has put the national daily consumption of petrol at 40 million liters per day. [s]The ‘barrel of crude’ equivalent is 478,068. That is to say that 478,068 barrels of crude should be able to supply the demand of petrol every day in Nigeria[/s]. Nigeria’s peak production and the 2016 budget is based on 2.2m barrels of crude daily. Basically 22% of Nigeria’s peak capacity can take care of the Nation’s demand.

478,078 Barrels of crude (76 million litres of crude) does not translate to 40 million litres of PMS.

[i]However, your suggestions are brilliant and it's thinking out-of-the-box.

We've been doing more of swap recently, but the cabals and corruption in the system are frustrating such efforts, coupled with the fact that NNPC does not have enough infrastructure to handle 100% imports and supply . . . which in my books are 'excuses' . . . for starters, we don't consume 40 million litres. Your idea of bringing in other marketers into the swap deals is a possibility, but these people are blood sucking leeches -- they will always find a way to mess up good intentions.

Overall, this is a smart way to conserve forex.
[/i]

This is based on d assumption that 478,068 barrels of crude will exchange for 40 million barrels of PMS which may not really be d case.
Its also worthy of note that nig govt. gets 55% of crude production.
Anywhere good analysis.
This is a smart idea n d govt. should be looking at swap deals rather than increase pump price.

Nice idea! The issue remain with the marketers, they will still smuggle bulk of the product to other countries to sell at a higher price if NNPC sell cheap.

Realdeals:
Nice idea! The issue remain with the marketers, they will still smuggle bulk of the product to other countries to sell at a higher price if NNPC sell cheap.

The major downside to this plan is corruption. That's it in a nutshell in my opinion. But my rationale is that if we are using a single payer system, it will be easier to track leakages and activities of those who aim to scuttle this process. Secondly, this is a short term plan that only exists till we sort out our long term problems. And at open market, between Dangote's refinery and the state owned refineries, we shouldn't be importing finished products by the end of 2018.