Africa’s Oil Benchmarking Moment

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Written by James Gooder – James is responsible for business development in Africa. James has been with Argus Media since 2004 in several editorial roles, including editing European electricity and emissions market publications. In 2007-10, he was the editor of the daily Argus Crude report, managing a global team of reporters and developing new crude price assessments.

Gasoline prices in Nigeria have reached a watershed moment. The weakening international markets mean that the cost of importing fuel has dropped below the regulated gasoline price, meaning that, in effect, Nigerian consumers are paying above the market to fill their cars.

Gasoline, known in Nigeria as premium motor spirit (PMS) or petrol, is consumed by 85pc of the cars in Africa’s most populous country, and most of the supply must be imported as the country’s four refineries have suffered from years of neglect and under-utilisation.

Independent price reporting organisation Argus Media has been publishing a west Africa delivered price for gasoline and other refined products since April this year. According to Argus data, the cost of imported gasoline dropped below the 87 Nigerian naira per litre ($0.44/l) government regulated price in late August, and has remained at a discount since. During September, the average price was a little under N83/l.

May’s fuel crisis in Nigeria, whose repercussions are still being felt, had much to do with unpaid subsidies and a system riddled with inefficiencies and graft, but also with regulatory issues replicated in other African countries where pricing is linked to outdated models. Markets change and evolve, but many of the fuel price formulas used in Africa are relics from earlier times, based on benchmarks that lack liquidity, transparency or relevance.

The incoming Nigerian government has a golden opportunity to address these problems to the benefit of taxpayers and consumers, by removing subsidies and aligning prices with international markets. This was abortively attempted in early 2012, causing widespread discontent. But lower outright oil prices make the present a more opportune moment if the case for the wastefulness of subsidies can be made.

As noted above, Nigerians ostensibly enjoy a fixed retail price for gasoline of N87/l. But outside the urban centres of Lagos and Abuja, away from the prying eyes of government inspectors, prices are reported at N150/l or higher. Yet all prices are useless if there is no fuel to be found at the pump.

The government is supposed to reimburse importers the difference between the regulated price and the import price, as Nigerian refineries are unable to meet burgeoning domestic demand. But the import parity reference price used does not reflect the quality of gasoline required in west Africa and is not a price that can effectively be hedged.

International trading firms can benefit from price differences between the gasoline import parity price and Argus’ benchmark northwest European Eurobob barge prices at the expense of the importers that are locked to the government regulated formula. It would be fairer to index against the same price assessment along the supply chain, to iron out distortions, allow hedging and link prices to international market levels.

An active swaps market settled against Argus Eurobob barge price assessments allows participants to lock in the price of gasoline, but not if the import parity formula decrees that importers are compensated according to a different price reference. The people that lose out are the African taxpayer, through inflated subsidy payments, and ultimately the long-suffering African driver, through patchy fuel availability because of this and other factors.

The Nigerian price cap encourages the illegal smuggling of gasoline from Nigeria to neighbouring countries. Much gasoline finds its way to Niger and Cameroon, while Benin has emerged as an informal hub for the distribution of cheap Nigerian gasoline to the rest of west Africa.

LPG — considered by many to be the fuel of the future for Africa and the key to switching rural populations away from firewood and kerosene, with their attendant health and environmental risks — is often priced in Nigeria according to the US Mont Belvieu index. This inland market price on the other side of the Atlantic was chosen in the days when the US was a destination for Nigerian LPG. But since the shale boom, the US has been a net exporter of LPG. The most obvious price reference for the African LPG market is the one for the Amsterdam-Rotterdam-Antwerp (ARA) area in northwest Europe, which is the key destination for African exporters and source for African importers.

Ghana, a growing producer of crude and LPG, took the step in 2011 of linking LPG prices to Argus cif ARA LPG benchmarks, where market liquidity is focused and against which hedging is easily done. This has eased the flow of LPG from the international market to the country, whose LPG production is swelling but not by enough to meet domestic demand of around 230,000 t/yr, compared with Nigeria’s 150,000 t/yr among a population some seven times larger.

Elsewhere in Africa, the story of outdated price benchmark application recurs. In South Africa and its neighbours, the regulated Basic Fuel Price (BFP) formulas are partly linked to Mediterranean fuel prices. But little if any diesel ever makes its way to the country from the Mediterranean, with most supplies coming from the Mideast Gulf and India, and gasoline tends to be imported from northwest Europe. In South Africa, LPG prices are indexed to the price of gasoline, despite LPG not being a transport fuel in South Africa. The authorities are investigating better ways of regulating the LPG market.

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