29 June 2018 ( Lagos ) : Strong oil prices should maintain the status quo in the downstream sector as it remains uneconomic for marketers to import products under the current pricing template (landing cost last estimated at ?171 per litre with $65/bbl oil price) and the no subsidy re-imbursement era. 

Thus, analysts expect NNPC to remain the sole importer of petroleum products in the country – a fact confirmed by the Minister of State for Petroleum Resources in April, though he debunked the claim that the implicit cost of the NNPC subsidy had risen to ?1.4 trillion. 

Analysts expect marketers to continue to receive premium motor spirit (PMS) at a regulated thin margin with product supply being relatively stable given the strides NNPC has made in strengthening its distribution channels. Notably, PMS truck-out has risen steadily in 2018 and NNPC share of downstream petroleum market has reportedly risen to 14%. 

As NNPC is able to sell below-cost, its increased distribution reach may prove challenging to other marketers who would be vying for market share ahead of expected deregulation in 2019/2020 (post-Dangote refinery). Meanwhile, existing arbitrage opportunity sustains the appeal of smuggling to neighboring countries, a scourge that the Ministry of Petroleum Resources continues to combat. 

However, analysts do not expect the status quo to change, and despite the financial burden of the implicit subsidy regime and the occasional controversy it generates, it would be politically expedient for the government to ensure product supply and no sign of fuel queues ahead of the 2019 polls. 

Deregulated products to continue to provide margin support 

Although analysts are less optimistic about the downstream space in the near-term given the reliance on NNPC and the current pricing regime, they see sector participants getting some joy from further diversification into deregulated petroleum products to support margins. 

This is a trend that has already been observed; 11 PLC’s new core investor NIPCO investment had already intimated its intention to expand its deregulated product portfolio and has begun construction of a new ATK (diesel) 20,000MT tank farm after rerentering the diesel business – a decision that has begun to support margins. 

Other marketers are toeing the same line and analysts expect expansion on this front as deregulated markets look more appealing than the current PMS market. For example, analysts note that Forte Oil (FO) may be poised to do this as its divestment plans and strategic focus on the petroleum downstream space may give it the financial and distribution clout to capture value in deregulated products. 

Finally, analysts expect industry players to look more closely at the Liquified Petroleum Gas (LPG) space give the FG’s state ambition to drive domestic LPG use through the LPG Penetration Programme. 

Source: Analysts at Vetiva Capital Management

Reporting for EasyKobo on Wednesday, 27 June 2018, in Lagos, Nigeria.