Nigeria’s oil market in limbo following NNPC-OVH deal

By Temitayo Lawal, Temitayo Lawal
Posted on Wednesday, 19 October 2022 17:49

Photo twitter: @nnpclimited

After transitioning from a government-controlled national hydrocarbon corporation to a privately-run entity, the Nigerian National Petroleum Company Limited (NNPCL) announced last week a major deal that it believes is key to its ambitious expansion drive.

The company acquired the downstream assets of OVH Energy, including a reception jetty (ASPM) with 240,000MT monthly capacity, eight LPG plants, three lubes blending plants, three aviation depots, and 12 warehouses.

The highlight of the deal, whose value remains undisclosed, is the 380 Oando-branded fuel filling stations that NNPC Retail Limited will add to its over 500 outlets across Nigeria. NNPC aims to own at least 1,500 retail outlets, which will make it the largest downstream company in Africa.

“In simple terms, what this deal means is that if you see a lot of NNPC petrol stations today, you will begin to see more,” Uwa Osadiaye, a senior vice president and oil and gas analyst at FBNQuest, tells The Africa Report.

Influential position

For years, NNPC imported most of the refined fuel used in Nigeria. In 2017, it became the sole importer. It sells the products in its outlets and to other independent marketers or energy retail companies in Africa’s most populous nation.

Uwa says the OVH deal puts NNPC in a strong position to facilitate the distribution of petrol products from any refinery across the country.

NNPC is expected to stop importing refined petroleum products upon capitalising on its newly acquired facilities. And if the downstream market is fully deregulated, NNPC will be in a prime position to influence fuel prices by depending on sales volume to rack up profits.

“They would still lack the capacity to supply the approximately 16 million MT demand and will still require independent marketers. Nevertheless, it will certainly be in a very strong position to manipulate prices [if subsidies are removed],” Ibrahim Shelleng, managing director at Credent Investment Managers Ltd, tells The Africa Report.

Will subsidies be finally ditched?

Even though consecutive governments flirted with the idea of removing the fuel subsidies, they failed to go ahead with it, rather favouring price adjustments despite the massive financial burden of the fuel subsidies.

Ibrahim points out that attempts to remove fuel subsidies are often met with a fierce backlash from labour and trade unions, out of the belief that such a step would open the door to corruption with very little accountability.

Nevertheless, it will certainly be in a very strong position to manipulate prices [if subsidies are removed].”

When former President Goodluck Jonathan announced the removal of fuel subsidies in 2012, nationwide protests erupted. Agitators argued at the time that there was no guarantee that the subsidy funds would be put to good use, with the then government facing corruption allegations.

President Muhammadu Buhari, who had failed to ditch the subsidies in mid-2022 as promised, said they would finally be removed by June next year. By then, his final tenure will have ended, which raises doubts over whether the oil subsidies will actually come to an end.

However, Uwa says that fiscal considerations may force a new government to remove the subsidies, which are expected to amount to $9.6 billion this year amid soaring oil prices. The World Bank estimated that Nigeria spent $4.5 billion on fuel subsidies in 2021, equivalent to 2% of its GDP or 35% of its oil and gas revenue.

Bittersweet impact on investment

The NNPC-OVH deal can both bode well and ill for the energy sector investment.

“The acquisition could seriously affect other players in the downstream sector as the NNPC Ltd would dominate the market and potentially could manipulate prices to hamper competitors, thereby defeating the aim of deregulation,” Ibrahim says.

“This would not be viewed favourably by foreign investors, who are currently grappling with inconsistent exchange rate policies and the outlook for the downstream is not positive.”

But despite NNPC’s dominance, other players will still have the chance to either compete for what is left of the market share or directly vie with NNPC for market shares, Uwa argues.

He believes it also signals to foreign investors that Nigeria is doubling down on the hydrocarbon route, which gives investors the confidence to invest in the market, especially in the long term.

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