Nigeria Downstream Sector Brief

Jan 16th 2015 PMS Price Adjustment Evaluation

PPPRA Price Adjustment Strategy Evaluation (Nov 2014-Jan 2015)

The Need to Introduce an LPG Pricing Template by PPPRA

Volume 1-3| Jan 2015

Usman Suleman MBA (Oil & Gas ); B.Eng (Civil)

Proverbs 4:7_Wisdom is the Principal Thing

Nigeria Downstream Brief | Vol_1 Jan 30th 2015

Jan 16th 2015 PMS Price Adjustment Evaluation

In order to evaluate the current downward review in the regulated pump price of PMS to N87 perlitre from N97 per litre vis-à-vis determine the most likely Open Market Price(OMP), the PPPRAPricing Template for some selected periods as indicated in the Chart below were analyzed.

The result of the analysis indicates that the most likely OMP for PMS is N88 per litre which wasdetermined by escalating the Feb ‘09 price level with reference to the 2-month average crude oilprice prior to price adjustments and applying YOY price inflation increase of 1.25% over circa. 6-years,while also considering the Distribution Margin differences between Feb ‘09 and Jan ‘15 using the 6th-tenth rule.

Government PMS Price Adjustment decision is given a Fair Value from our traffic light rating.

88.0

N/litre

Decision Rating

65

PMS Price Regime Scale: Naira/litre

70 75 80 85 90 95 100 105 110 115

Fair

Estimated Price level based on using a2-month crude oil average price, priorto price adjustment (This wasdetermined using the 6-tenth rule fromFeb ‘09 OMP level and an inflationaryincrease of 1.25% over a circa. 6-yearsperiod.

PPPRA Price Adjustment

Period

2-months Crude Price Average Prior to Price adjustment($/bbl)

Landing Cost (Naira per

liter)

Distribution Margin (Naira

per liter)

Expected Open Market

Price (Naira per liter)

Regulated Price (Naira

per liter)

Subsidy (Naira per

liter)

Exchange Rate

(Naira:$USD)Period 1_Feb '09 44.05 58.51 13.20 71.71 65.00 6.71 141.78Period 2_Dec '10 88.74 112.82 13.20 124.75 65.00 59.75 152.03Period 3_Apr '11 118.80 145.56 13.20 158.76 65.00 93.76 155.42Period 4_Dec '14 67.51 83.80 15.49 99.29 97.00 2.29 158.85Period 5_16th Jan '15

52.37 74.35 15.49 89.84 87.00 2.84 158.85

89.84

N/litre

87.00

N/litre

Newly Announced Regulated Price for PMS

EOM Price for the same period for PMS

Source: PPPRA Templates (2009-2015)Opec Crude Oil Open Basket RegimeAuthors Analysis

Nigeria Downstream Brief | Vol_2 Jan 30th 2015

PPPRA Price Adjustment Strategy Evaluation (Nov 2014-Jan 2015)

In order to understand and evaluate PPPRA’s Price Adjustment Strategy for the period(s) spanningNovember 2014 to January 16th 2015; the price adjustments made were mirrored against the daily OpecBasket prices for the same period.

From the analysis, it appears that PPPRA price adjustments were made constant for a period of 44days in theface of dropping crude oil prices over the same period. This delay in price adjustment could have onlyincreased the OMP and the subsidy borne by Nigerians and Government. This delay in price adjustment alsooccurred between 29th December and 16th January 2015.

While the decision to reduce the regulated price for PMS to N87 per liter is commendable, it was ratherbelated as the opportunity to create a positive perception by consistently reducing the OMP against fallingoil prices was missed by Government .

PPPRA Price Adjustment decision for these periods are given a Barely Fair Value from our traffic light rating.

Decision Rating

Barely FairSource: PPPRA Templates (2009-2015)

Opec Crude Oil Open Basket RegimeAuthors Analysis

0

20

40

60

80

100

120

140

21-O

ct

24-O

ct

27-O

ct

30-O

ct

2-N

ov

5-N

ov

8-N

ov

11-N

ov

14-N

ov

17-N

ov

20-N

ov

23-N

ov

26-N

ov

29-N

ov

2-D

ec

5-D

ec

8-D

ec

11-D

ec

14-D

ec

17-D

ec

20-D

ec

23-D

ec

26-D

ec

29-D

ec

1-Ja

n

4-Ja

n

7-Ja

n

10-J

an

13-J

an

16-J

an

19-J

an

22-J

an

25-J

an

28-J

an

31-J

an

November-14 December-14 January-15

PPPRA Refined Product Price -Adjustment Strategy Evaluation(Nov 2014-Jan 2015)

PMS ($/bbl) DPK ($/bbl) AGO ($/bbl) FO ($/bbl) Opec Crude Oil Basket Price $/bbl

Nigeria Downstream Brief | Vol_3 Feb 4th 2015

The Need to Introduce an LPG Pricing Template by PPPRA

The non-availability of an official LPG Pricing Template have allowed for a non-transparent price fixing regime. Fromour analysis, using Saudi-Aramco Contract Price for a 70:30 LPG Mix and marking-up the current Cost Elements for PMSby 70% to determine the most likely LPG Open Market Price in Nigeria; indicates that Nigerians are currently beingsurcharged by the current system.

To further confirm these anomaly, our projected OMP for LPG was compared to the recently revised OMP for New DelhiIndia, for the same period. From the comparative analysis, using Ajah_Lagos average price of N3000 per 12.5kg showsthat Nigerians may likely be paying in excess of N1600 per 12.5okg than Consumers in New Delhi.

However from our analysis the projected maximum OMP for February 2015 should be about 1856 Naira per 12.5kgCylinder i.e. about 456 Naira above Delhi OMP (Desired Price plus Distributor Commission for Feb, 2015). This is becausethe cumulative margin above C+F Price was projected to be 202 $ per mt as compared to Delhi ‘s 160 $ per mt.

It is therefore imperative, for PPPRA to come up with a Price Adjustment Strategy for LPG to correct this unjustifiedAnomaly. It should be noted that Nigeria is a Net Exporter of LPG as against India that is a Net Importer , with bulk of itsImports coming from the Asian Gulf.

In developing the new pricing template, provisions should be made to support an LPG Infrastructure expansion fund asa percentage of the Cost & Freight Price from Bonny NLNG; while the Tax(s) Component should be made Zero. A 1-month moving average price fixing regime based on a 5-10% discount on the Saudi-Aramco Contract Price for Propaneand Butane Should be adopted by the NLNG for the Domestics Market.

This initiatives will make LPG Prices very affordable and thus competitive against the currently subsidized OMP forKerosene; and ultimately drive the demand for LPG in Nigeria.

Decision Rating

Source: Delhi LPG Price Buildup for Feb 2015 (Assessed from www.hindustanpetroleum.com/documents/pdf/pb/pricebuildup_LPG.pdf)PPPRA PMS Jan 2015 Template (Assessed from www.pppra.ng.com)Opec Crude Oil Open Basket RegimeAuthors Analysis

2,443.30 2,441.31 2,361.89 2,320.19 2,286.431,982.63 2,055.23

1,824.97 1,856.03

0.00

50.00

100.00

150.00

0.00

1,000.00

2,000.00

3,000.00

4,000.00

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15

Nigeria Projected LPG Open Market Price(OMP) Analysis Using Saudi-Aramco CP

Distributors Margin ($/mt)

Storage Charge ($/mt)

Jetty Thru'put ($/mt)

Financing ($/mt)

NPA ($/mt)

Lightering Expenses ($/mt)

Traders Margin ($/mt)

LPG Freight ($/mt)

LPG FOB Cost using Saudi Aramco LPG Contract Price for 70:30 Butane:Propane Mix ($/mt)

Projected Expected Open Market Price Naira/12.5kg)

Opec Crude Oil Open Basket Price ($/bbl)