Amidst the recurring crisis in the downstream petroleum sector, the Managing Director and Chief Executive Officer of 11 Plc and former Chairman of the Major Oil Marketers Association of Nigeria, Tunji Oyebanji, in an interview opens up on the many challenges faced by marketers, as well as issues of deregulation, cross-border smuggling of petroleum products to neighbouring countries, among others.
Being at helms of the affairs at former Mobil Oil, now 11 Plc, can you describe how the journey has been so far?
As you may know, the company changed its name from Mobil to 11 Plc on April 1 2017. Essentially, what happened was that Exxon Mobil used to own 60 per cent of the shares of what was then Mobil Nigeria Plc. They had announced about a year and a half before that they intended to sell their 60 per cent interest. The remaining 40 per cent was owned by members of the Nigerian public quoted on the Nigerian Stock Exchange. A lot of people got involved, bids were opened, and after people submitted their bids and proposals on how to run the company, we had a series of discussions and negotiations, and Nipco investments emerged as the preferred bidder, and on April 1, 2017, Nipco took over the company.
As it turned out, I had served as chairman of the company at Mobil Nigeria Plc. When the new owners came over, of course, the new core investor became the chairman of the company but was gracious to me to continue as the MD/CEO of the company. And that has been since 2017 till now. It has been a very interesting journey, and a lot has happened to the company since that time. I think the final thing I want to talk about in the journey so far is that about a year and a half ago, we invested in the purchase of a hotel. That’s the Lagos Continental Hotel in Victoria Island. We bought it from AMCON, and I can tell you that the hotel is now turned around and well-managed.
What challenges have you encountered running the business in Nigeria’s downstream sector?
They are numerous and multi-faceted. Let me start with some of the things that are more common. As you know, Nigeria is foreign exchange-challenged. So, getting enough forex is a big problem. We struggle to get the amount of forex that we need to import, and for us, when we want to import either aviation fuel (AGO) or raw materials we use in blending our lubricants, it requires a huge amount of forex. If a metric tonne of aviation fuel is $1,000 and you want to import 10,000 metric tonnes, you know what that means in terms of the amount of dollars that you need. That will be almost $10m to $11m. So, to be able to mop up that from different sources, different banks become a big problem.
Secondly, the rate at which you get the dollar is also a major problem that you have to deal with. So, these are some of the issues on the forex side that we have struggled with. More specifically, our business is importation. We have to import a lot of raw materials. Getting raw materials out from the ports is another big nightmare. It takes forever from placing the order, to receiving them into our facility. This can be between six and eight months. And because of that, we have to hold a huge inventory of those raw materials because if we don’t have that inventory, then, it becomes a problem because we won’t have materials to produce. Another area that is a bit of a challenge for us is what I call multiple government agency oversight. The Federal Government, through the NMDPRA, should by law be the only one regulating. But you now have other actors who want to come in and get a piece of the action. Lagos State can come, NMDPRA will come and ask for environmental impact assessment, and even the local government will come and perform the same assessment over and over again. What used to be PPPRA has a representative here; what used to be DPR has people here. The NNPC has people here, so you have about five to six government agencies doing the same thing. They would look at the product we receive from the ports, the quantity of litres we collected, the quantity we are we loading out. So, the time we spend addressing all those agencies is so much, and indirectly, it impacts our costs of doing business and doesn’t allow us to be efficient. All these are additional costs of doing business. For our lubricants, we face the challenge of adulteration. We have to spend a lot to educate the public on what our products look like and use tamper-proof packaging. The regulators that are supposed to curb fake products from the market are not doing their jobs either because of the capacity of such agencies or even lack of knowledge on how to go about those things.
What are those big challenges in the downstream sector you wanted to talk about?
The major challenge is particularly on PMS. The margin is very low vis-à-vis the cost of doing business, the investments we need to make on terminals, transportation of products from depots to petrol stations. When you look at the profit, it’s very low, and it is because the price is fixed.
So, since you said the margins are low, what price do you think marketers should sell petrol per litre?
The margin you make on a product doesn’t really count. It is not the price that should determine how much a litre should be sold. For instance, my margin on lubricants is healthier because when my cost is up, I can adjust my price to reflect increasing costs. But fuel, because the price is fixed and all the components of the product are also fixed, I can’t adjust price to reflect costs. For instance, if they ask you to sell at N165, they will say out of that N165, transportation is N15, margin to marketers is N4, costs of pipeline delivery is this and that – everything is fixed. What that means is that when you fix the head price, if the cost of delivery goes up, and you don’t adjust the price, there is no room to increase margin. So, the business becomes more and more unprofitable.
So, what you are saying is that marketers are running at a loss?
Yes, as far as PMS is concerned.
What is the value of the loss you are incurring?
The way to be able to assess it is to say, for instance, the cost of transporting a litre from Lagos to Abuja, let’s say, is N17. The person who invested in the truck, because of the fixed cost of N17, the revenue he will generate could be N17, 000. But the cost of diesel today is such that if he fills the tank, he needs like 1000 litres to take him to that location. Because of the cost of diesel today, that cost of diesel is now, say, N900,000. So you can see if his rate is fixed, he is going to earn N750, 000, but the diesel he’s buying is 900, 000. So, you can see that he’s already operating at a loss.
Maybe the Federal Government is scared of allowing fuel marketers to fix prices as they want to avoid exploitation like what is currently happening with gas where NLNG is selling to depot owners at N7m per 20MT, and depot owners sell at N12.5mn. Is that the case?
That’s because everybody has so much emotion when it comes to petrol prices. When you go and buy beans, the price won’t be the same all the time. The big problem is that when you have only NLNG or NNPC bringing in the products, there’s usually not enough to go round. They are incapacitated to meet demand. But when the market is open and free, there will be relative scarcity at first and people will make extraordinary profits. How a market works is that, when players are few like you have a monopoly, the product is not enough. When a lot of people are scrambling for a product, and it’s coming from one source, then, the price will go up.
Maybe we should say you marketers are preventing the refineries from working because if you complain of high importation costs, why don’t you support or even invest in local refineries to stop high costs?
In the past three years now, for instance, who has imported? Do you know how much one refinery costs?
Can’t you pool resources together from different sources to build?
Nobody has that kind of money in his pocket. So, you go to the bank to raise funds. But when you get there, they ask you for plans. So when you tell them 80 per cent is PMS, 10 per cent is diesel, and others for kerosene, they will ask how you intend to recoup the investment since PMS is not deregulated and you can’t fix prices based on operational costs. They won’t give us loans and that’s why all the modular refineries you hear about produce diesel, not PMS, because capital requirement for PMS is much more than is available.
Now, let’s look at Dangote, who I will say is not an ordinary business man. I think in order to encourage him, the government does whatever he needs to grow. I’m not saying more than that. He has to use a big chunk of his personal money, approach the bank and convince the bank to give him the rest. If he had gone to the bank to say he needed 100 per cent of the $19bn, they wouldn’t have given him the loan. Even today, hardly will you find international financiers who want to finance refinery construction because the world is moving to renewables and there is overcapacity of refineries globally. All the big multinationals are actually closing down all their refineries. Ordinarily, Nigeria likes to rush into business that is profitable, and that’s why all these storage tanks that you have here are more than what we ever need. We have over 300 depots all over Nigeria, more than what we ever need. This is simply because they can invest in them with N3bn-N4bn and start making money. But in a refinery, for you to build a standard small one, you will have like $2bn. By the time you are now talking about a big one like Dangote’s, you are talking about $15bn. Even the country as a whole will struggle to find that kind of money. So, it’s more of an emotional talk than economics when people are saying we should build refinery.
Dangote refinery recently said the NNPC refineries are not old, and that they could be revived through TAM and the increase capacity. Does it mean NNPC doesn’t have a clue on how to go about the refineries?
