The country’s downstream petroleum sector is in need of favourable policy steps to ramp up investment, analysts at FBNQuest have said.
The analysts, in a note on Friday entitled ‘Downstream oil and gas at a crossroads and due for favourable policy steps,’ said given relatively softer petroleum products demand in the first half of this year, the near-term outlook for the sector was certainly subdued.
They, however, said the long-term prospects appeared more promising.
FBNQuest said, “The downstream oil and gas business is typically a low margin one. However, other factors, mainly constraining policies, have led to historically low investments in the sector over the last decade.
“In our view, the fortunes of the sector could change with the growing possibility of full pricing deregulation.
“We believe the reintroduction of a market-friendly pricing template for petrol in March and the central bank’s current attempt at unifying foreign exchange rates increase the prospects of the end of mandated petrol price ceilings.”
It noted that the newly adopted pricing template took into consideration several factors such as the petroleum product cost and the foreign currency conversion rate at which oil marketing companies import petroleum products.
The analysts said, “We expect the recent adjustment of the naira official FX rate from N306/$1 to N380 to test the durability of this template within this quarter.
“Assuming all other inputs remain constant on the most recently published PPPRA petrol pricing template, an adjustment of the FX rate assumption to current levels raises ex-depot prices by approximately 20 per cent.
“Competition within major marketers is growing with new ownership/management. In the event that the Federal Government decides to continue with the new pricing template, effectively deregulating the sector, we see competition intensifying over the long term.”
The analysts said under this scenario, reach and distribution would be a key competitive advantage.
They said, “In the near term, we expect the industry to take a hit from measures adopted to stem the spread of the COVID-19 pandemic. The implementation of a total lockdown, followed by a partial economic re-opening in key states – Lagos, Ogun and the FCT – should result in declining petrol consumption in Q2.
“We estimate a petrol consumption contraction of between 40 and 45 per cent in Q2 even though product importation grew eight per cent year-on-year to 5.3 billion litres in the prior quarter.”
