Analysts at merchant bank and asset manager, FBN Quest said in a note titled ‘Downstream Oil and Gas at a Crossroads and Due for Favourable Policy Steps,’ on Friday that the near time outlook for the petroleum industry was subdued considering the comparatively low fuel demand in the first half of 2020.
They also observed that a full pricing deregulation is crucial to the transformation of the fortunes of the oil and gas industry given that the downstream business is characteristically a low margin one.
The note prepared by Uwadiae Osadiaye, Oil & Gas, Industrials and Agriculture Analyst at FBN Quest nevertheless stated that the long-term prospects of the sector seem promising.
“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.”
FBN Quest remarked that recently adopted pricing template embraced several factors like petroleum product cost and foreign currency conversion rate at which fuel marketing firms import petroleum products.
They 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.”
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