Questions over Price of Kerosene

The undisputed champion of the downstream sub-sector of Nigeria’s oil industry is on the march again, to corner the kerosene market

By RAYMOND MORDI

Femi Otedola

Fred Itua, an oil and gas consultant, believes that Nigerians are not being told the whole truth about the campaign by Femi Otedola’s African Petroleum, AP, to provide kerosene to the ordinary Nigerians at affordable price. He said going by the rising cost of crude oil internationally, coupled with the cost of freight, it may not be feasible for the average marketer in Nigeria to sell kerosene at that price. Besides, he said considering the cost of taking the product from one part of the country to the other alone, it cannot have a uniform price nationwide. So, he believes government must be involved in one way or the other, by way of granting waivers or paying for the cost of bridging the product to various locations across the nation. “If that is the case, it then means that there is an element of subsidy from government. Nigerians need that level of subsidy from government for now anyway, because kerosene is being used by majority of Nigerians. More than half of the population depends on it for cooking”, he explained.
Similarly, Karimu Azeez, an attendant at the Mobil Service Station along Oba Akran Avenue, Ikeja, Lagos, was equally amused by the scarcity that has hit the kerosene market, following the launching of the Otedola campaign. Azeez told the magazine that the idea of bringing down the price of the product is a good one, but that it would not work because government would not fulfil its own end of the bargain. He said in the agreement it entered into with AP government had promised to supply AP with kerosene, otherwise known as dual-purpose kerosene, DPK, “but after the first batch government has not been forthcoming and AP has been left in the lurch”.
Otedola was the cynosure of all eyes recently in Abuja, the nation’s federal capital, when he launched with much fanfare, the campaign to make kerosene available to Nigerians at the rate of N50 per litre. At the occasion, politicians and high-ranking government officials, such as David Mark, the Senate president, Odein Ajumogobia, minister of state for energy (petroleum), who represented President Umaru Yar’Adua, Abubakar Yar’Adua, the group managing director, Nigerian National Petroleum Corporation, NNPC, took turns to pour encomiums on the AP chairman’s selflessness, initiative and business acumen. Indeed, the idea of selling kerosene for N50 a litre was received with applause across the nation; because the product is the major cooking fuel which majority of Nigerians rely on, for domestic cooking.
But the magazine’s investigations indicate that the campaign took off on a bad note, as the oil marketing company does not appear to have firmed up arrangements before going public with it. There was no kerosene at all the service stations the magazine visited across Lagos last week, at least as at Thursday. After exhausting the first batch of DPK supplied, the stations had none to sell. There was an uneasy calm in the market, as other marketers apparently decided to adopt a wait-and-see attitude, by steering clear of DPK for the time being. The current price regime has pushed them out of the market, but most of them do not equally believe that AP can make good its promise of making the product available across the nation at a uniform price of N50 per litre.
Itua believes that it is not everybody that can dabble into such a big campaign to make kerosene readily available nationwide at N50 per litre, because of the logistics involved. Though he described Otedola as a very resourceful person who tries to go the extra mile in his business to stay ahead of competition, Itua is a bit wary about the logistics that would be used to achieve the objectives of Otedola’s campaign. His words: “First and foremost, my question is, how is he going to source the product?” The oil and gas consultant is of the view that the supply end may pose a challenge for the AP campaign. He said Otedola is probably going to import, because the country’s refineries do not have the capacity to produce kerosene for the nation. “Even outside Nigeria, it’s not all refineries that are ready to produce kerosene. It’s only in Nigeria that it is in high demand because we use it to cook. In developed countries or even developing countries with focused leadership, they prefer to use gas or electricity for cooking. Only few companies, such as those that produce insecticides, use it as raw material”, he said. Itua told the magazine that the success or failure of the campaign would be determined by the way and manner Otedola is going to source the product.
Aside from all that, there are those who are not comfortable with the idea of Otedola dominating the kerosene market because of his antecedents. Otedola seems to have a reputation for being shrewd and calculating in business. Those who know him very well say the son of the one-time governor of Lagos State, who ventured into the oil sector in March 1999, by incorporating Zenon Petroleum & Gas Limited, an indigenous company engaged in the procurement, storage, marketing and distribution of petroleum products such as petrol, diesel, kerosene, gas fuel oils and lubricants, utilises his connection with people in high places to gain advantage in business. Today, Otedola dominates the diesel market, a product that is currently selling for between N150 and N155 per litre, like a colossus. Like the present campaign, he took over the diesel market through an aggressive marketing policy that is based on price reduction, as a way of undercutting competitors. Some observers say he started jerking up the price the moment he captured the market, and so there are similar fears that he may do likewise this time around.

African Petroleum House

According to Oliver Mordi, chief executive officer, Starways Energy, the implication of this development is that Otedola is likely to dictate the pace in the kerosene market in the future, as he did in the diesel market. “Femi Otedola is a study in how to achieve business success through making the right friendship and being calculating without being loud”, a businessman who does not want to be named told the magazine. Similarly, Mordi described Otedola as somebody who tries to take the bull by the horns. “He loves facing daunting challenges and he easily overcomes them. He is certainly a trailblazer. In the downstream sector, he has proved his mettle in the marketing of diesel. His contemporaries know that he is a man to watch”, he told the magazine. He said the merger between AP and Zenon produced one of the biggest indigenous oil marketing companies in the country. His justification: “Of late, there was loan syndication for Zenon running into about $2.2 billion. This is expected to be used to expand the operations of the company. In fact, with that kind of money, you can build a refinery. With that kind of money, they are no doubt the largest indigenous oil marketing company around”.
 The question agitating the minds of Nigerian now is, is it really possible to sell a litre of kerosene for N50? Put differently, will Otedola’s kerosene price reduction campaign work? The magazine’s investigations at some of the oil depots across the country, particularly in Apapa, Lagos indicate that ex-depot price of DPK ranges from N58 to N65 per litre, meaning that at the service station the price is likely to range between N70 and N75 per litre. Before the AP campaign kicked off, the price of a litre of the product at some filling stations in Lagos ranged from N75 to N80. Some dealers who spoke to the magazine outside the premises of the Rahamaniyya Oil & Gas Limited depot in Apapa, said government has been paying a lot of lip service to the issue of subsidising petroleum products, and that under the present circumstances, there was no way marketers can successfully sell at N50 per litre nationwide. This is explained by the fact that there is a perennial scarcity of kerosene across the country, as the supply of the product is not stable.
On his part, Itua is not sure whether the idea would be sustainable, given the present volatile nature of the world economy, as dictated by the rising price of crude oil internationally. But he is of the view that if any marketer in Nigeria can do it, that man would be Otedola. “For a long period, while competitors were selling diesel for N65 per litre or more, he was selling for N60. That factor helped him to corner the market. So, if he was able to do it with diesel, he can do it with kerosene”, he told the magazine. Against this backdrop, Mordi said Otedola’s joker might be in the area of the quantity of kerosene he is importing or the profit margin he is willing to forgo. His words: “He might be exploiting what economists describe as economies of scale. For instance, where other marketers are placing order for two to five shiploads of kerosene, he might order for 20 shiploads. That would definitely bring down the purchasing price for him. He might also be selling at a little profit, with the hope of getting his returns from the huge turnover that this would engender”.
Tam David-West, professor of Virology and one-time minister of petroleum resources, is of the view that the price regime as announced by Otedola has vindicated him. “I have consistently maintained that our petroleum products are overpriced. I congratulate him for the feat to the extent that he doesn’t have a hidden agenda to dump the masses afterwards. What he has done is great and I pray he can sustain it without bowing to pressures for a reversal. AP is a Nigerian company and we should be proud of it. They messed up the company, but Otedola is now trying to rebuild it. I wish him well”, he said.
Attempts throughout last week, to get AP to clarify issues on the campaign were rebuffed by the company. An interview had been arranged with Dominic Nkwopara, a senior manager in AP, who is the chairman of the monitoring committee of the campaign, by an official of the corporate communications department, to throw more light on the development. Indeed, the magazine attempted to conduct the interview on phone, but Nkwopara insisted that he would prefer a face-to-face interaction, and requested that the reporter should come over to the organisation’s headquarter in central Lagos. But unfortunately, the senior manager told the reporter on getting to the AP headquarters that he sought clearance for the interview while he was on his way to the office, and that it was not granted.
AP’s reluctance to speak on the issue probably lends credence to views that Otedola may be using the campaign as a ploy to corner the kerosene market, as he did with diesel, the price of which he later jerked. Going by his antecedents in Zenon, Otedola has an aggressive marketing policy that utilises the strategy of reducing prices, as a way of undercutting his competitors, in the marketing of his products. David-West has, however, warned Otedola not to play a fast one on Nigerians. He said Rockefeller did a similar thing in the United States, US, by forming a cartel that dictated price to consumers. “It will be up to the Nigerian government to curtail him through legitimate means like we have in other countries. For instance, the Consumer Protection Unit is a very powerful group in the US and Britain. Our government is only making the people experience serious hardship and it is very shameful”, he said. Itua, on his part, waved aside the fear that Otedola might use the strategy as a ploy to capture the market and jerk up the price later as mere speculation. But on the other hand, he said it is the duty of government to call him to order, if after launching the campaign with so much fanfare, he should renege on his promise to the people after capturing the market, by jerking up the price.

Kerosine queue

In less than a decade, Otedola, the white apparel-loving businessman from Odoragunsin near Epe in Lagos State, has successfully positioned himself as the man with the Midas touch. He started very small, with just N20 million in 1999, but today he is presiding over an organisation worth N600 billion. The intriguing thing about it is that Otedola, who is in his early 40s, achieved this feat by selling diesel; hence he is popularly called ‘Diesel King’. He also pioneered the importation of diesel. “This was a time when the focus was on Nigerian refineries; nobody ever considered importation then. Marketers then depended on allocation from the NNPC, and through middlemen, sell at almost twice the official price. But he flooded the market with imported diesel and drastically reduced the price”, Itua explained, adding that Otedola rode on the back of the deregulation of the downstream sector to carve a niche for himself in the sector. “But he was able to capitalise on it because he was focused and innovative. He built large storage facilities and purchased in bulk to lower the price. He bought a lot of trucks to supply directly to his customers”, the consultant told the magazine. Thus, within the space of a couple of years, Otedola was able to turn N20 million into N400 billion. “The crisis in the energy sector helped him, he saw an opportunity and moved in; in other words, he saw the future, which a lot of entrepreneurs could not see. Thus, while they were still struggling for allocations from the NNPC, he moved to the next stage”, the consultant said.
Thus, from all indications, the man appears set to corner the kerosene market. But where he would go from there, remains to be seen; and that is a question only Otedola himself can answer.