Gabriel OGBECHIE Group Managing Director RAINOIL LIMITED

Deregulation will allow the downstream sector to flourish and grow its pace.

Gabriel OGBECHIE Group Managing Director RAINOIL LIMITED

Nigeria’s downstream dynamics

June 25, 2021

Gabriel Ogbechie, group managing director of Rainoil Limited, talks to The Energy Year about the obstacles facing Nigeria’s downstream deregulation and autogas programme and the company’s strategic approach to LPG storage and supply. Rainoil Limited is an indigenous integrated downstream company operating in the Nigerian Oil and Gas industry chiefly supplying petrol, diesel, kerosene and LPG.

To what extent did the pandemic impact retail sector players in Nigeria?
The year 2020 was pretty challenging for the downstream sector. Despite the economic shutdown, the government identified the provision of petroleum products as an essential service, as they are required to fuel diverse segments of the economy which were still up and running. As a consequence, our facilities, fuel stations and tank farms remained open.
Nevertheless, we did experience losses at the height of the lockdown, triggering a reduction in sales of around 50%. The reduction in the movement of people and vehicles across the nation was a harsh blow for the retail sector. Since, we have recovered and today we are back to pre-Covid-19 levels.

How important is downstream deregulation, and what structural barriers are holding it back?
From a regulatory point of view, the government has tried to deal with what we consider to be the elephant in the room: the deregulation of the sector. This policy is long overdue and it will allow the downstream sector to flourish and grow its pace. A lot of progress has been made but there is still a long way to go, given the numerous obstacles. The main obstacle is our reliance on imports, which represent 90% of the petrol we consume and this creates a major issue with the exchange rate.
Doubts surround the exchange rate. Is it NGN 390:USD 1, which CBN [the Central Bank of Nigeria] is selling it for, or 470:1, which is what one tends to get in the parallel market? NNPC, as the sole importer of PMS [premium motor spirit] in Nigeria, does its computation based on CBN’s exchange rate. Yet the rest of the marketers are unable to obtain this rate, a reality that creates a discrepancy in pricing.
This is why the deregulation policy has struggled to take off at full steam. PMS coming from NNPC is much cheaper than the product you would get from a private marketer. And this is why today everybody still queues behind NNPC as the prime product importer. Structurally that is what the system has forced on the industry.

Is consolidation the ideal model retail players should adopt in order to excel in today’s market?
The last 30 years have witnessed a number of consolidation waves. The first phase saw Conoil take over National Oil, Forte Oil acquire AP, MRS take over Texaco and Oando take over Unipetrol. We are now experiencing a second wave of consolidation where, for example, Prudent Energy acquired Forte Oil, now renamed Ardova PLC, which is now in the process of acquiring Enyo Retail & Supply. This reflects a reality where the market cannot afford to remain fragmented. The days of small and fringe players are disappearing and the market is riper than ever for consolidation. Further, the retail business model has to change, giving way to M&As which ultimately build scale and capacity and become more efficient in terms of throughput.
In addition, margins are still very thin in the retail sector, remaining under 2%. Most players have margins of around 1.5% which means that if you are going to remain in business, you must find ways of scaling up and most importantly, of being efficient. Consolidation is a way of achieving this. Thus, the year 2021 will witness more acquisitions taking place. Marketers need to come to the table and see how they can collaborate, save costs and pull together in order to survive.

What investment considerations will impact Nigeria’s autogas programme?
The autogas programme is a very laudable policy. We want to solve the problem of the rising cost of petrol, and more so after the subsidy removal for PMS. Here, the immediate alternative is autogas, which is even more attractive considering the huge gas reserves we have. However, it can be seen as relatively futuristic given the current environment. More than 99% of vehicles on Nigeria’s roads run on petrol so this scheme will take time to establish. If you are going to convert these cars to run on gas, an initial investment will be needed.
We have yet to see how many car owners are ready to take on that type of investment. We also have to consider how many petrol stations in the country are equipped to facilitate supplying autogas to customers. There has to be a robust network in the country to avoid people getting stranded.
So, there are numerous challenges that need to be tackled before citizens feel ready to run their vehicles on LPG. It is a programme that needs to be looked at from a pure investment perspective – in terms of network infrastructure and car conversions. There is a lot of work to be done to move from policy to actual implementation.

 

What approach has Rainoil Limited taken to LPG storage and supply?
Over the last five years, we have seen a shift from cooking with firewood and kerosene to cooking with LPG. Additionally, we’ve witnessed the national consumption of LPG ramp up from 300,000 tonnes per year to reach 1 million tonnes per year at the end of 2020. Given the trend of growth in this market, we decided to invest. In August 2020, we commissioned our 8,000-tonne LPG storage facility in Lagos. What we are doing now is investing in the whole LPG value chain as it is not enough to just have a storage facility. You need a bottling plant and trucks to move the product and, most importantly, you need to be able to move it upcountry.
To this end, we have a two-pronged approach. Firstly, we are setting up standalone LPG plants across the nation. From here, we have launched Rainoil Gas, which exemplifies our commitment to LPG delivery nationwide. Secondly, we are also putting LPG skids in our retail stations, aligning with the government’s autogas programme. We are growing our retail footprint from 106 stations, aiming to reach 200 by the end of 2022. In the next 12-24 months, we are going to put a lot of emphasis on the expansion of our retail network and on the growth of our LPG position across the country.

What is the rationale behind Rainoil’s expansive LPG logistics business?
To be able to move LPG you need specialised trucks. It is not enough to have LPG storage capacity; you need to be able to get it to market. Thus, we have identified that logistics is key to us. We started with 40 LPG trucks and we are now working towards increasing that number. Another of our unique selling points is that not only do we have LPG, we can also deliver it to your plant. Thus, by tapping into the logistics space, we can fully embrace the LPG space, getting the product delivered to each and every Nigerian.

What efforts are you making to promote and incentivise the use of LPG cooking gas?
We are making an effort to promote Rainoil Gas but we are also supporting the government in its LPG drive. The transition to gas is not only key to halting deforestation but it is also beneficial for people’s health. LPG is a cleaner and cheaper fuel if we can make it available.
The challenge, especially in rural areas, revolves around the initial cost of investment when acquiring the cooking gas, the cylinders, gas cooker, etc. To this end, we are trying to see how we can collaborate with the federal government regarding subsidies to make cooking gas available for people in these regions. Also, we have signed a partnership with NALPGAM [the Nigerian Association of Liquefied Petroleum Gas Marketers] to enhance the utilisation and distribution of cooking gas.

How is Rainoil’s depot business strategically established across the country?
We remain the only downstream oil and gas company in Nigeria that owns storage facilities in three of the four key Nigerian markets. Our ultra-modern petroleum product storage tank farms have a combined capacity of 150 million litres. We have a 50-million-litre petroleum storage depot in Ijegun, Lagos; another 50-million-litre depot in Oghara, Delta State; and a 50-million-litre depot in the Calabar Free Trade Zone, Cross River State. These are centrally located and easily accessible by retailers from the North, East and South-South regions of Nigeria.
Regarding the storage of petroleum products in Nigeria, there are four key markets. The most important market is Lagos, the second is Oghara and Warri as a cluster, the third is Port Harcourt and the fourth is Calabar. We cover all these markets, which reflects how important storage is to our business. It is vital to our distribution network, through which we today control a very significant part of the petrol that is distributed and consumed in Nigeria.

In what ways will the refining revolution change the status quo of the downstream sector?
From an industry perspective, there is a lot of hype surrounding the Dangote Refinery. This venture will add value to the retail sector. As of today, 90% of the petrol we consume is imported. However, once this mega-project comes on stream, instead of buying refined product from foreign suppliers, we will go to the Dangote Refinery.
As for modular refineries, we are also excited by the traction in that area – the Waltersmith refinery being a clear example. A lot more modular refineries will come on stream. However, these only make sense if their corresponding owners also own the oil well and would be refining their own crude. If you have to buy the crude and pay commercial value for it to then refine it modularly, there is a challenge in terms of value addition. Owning both the crude and the refinery is a scenario where real margins can be made. If you decouple the two, the modular refinery model might struggle.

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