Between downstream deregulation and petrol subsidy re-introduction
Implications that followed the deregulation of the downstream sector of Nigeria’s petroleum industry and the eventual end to the payment of petrol subsidy have many parts. KINGSLEY JEREMIAH writes on the need to strike a balance, especially by ensuring sustainable growth of the downstream sector while offering Nigerians value for money.
From 2006 to 2019, Nigeria reportedly spent N10.7 trillion subsidizing the consumption of Premium Motor Spirit (PMS). After years of political gimmicks, the Federal Government, in March 2020, announced plans to deregulate the downstream sector of the petroleum industry and end the subsidy scheme.
Just last week, the Minister of Power, Sale Mamman disclosed that as much as N600 billion is spent yearly on subsidizing consumption of electricity. If that figure is added to the estimated N1 trillion previously spent on petrol subsidy every year, Nigeria would have been spending above 10 per cent of yearly national budget on subsidizing the consumption of electricity and petrol.
Sadly, Nigeria is a top producer of crude oil and as such, has the capacity for a globally recognized downstream sector, where products are locally refined and where industries like petrochemical, agriculture, electricity and others should thrive on the backdrop of a robust downstream sector.
Subsidy payment and a weak downstream sector has many implications for an economy with negative indexes, including heavy debt, high inflation, acute infrastructural and high unemployment.
While subsidy is not bad in itself, economically, there is more sense in infrastructural development, strengthening of local industry and production through subsidy than supporting consumption. Apart from the retarded growth in investment and weak contribution to real Gross Domestic Product that the country has witnessed over the years, regulation and interference of the government in downstream sector limit the capacity of the industry, make importation of refined products normal and leave huge economic burden on the country.
For instance, before exiting recession last week, Nigeria’s economy, according to the International Monetary Fund (IMF), contracted 1.92 per cent last year. This came after a serious plunge in 2016. As of December 2020, Nigeria’s external debt profile stood at about $27 billion, while over 86.9 million people live in severe poverty. With inflation rate at about 16.47 per cent, unemployment remained endemic hitting 27 per cent as of second quarter of last year, according to the National Bureau of Statistics (NBS).
In the petroleum industry, the downstream sector deals with petroleum product refining, storing, marketing and distribution. The sector is an enabler to other critical industry such as petrochemical, construction, agricultural, industrial sectors, and others. Though it is a vibrant segment and major revenue earner for most oil-producing countries across the world, the sector has remained in shambles in Nigeria.
For over 63 years when commercial oil was discovered in Nigeria, the sector has literally suffered similar fate from military to democratic governments. To many experts, the sorry state of the downstream sector could be responsible for the minimal contribution of the oil and gas sector to real Gross Domestic Product, although it accounted for over 70 per cent revenue generation.
Nigeria is reportedly the only oil and gas producing country that relies solely on importation of refined products of the raw commodity it produces and exports. This is because its downstream sector has been crippled by poor pricing, obsolete regulations, undue government interference, harsh operating environment, dearth of infrastructure, insecurity, and other challenges, which continue to deter investment.
The precarious situation of the sector should have taught Nigerian politicians that investment is no respecter of political parties, it only responds positively to business-friendly environment, where financiers are certain about the short or long-term outlook of their investment, especially under a clear regulation backed by acts of parliament.
The result of the rascality and insensitivity to the long-term growth of the sector became obvious with the level of divestment witnessed in the sector in recent times. There are high safety issues, which has contributed to loss of lives and properties. With poor margins, there has been steady degradation of assets and equipment thereby compromising safety issues – no thanks to the series of fire incidents, repeated pipeline attacks and truck accidents in the country.
Last year, Nigeria opted for deregulation of the downstream. Being a decision that was long due, most stakeholders expressed their support for the scheme, believing that job creation, inflow of investment, sustainable sector and other implications would become a reality in the industry. The other side of deregulation and halt of subsidy payment is that citizen would have to bear the full cost of the product. By implication, crude oil, which is the feedstock for petrol and foreign exchange, becomes a major driver of what the price of petrol would be at the pump.
Immediately the government deregulated the sector, the pump price of petrol was reviewed downward since the price of crude was very low. Afterwards, the price rose from N121.50 to N123.50 per litre in June; N140.80 to N143.80 in July and N148 to N150 in August. In September, pump prices rose further to N158 and N162 per litre.
When attempt was made to increase the pump price in December last year, labour unions demanded the head of Sylva. They, the Nigerian Labour Congress (NLC) and Trade Union Congress (TUC), were furious over the repeated hike in petrol price, and dragged the Federal Government to a dialogue, where NNPC agreed to slash N5 from N167.44, a development which the Minister of Labour and Employment, Dr. Chris Ngige, said would bring down the price of petrol to N162.44K.
Last week, the price of crude oil rallied to about $64 per barrel, the highest in 13 months. This was after oil price sank to sub-zero level in the wake of the Covid-19 pandemic in 2020. While the price rally should have been good news for a country that is heavily depending on crude oil for revenue, the development is an indicator of price increase in petrol. This is normal under a deregulated market even if Nigeria has functioning refineries. Cost of freight would have been the only saving grace provided local refiners buy crude at international market rate and in US dollar.
During the launch of the Nigerian Upstream Cost Optimization Programme (NUCOP) recently, both the Minister of State for Petroleum Resources, Timipre Sylva, and Group Managing Director of NNPC, Mele Kyari hinted at the prospect of a rise in the pump price of petrol in the country in line with the deregulation regime considering the increase in the price of crude oil.
Nigerians and indeed the global community have been facing critical challenges due to the outbreak of Covid-19 pandemic. With so many people already out of job and the inability of many employers to meet up with payment of salaries, it is therefore not out of place for the organized labour to resist increase in pump price. But years of mismanagement of resources and obvious depleted revenue mean that the country is already boxed and unless the stakeholders find a common ground to move forward, there are indications that further crisis would only compound existing challenge for Nigerians.
The increase in the price of crude oil at the international market means more revenue for the Federal Government, which had opted to borrow over N5 trillion to finance the 2021 budget. Except Nigerians want to have their cake and eat it, an increase in the pump price remains obvious since the landing cost of petrol into the country using the interbank official exchange of N379.5 is projected at about N180 per litre.
Although there are no provisions for petrol subsidy in the 2021, the differences between the current official cost of N162 and the expected price of over N190 per litre would have amounted to about N43 billion monthly, which may mean a return of subsidy. So, it is expedient to choose wisely either to return the country to subsidy regime, which according to some argumets, likely favours the rich with high purchasing power or canvassed for the growth of a sector, which has the capacity to improve the lots of future and present generations.
Historically, subsidy and the deregulation of the downstream sector has created repeated face-off between the Federal Government and labour unions since 2004. In fact, some labour union leaders and political actors earned their reputations from it and leverage on it into political offices.
While union leaders have repeatedly made case on the absent of functioning refineries in Nigeria, it is high time Nigerians realised that only a marginal decrease may be seen in the pump, especially if refineries are subject to buying the crude at the international price and possibly in foreign exchange, since oil and gas businesses are traded in US dollar. The marginal decrease may only come from the cost of freight.
To many experts, while the Covid-19 pandemic has adversely affected the buying power of many citizens, reversing downstream deregulation would cost Nigeria more, especially given the prevailing economic situation and global trends.
PricewaterhouseCoopers’s Associate Director, Energy, Utilities, and Resources, Habeeb Jaiyeola said although the increase in crude oil would reflect in an increase in the landing cost of white products in the country as well as the retail price of the white products, Nigerians must find a way to accept the fluctuations in the retail prices to allow for a truly deregulated downstream petroleum sector, and end subsidy costs.
Instead of creating more crisis by frustrating the increase in pump with possible scarcity of petrol, Jaiyeola believes that stakeholders, including civil society organizations and the labour unions should demand a truly deregulated sector.
He also insisted that energy should be channeled into demanding for adequate monitoring by the regulators to ensure that Nigerians pay fair price for white products while also allowing sector players to make profit.
While stakeholders asked objectivity in the resistance to the downstream sector reforms, the National President of PETROAN, Prince Billy Gillis-Harry, noted that the government would need to carry along the players in the sector to avoid a flip-flop, adding that the market must be fair to all.
Admitting to the stability in the market since the sector was deregulated, stakeholders believe that addressing foreign exchange challenges would enable the marketers to import products instead of allowing the national oil company play the dominant role of importation of petroleum products.
An energy economist, Prof Winmi Ileadre, said the deregulation of petroleum products market was going to become more difficult unless the Petroleum Industry Bill becomes a 2021 Act, adding that the country must resist subsidy reincarnation.
An energy expert with FOSTER, Michael Faniran, noted that the country’s priority should not be shifted from adding value to crude oil instead of exporting it.
He said: “We need to leverage our advantage to increase our refining capacity and make Nigeria a refining hub for the region. Also, encourage investment in petrochemical industry so we can produce many of the imported products locally and reduce the pressure on FX demand which is hurting the economy currently.”
The energy experts further noted that since Nigerians cant eat their cakes and have, any attempt to disrupt the deregulation of the downstream sector would amount to hoodwinking Nigerians.
Also, a Professor of Economics at Babcock University, Segun Ajibola, has also said there is need for pricing model in the country to create transparency in the determinant of the pump price.
“In the absence of a pricing model, the pricing regulators in Nigeria are left to the rule of thumb in determining what price and when to implement it. We also need to know how often the pricing review is conducted to regularly benchmark current international price of crude,” Ajibola noted.
According to him, as conversation rages on the transition to a deregulated market, these are areas that Nigeria needs to work on to create a meaningful nexus between the international price of crude oil, and the local price of fuel.
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