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How to deregulate Nigeria’s oil, gas downstream sector beyond politics

By Kingsley Jeremiah
26 May 2020   |   4:22 am
With over N10.7 trillion spent on subsidising petrol between 2006 and 2019, the move by the federal government to exit subsidy and deregulate the downstream sub-sector will create a win-win situation...

Sylva

With over N10.7 trillion spent on subsidizing petrol between 2006 and 2019, the move by the federal government to exit subsidy and deregulate the downstream sub-sector will create a win-win situation for the government, investors, and end-users. However, the development could end as motion without movement if the government fails in its policy direction, especially the attempt to control the price of petroleum products in a deregulated regime.

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 sector, 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 63 years after oil discovery. It has suffered similar fate from military to democratic governments.

Reportedly, Nigeria is the only oil and gas producing country that still 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.

Indeed, 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 current reality in the sector has gone worst as the federal government largely monopolizes the sector, acting as regulator as well as sole importer of the products it fails to refine and then pay subsidies to its own agency in an opaque manner that gives little room to the public, civil society organizations or the media to monitor spending.

The result of such 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. The lack of investment and poor margins in the sector have led to a steady degradation of assets and equipment, recurring safety issues in the system, especially the fire incidents, repeated pipeline, and truck accidents.

In a country bogged down by under-development despite producing about two million barrels of crude oil daily and boasting of about 37 billion barrel reserves, poor governance of the oil and gas sector among other challenges has resulted in heavy debt as Nigeria’s external debt currently hovers around $27.6 billion, while domestic debt has hit N6.5 trillion as GDP is expected to contract by 3.5 per cent year on year in 2020 as well as projected decline by 90.0 per cent in 2020 crude oil revenue.

While government is already boxed and lack funds to even finance the 2020 budget, Group Managing Director of Nigerian National Petroleum Corporation, Mele Kyari, said the era of subsidy on petrol was gone forever, adding that “Subsidy and under-recovery are zero today. And it is zero forever.” The Minister of State for Petroleum Resources, Timipre Sylva, corroborated Kyari, adding that the downstream sector has been deregulated.

The development prompted commendation from stakeholders in the industry, who saw the move as the first step towards achieving projected objectives but the federal government, however, left the sector in mixed feelings last week, as Sylva insisted that the federal government would continue to intervene in determining the pump price of Premium Motor Spirit (PMS) or petrol.

Disclosing that the country has totally deregulated the downstream sector of the industry, Sylva said: “PMS and petroleum products are very strategic; you cannot allow the price of these commodities to be determined solely by the marketers. It is government’s responsibility to protect the consumers. Anywhere in the world there is the recommended retail price.

“The consumer protection agency will ensure that nobody profiteers inordinately from the people. If you allow marketers to go ahead and fix prices as they like, it is not good because these commodities are very centre to the lives of the people.

“That is why you have a regulator to determine the price, bearing in mind what it takes the marketers to land the products, allowing for some profits and ensuring that the consumers are also protected. It is done everywhere in the world.”

It is worthy to note that unless repealed by the National Assembly, Petroleum Products Pricing Act vests the power to determine prices of petroleum products solely in the hands of the federal government. The Petroleum Products Pricing Regulatory Agency (PPPRA) is also empowered as an agency to determine and enforce pricing of the product. Under this legislation, the federal government could overnight determine what the price of petrol would be.

The regulations supporting price control are also backed by a subsidy regime as Nigeria has reportedly through the Petroleum Equalization Fund (PEF) Management Board, which offsets transport costs of petroleum products to some parts of the country in an attempt to make the prices uniform across the country.

It is critical to note that while market forces should basically determine the price of petroleum products, any attempt to increase prices usually elicit civil unrest, which would eventually force government to rescind its decisions. Also, since most political actors use the petroleum sector to score points, it has always been easy to decide overnight what the pump price should be.

For instance, on assuming office in 2015, APC government under Buhari, which had condemned its predecessors’ huge payments on subsidy, calling it a scam, began to see what the Jonathan administration saw and backed down on the removal of subsidy even though he campaigned and promised the masses that subsidy would be removed. What was worse, Buhari scandalously jerked up the pump price from N87 to N145 per litre of petrol.

After the oil price crash of 2015, the Buhari-led government reintroduced subsidy through the back door as soon as it noticed the oil price rebound, a development which would have drastically increased the pump price. The implications of the continuous control of prices could mean that for political reasons government would easily adjust the pump price at the discretion of the government of the day.

A professor of Petroleum Economics and Management at the University of Cape Coast, Ghana, Wunmi Iledare, had noted that what government describes as full deregulation is nothing more than liberalization, because one can liberalize and control price but cannot have a deregulated market and price setting at the same time.

To him, price setting maximizes social welfare loss in a deregulated market, as this is worse than a transient social unrest, adding that government must do something that would take Nigeria away from this price control debacle that basically transfers consumer surplus to the elite of the society.

Insisting that petroleum subsidy in Nigeria is an elitist ‘welfarism’, Iledare said: “Unintended consequences of elitist welfarism are evident in bad schools, poor health facilities, unemployed youth, poor infrastructures (road, energy, water, housing) and of course, expensive governance by sentiments and patronage!

“When you liberalize you are allowing more participants in the market until no single seller or buyer in the market has dominant influence on price setting, including government as a major consumer. And government’s influence in such markets disappears into thin air and price regulatory authority dies a natural death.

“So Hon. Minister Sir, your predecessors indeed liberalized the downstream market but the market remains regulated. In fact, Nigeria still indirectly limits the participants’ ability to source quality PMS outside and sell it at a market price.”

Admitting that price gouging is real, the don stated that government has the leverage to prosecute any seller over-charging or swindling consumers to the extent of the law. Ghana does it.

With a fully deregulated market, Iledare said: “Economy will work better, and history supports the fact that social unrest has never lasted beyond six weeks, because of a spike in petrol! Price decontrol is good for the economy, and Nigerian people will be better off in the long run. Empirical evidence supports my presupposition.”

Indeed, when participants spoke recently at an online event hosted under the auspices of Oil Trading Logistics (OTL) Africa Downstream, Major Oil Marketers Association of Nigeria (MOMAN), Depot and Petroleum Products Marketers Association of Nigeria (DAPMAN) and Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN), they commended government’s plan to deregulate the product but advised against controling prices of the commodities.

The sub-sector, which is reportedly suffocating and heading for collapse over undue government’s interference and lack of political will to fully deregulate the sector as well as repair existing refineries, according to stakeholders would be drastically affected if government fails to create a clear-cut policy but rather chooses to deregulate the sector with price controls.

With the federal government solely controlling the sector through the Nigerian National Petroleum Corporation (NNPC), which has remained the main importer of the product, the sector noted that over 70 per cent of depot owners have gone out of business despite huge investments.

Stakeholders also insisted that the prevailing economic situation in the country creates a better opportunity for subsidy removal to create more jobs, raise more revenue, address infrastructural challenges while attracting investment into the country in the face of low crude oil prices.

Managing Director 11 Plc and Chairman, Major Oil Marketers Association of Nigeria, Mr. Tunji Oyebanji, feared that the attempt to continue to control petrol price would negatively affect investment in the sector, stressing that government has historically been constrained to retain the price due to political consideration, especially since the move has always had civil unrest as fallout. Oyebanji disclosed that the lack of uncertainty in the sector has already led to divestments, adding that the industry needs significant investment, which could only come from certainty and full deregulation as well as a level playing field.

Demanding an enabling environment to make the sector drive the nation’s sickly economy, Oyebanji said: “We need to put behind us the need to control price. What we need is an agency to come down heavily on anyone who abuses regulations and imposition of significant fine as it is done in other sectors like telecommunication. That would address the concern that some people may have expressed.”

While some stakeholders had asked government to scrap Petroleum Equalization Fund (PEF) Management Board as well as Petroleum Products Pricing Regulatory Agency’s (PPPRA), Oyebanji said a legal and operational framework consisting of a Downstream Industry Operations Regulator, the Federal Competition and Consumer Protection Council (FCCPC), or Competition Commission (for pricing issues) and the interplay between demand and supply which will ensure a level playing field to protect the Nigerian Consumer and curb any market abuse or attempts to deliberately cause inequities in the system by any stakeholder.

Chief Executive Officer, Northwest Petroleum and Gas Company Ltd and Chairman of DAPPMAN, Dame Winifred Akpani, stated that while investors had massively invested in depot operations thinking the business would be worthwhile, government’s control of the sector created challenges for the environment. Akpani said with NNPC taking over 100 per cent of imports, most of the investors have ended in bankruptcy and taken over by Asset Management Corporation of Nigeria (AMCON).

“With the little margin we are given, it is difficult to pay for our expenses,” Akpani said. “You hardly get 10 kobo per litre eventually. Some operators have gone out of business. Less than 30 per cent of operators are currently in business,” adding that if government fully deregulated the sector would be able to operate sustainably and efficiently while consumers would have value for money spent.

Akpani said the current state of the sector is clouded in inefficiency, adding that deregulation would put more money in the pockets of consumers, business owners and the government.

Group Chief Operating Officer of MRS Holdings Limited, Hajiya Amina Maina, stated that companies have been unable to meet up with costs going by the prevailing situation, insisting that a fully deregulated market was important to attract investment into the sector. She allayed the fears that petrol marketers could form a cartel to frustrate the market, stating that such cooperation would be difficult in a sector that is highly competitive.

“There will be no cartel in downstream sector, because there is not enough cooperation in the sector,” Maina said. “The industry has gone through transformation.”

The National President of PETROAN, Prince Billy Gillis-Harry, asked government to carry every sector along to avoid flip-flop and ensure an efficient deregulated sector. He stated that preferential treatment in the allocation of foreign exchange would worsen and negatively affect the sector.

A former Executive Director, Corporate Planning and Strategy, Nigerian National Petroleum Corporation (NNPC), who is current a Managing Partner at Teno Energy Resources Limited, Dr. Timothy Okon, stated that setting price for petroleum products remained illogical on the part of government considering that the government doesn’t even control the price of crude at the international market.

Okon canvassed the introduction of a pricing formula, which would be reflective of market realities, especially pegging the prices in line with tentative price of crude oil. Noting that government should rather be bothered about the depleting nature of resources and the need to introduce taxes that would discourage use of the product due to the environmental challenges posed by the resources, he added that there was need to prioritize using resources for economic development.

With the current reality in the international oil market and going by the economic situation as well as the need to achieve economic diversification in the country, there is need for the national assembly and the executive to carefully work with the private sector in designing a sustainable deregulation policy to harness the enormous potential of the sector.

With a comprehensive, holistic and modern downstream sector, the federal government, especially the Buhari-led administration would not only achieve its campaign promises of lifting over 10 million Nigerians out of poverty through meaningful direct and indirect employment, but that byproducts that would fast-track industrialization will be made available for sectors like agriculture.

Nigeria is strategically positioned to be the refining hub of the continent. The country needs to focus on refining crude that would serve the nation’s huge population and turn the country to a net exporter of products to the sub-region and other regions on the continent. This would be a huge foreign exchange earner for the country.

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