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Nwakwue: Transparency, stakeholders’ engagement missing in downstream petroleum sector

By Kingsley Jeremiah
22 November 2020   |   4:14 am
It is important for context to state that we are presently not in a deregulated market. What we have done, as best as I can see, is subsidy removal.


The former Council Chairman, Society of Petroleum Engineers (SPE), and Partner at Zera Advisory & Consulting Joseph Nwakwue, in this Interview with KINGSLEY JEREMIAH, identifies gaps in the deregulation of the country’s downstream petroleum sector, insisting that pricing system for petroleum products lacks transparency.

In March this year, the Federal Government deregulated the downstream petroleum sector. What do you make of the development thus far?
It is important for context to state that we are presently not in a deregulated market. What we have done, as best as I can see, is subsidy removal. There is a world of difference between subsidy removal and deregulation. We still have price controls, but prices are being set at levels that allow full cost recovery.

We need to move beyond subsidy removal to price liberalisation and then industry restructuring to fully deregulate the market.

Subsidy removal is no doubt a welcome development though the timing may be problematic given the COVID-19 challenges. We should have done this a long time ago, but it’s important that we close this fiscal leak. Price fixing is the reason that we have a stunted downstream growth. It discouraged new investments in the downstream sector, led to significant divestments of the major marketing companies, provided a conduit for leakage of government revenues, fuelled corruption and sub-optimal consumption and demand, encourages smuggling, distorts and stunts growth of the sector. We did not have to wait this long to stop this, even though I still believe that we are yet in a fully deregulated market.

One can only say that we may have started the journey to deregulation based on all the policy pronouncements from the minister of the state for petroleum. I also think that there are pieces of legislation that should be repealed, or amended to provide the right legislative framework for full deregulation. These are Section 4 of the Price Control Act 1977, Section 7(a) and (d) of the Petroleum Products Pricing Regulatory Agency (PPPRA) Act 2003, and Section 6(1) of the Petroleum Act. So, the legislature has a role to play in this process.

Do you think the model adopted in arriving at the retail price and the ex-depot price of the product is transparent enough?
It is my understanding that current price-fixing using the template is a transitional arrangement that would hopefully lead to full deregulation. I would have preferred a well-articulated deregulation programme with stakeholders’ buy-in. I am yet to see a plan and frankly, that creates a transparency gap. The pricing template also has lots of items that one is not quite comfortable with. Most of them are costs of inefficiency and should not be there. Payments to NIMASA, the NPA and PPPRA needs to be reviewed.

Also, an import-dependent downstream is not desirable and money-making by agencies of government for importation suggests that they might not have an incentive to support domestic refining. There is therefore need for a great deal of transparency and stakeholders’ engagement.

Prices of products, especially petrol has been going up even when crude oil price oscillated between $40–$45 in the last two weeks, while the official exchange rate stood around N360–N380 in the past two months. Are you worried about this development knowing well that these market forces drive the products?
My understanding is that they are using a price modulation template, and this needs to be shared with stakeholders each time there is a price adjustment for comfort. Presently, the average person on the street does not understand what is happening. Deregulation everywhere requires stakeholders’ engagement and buy-in to succeed. Beyond the crude price, you have other variable factors, which may have changed. Remember also that the exchange rate differential is a pass-through. So, I may not be able to comment on the basis for the current price adjustment until I see the updated template.

Although part of the key reasons for deregulation was competition, the NNPC has remained the main importer of petrol. What are the implications of this development?
That is an important observation. Deregulation should naturally diversify supply. That has not happened primarily because the industry is presently import-dependent and access to foreign exchange is a major challenge. I believe once the CBN supply marketers forex at the rate the state monopoly is supplied, they will certainly resume importation. So, deregulation is not only about products’ price, but also industry structure. We presently have a monopoly and cannot therefore reasonably talk of price liberalisation. Efforts should be made to bring the major marketers into the supply side otherwise we will be clapping with one hand.

One of the fears, which the public expressed at the takeoff of the deregulation policy was that petrol marketers could profiteer in the face of weak regulation. Is this a genuine worry?
Again, that is a valid fear, but one hopes that the PIB would birth a robust and effective regulatory regime. Also note that regulation on its own has its limitations. My sense is that there would be challenges in the near term with respect to price gouging, but the market will take care of those once supply meets demand, and a successful deregulation will ultimately fix the supply side. We certainly need sufficient diversified supply to achieve success.

Apart from marketers margin, other margins, including bridging cost by the Petroleum Equalisation Fund (PEF) significantly increase the pump price of petrol. Do you think there are better ways to handle this?
In principle, deregulation should mean the end of price equalisation. Price equalisation may have been okay in the past, but it is no longer desirable. The draft PIB seeks to re-purpose PEF to an infrastructure fund and that’s a welcome development. There is no doubt that policy clarity is needed.

What recommendations would you offer for effective downstream operations, including pricing under the deregulated regime?
Beyond price liberalisation, we need a liberalised supply regime, including access to forex. Getting this right will no doubt spur competition in the near term, and one expects significant domestic refining and exit of imports in the long term. We also have to take a look at petroleum infrastructure, that is infrastructures that support the downstream – refineries, pipelines, storage depots etc. These constitute the backbone assets that support the downstream and are currently, mostly dilapidated and lots of money are needed to revitalise them. Money, one can sense the government does not have. So, we need to rethink how these assets will be maintained and managed. I would have loved to see an unbundled NNPC and these assets and activities heaved off to an entity with private sector participation under an open access regime. The consolidation of these assets in the NNPC has not worked and this should be re-visited.

What other issues affecting the downstream do you think require attention?
We need to pay attention to downstream gas also. The minister of state for petroleum has made significant efforts aimed at stimulating the auto-gas programme. We must deliberately transition our energy mix to cleaner fuels including gas, especially for power generation, manufacturing and transportation.

Again, it will be useful to have a properly articulated plan. There is huge potential to switch from PMS to gas, but it must be done in a carefully planned way to achieve the objective.

Also we need a domestic crude supply obligation regime to be able to supply crude oil to the planned and upcoming refineries. It is important that crude supply guarantees are in place.