Should Nigeria Deregulate its Petroleum Downstream Sector?

By Ahmed Adamu

As the sixth largest oil exporter in the Organization of Petroleum Exporting Countries (OPEC), Nigeria is endowed with abundant quantities of oil, subsequently the country has generated billions of dollars as revenues from oil since the last four decades when oil was first found in the country. Despite the enormous revenues Nigeria gets, the benefit has not reflected into the lives of ordinary citizens in the country and the Nigerian Economy is continuously confronting challenges, this may have resulted from inefficiencies, corruption, abuse of Natural Monopoly Powers, mismanagement, smuggling, bureaucratic bottlenecks and excessive subsidy.

The Nigerian Oil industry is separated into two sectors: the upstream sector and downstream sector. Upstream sector deals with exploration and production while the downstream sector deals with refining and distribution of crude oil for domestic consumption. This analysis only focuses on the downstream sector and issues relating to its deregulation especially removal of subsidy in Nigeria, this is because the Downstream sector has a significant impact on the lives of all Nigerians especially on how the sector operates.  Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.[1] Deregulation does not mean elimination of laws against fraud, but eliminating or reducing government control of how business is done, thereby moving toward a more free market.[2]

Nigerian downstream sector is managed by the government through the National Oil Company Nigerian National Petroleum Corporation (NNPC) which was given the powers and operational obligations in refining, Petrochemicals and products transportation as well as marketing. Oil refining in Nigeria dated back to 1965 when the first refinery was built. Presently, the country has four refineries with the total capacity of 445,000bpd but operates below its optimal capacities. The supply of Petroleum products and management of pipeline networks that link these refineries to bulk customers is undertaken by the NNPC subsidiary known as Pipelines and Product Marketing Company (PPMC). The bulk customers otherwise known as dealers supply the products to the millions of customers throughout the country. These products include Petroleum Motor Spirit (PMS) otherwise known as Gasoline, Automatic Gasoline (AGO), Household Kerosene (HHK), Fuel Jet and Liquefied Petroleum Gas (LPG).[3]

In the 1990’s, due to the increase in demand for Oil Products, which outweighed its supply, it became necessary for NNPC (as a state owned Enterprise) to import heavily from abroad to meet the escalating demand, and as a result, the revenue generated from crude oil export had to be used to import refined products in to the country.  Currently, Nigeria imports 85% of refined products. This has exposed the country to difficulties in funding subsidies on the refined petroleum products, the country had to borrow from International Financial Institutions to maintain this subsidy and also spent more to service the debts. Consequently, the country entered a difficult situation where meeting the major budget needs of the government became difficult.[4]

Considering the fact that international oil prices were increasing and the real refined production in the country was dropping the government decided that it could no longer afford the continued subsidies in the pump price of the fuels because it was purchasing refined products at huge international prices only to sell at a heavily subsidized rate. Presently, one litre of Petroleum Motor Spirit (Gasoline) is regulated at N65 (US$1=151.38   Naira, as at 21/4/2010) but the actual cost is expected to be N114.32, therefore for every litre of Gasoline the government pays the difference of around N49.34. However, Nigerians consumed around 32 million to 35 million litres of Gasoline per day. Therefore, Nigerian government pays around N1.6 billion (US$1.1 Million) per day on subsidies.[5] The government claims that despite the huge amount spent, the subsidies did not reach the targeted individuals but rather few higher income groups, it further claims that continuation of subsidies on Petroleum Products limits its ability to deliver its statutory functions such as power generation, security, education health etc.

Consequently, the government found it imperative to resort to selling the refineries and invited other local Marketers to apply for licenses to build private refineries. This was not achieved because the marketers who are profit motivated declined their interest to apply as the government still regulates the pump price. Subsequently, the recent government considers it necessary to deregulate and privatized the downstream sector in the country.  However, the deregulation process is now facing serious challenges and criticism especially from Labour and Trade Unions, Parliamentarians and the public.  It is against this backdrop that this analysis seeks to examine this controversial issue with a view to discovering: whether deregulation could be important and relevant to the country? My analysis employs empirical literature in discovering and analyzing the issues surrounding deregulation and its feasibility in Nigeria.

RATIONALE FOR REGULATION IN NIGERIA

“Disruptions in the Nigerian downstream sector have deeper and more immediate domestic and political implications for the country than those that may occur in the upstream sector” (Sarah 1994), hence the need to regulate the downstream sector. “Rationale for National regulation is that uniform national regulations are generally more efficient for nationally marketed consumer products” (Viscusi, et al, 2005). Generally, government intervention in the petroleum sector either through public ownership or through regulation could be justified to ensure adequacy, reliability and affordability of the petroleum products in a country. Nigeria is not in exception, as part of the efforts to ensure energy security, the government provided subsidies on its critical Petroleum products to guarantee the following:

SUPPORT FOR THE POOR:

Nigeria is growing into a more industrialized and urbanized country where movement and appliances that require modern fossil fuels are becoming popular among poor and rich people. However, more than half of Nigerians are living below one dollar per day. Subsequently, the Nigerian Government has deemed it necessary to regulate and subsidised these important ingredients of human lives to make it reliable, adequate and affordable to the poor (majority group of people in the country). The government resolve was due to the appreciation of the fact that the poor man cannot afford the real prices of petroleum products, this came as a relief and support to the poor as the government now pays up to 40% of the price of every litre of Gasoline.

ENCOURAGE PATRONAGE:

Traditional energy had dominated Nigerian Energy sector until the last forty years when fossil fuels especially oil and gas were discovered in the country. To transit to new and more energy intensive sources, the Nigerian government introduced subsidies on these Fossil fuels to encourage people to start using them as they are more flexible and energy saving. This worked out effectively, as the traditional energy sources were replaced with Fossil fuels in the country although traditional energy is still been utilized in the rural areas. However, due to the provision of the subsidies the people over concentrated on the exhaustible fossil fuels in their energy consumptions; this will be elaborated in my next article.

FEAR OF INFLATION:

Oil prices are so volatile and Nigeria imports heavily refined products. This accentuates Nigeria as an oil dependent country to highly inflated and frequent fluctuations of petroleum products prices. This is another reason for introducing subsidies to protect the citizens from facing the highly volatile petroleum products prices so that they will continuously face regulated fixed prices.

NUTSHELL:

According to Ahmed, Nigeria is blessed with oil resource which accrues huge amount of money to the country every year. To him, at a point, it was comfortable for the government to regulate the downstream sector and subsidize the petroleum products to make it affordable to the citizens especially the poor. But Recently, due to low production level of refineries, non reflection of regulated prices at the retail outlets, exclusion of the targeted group of people from the benefits and increase in consumption of the petroleum product, government found it unbearable to continue regulating the sector and decided to deregulate the country’s downstream sector so that it can discharge its statutory functions effectively. This, according to Ahmed, has lead to serious challenges and criticisms from some group of people. Ahmed has studied the two divergent opinions with a view to finding out whether it is economically efficient to deregulate the country’s downstream sector. His analysis has empirically analysed the reform issues and concludes that if the government will be prudent, committed and adhere strictly to the necessary steps and recommendations in the process, deregulation will be good for the country economically and politically. This is the first in a series of 3 articles on the subject; the second article will examine the benefits and problems of subsidy removal in Nigeria while the third will focus on his recommendations on the way out of Nigeria's subsidy-deregulation situation. For more information on this article and to view Ahmed's professional profile, click here -->

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[1] Sullivan, Arthur; Sheffrin, Steven M. (January 2002). Economics: Principles in Action. New Jersey: Pearson Prentice Hall. ISBN 0-13-063085-3.

[2] Diran Fawibe(2009); The need for complete deregulation in the Nigerian Petroleum Industry International Energy Services Limited, Lagos Chamber of Commerce and Industry.

[3] Nigerian National Petroleum  Corporation ( NNPC) 2010, official website.com “ http://www.nnpcgroup.com “

[4] Sarah, A. K., (1994), Nigeria: The Political Economy of Oil , Oxford institute for Energy Studies, Oxford University Press.

[5] Chika, Amaze-Nwachiku, (2010), shake-up looms in oil industry , News paper article, this day News Paper online 21^st April, http:// www.thisdayonline.com