THE ISSUE OF SECURITY OF SUPPLY
IS THERE REALLY A PROBLEM?
The struggle for energy sufficiency in the world today is fundamental to national security. It is a concept that has assumed a wide knowledge, that security of supply of petroleum product is indispensable for smooth running of a state. Nigeria ranks 6th in the world in the OPEC ranking of petroleum and gas reserves and it cannot boast of sufficient products for domestic consumption. This paper examines the lack of product and distribution capacity and what the future holds.(a) LACK OF PRODUCT:
Nigeria’s sources of petroleum products supply are local refineries and imports.
The lack of adequate maintenance has led to the dilapidation of the four refineries in the country which are functioning at the average capacity of 22%[1]. At this rate the domestic demand of products cannot be met, as such the country has continued to witness long queues and complete lack of products. The supply regime of products in the country has by regulatory capture, political and socio-economic constraint demonstrated its inability to guarantee adequate supply. This is due to factors like poor infrastructure, lack of regulation, vandalism, banditry and sabotage. Again where importers resort to importation of products, the activities of the price regulatory agencies has made the venture unprofitable. The shortfall in landed cost of imported products and their selling prices is the factor responsible for its unprofitability. Also responsible is the dilapidated state of the storage facilities and the installed capacity of many depots which have broken down.
The lack of adequate maintenance has led to the dilapidation of the four refineries in the country which are functioning at the average capacity of 22%[1]. At this rate the domestic demand of products cannot be met, as such the country has continued to witness long queues and complete lack of products. The supply regime of products in the country has by regulatory capture, political and socio-economic constraint demonstrated its inability to guarantee adequate supply. This is due to factors like poor infrastructure, lack of regulation, vandalism, banditry and sabotage. Again where importers resort to importation of products, the activities of the price regulatory agencies has made the venture unprofitable. The shortfall in landed cost of imported products and their selling prices is the factor responsible for its unprofitability. Also responsible is the dilapidated state of the storage facilities and the installed capacity of many depots which have broken down.
(b) DISTRIBUTION CAPACITY
The NNPC/PPMC has over 6000km of pipelines used in moving products from refineries to depot to its 21 depots nationwide. These pipelines are known as the multipurpose lines. Ordinarily the pipelines are the primary source of distribution; however the pipelines are frequently vandalized. The combined effects of the poor pipeline networks and dilapidated storage facilities have made petroleum product distribution a nightmare. Currently the most effective way of distributing petroleum product is by trucking. The trucks are owned by major and independent marketers primarily for the moving of the products from the tank farms or depots to their various retail outlets.Nigerian pipelines were built in the late 1970’s and buried on shallow ground of 3ft and the attendant consequence now is that the integrity of the pipelines is no longer assured. Also responsible for the damage of pipelines is the vandalization by militants. Products can no longer be moved to some depots; to ease the constraint, the products are trucked from depots where they are available to depots or areas where they are unavailable to prevent product scarcity. This is known as abridging[2]
The lack of integrity of these pipelines has hindered the security of supply in Nigeria. Even when turn around maintenance is carried out on the refineries to increase production capacity, acts of vandalization disrupt domestic supply and crude oil distribution. This is also responsible for shortage of supply, unavailability at some parts of the country and refineries operating at reduced capacity or shutting down[3].
Lastly, major and independent marketers are not allowed access to the pipelines; in effect they device their own means of distributions by trucking of the products to their various retail outlets.
The Future
Nigeria must take urgent steps to move from where she is now to where she ought to be in order to achieve security of supply. Achieving security of supply of petroleum products is one of the references in vision 2020 and by that year the country will be one of the 20 largest economies in the world.[4]
For the country to achieve the security of supply of petroleum products in line with vision 2020, the paper would forecast the daily consumption of the three main petroleum products in Nigeria till 2020.The forecast projection for the three main products - PMS, AGO and HHK was done using the growth rate model. The growth rate model is of the form:
Dt = Do (1+g)t
Where Dt is the dependent variable, the demand at a time t ; Do is the demand in the previous period, g is the expected growth rate. From the equation Dt is the dependent variable and Do(1+g) are the independent variables. For PMS the consumption in 2009 was 32million litres per day. Applying the equation to forecast for up to 2020, I obtained the table as shown:
The table below shows the daily projected demand of PMS in Nigeria over the years 2009 till 2020 in Million litres.
Fig.1The graphical illustration of the above table is shown here below:
For AGO, applying the same equation, we obtained the table as shown below:
The table below shows the daily projected demand of AGO in Nigeria over the years 2009 till 2020 in Million litres.
Fig.2The graphical illustration of the above table is shown below:
The growth rate equation for HHK was of the same format applied in the previous products. The projected demand for the product is given in the table below:
Fig.3The graphical illustration is shown below
Having obtained the projected daily consumption of PMS, AGO and HHK, the it necessarily follows that one must assess the factors that must be put in place to achieve security of supply of the above named products.
The Refining and Distribution of Products
The four refineries in the country must be overhauled completely and new ones built to meet domestic obligation and thereafter the excesses may be sold in spot market. Government has already licensed over 14 private refineries since 2004 and most of them are yet to start the foundation laying of the refineries.[5] The reason is simple; there is no return on investment with the current situation in the downstream sector and its anticompetitive tendencies. Government of Nigeria must build new refineries due to the problem stated above, and begin to pull out gradually from refining by handing over the refineries to a new National oil company that would emerge with the new Petroleum Industry Bill.
Distribution of products must be done primarily by transit pipelines which has a secure integrity. The current pipeline networks in Nigeria constructed in the 1970’s are no longer reliable and are not buried deeply into the ground. This makes it easy for vandals to vandalize the pipelines. There is an urgent need for the pipelines to be relayed as part of development of critical infrastructure to bring about a new pipeline system with integrity. This is one of the policy targets of government but by a way of re – emphasis it is a project whose time has come.[6] Also the PIB have provided for and recognized the essential facility doctrine and the need of third party access to pipelines on fair, equitable and non discriminatory terms. With a good pipeline network, the issue of ‘bridging’ products would be history and the Petroleum Equalization Fund would be channeled to development of infrastructure. Other modes of product movement should be improved- such as the marine vessels used in moving products from Warri and Portharcourt refineries. Government must dredge the River Niger to give access to marine vessels to the inner most parts of the country.
REGULATOR AND REGULATION
There are several regulatory bodies in Nigeria regulating the activities of the downstream sector of the petroleum industry. They include the ministry of petroleum resources, DPR, NNPC,PPMC, PPPRA and PEF. The activities of these departments are simply multiplied and bogus. This creates confusion, incoherent policy formulation and implementation, poor statistics and regulatory capture. This paper calls for the repeal of the Acts or Statutes creating them or better still merge their activities. To this end, provisions have been made to streamline their activities and merge them in the new PIB. This would create a one stop shop for licensing, pricing, monitoring, supply and distributing agency.
DEREGULATION
This is one step that would help in attainment of the security of supply obligation. Government must not deregulate a failed downstream sector in Nigeria as it is not ripe for such. This paper argues that deregulation of the sector should be carried out once the refineries are running on full capacity and new ones built, critical distribution infrastructure must also be constructed as petroleum products distribution is a fundamental because it touches all other factors of production.
The importance of deregulating the sector having regard to the caveats above raised in this paper were aptly captured by Nigeria’s minister of petroleum resources:
‘ Nigeria’s long term energy security depends on our ability to deliver petroleum products in the domestic market at cost reflective prices. This can only be attained in an environment where clear ground rules are set and oligopolistic market distortions are removed. For effective and competitive domestic petroleum products market to be developed in Nigeria, the downstream petroleum sector must be deregulated. This will encourage investment in refining and marketing infrastructure’[7]
DEMAND SIDE MANAGEMENT STRATEGY
Another factor that can promote security of supply of petroleum product is demand side management strategy. Demand side strategy is a deliberate action aimed at influencing the quantity or pattern of consumption or use of petroleum products consumed by end users.The projections or forecasts made on daily consumption of petroleum products did not factor demand side management strategies and the role advancement in technology and alternative means of transportation can play in reducing daily consumption- thereby improving security of supply.
To this end, petroleum product usage can be reduced by developing other means of transportation like building of modern integrated railway system as well as using cars that use other fossil fuels or compressed natural gas which is in abundant in Nigeria.
NUTSHELL:
This article constitutes the final part of a paper written by Ojukwu having critically examined the activities of the downstream sector as it relates to the security of supply of petroleum products. Ojukwu's paper finds in conjunction with his view on the “future of supply” of petroleum products that for Nigeria to achieve supply security, there must be total restructuring of its regulatory bodies and new regulations must be put in place. He recommends a quick passage of the PIB as it relates to downstream petroleum industry: "The passage would resolve problems like multiplicity of function of regulators, third party access to pipeline, bring about new regulation, deregulation of the industry, transparency and encourage competition".He finds that Nigeria has good policies in terms of building of new refineries and recommends that the policies embedded in the refining license be enforced. Finally, he recommends that for the attainment of security of supply of petroleum products, Nigeria must first invest in her infrastructure before deregulation.
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