Supply Obligations and Dynamics of Downstream Oil in Nigeria

By Ojukwu Chikaosolu

The downstream sector of the Nigerian Petroleum Industry is responsible for the regulation of the refined petroleum products. The sector is partially deregulated allowing investors participate in purchasing, supplying and pricing of petroleum products. The main petroleum product used in Nigeria are Premium Motor Spirit(PMS), Automotive gas oil(AGO) and Dual Purpose Kerosene(DPK) or House Hold Kerosene(HHK). These products are heavily regulated due to the payment of subsidies by the government. Government on its side has been desirous of fully deregulating the sector with a view to creating   unimpeded access, which would create competition and result in more participants in the downstream petroleum market. Government argues that while PPPRA[1] is saddled with all responsibilities relating to licensing, monitoring technical analysis of product supply and pricing, the forces of demand and supply would actually determine the price of products.

In Nigeria, there are four refineries which are the first and second Port Harcourt Refining Company, Warri refining and Petrochemical Company and Kaduna Refining and Petrochemical Company.
They have a combined installed capacity of refining about 445,000 barrels of crude oil daily.[2] However the refineries are in a state of disrepair and operates around 30% of its installed capacity[3]. The country resorted to importation of petroleum products to augment the ones refined locally. To this end, the DRP issues what is called Petroleum Products Import Permit specifying the product, country of origin of product, quantity and value of product to be imported. This is without prejudice to the importation undertaken by NNPC, it is instructive to note that the major marketers like Oando Plc, African Petroleum, Mobil Nigeria, Total Nigeria Plc and independent petroleum marketers are issued with permits. Most of them under IPMAN import petroleum products through a floated company named NIPCO (Nigeria Independent Petroleum Company Plc) which has Pure Bond United Kingdom as its core investors. The products are received by PPMC and are distributed to end user.

This paper looks at Nigeria’s regulation, if any, for the security of supply of petroleum products; the issue flowing here from is, what does security of supply mean? It is difficult to find a clear definition of security of supply of petroleum products in any literature. This paper attempts defining security of supply obligation of petroleum product as the means devised to achieve an uninterrupted flow of product to consumers and at a reasonable price. It has also been seen as a means of ensuring that diverse energy resources are available in sustainable quantities and at affordable prices, in a given economy in support of economic activities taking into account interactions among economic sectors and environment.[4] The regulations for the achievement of this objective are made by the Nigeria’s Ministry of Petroleum, DPR, NNPC, PPMC, PPPRA, in essence all regulators in the petroleum sector, in one way or the other makes regulation for the attainment of security of supply obligations. These regulations are embodied in policy instruments gazetted in the official gazette of Federal Government of Nigeria, licenses and sets of regulations. 

  

SECURITY OBLIGATIONS

IMPORT OBLIGATIONS

Nigeria, a country with four refineries with installed capacity of 445,000 barrels per day is 85% dependent of petroleum product importation to meet its domestic obligation. The reason is not farfetched, the refineries are not maintained, and the average capacity utilization in 2008 of all the refineries is 22%.[5] It is estimated that the daily consumption of petroleum products in Nigeria as at today is PMS 32million litres, AGO 12million litres and HHK 8million litres.[6] This amounts to 300% of the combined refining capacity of all refineries in the country on the assumption that they are working at full capacity.[7] This is a dysfunction of state of affairs of a country which is the sixth top oil producer in the world.

To achieve supply security or even meet the daily demand of petroleum products occasioned by lack of domestic sufficiency, the regulator has sets of regulations that guide petroleum product importation. The importation of petroleum products in Nigeria has become a strategy of necessity. Under the security obligation, to achieve merit in supply of petroleum products the DPR gives permit to all importers based on their storage and distribution capacities. The importers are given time limit within which to get the products delivered to NNPC. Where they import products contrary to the term contained in their permit, the products are confiscated and the importer is fined or prosecuted. The importation of fuel is regulated by Petroleum Product Import Permit issued by the DPR in consultation with NNPC.

It is instructive to note that NNPC has hitherto maintained monopoly right in importing petroleum products into the country. With the involvement of new players into the market, the country has witnessed price hikes, unavailability of product and even total stoppage of importation by marketers due to the tight multi-regulator interference in pricing of the petroleum products. Availability of petroleum product at a reasonable price at all times is fundamental and an indicator of security of supply. Nigeria rely heavily on importation of petroleum products to meet domestic demand grapples with stability of prices of petroleum products. Consequently local consumption is dependent on the fluctuations in international market, of crude oil prices. The PPPRA, the body charged with the regulation of the price of petroleum products usually fix pump price for products throughout the country. This has led to disparity in open market price (OMP) and the Controlled Pump Price (CPP). Many major marketers due to this economic activity stopped importation claiming that it was no longer viable for them to import petroleum product with the attendant high losses being recorded. Government in response intervened with a new price modulation fund known as Petroleum Support Fund (PSF); which is drawn to cushion the rising price of crude oil and its effect on domestic consumption and was included in the 2006 Appropriation Act.[8] The PSF subsidizes the OMP by bearing the difference between the OMP and CPP, thereby locking the volatility of the price. When OMP is more than CPP the fund pays the difference. While the operators would be required to pay into the fund where the CPP is higher than the OMP. The PSF is funded by federal government contributing 50% while state and local government contribute the remaining 50% and the fund is held by the Central Bank of Nigeria.[9] With the PSF, major and independent marketers were able to resume fuel importation and the differences in price due to the activities of the PPPRA in price regulation are settled once the claims are received. In the final analysis, this paper sees the PSF as the balance between what the general public pay in terms of CPP weighed against the OMP on the one hand, and a security for the marketers to import in an uncompetitive and highly regulated market on the other hand.

OBLIGATION TO ALLOW ACCESS

The obligation of supply security is achieved when the available product has reached the end users, it follows therefore that distribution of product and access to storage facilities are essential for the attainment of the goal. In Nigeria, storage and distribution of products are the main constraints facing marketers as well as the unstable price of petroleum products. The combined effect these factors have on the economy is devastating to say the least.

To achieve the goal of product storage and distribution, major players in the downstream sector of the industry should have access to essential facilities for storage and distribution. This concept of allowing access to persons, players or marketers however so called to essential facility is consistent with liberalization and competition. It is known as essential facility doctrine and third part access. What is essential facility doctrine? It is a doctrine that has its origins in the USA, it seeks to prohibit monopolization or attempts to monopolize. The doctrine is contained in section 2 of the Sherman Act of 1870, it is an exception to the general rule that a company is under no obligation to deal with others.

In B&1/Sealink[10], the European commission in reaching that the harbor in this case constituted essential facility defined essential facility as:

‘a facility or infrastructure without access to which competitors cannot provide services to their customers’.[11]

(a) ACCESS TO STORAGE FACILITIES

Storage facilities in Nigeria are owned by NNPC/PPMC, major marketers and independent marketers. As at 2006, the combined holding capacities of petroleum product depots in Nigeria stands at 1,284,290,000 litres for PMS, 708,900,000 litres for DPK and 1,084,900,000 litres for AGO with the partial deregulation of the downstream, many independent marketers have invested heavily in construction of tank farms or depot. The practice is that owners of tank farm allow access to any marketer to store its product for a consideration of a fee per litre. In essence, this paper argues that there is no competition law in Nigeria. The essential facility doctrine is  not recognized. Third party access to NNPC/PPMC storage facility is based on whether the importer has PPIP to import on its behalf.  Once the importer has permit, the NNPC/PPMC would give him access to its storage and distribution system but major and independent marketers regulate their own facilities as to who stores what and at what price.

(b) DISTRIBUTION ACCESS

Security of supply of petroleum product cannot be achieved where the products though available in the country cannot reach the end users. In other words, it is not only necessary to be in merit as to the daily consumption and stipulated strategic reserve; there must be effective and efficient way of distributing such products

Supply and distribution processes begin with crude oil and market division which allocates crude oil to refineries based on local consumption pattern and state of refinery. The refineries then refine the crude oil and the products are then stored in depots from where they are distributed to other 22 NNPC depots strategically located across the country[12]. The depots are designed to receive finish products from refineries without interference from a third party, through a pipeline network spanning over an area of 6000kms[13]. Also tankers play major role in product distribution as well as marine tankers. A third party access is restricted by the operation of the law. S.18(1) of the Oil Pipeline Act allows a person to use a pipeline not owned by him to transport product, however, such a person shall apply to minister of petroleum who shall have a final say on such request.[14]The paper argues that there are restrictions on the primary mode of petroleum product distribution and that such restrictions impede the effective distribution of products.

NUTSHELL

This is the first of two parts of an analysis by Ojukwu which seeks to discuss the regulations in place for the security of supply of petroleum products and its status currently in Nigeria. That is to ascertain, assuming there are regulations, if they are effective or not. Again, it looks at the security obligations like import obligation to distribution obligation and essential facilities doctrine. His analysis would also look at the problems of security of supply and the future of the downstream petroleum product supply in Nigeria. 

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