ABSTRACT
The concept of oil and gas was limited to the search for, work and win crude oil. For decades, nations only concerned themselves with upstream petroleum activities. The availability of crude oil determines the extent of relevance a nation commanded at the global scene. This fact is amplified by the role Nigeria played in the struggle to rid Africa of colonial vestiges. The marketing of petroleum products (downstream sector activities) is therefore brought to the fore of the national petroleum industry. The issues of oil and gas in Nigeria are very topical and sensitive. The products of oil and gas are present in every home in Nigeria. Arising from this, the government became very much involved in the supply and distribution of its product. Various laws, including the Petroleum Equalization Fund (Act) Instituted as a result of the problems associated with the petroleum distribution, were put in place to govern the petroleum industry. However, there appear to be inconsistencies between these laws and what actually obtains. This research principally adopted a doctrinal research methodology which relied on existing statutes, subsidiary legislation and literature on petroleum products marketing. It analyzed the issues and drew inferences which culminated in the findings. This dissertation found that the legal framework for the regulation of the downstream sector of the petroleum industry is not robust and comprehensive; that there is conflict of functions between the Petroleum Minister and the Petroleum Products Pricing and Regulatory Agency. This is with respect to the fixing of the prices petroleum products. This conflicting function does not make for improvement of effective pricing of petroleum products as it does not allow market forces to determine the price; that the functions of government regulatory agencies such as the Nigerian National Petroleum Corporation (NNPC), the Department of Petroleum Resources (DPR), the Petroleum Products Marketing Company (PPMC) and the Petroleum Products Pricing and Regulatory Agency (PPPRA) are overlapping and therefore work at cross purposes; that the Petroleum Equalization Fund put in place for the sole purpose of unifying the pump prices of petroleum products across the country is ineffective, fraught with corruption and has resulted in waste of financial resources; and that government involvement in downstream activities makes law enforcement weak and ineffective. This paper therefore recommends a restructuring and reforming of the legal framework and regulatory bodies for the Nigerian Petroleum Industry through the passage of the Petroleum Industry Bill (PIB); existing laws should be reviewed for effective regulation with the roles of government agencies clearly defined; that the Petroleum Equalization Fund be repealed; and that government should exit participating in the downstream sector (through the Nigerian National Petroleum Corporation) and only be a regulator. Despite the vast potential Nigeria has as an oil country, its downstream sector production has failed to meet up with the demand of the populace, leading to shortages in fuel, long queues at pumps; and the claim of heavy subsidization in the importation of fuel by the government to meet the demand. To reverse this trend and to address this crisis in the downstream, the government deregulated the sector. The oil industry has witnessed multiple changes and policy effects. The question is the availability of an alternative remedy to the situation, the best post-deregulation handling moves and the sufficiency or otherwise of the legal framework and the regulatory body on ground and what can be done about their inadequacies.
INTRODUCTION
The downstream oil industry is a key sector in the nation’s economy. It includes four refineries. Problems such as fire, sabotage, poor management, lack of turn-around maintenance and corruption have meant that the refineries often operate at forty percent of full capacity. This results in shortages of refined products and the need to increase imports to meet domestic demand. In spite of the increase of imports, petroleum products are still largely unavailable. This led to an arbitrary increase in fuel price, leading further to the increase in the prices of foodstuff, transportation fares and other services, which in turn has invariably plunged citizens into further economic hardship.
In order to salvage the downstream oil industry, the government realised that it will be necessary to boost production levels of the refineries but at a huge cost. They decided to invite local marketers to apply for licenses to build private refineries. This failed as the marketers, solely driven by profit were not interested while government still controlled the pump price of gas. Government decided that it was necessary to deregulate the downstream sector in the country for its improvement. However, Since the implementation of the deregulation policy in the downstream sector, the question to ask is, has the policy been suitable and what legal framework can be established to improve the policy and to fill the loopholes in it, if any?
HISTORY OF THE NIGERIAN OIL ECONOMY
1960 brought for us political independence with an economy major and dominant on agriculture. In 1956 oil was discovered in commercial quantity in Oloibiri, Nigeria and the first export began in 1958. In the first four years of Nigeria's post-independence economy (1960-1964), agriculture contributed 62.5 percent to the nation's Gross Domestic Product (GDP), and over 75 percent of the workforce was engaged in the agricultural sector. By 1970 the share of contribution of the agricultural sector to the nation's revenue had risen to 70 percent while that of petroleum sector was only 26.3 percent. The production of crude oil in Nigeria advanced to 2.16 million barrels per day and its revenue increased. Agriculture was then neglected leading a decline in its contribution to the GDP and foreign exchange earnings. Oil and gas now account for 95% foreign exchange earnings and about 65% of its budgetary revenues while agriculture contributed 43.64% instead of 70% in 1970, and petroleum 14.27% to the nation’s GDP respectively.
Nigeria remains the world’s 14 the largest producer of crude oil and 10th in gas. Nigeria has four petroleum refineries, two of which are located in Port Harcourt, one each in Kaduna and Warri with a combined installed capacity of 445,000 barrels per day including a large network of pipelines and depots strategically located. These refineries are said to be operating about 26% capacity utilisation due largely to political interference in the management of the nation’s refineries and the preposterous lack of crude to refine. The resultant effect, therefore, is that Nigeria now largely exports crude oil and gas through the Nigerian National Petroleum Corporation (NNPC) and the Nigeria Liquefied Natural Gas Limited (NLNG) for her foreign exchange earnings and depends on importation of refined petroleum products for consumption by her teeming population. Nigeria’s daily consumption 40 million litres of petroleum products (premium motor spirit) far outweighs daily production of all the five refineries, resulting in over dependence on imported refined products.
By 1994, the petroleum sector experienced crisis in terms of its inability to contribute to the nation's infrastructural development. As a result, the Nigerian National Petroleum Corporation (NNPC), the state owned petroleum company issued 'a marching order' of a 'drastic measure' to stem supply-price crisis of the oil sector by marketers, who smuggled and diverted petroleum products to illegal destinations for higher profits than what was obtainable in the country. The assumption is that the petroleum marketers in Nigeria are able to smuggle the products across borders in order to make higher profit due to the lower price charged by the government. However, it was in a bid to alleviate the suffering of the people against inappropriate pricing of petroleum products in Nigeria that made the Federal Government to introduce petroleum subsidy. The term subsidy is a grant of money, property or some other form of aid for which it expects no direct return or repayment.
The downstream sector of the Nigerian petroleum industry has not always been under government’s control and management. Before 1965, crude oil produced in the country was solely by imports in a deregulated environment. The petroleum products marketing companies, (SHELL, BRITISH PETROLEUM, ESSO, MOBIL, TEXACO and TOTAL) bought crude oil and refined it at the Port Harcourt refinery, paying a refining fee. They then collected the products and distributed through their outlets all over the country. Between 1965 and 1989 however, four refineries with a combined capacity of 445,000 barrels per day were established in Port Harcourt, Warri and Kaduna. These local refineries at the time were able to meet local consumption while their surplus was exported mainly to neighbouring countries in the West African sub-region.
Government’s involvement in the downstream petroleum sector came as a result of its membership of OPEC and the gaps that appeared between the supply and demand for petroleum products in the country due to the rapid growth in the Nigerian economy and population. OPEC’s Resolution Xvi Article 90 of June 1968 enjoined all members to acquire participating interests in the operations of the oil companies according to a prescribed timetable that required each member to achieve 51 per cent participation by 1982. The Nigerian government set to achieve this with the establishment of the NIGERIAN NATIONAL OIL COMPANY (NNOC) in 1971. By 1974 government acquired thirty-five per cent investments in the major production of oil in the industry and by 1975; its level of investment had risen to fifty-five per cent. Government got involved in the distribution of oil in 1977 when the NNOC and the Federal Ministry of Petroleum Resources merged to form the Nigerian National Petroleum Corporation (NNPC) by Decree 33 of 1977. The NNPC is charged with the responsibility for oil exploration, production, transportation, research, refining and marketing of petroleum products and derivatives. Also, the government in its involvement in the downstream sector promulgated Decrees that allowed the Nigerian Government ownership and management of refineries in the country. These Decrees include: The Petroleum Products (Uniform Prices) Order of 1973; The Petroleum Equalisation Fund (Bridging Managing Board) Decree of 1975 and the Petroleum Amendment Orders of 1996 and 1998.
Government’s involvement in the management and ownership structure of the refineries and downstream infrastructures gave rise to a regulated regime that has been characterised by; an inadequate supply and distribution of petroleum products; the monopoly of the sector by the Government agencies, especially the NNPC; funding problems for NNPC leading to irregular maintenance of refining and distribution facilities; acute products scarcity which often lead to long queues at the fuel stations; refining capacity under- utilization; smuggling of petroleum products; adulteration of products and fire hazards; social and political unrest (the Niger Delta situation); rampant pipeline ruptures and vandalization; divestment of marketers; heavy importation and subsidization of petroleum products by government; untold hardship to the masses and poor economic growth.
The administration of PRESIDENT OLUSEGUN OBASANJO seeing the need to rejuvenate the nation’s economy and most importantly its moribund downstream sector, introduced a number of reforms including the deregulation of the downstream oil sector. The focus of the government’s deregulation policy can be summarized as follows: to maintain self-sufficiency in refining; to ensure regular and uninterrupted domestic supply of all petroleum products at reasonable prices and to establish infrastructures for the production of refined product for exports.
In understanding deregulation, it is important to look at other terms which may seem similar to it but different meaning. These terms are; privatization, commercialization and liberalization. Privatization is “the relinquishment of part or all the equity and other interests held by the Federal Government or its agency in enterprises whether wholly or partly owned by the Federal Government…”[3] Privatization is also “the conversion of businesses from government ownership to private property. This can involve the denationalisation of industry as well as allowing the private sector to provide what had been considered government services.”[4]
From these, it is understood that privatization is simply the conversion from public to private sector ownership. The statutory definition does not suggest that a privatized enterprise will be registered as a private limited liability company; indeed, it will most probably be a ‘Public Company’. Privatization is different from deregulation in that the latter has to do with the reduction of government’s involvement and the removal of regulatory controls in the economy or a sector in particular, whilst the former has to do with the sell in part or whole of an industry or business so that it is no longer owned by the government. Deregulation may take the form of abolition of regulatory controls, reducing administration, decentralisation of regulatory rule making, and making less interventionist laws. A deregulated sector may consist of privatized business in the sector but a privatized industry may not mean a deregulated industry.
The Public Enterprises (Privatization and Commercialization) Act N0 28 of 1999 defines Commercialization as “… the re organization of enterprises wholly or partly owned by the Federal Government in which such commercialized enterprises shall operate as profit- making commercial ventures and without subvention from the Federal Government…”. This directly portrays the intention of government. While government may retain a few shares in them, it is not to be their source of funds in times of need. Commercialized companies must swim or sink on their own merits.
Liberalization as concerns the downstream sector of the oil industry is the opening up of the sector to competition among players in the industry. It means ensuring that every aspect of production, refining, distribution and dispensing of petroleum products is self - financing. Liberalization also means giving every player the opportunity to refine or import petroleum products for use in the country in so far as the products so refined or imported meet the quality specification. It involves lifting all competitive pricing barriers to entry. It is similar to deregulation with little or no difference between the two. In fact reality, a liberalized economy is very much a deregulated economy.
With the enormity of the country’s wealth in both crude oil and gas reserves, Nigerian citizens still continue to wallow in poverty and perennial scarcity of petroleum products occasioned by arbitrary price increases by over ambitious petroleum marketers. These situations have persisted in the country over the years in spite of measures adopted by successive governments to cushion the effects by way of subsidy. Subsidy regime dates back to 1973 after the civil war. It was a short term measure to cushion the effects of the high cost of imported petroleum products on the people by the Federal Military Government led by General Gowon at the time. The Federal Government at the time operated fuel subsidy to reduce the effect of actual market prices of the products on the people as the landing cost was a huge burden, hence the need to make the products not only available but affordable. The intention of the operation of the subsidy regime fared well between 1973 and 1983. In 1986, the Federal Military Government of Ibrahim Babangida increased pump price of petrol from 20k to 39.5k, about 97.5% increase at the time. Nigerians experienced high cost of petroleum products during the Babangida administration as much as five times. The last of the pump price during his regime stood at 70k from 60k before he stepped aside in 1993.[5] Successive regimes after the Babangida administration severally increased the pump price of petrol amidst mass protests. Subsidy payments by governments became worsened with the prices astronomically rising to N20 before the final exit of the last military administration on May 29, 1999. The emergence of civilian rule in 1999 did not however ameliorate the problem of fuel subsidy either. Under Obasanjo administration in 2000, the pump price was moved from N20 to N30, a clear upward of 50%. This was a clear departure from the original intention of those who founded the subsidy as it was gradually subdued and exited with occasional price increases.
The huge amount paid by the Federal Government on fuel subsidy annually neccesitated the introduction of the deregulation policy into the petroleum sector. This is because Fuel subsidy price could have been expended on infrastructural development to enhance the living standard of the people. In 2008, the then Minister of Petroleum, Odein Ajumogobia stated that government's subsidy on petroleum products was NGN 1.5 trillion or USD9.68 billion annually. By this the deregulation policy of the Nigerian petroleum sector by the Federal Government is likely to bring about development of infrastructure and job creation. However, there are obstacles like corruption, high cost of governance and crisis of confidence about government policies that prevents the people from supporting the deregulation policy.
The history of the downstream sector, is the history of scarcity and arbitrary price increases of petrol products, subsidy payments and the removal of subsidy by successive governments. The price of fuel has continued to rise from 1986 until the emergence of Yar’Adua administration in May 2007, when it subsidized the pump price to N65 per litre [6]. The price later was moved to N87 under Jonathan administration which ended on May 29, 2015. The administration of Jonathan witnessed huge subsidy payments that took the bulk of the country’s annual budget. In 2011 alone, Nigeria’s fuel subsidy cost the country an estimated $8 billion and the price tag for 2012 was expected to be even greater.[7]
NEITI’s audit report aptly restates the narrative when it said in very clear terms that:
The value of the subsidies has gone from $1 billion in the 1980s to prohibitive $6 billion. Available data show that the Federal Government spends about N1.4 trillion, about 30 per cent of its total yearly expenditure yearly on fuel subsidy.
The government spent a whooping N4.5 trillion on fuel subsidy claims between 2006 and 2012. The Nigerian Senate in late 2015 approved N521 billion out of N575 billion supplementary budget sent to it by the Buhari administration to settle backlog of fuel subsidy claims even at a time the pump price of PMS was sold at N180. When viewed against the backdrop of fallen prices of crude oil in the international market, Nigeria is at a loss of revenue as we depend solely on crude oil for survival in the face of ailing infrastructure and human capital. It is argued that the subsidy regime of government has been engrossed in corrupt practices.
Successive governments have always advanced justification to deregulate the downstream sector and consequently remove subsidy on petrol as savings made could be channelled into critical infrastructure in the country. The moves by successive governments to remove subsidy as part of deliberate efforts to deregulate the sector have always not only been criticised butresisted by the Nigerian people through the civil society organisations and labour unions on the strengths of massive corruption in the subsidy regime and the fact that governments have not been and will not be sincere in living up to their promises of channelling savings made to critical infrastructure as being canvassed. In other words, successive governments in Nigeria since 1999 have faced the challenge of whether or not to adopt deregulation policy in the downstream sector of the petroleum industry. In fact, the decision of whether or not to adopt deregulation policy as a panacea for remedying the perennial fuel scarcity and arbitrary price increases in petroleum products has been an albatross around successive governments in Nigeria, especially when viewed against the backdrop of huge mind-boggling annual subsidy payments to fraudulent oil marketers.
It is on this background that this article attempts to interrogate the political economy of deregulation policy in the downstream sector of the petroleum industry in Nigeria with a critique of the politics and economics of the deregulation policy with a view to answering the questions of whether or not the deregulation policy would address the perennial scarcity of refined petroleum products, arbitrary pump price hikes as well as the challenges and prospects of a fully deregulated downstream sector of the petroleum industry in Nigeria.
The deregulation of the downstream petroleum sector in Nigeria has generated a high level of deliberation in the country. The policy was initiated by President Olusegun Obasanjo as part of the economic reform policies for the country, with the intention to diversify the economic base of the country, reduce the dominant nature of the oil sector in the economy and hopefully create a vibrant sector that can respond to the vigour of market forces. This policy is encapsulated in the NEEDS[8] document, a four year development plan, that sought to achieve the Millennium Development Goal in Nigeria by 2015. NEEDS was adopted with the view of strengthening government institutions, creating additional wealth for the nation through efficient allocation of resources and reducing poverty through the encouragement of private initiatives, accelerate privatisation, liberalisation and public sector reforms.
The
deregulation policy has been implemented into other sectors of
the economy like the aviation industry, communication industry,
banking industry and also the media. The deregulation experience of
these sectors would be viewed later in this study. Essentially
deregulation does not mean the absence of regulation; rather, it
is a deliberate and informed process of removal or mitigation
of regulations which are anachronistic and tend to foster
inefficiency or competitive inequities. According to PRESIDENT
OLUSEGUN OBASANJO “deregulation means paying what it cost to produce
fuel at the pump price so that the N200 billion that is being
used to subsidise is no longer used to subsidise fuel. That money
is available to do other things. An Internationally acclaimed
dictionary ENCARTA defined deregulation as the dismantling of
legal and governmental restrictions on the operation of certain
businesses.
The deregulation of the downstream sector of the
petroleum industry means freeing the sector of all government
involvement, that the erstwhile control exercised by the government
will cease except of course in the areas of national policy
articulation and policing of the industry to ensure safety and
security off life; property and the fair dealing among stakeholders in
that sector of the economy. The philosophy supporting deregulation is
the Laisser-Faire doctrine (French word for “let things alone”).
This doctrine favours capitalist self interest, competition, and natural
consumer preferences as forces leading to optimal prosperity and
freedom. It arose in the eighteenth (18th) century as a strong liberal
reaction to trade taxation and nationalist governmental control
known as Mercantilism.
The most important and influential proponent
of the doctrine was the 18th century British Economist, Adam Smith. He
believed that individual welfare was more important than national
power. In his book The Wealth of Nations (1776), he advocated a
policy of free trade so that the “invisible hand” of
competition could act as an economic regulation. Smith’s advocacy
of private enterprise as the best stimulus to equitable distribution
of wealth gained increasing support in the early nineteenth
(19th)century partly due to the wave of libertarian revolution that
swept through Europe and the U.S.A. His theories were further
developed by the British Economists such as David Ricardo and John
Stuart Mill. Similarly, OLISA AGBAKOBA a Senior Advocate of Nigeria
comments that “…regulation…refers to laws and rules that seek to
impose outcomes that would not be reached by the operation of free
market forces and private legal rights.”
STRUCTURE OF THE DOWNSTREAM SECTOR
Nigeria
imports and exports some petroleum products because the product
composition of the refinery output does not exactly match the
composition of domestic demand. Consumption data show that the middle
distillates, like petrol and diesel, dominate the demand structure;
Nigeria is often a net importer of these products.
Due
to low level of capacity utilization of the refineries, domestic
production levels falls short of total demand, leading to shortages
of products, and as a result, to high levels of petrol and
diesel imports. The import, distribution, and storage
infrastructure is dominated by the Pipelines and Product
Marketing Company (PPMC) which is a subsidiary of NNPC. Most
of the infrastructure investments began late in the 1970s, spurred
on by Nigeria’s growing oil production capacity and oil revenue after
the oil price hikes in 1973 and 1979.
Nigeria has five jetties for imports, the Apapa and the Atlas Cove terminals near Lagos, Escravos in the Western Delta, Okirika near Port Harcourt, and Calabar near the border with Cameroon. The two main import terminals are Atlas Cove and Port Harcourt close to the Port Harcourt refinery. These are deep sea ports.
Nigeria
has four refineries, two in Port Harcourt (Rivers State), one in Warri
(Delta State), and one in Kaduna with a total nominal refining capacity
of 440,000 barrels per day (bpd). The four refineries are:
- the oldest unit in Port Harcourt is decrepit and not producing although it has a nominal capacity of 60 bpd;
- a new refinery was commissioned in Port Harcourt in 1989 with a processing capacity of 145 bpd of crude oil;
- the Warri refinery was commissioned in 1978 and upgraded to a capacity of 125 bpd in 1987;
- The
Kaduna refinery was commissioned in 1980 and expanded to 110 bpd of
processing capacity in 1986; crude oil to the refinery is delivered
through a 700km pipeline from Escravos Terminal in Delta State.
These
refineries have never operated in their nominal capacities. In recent
years, capacity utilization has been at 30-40 per cent. This
performance gap is only partly explained by the deterioration of
equipment of the old Port Harcourt refinery, supply disruptions
at the Kaduna refinery (vandelization of pipeline), and social
unrest in the area around the Warri refinery. More importantly,
however under the pricing regime prevailing before September 2003,
there was a clear incentive to export rather than refine crude
oil in order to finance NNPC’s losses in downstream petroleum
distribution.
Apart
from the crude oil pipeline that feeds the Kaduna refinery,
Nigeria is criss-crossed by more than 4000km of petroleum
product pipelines, which deliver products to strategic storage depots in
the regions. About twenty pumping and booster stations keep
petroleum products flowing through the pipeline. The current
configuration dates back to the early 1990s, when the last phase of
the Pipelines and Depot Project worth $600 million was completed.
Despite this investment, many pipelines and other pieces of equipment
are run down. The functioning of the system is further hampered by
vandelization and theft.
Following
the refining process, petroleum products are first deposited in large
storage depots at the refineries. From there, they are shipped
through the pipelines to fifteen storage depots strategically
located in various regions. A large percentage of the storage
depots are old and leaking, which results not only in
financial losses, but also in significant groundwater pollution.
Transportation
of products between strategic storage depots and filling stations
is provided by a fleet of road tankers owned primarily by the major
marketers. Due to the low margins that have prevailed over the
recent past, the retail sector has suffered from insufficient
investment in maintenance and new equipment.
THE DEREGULATION POLICY IN DOWNSTREAM SECTOR
The
Nigerian petroleum industry consists of the upstream and the
downstream sectors. The upstream sector deals with discovery,
exploration (onshore and offshore), extraction of oil and gas,
treatment, transportation and delivery to export terminals/processing
plants. The downstream sector, on the other hand, entails refining
of the white products, conversion to petrochemical products,
transportation, distribution and marketing of the finished
products. These products are mainly Premium Motor Spirit –petrol,
Automotive Gas Oil – diesel, Dual Purpose Kerosene, Low and High Pour
Fuel oil (LPFO/LHFO), Base oil, Liquefied Petroleum Gas (LPG), Bitumen,
Paraffin Wax and Sulphur. The downstream oil sector has not been
without its many problems. These problems can never be over stated and
they are; petroleum scarcity, mishandling of products, waste of
productive man-hours due to queuing in fuel stations, hording of the
product by marketers, cross-border smuggling, large-scale corruption in
the distribution and marketing chain, lack of Turn Around Maintenance,
mismanagement of funds, poor maintenance and vandelization of
facilities.
The
CHIEF OLUSEGUN OBASANJO administration in the bid to completely
stamp out these recurring problems on the 14thof August 2000 set up a
34-man committee comprising of various interest groups in the
country including the Nigerian Labour Congress (NLC). The
committee known as the Special Committee on the Review of Petroleum
Products Supply and Distribution (SCRPPSD), deliberated on the
problems for more than three months and recommended the total
liberalization of the sector as the only viable solution to the
myriads of problems plaguing the downstream petroleum sector. By
this, the committee meant that the various aspects of the
downstream sector of the oil industry should be opened up to
participation by individuals and corporate bodies who have the
wherewithal and the technical experience to invest in the sector.
Other
recommendations of the committee includes: that the importation
of petroleum products should be deregulated to allow for other
participants to join apart from the NNPC; that Nigeria must
maintain self-sufficiency in refining; that efforts must be
made to ensure uninterrupted domestic supply of products at
reasonable prices; establishing facilities and infrastructure for the
production of refined products targeted at the export-market;
support local production of petro chemicals; provide gainful
employment which could facilitate acquisition of technical
know-how in refining and distribution business by Nigerians;
privatization of government refineries and the provision of incentives
for the establishment of new refineries; the setting up of a Petroleum
Products Pricing Regulatory Committee (PPPRC) to superintend the phased
proposal and lastly, a three phased approach to the deregulation of the
downstream oil sector.
Following the submission of the committee’s report by October 2000, the Federal Government released its white paper on the recommendations on January 2001. In the white paper, government approved a phased implementation of the liberalization process. It also approved the setting up of the 23-member Petroleum Products Pricing Regulatory Committee(PPPRC) on the 22nd of March 2001, as a fore runner to the Petroleum Products Pricing Regulatory Agency (PPPRA), which was subsequently established by an Act of the National Assembly on 27th May 2003. Former President Olusegun Obasanjo inaugurated the Board of the Agency on 19th June 2003.
January 1 2002 saw the commencement of the deregulation of the downstream sector of the oil industry. Ceiling prices for PMS, AGO, DPK at N26, N26 and N24 respectively became operational. Also the consumption tax of N3.00 was abolished, while a N1.50 import duty was introduced on all imported products. Government also raised the prices of crude to the NNPC. The N1.50 import duty on petroleum products was later removed to encourage marketers to import products. The removal of the tax signified that imported products attracted zero duty. Finally, in September 29 2003, Government commenced total liberalization of the downstream sector of the oil industry.
The
goals and objectives of the deregulation of the downstream oil
industry include; decontrol of petroleum prices, removal of
restrictions on the establishment and operation of petroleum
infrastructure, importation and exportation of crude oil and petroleum
products, allowing market forces to prevail, free entry and exit into
the products market. The objectives aim to ensure: the move to a market
based pricing regime and eliminating regulatory distortions in order to
encourage efficient allocation of resources and phase out
uneconomic fuel subsidies; open downstream markets in a manner
that encourages private sector investment and establish a level
playing field for competition among industry participants for market
and profits; restructure NNPC in a manner that the privatized NNPC
subsidiaries will be able to compete in the market and attract
investment opportunities to the downstream; refocus and
strengthen sector regulation in order to protect the public
interest; encourage opening up of PPMC facilities to third parties on a
user-fee nondiscriminatory basis; and lastly, limit government’s
involvement to policy formulation and fiscal matters leaving
commercial and investment activities to the downstream operators and
regulation to an independent regulator.
The well implementation of the deregulation policy was expected to:
- Lead to a diversified and sectional growth of the economy through the optimal process of resource allocation and utilization. Scarcity of products will be eliminated and in the long run, bring low pricing. Marketers will attract buyers by price reduction and after purchase incentives.
- turn the present sellers’ market to become buyers’ market and customers will be king.
- create jobs for skilled, semi-skilled and unskilled workers.
- help the NNPC to explore the international market by selling off excess products and import the right raw materials best for its operations.
- channel government savings from deregulation to other productive ventures and social amenities (education, shelter, employment, transportation, electricity and enhanced salaries.) that would make life better for the people.
- ensure the Building of small and medium refineries by private sector actors which will inevitably bring down the prices of petroleum products.
- Discourage smuggling across the border which presently benefits other countries.
- transfer technology and technological expertise. This is because much of the industry is technical, thus, it will be virtually impossible for the investors to invest without bringing in the requisite technology. The technological transfer will have a multiplier effect on other sectors of the economy.
- localize the industry and
upswing economic activities. It will also promote labour
mobility, raise professionalism and enhance the technological know-how
of the Nigerian engineers. It will further lead to the
re-engineering of the oil and gas sector.
LEGAL AND REGULATORY FRAMEWORK
A pre-requisite for transition from a regulated to deregulated economy is an appropriate legal and regulatory framework. A deregulated economy does not imply the absence of regulation. The regulatory and supervisory bodies exist to oversee various aspects of the implementation of the policy in the downstream sector, pricing, supply and distribution, adherence to standards, health safety and environment, consumer protection, planning and research and other areas that require monitoring. However, it is the business environment that dictates and determines the nature and extent of involvement of regulator or supervisory bodies.
The
regulatory framework established for the deregulation of the
downstream oil sector is the Petroleum Products Pricing Agency
(Establishment) Act, 2003, primarily to determine the pricing
policy of petroleum products and regulate their supply and
distribution. The functions of the Agency are to:
- determine the pricing policy of petroleum products;
- regulate the supply and distribution of petroleum products;
- moderate volatility in petroleum products prices, while ensuring reasonable returns to operators;
- maintain constant surveillance over all key indices relevant to pricing policy and periodically approve benchmark prices for all products;
- establish an information and data bank through liaison with all relevant agencies to facilitate the making of informal and realistic decisions and pricing polices;
- identify macro-economic factors with relationship to prices of petroleum products and advise Government on all appropriate strategies for dealing with them;
- oversee the implementation of the white paper on the Report of the Special Committee on the Review of Petroleum Products Supply and Distribution as they relate to its functions, taking cognisance of the phasing of the specific proposals;
- establish parameters and codes of conduct for all operators in the downstream sector of the petroleum industry;
- Establish
firm linkages with key segments of the society and ensure that
its key decisions enjoy the widest possible understanding and
support.
In analysing the legal framework that has been put in place to effect the deregulation policy in the downstream petroleum sector, it is sad that apart from the Act establishing the PPPRA, which is the regulatory agency, there is no solid legal framework.
Nigeria
is not the only country to deregulate its downstream oil sector. Other
countries have done so. The experiences of these countries are
analysed in this sub-section with the view of drawing from their
experience. These countries include Ghana, which is not an oil producing
country and so it has to import its petroleum products. The NPTB is in
charge of importation, refining, distribution and sale of all petroleum
products. The cost of deregulation is the potential of increases from
transport to food, to cement, to rent, and so on. The Ghanaian
government has already initiated measures to mitigate the effects of the
price increases. South Africa also, with four functioning (stress
on the “functioning”) refineries and a fifth Gas to Liquid(GTL)
Refinery has a total refining capacity of approximately 650,000 bpd,
sufficient to meet current demand. The country has the second largest
refining capacity in Africa after Egypt. The intention of the Government
is to introduce a deregulated oil industry as pre-determined milestones
are achieved. Knowing that the transition process may be
difficult and that there may be some negative effects on
employment and small businesses in the short and medium term. In view
of these, the government proposes a phased and managed reform
process which will allow for proper management and monitoring. It
will allow time for preparation and adjustment by the respective
industry participants and role-players. Currently the country is into
export of petroleum products to Southern Africa and the Indian/ Atlantic
Basin Markets. The deregulation is designed to be in three sequential
phases. The first phase will allow for interim adjustments to
fuel price mechanisms and settling of over/under recovery account with
the oil industry. In this phase, mechanisms will be put into
place to ameliorate any negative impact on employment
opportunities as a result of restructuring process. The key milestones
to be achieved in this phase include: the sustainable presence,
ownership or control by historically disadvantaged South Africans
of approximately a quarter of all facets of the liquid fuel
industry, or plans to achieve this; the introduction of
necessary legislation to give effect to the cornerstones of
government policy including the protection of “full service” and
equitable participation of small business in the industry; the
introduction of any necessary institution and regulatory capacity
required to enable government to adequately monitor possible post
deregulation distortions and to enable it act against such distortions;
suitable arrangements to address any labour related consequences of the
deregulation. The second phase is characterized by allowing market
forces set prices. Retail price regulation, import control and
government support for the service station rationalization plan will be
simultaneously removed. The third phase will be the post deregulation
transition phase. This will be characterized by government
vigilance and monitoring for possible problems arising from the
introduction of deregulation and corrective actions to address
them. In the event of uneven competition resulting in price
distortions, for example rural –urban cross-subsidies, fiscal
measures or price capping may be employed too counter balance such
distortions. Government will monitor and evaluate possible
problems arising from the introduction of deregulation and will
be taking corrective actions on the different phases as they
unfold.
In
Philippines, deregulation of the Philippine petroleum downstream
industry was achieved in 1998. It was done in two phases namely;
partial and full deregulation. In the partial deregulation phase, oil
importation was liberalized and the automatic pricing mechanism was
implemented. While in the full deregulation phase, controls on oil price
setting were lifted. Mali also had her share in the deregulation
subject at a point in her history.
Post-Deregulation Era
The
importance of the oil industry and the downstream sector in
particular to Nigerians cannot be over emphasised. For a sector that
contributes over ninety per cent of the nation’s earnings, it is easy to
understand that developments in that sector will have ripple effects on
the whole economy and will impact significantly on
the lives of the citizens. The deregulation policy is a germane topic in the country birthing many events
since the implementation of the policy. These events include the establishment of the
regulatory body PPPRA and the Petroleum Support Fund, the selling of two refineries and Government’s
shares in African Petroleum, the incessant rising of fuel price
followed by the presence of long fuel queues, strikes by organised labour and the increase in the prices of transportation,
housing, food, necessaries of life. These events are effects of the deregulation policy.
The effects of the policy include:
- Entrance of Private Operators: Prior to the deregulation of the downstream oil industry, the government through the NNPC played a leading role in the oil industry. The Nigerian National Petroleum Corporation had monopoly of petroleum product supply; it was the only wholesale supplier of petroleum product, both through refining and imports. Following the announcement of the deregulation of the downstream petroleum sector, private investors/ operators embarked on massive investment in the sector culminating in building and commissioning of jetties, depots and service stations with new pumps development, expansion of trucking fleet, modernisation of Health and Safety Environment equipment. Apapa jetty which was hitherto exclusively used by NNPC was opened for use by other players on a user fee basis. Independent Marketers together with their foreign partners, Pure bond of London have floated the Nigerian Independent Company (NIPCO) to build a 3.65 billion-naira depot in Lagos. The depot has a 40 million litres capacity for PMS, AGO and DPK. The Depot and Petroleum Products Marketers Association are not left out either (DAPPMA). DAPPMA has made substantial investment in the area of storage facilities and products haulage. In the construction of private refineries, eighteen companies have been awarded licence to build refineries. Badagry Petroleum Refinery Limited is one of the private operators awarded to build petroleum refineries. The company partner with TRICAN Corporation United States of American to carry out the project. Mr. Babajide Soyode the Technical Adviser Badagry Refinery in an interview on a daily newspaper stated that the joint venture agreement became expedient to adequately implement the deregulation policy. Under the agreement, TRICAN Corporation becomes the majority equity holder of 58%, while BPPLY holds the balance of 42%. Furthermore, NNPC’s monopoly of product supply is being broken through direct importation, storage and distribution of petroleum product by private investors.
- Privatization of Government’s Shares and Infrastructure: The
past administration in its implementation of the deregulation
policy sold NNPC’s shares in AFRICAN PETROLEUM. It also sold
both the Kaduna and Port Harcourt refineries. One of the effects
of the deregulation policy is the establishment of the PPPRA. The
PPPRA, in a nutshell, is the regulatory body established to
superintend the various phases of the proposal embodied in the
report submitted by the SCRPPSD, especially the deregulation and
liberalization of the downstream sector of the petroleum
industry; to determine the pricing policy of petroleum products
and regulate their supply and distribution. The PETROLEUM SUPPORT
FUND came about as a modulator mechanism that was recommended by the
“Independent Coordinating Committee On Measures for Cushioning
the Effects of the Increase in The Prices of Petroleum
Products”. The Committee recommended the establishment of a
modulator mechanism to stabilize domestic prices of petroleum products
and mitigate the impact of fluctuations in crude prices on the domestic
products market. To that effect, the Government established the
Petroleum Support Fund. The PSF is a pool of funds budgeted for by
Government to stabilize the domestic prices of petroleum
products against the volatility in international crude and
products prices.
Fuel Subsidy Removal
The major
issue in the deregulation of the downstream sector
is the price. The government, in an effort at solving the
problem of pricing of petroleum products employed several
options and the issue of subsidy became a major one. Subsidy
remains today the most unpopular weapon government employs anytime
it decides on effecting an increase in the price of oil. It remains
the only word government resorts to when questioned on the
rationale behind any such increase and the frequency of the excuse
of the need to remove subsidy has made the word unattractive to
Nigerians. Former President, Chief Olusegun Obasanjo, told Nigerians
that the removal of subsidy on petrol was the key to the policy of
deregulation, but today it has proved to be its albatross and that
is why it is difficult to get people into refining business
in Nigeria. That has also accounted for why 17 (seventeen)
companies licensed to build and operate refineries in the country
five years ago have not advanced much as it was envisaged in
the beginning. The licenses stated that they could not understand why
the government should sell Nigerian crude to Nigerian companies
operating in the country at international price, more so when it knows
that it will be morally wrong for government to ask Nigerians to pay
international price for the refined petroleum products when they
know that the crude these companies are using in making the fuel
available is gotten from their backyard.
The government’s method
of implementing the deregulation policy of the downstream sector
led to periodic and constant increase in the price of petroleum
products for the local market and exploitive tendencies of the oil
marketers. September 2005 in Nigeria witnessed an unprecedented
wave of protests in form of mass demonstrations and rallies that
were held in at least ten major state capitals across the country. The
demonstrators rejected all forms of increment in prices of petroleum
products. The increment was over 30 per cent. This was the tenth
increase in the price of petroleum products since the inception of the
administration of General Olusegun Obasanjo. With two days to the end of
his eight-year rule as elected president of Nigeria, General Olusegun
Obasanjo, on Sunday, May 27, 2007, effected another increase in the
prices of petroleum products with petrol from N6500 to N75.00 and
kerosene from N54.00 to N64.00. The price of diesel which was said
to have been deregulated was not affected. In eight years, Obasanjo
upped the price of petrol eight times – from N20.00 to N75 –
representing a 275 per cent increase. For diesel and kerosene,
the margins are even wider. The devastating effects of previous
increases had in no way been ameliorated when another price hike was
imposed. The price hike led to another strike by Organised
Labour for price reversal. This made President Umar Yar’Adua to
reduce the price to N70.00. The multiplier effect of these increments
has been enormous on the Nigerian populace. Directly, it has meant
sharp increase in the cost of household energy procurement, since most
households rely on kerosene and other petroleum products for
domestic fuel to cook food and so on. The recurrent increase has meant
that more of the already inadequate income of workers is now going
towards household energy procurement. For those who cannot cope, it has
meant going back to wholesale firewood cooking with its numerous health
and environment hazards. For industries, it led to an enormous
increase in the cost of industrial energy procurement and hence a rise
in the cost of production. This is more the case since the
electricity supply remains predictably epileptic and most of the
factories and other industries have no choice but rely on
diesel generators to propel their productions. This added cost has led
to a major crisis on the industrial plane with the untoward
effect of workforce load shedding (mass retrenchment) and in
some circumstances, leading to the outright closure of factories
and other workplaces that depend heavily on diesel running
generators. In the same ration, leading to the escalation of violent
crimes, fraud, prostitution, the list is inexhaustible.
The
transport sector is obviously the worst hit among the sectors
under review. Increment in prices of petroleum products has led to a
direct increase in the cost of transportation of commuters and goods.
The increase in the price of petroleum products comes with the attendant
increase in the price of everything; from the price of rent to the
price of the supposed not so important things in the market, for example
toiletries.
Deregulation as a policy has wonderful benefits
if well implemented. As has been witnessed, the deregulation policy
in Nigeria did not scratch the surface in solving the problem
it was introduced to solve. The following in this writer’s
view are what the government should have implemented, the
alternative remedy to the deregulation policy.
- Developing the agricultural sector: long before the discovery of crude oil in Nigeria and by the time Nigeria became politically independent, agriculture was the dominant sector of the economy, contributing about 70 per cent of the gross domestic product (GDP), employing and accounting for about 90 per cent of foreign earning and Federal Government revenue. After the discovery of oil in commercial quantities in1956, crude oil became the dominant resource in mid 1970’s. The oil boom of the 1970’s led Nigeria to neglect its strong agricultural and light manufacturing base in favour of an unhealthy dependence on crude oil. The largely backward agricultural sector has been unable to keep up with rapid population growth, and Nigeria once a large exporter of food, must now import food. The Nigerian government needed to have developed the agricultural sector of the country. In so doing it would have reduced the level of unemployment in the country and shifted the country’s dependence from crude oil. In this way, the usual reliance on petroleum will no longer be in existence. Secondly, the additional revenue the government gave as reason for the deregulation of the price of fuel- that is the removal of subsidy- would have been gotten from the improved agricultural sector. One of the factors that make a country to have a strong economic base is the fact that the country produces enough food to feed its population. America is a strong country due to the fact that it has a strong agricultural sector. It produces more than 90 per cent of the food its population feeds on and has more than enough to export.
- Seeking other energy avenues: Jimmy Carter, a one-time President of the United States of America, when the country was going through fuel shortages, long fuel queues, increase in the price of gasoline, stated that one of the ways the country was going to get out of that situation, was to commit funds and resources to the development of alternative sources of fuel. In this way, the country’s dependence on petroleum will be reduced. In keeping to this, the George Bush administration presently, proposed a budget to increase funding for research into clean coal, ethanol -which is a bio fuel, and renewable energy. President George Bush had announced the Advanced Energy Initiative which involves developing alternative fuels and clean energy in an effort to replace more than 75 per cent of the country’s oil imports from the Middle East by 2025. The plan includes a new solar energy initiative, wind energy research, increase in funding to speed up development of cars that run on hydrogen and electricity. Dependence on petroleum is no longer encouraged. The most appropriate thing is to seek and develop alternatives to crude oil. This will reduce the country’s reliance on petroleum as a source of energy. The problem of fuel scarcity will no longer exist because; petroleum products will no longer take centre stage as energy provider for the populace. Also diversification from the oil and gas sector would put an end to the cases of restiveness and other social vices among the youth in the Niger Delta.
- Development of a working Transport System: one of the things the government should have done rather than the deregulation policy is the development of the Nigerian transport system. This is one of the ways of reducing the consumption of fuel by individuals. If the country could boast of a good railway and effective bus system, the need to own cars would have been dispensed with by most people. The need to fuel more cars would then, not arise. More people will make use of both the railway and bus system to get to their destinations. In developed countries, these are the measures that have been taken to reduce the consumption of fuel by the populace. People who own cars usually, would, park them in the car parks so as to benefit from the railway and bus system. This helps them to save more and reduce their consumption of petrol.
- Building More Refineries: If we ask of what use is it to build more refineries when the present ones are not being utilized, the population of the country has increased from what it used to be after the last refinery was built in 1989. The government needed to have rejuvenated the existing refineries and provided new ones. It can rightly be argued that the building of refineries is one of the benefits of the deregulation policy, but as is clearly seen, licences have been given for the building of refineries by private operators but till date non has been built and so the country continues to rely heavily on the importation of refined petroleum products rather than producing her own. A lasting solution to the problems of supply of petroleum products lies in the repairs of the present refineries, building of more refineries to at least double the combined capacity of the present four refineries.
Government exists to formulate and implement public
policies to enhance the living standard of the people; and deregulation
of any aspect of the economy is one of such public policies that
government can adopt. Public policy is the formal or stated decisions of
government bodies or a plan of action adopted by government or its
agents. It involves the use of state coercion agencies to enforce and
ensure compliance.
Deregulation of any aspect of a nation's economy on the other hand could take the form of privatisation or divestiture of an aspect of the economy from government to private investors. The purpose of deregulation is to ensure competitive economic system devoid of monopoly and allow price mechanism of demand and supply's principle of economy to prevail.” Deregulation is also a tool for reducing government intervention in economic activities and providing relevant structure of incentives that would put the economy on the path of recovery and growth. Other scholars see deregulation as a process where government reduces its role and allows the natural market forces of demand and supply to become fully operational. Its effect according to them is freedom in the market place and the best route to an efficient and growing economy. As such, deregulation could be said to be government withdrawal of control from the working of an aspect of the economy and leaving same in the hands of the private sector operators for more efficient use of resources and to bring about development in the society. The main objectives of deregulation of any aspect o f a nation's economy include: introduction of market economy, increasing democracy and guaranteeing political freedom, and increasing government revenue.
In
importance, the deregulation of an aspect of the economy o f a country
returns that when market forces are allowed to play out, and
the private businesses are given pre-eminence in the economy,
then the economy would be rejuvenated and sustainable development
would consequently ensue.” Proper management of revenue generated
from the deregulation of an aspect of the economy could go a long way in
the provision of social amenities, infrastructural development and
job creation for the populace. When this happens, it can be
concluded that development has materialised in that society.
The
concept of development itself has generated different meanings amongst
scholars. It is a multidimensional process involving the
re-organisation and reorientation of the entire economic and
social system, which involves the improvement of income and output,
radical changes in institutional, social and administrative structures
as well as in popular attitudes, customs and beliefs. It is a continuous
process of positive change in the quality of life o f a person or group
of persons by the reason of access to better living condition. They
went further to identify indicators of development as: ability to
feed, clothe and shelter oneself resulting from more income in one's
occupation or means of livelihood; ability to live a much longer life
as a result of the provision of health and medical facilities,
and prevention o f diseases through better sanitation; ability to
read, write and understand forces surrounding one through the
provision of formal and informal education; and ability to
participate meaningfully in political activities and in the
policy making process at the local and governmental levels.
Development is a progressive realization of the fullest possible and balanced flourishing of both human and natural resources - the latter in view of the former. It is also a continuous improvement in the capacity of the individual and society to control and manipulate the forces of nature for the enhancement of the living standard of the people in a society. On the other hand, development can be viewed in terms of improving the living conditions of people amongst the world's poorest nations because it entails a higher quality of life, higher income, better education, higher standards of health and nutrition, less poverty in society, a cleaner environment, more equal opportunities, greater individual freedom and richer cultural life amongst citizens of poorer nations. Development also refers to advancement through progressive changes in economic, social, cultural, technological and political conditions of a society leading to an improvement in the welfare of citizens. Scholars have argued that no society can claim to be developed if there is a high level of poverty, insecurity, unemployment, illiteracy, malnutrition, child mortality, political instability, deplorable state of infrastructure and inequality in income distribution.
For development to have taken place in a society; there must be an enhancement of the quality of life of citizens: meeting the basic needs of food, shelter, good health, good education and a general sense of wellbeing amongst the people. Development therefore is a process that entails growth both in infrastructure and in the lives of the people. Development can be stagnated where there is lack of long-term perspective on the part of leadership in a country. From the foregoing, development is associated with better quality of living in terms of the availability and access to the basic necessities of life such as clean water, food, clothing, shelter, good education, health and the ability to participate in the decision making process of government in a society. These indicators of development as pointed out above require funds on the part of the government. Hence all things being equal the more funds available to government, the more likely the provision of these amenities.
DEREGULATION OF THE PETROLEUM SECTOR AND DEVELOPMENT IN NIGERIA
Nigeria
currently has five refineries located in Port-Harcourt, Warri and
Kaduna, of which four plants are government owned and managed by the
state owned company - Nigerian National Petroleum Corporation (NNPC),
while the fifth plant is owned and operated by the Niger Delta
Petroleum Resources (NDPR). The total output production of petroleum
products from these five refineries combined barely met 30
percent needs of domestic consumption. These five refineries are
currently working at below 55 percent installed capacity due to
mismanagement, lack of maintenance culture and corrupt practices on
the part of the operators. As a result, the Federal Government had to
resort to fuel importation to meet domestic needs. This development
resulted in the emergence o f “rich oil Mafia” that controls the
Nigerian petroleum sector and hoards petroleum products with a view to
increasing the pump price o f petrol arbitrarily without
considering the interest of the citizens. The dangers o f over
reliance on oil and gas as major sources of revenue and resorting to
fuel importation as a means of meeting the domestic needs of
petroleum products in Nigeria are close. Unless Nigeria faces the
reality of diversifying its economy from reliance on oil as a major
revenue earner and develop capacity in other areas like agriculture,
mining and solid minerals; the future may remain bleak. Our four
state owned refineries are not operating at full capacities and we take
delight in exporting our crude oil and again import back as refined
products at high costs..
There were certain principles and assumptions associated with the deregulation policy of the Federal Government in the petroleum sector. These are: that the Nigerian government recognises the inadequacies of the existing state-owned oil companies and desires to maximise supply sources for the refined products market in the country; that local and private investors would be willing to takeover the state-owned facilities in their current state of dilapidation and operate them efficiently and profitably thereafter; that government monopoly o f refining and distribution from the state-owned storage depot would be completely unbundled and abolished; that private refineries would procure crude oil at competitive rates and sell their refined products profitably and at international prices both in and outside Nigeria as desired by the operator; that private investors would have open access to state-owned facilities like petroleum reception jetties at Escravos, Atlas Cove, Okrika, Effurun and Calabar, including the storage tanks at Port-Harcourt, Warri and Kaduna for expediting the logistics o f improving petroleum products availability in Nigeria; that prospective private operators must have the necessary financial and technical capacities and be liable to applicable environmental, community relations obligations, safety, quality and other standards, and that unnecessary impediments, including over-bearing procedures for granting licences to prospective private refiners and other potential investors in the downstream sector that need to be removed may remain, given the nature of the bureaucracy in Nigeria.
The
PPPRA evolved to establish an information and data bank by
liaising with relevant agencies; facilitate informed decisions on
pricing policies; moderate volatility in petroleum products
pricing, while ensuring reasonable returns to operators; oversee the
implementation of relevant recommendations and programmes of the
Federal Government; establish parameters and codes of conduct for all
operators; maintain constant surveillance over all petroleum products;
identify macro-economic factors in relation to pricing of petroleum
products and advise the government on appropriate strategies
for dealing with them; establish linkages with key segments of the
Nigerian society and ensuring that their expectation enjoy the
widest possible understanding and support; prevent conspiracy and
restrictive trade practices that are harmful to the sector; and play a
mediating role for all stakeholders in the sector. One of the major
criticisms leveled against the PPPRA from the inception is its
method of implementing the liberalisation (deregulation) policy o f
the Federal Government, which has to do with periodic and constant
increases in the pump price of petrol and other petroleum products.
This has further encouraged the exploitation of Nigerians by
oil marketers in the country.
Consequently,
due to the low minimum wage paid to workers in Nigeria at NGN 18,000 =
$116.13 per month.; any increase in pump price o f petrol is easily felt
by the people and automatically translates into price increases in
other areas such as costs of transportation, food, shelter and
other basic household needs, hence the resistance from the people
each time the price o f petrol goes up. The NGN 18,000 = $116.13 per
month as salary is too small to enable people live quality life.
Justifying
the deregulation policy of the Federal Government in the Nigerian
petroleum sector, arguments have surfaced that deregulation policy has
the capacity to reform and reorientate the Nigerian public and private
businesses to a better value system of transparency and accountability
as a way of tackling effectively the menace of corruption. In defending
the announcement of the new petrol price regime that commenced on 1st'
January, 2012 as the outcome of the total deregulation of the Nigerian
petroleum sector (from #65 to #141 per litre) by the PPPRA, the
Federal Government argued that the need for the deregulation of the
petroleum sector of the Nigerian economy has become so urgent
because of the desire for economic growth and infrastructural
development. To achieve the development goals of the Federal Government,
more revenue is required, yet so much is spent on fuel subsidy. For
instance, while the amount paid on petrol importation by the government
as subsidy was put at NGN1.5 trillion or USD9.68 billion in 2009, it
rose to NGN 1.7 trillion or USD10.96 billion in 2011. Furthermore,
while recurrent expenditure has consistently increased since 1999 when
Nigeria returned to democratic governance, capital expenditure on
the other hand has continued to decrease.
The
implication is that if development is truly desired in the
country, then deregulation of the Nigerian petroleum sector must be
encouraged, implemented and an end put to the payment of subsidy on
petroleum products. It was in a bid to overcome the problem of
inefficiency in government owned business ventures; eliminate fuel
subsidy and corruption in the public sector that made the
Federal Government to redefine its role in the economy. The
government has now limited itself to the role of creating the
enabling environment for private sector intervention aimed at
facilitating sustainable growth and development in the country. This
role is to be achieved through: the reduction in the duration and cost
o f registering a business; simplification and harmonization of
the tax systems and payment channels; reduction in the turnaround
time and cost of obtaining building permits; ensuring easy access to
affordable and long-term finance; expansion of Information Technology
(IT) infrastructure to facilitate easy access to Internet and
telecommunication services; encourage both local and foreign investors
by improving ports and customs management (48-hours clearance o f
goods at the sea ports); eliminating immigration bottlenecks
(simplify visa issuance and work permits); improving security of
lives and property; complete the modernization of the
transportation system; and improve basic critical infrastructure.
Considering the current revenue predicament of the Federal
Government, the successful implementation of the deregulation
policy of the Nigerian petroleum sector has the potential of
creating more jobs, bringing about development and enhancing the living
standard of the people.
BARRIERS TO TOTAL DEREGULATION OF THE NIGERIAN PETROLEUM SECTOR
Cost of Governance refers to increased recurrent and personnel cost or expenditure of the government. And this has continued to rise over the years without corresponding meaningful development in the country. A bloated but under performing public bureaucracy, an expensive presidential system and some unviable sub-national units conjointly exacerbate the delicate/precarious position on cost of governance in the Nigerian Public Sector.
The
observation that over 70 percent of the recurrent expenditure
in the 2012 national budget was dedicated to the maintenance of
political office holders in Nigeria is sure to affect development
adversely. To support the above view, the Presidency had a feeding
allowance of NGN1 billion ($6.45 million); the budget for fuel and
electricity generating set was NGN 1 billion for the Presidential
villa; two bullet proof cars for the Presidency was NGN280 million (USD
1.8 Imillion); budget for dinning set up was NGN 300 million or
USD1.94 million (also for the Presidential Villa). It has also
been documented that the Nigerian Federal lawmakers are about
the highest paid in the world, with the maintenance cost for each
Senator for four years at approximately NGN3 billion or $19.35 million.
Corruption
connotes misuse of official powers to obtain personal advantage or
favouring one's associates. Corruption could also mean betrayal o f
trust resulting directly or indirectly from the subordination of
public goals to personal interests. These connotations of corruption
are conspicuous in public management in Nigeria and underlines elite
complicity in resource plunder as corroborated by the following
examples: the Pius Okigbo Panel of enquiry instituted by the late
General Sani Abacha’s military government found General Babangida's
military government (1985-1993) guilty of gross mismanagement or
outright diversion o f public funds to the tune o f USD12
billion. These mismanaged funds could have redressed
infrastructural deficits, created more jobs for the unemployed, enhance
living standard of the citizenry, and lead to deceleration in
the rate of underdevelopment.
Corruption is the primary cause of poverty in Nigeria, and this has become economically and socially paralysing despite the production o f two million barrels of crude oil per day, which has the potential of conferring enormous wealth on the country derivable from the export o f oil and natural gas. Nigeria realised USD300 billion or NGN46.5 trillion within twenty years from the sale of crude oil in the international market without concrete development to show for it. The KPMG (audit firm) report revealed that the cost of subsidy payment on petroleum products not consumed by end users due to losses from theft and those not supplied between 2007 and 2009 amounted to NGN 11.8 billion or USD76.13 million. These explains the poverty situation in Nigeria (one of the twenty poorest in the world) and why the citizenry are skeptical of the total deregulation o f the petroleum sector. This position was taken further by a UN report that noted:
Seventy
percent of the population is classified as poor, with 35 percent
living in absolute poverty. Going by the 1991 population figure
o f 120 million, those living below the poverty line were 84
million.. .if the country's population has grown to 140 million
according to the new census figures o f 2006, then by analogous
reasoning, the number o f people living on less than one dollar in a
day must be 98 million. This means that another 14 million
impoverished people have been unleashed on the country. This figure
is more than the population o f oil producing states o f Bayelsa,
Rivers, Delta, and Cross-River States put together going by the 2006
census figure. The combined population of the Niger Delta Oil
producing Region is $13.85million.
It is obvious from these
narratives that corruption is a major drawback and disincentive to
development in Nigeria. Crisis of confidence on Government Policies
relates to the lack of trust by the citizenry in government decisions
and programmes. Research has shown that the failure of governance
underscores citizen's distrust in government (Torres, 2005). Successive
central and sub-national (units) administration in Nigeria,
hardly keep their ends of the social contract bargain. The attitudinal
inclination by government tends to circumscribe citizens' support
for government policies as demonstrated by the six days nationwide
strike/opposition to total deregulation of the petroleum sector
which was announced by the Federal government (under former President
Goodluck Jonathan) on 1S1 January, 2012.
Consequently, the government had to soft pedal after losing many man-hours estimated at a cost of NGN300 billion or USD1.94 billion to the strike. Another measure to demonstrate good faith on the part of Government was the announcement of the reduction of the pump price of petrol from NGN 141 to NGN97. These avoidable losses to strike could have been used for infrastructural development, employment creation for the unemployed with a trickle-down effect on standard of living, had the government cultivated the trust of the populace through effective public service delivery and better economic empowerment for Nigerians.
There is no doubt that, though, Nigeria is among the world’s leading oil and gas producing countries of the world, yet has been encumbered in a paradox where fuel and power shortages, have become the order of the day in the midst of plenty thereby negatively impacting on both infrastructural and human capital developments. It is worthy of note that a total of 445,000 barrels of crude oil per day are reserved for domestic consumption but the capacity of local refineries stand at 170,000 barrels per day, prompting a balance of 275,000 barrels difference to be refined abroad and imported into Nigeria. Also, the four existing refineries in Nigeria which ought to produce at full capacity at some points became moribund and often times when operational produce below capacity for whatever reasons. Similarly, the dire need to deregulate the downstream sector became imperative due largely to the very dilapidating state of the existing refineries with its attendant inefficiency in refining and distribution, ineffective and fluctuating price of the products as well as the propensity for institutionalised monopoly having adverse consequences on the country’s economy. All these have been on the front burner of national discourse, hence the arbitrary scarcity and the poor pricing mechanism of the petroleum products are said to be fluctuating and skewing against the impoverished Nigerian populace who are supposed to be the major beneficiaries while the state officials in collaboration with their comprador oil cartels/cabals appropriate from the existing arrangements.
There
is no gainsaying the fact that the intended objectives of
the founding fathers of the subsidy regime was to alleviate
poverty by subsidising the private consumption of refined
products to maintain some level of stability in the pump price. Rising
international prices of crude oil and refined products, over the
years, have resulted in the significant increase in subsidy
payments to fraudulent oil marketers, hence the colossal damage to the
country’s ailing economy. This has made it difficult for the
country to meet daily consumption needs of 40 million litres, and
consequently has resorted to over dependence on importation of
refined products to meet the local consumption. Since the
country largely depends on imported refined petroleum products and
with a preponderance of a poor population in dire need of the products,
successive governments have adopted palliative measures by way of
subsidy to ameliorate the sufferings of Nigerians. Yet, in the face of
these measures, there have been monumental perennial scarcity and
arbitrary price increases of petroleum products in Nigeria since 1999.
This has resulted in so many stakeholders and researchers to call
for a complete deregulation of the sector as way of solving the
perennial scarcity and arbitrary price increases of petroleum
products even in the face of global fall in oil prices and
revenues accruable to the country.
The deregulation policy
conceived in 2003 was not only intended to remove regulatory
controls on prices of the products but the unbundling of the entire
sector to allow free market economy where new entrants can invest in
the refining, sales, marketing and distribution and even importation
and exportation of petroleum products. The need to deregulate
the downstream sector stems also from the state of Nigerian refineries
and the lack of capacity to meet daily local consumption. It was
for these reasons the federal government under President
Olusegun Obasanjo, on the recommendations of the Special
Committee on the Review of Petroleum Products Supply and
Distribution (SCRPPSD) set up in 2001 to review the challenges
of the downstream sector of the petroleum industry, established
the Petroleum Products Pricing Regulatory Agency with a
view to beginning the process of deregulation. As recent events
unfold in the petroleum industry, deregulation becomes inevitable as
government participation in the downstream sector was
characterised by challenges as: low investment opportunities in
the sector, large scale smuggling of petroleum products,
pipelines vandalisation, low capacity utilisation and refining
activities in the nation’s refineries, scarcity of petroleum
products, mismanagement of revenue from petroleum and high level of
corruption in the state-owned petroleum parastatals vis-a-vis political
office holders.
Deregulation has brought with it a number of changes in the downstream oil industry in Nigeria. The direction to take is to seek ways it can be duly implemented. The policy was not the best solution the government could come up with. The policy rather than improving the standard of living up the populace has made it worse. The deregulation is associated with increment of fuel prices; marketers have taken advantage of the opportunity. As it is the norm, increase in the price of fuel means inflation in the price of transportation, food, housing and many other necessities of life. Based on these, the deregulation policy was not the best the Nigerian government could have offered its citizens. There was no functional structure put in place to initiate the policy effectively.
The following are suggestions to aid in the implementation of the deregulation policy.
- The establishment of structures to implement the deregulation policy. This is crucial to the successful implementation of the policy. This includes the formation of a blueprint for the policy; restructuring of the civil service to accommodate the changes that will come about, reformation of the justice sector and a functional legal and regulatory frame work. One of the problems in the energy sector are fall outs of the absence of sectorial reform policies. For a successful implementation of the deregulation policy in the downstream oil industry, the inability of the banking sector to provide long term credit for over a period of five years to the private sector and little credit to smaller and medium sized enterprises needs to be removed. If the inability still exists, then the private operators with licenses to build private refineries would find it an insurmountable task. The banks should be in a position to render soft loans to these enterprises. The judicial sector has to be restructured to be able to address the changes that accrue to the implementation of the policy. It should be able to offer efficient enforcement of contractual obligations. In the absence of this, it should be able to encourage alternative dispute resolution and be in the position to enforce the awards. There should be a shift toward alternative dispute resolution techniques in preference to litigation. The regulatory body should be independent in every way. It should not rely on the government for its funds. It should be able to generate its funds on its own. That way it will be strong to enforce its decisions without fear or favour. For the legal frame work, existing laws should be amended to create the necessary investment environment. The Bills that are before both Houses of Assembly should be debated upon and signed into Law. An example of this is the Bill for an Act to amend the NNPC Act CAP 320 so as to deregulate petroleum refinery. Also, new Laws should be drawn up to complete the deregulation process. An example of such is the Nigeria Downstream Oil Deregulation Act that was proposed in the First Nigeria Downstream Summit on September 2004. Others are a Competition Act to ensure that there is a level playing field among operators; a Restrictive Practices Act to ensure that consumer interests are protected and to prevent the abuse of market dominance by any individual company. RPA is required to control cartels and other anti-competitive agreements. It will establish the office of the Director of Fair Trading. The Fair Trading Act will control monopolies and mergers that are likely to emerge from privatization.
- A Social Development Agency should be established to cushion the effect of the increase in the price of petroleum products which in turn increases the cost of everything in the economy.
- There should be an establishment of appropriate agencies for monitoring and enforcing standards.
- The deregulation policy should be backed by a plan to ensure that the existing refineries are working while new ones should be built. That way, the nation can shift from exporting crude oil to exporting refined oil products. The policy should encourage the domestic production of petroleum products to eliminate their importation for internal consumption. The goal should be to shift from importing refined products to exporting them (as stated above). This will reduce foreign exchange usage; eliminate the freight insurance, interest and commission charges arising from import dependency. In addition, importation of oil comes with inflation and unemployment.
- The refineries and other NNPC subsidiaries should not be privatized but be allowed to compete with other private investors so as to maintain control; ensure stability and efficiency of operators involved. This is what is attainable in other oil producing countries. Privatization of national refineries will lead to total mortgaging of the national assets with its attendant implications on national security and investment.
- Pipeline capacity should be improved and the incessant problem of vandelization should be tackled. There is a modern technology in existence that protects pipelines from being vandalised. It triggers off an alarm once vandals strike. This technology can be used on the pipelines.
- If prices of petroleum products must be deregulated, the refineries should be effectively repaired. If this is not put in place and the supply problem persists, the result will be exorbitant import parity for products while the refineries are idle and wasting. Price deregulation without local supply will only further encourage import and seal all hopes of ever reviving the refineries and gainfully utilizing the vast assets therein. Also given the volatility of products’ prices in the international market and Naira exchange rates, the unstable exchange rate will create double jeopardy and uncontrollable sudden shocks in the system the economy will just get more comatose.
- The National Assembly should bring sanity to the downstream oil sector through harmonizing and streamlining the regulatory activities of DPR, PPPRA, PEF, the Federal Ministry of Commerce and the Standard Organisation of Nigeria. This will eliminate regulatory distortions as most of their legitimate functions overlap.
- The proposed
Nigeria Downstream Oil Deregulation Act should include provisions
mandating all Joint Venture Multinational exploration and
production companies to locally refine at least fifty per cent
of crude produced and that local private refineries should be
guaranteed domestic supply of crude oil.
Scholars
have argued that businesses are better organised and managed by the
private sector in a development oriented manner. This line of argument
confirms that there is a relationship between deregulation policy and
development, and supports the call for government to remove all
restrictions to private sector participation in the economy.
Deregulation policy which allows market forces to determine prices and
promote efficiency in public sector management is a response to this
challenge. By popular research, deregulation policy and the
development nexus of the Nigerian petroleum sector must be twined
to achieve the goal of development in Nigeria. Government at all
levels should put in place measures to fight corruption, reduce
the cost of governance and earn citizens' trust in its activities
which must be geared towards effective service delivery as a
catalyst for the successful implementation of government deregulation
policy in Nigeria.
Conclusion
Successive governments in Nigeria since the inception of democracy in 1999 have faced the challenge of whether or not to adopt deregulation policy in the downstream sector of the petroleum industry. In fact, the decision of whether or not to adopt deregulation policy as a panacea for remedying not only the perennial fuel scarcity and arbitrary price increases in petroleum products but the ailing economy and the state of both infrastructure and human capital has been an albatross around successive governments in Nigeria. We interrogated the political economy of deregulation policy in the downstream sector of the petroleum industry in Nigeria since inception, hence contend that the subsidy regime of successive governments has not addressed the perennial scarcity and arbitrary price increases of petroleum products in the country let alone the economy. The fuel subsidy regime has been an instrumentality of corruption as it has failed to address the original intentions of its founding fathers.
The
downstream sector of the petroleum industry in Nigeria is one sector
too many. The sector touches, to a larger extent, on both the very rich
and common Nigerians. As soon as it sneezes, the entire country catches
cold at once. Unlike the upstream sector where slight changes could take
a while to be noticed by the populace, the downstream nose-dives when
once there is a hiccup in the distribution chain. This is why, over
time, successive governments have always played safe in matters
concerning the downstream sector of the petroleum industry. Caution has
always been the watchword. This is also one sector that appears to
have an entrenched class interest that must be protected by the
managers of the sector to avoid a backlash on their
collaborative economic motives. This explains why it has not been easy
for the ruling elite, over the years, to take decisive steps in
addressing the rot they created in the sector. This is why the
decision of whether or not to implement the deregulation
policy by successive administrations in the downstream sector
has been very challenging. To implement a fully deregulated
downstream petroleum economy requires very strong political will on the
part of government. It is either they are afraid of the backlash of
their actions or inactions from their collaborators or that they are
afraid of the political consequences of their actions or inactions as it
were. Far-reaching measures that would launch the country into
a fully deregulated petroleum economy are themselves politically and
socio-economically sensitive to handle with a wave of hand by any
administration.
The
myriad of arguments for and against the deregulation policy is enough
to hang a government in the balance in the choice of which policy to
pursue due largely to the dire consequences each action or inaction may
cause the nation. Whichever way, what is most important to the
people is what would reduce the untold hardship suffered by
the teeming consumers of the products across the country. It is on this
note that we conclude that the benefits of a fully deregulated
downstream sector of the petroleum industry far outweigh those of a
regulated regime. The earlier the country implements the deregulation
policy the better for the economy. And there is no better time to do so
than now as it would largely address not only the perennial scarcity and
arbitrary price hikes of petroleum products in the country but
stimulate the economy such that the ailing physical
infrastructure and human capital will be turned around for
better. The multiplier effects of the socio-economic and political
benefits of the deregulation policy in the downstream sector of
the petroleum industry in the country are enormous and should not
be sacrificed on the alters of politics and economics.
The
future of Nigeria’s downstream sector of the petroleum industry lies in
the elite in power especially now that the entire global oil prices have
fallen below expectation. Going into full deregulation, though with its
initial hiccups and devastating effects on the masses, would have
little or no effects as the current international oil prices would have
no significant differences and consequences that could ignite the usual
mass actions from the civil society organisations and organised labour.
The deregulation policy requires this kind of subtle but
far-reaching approach in addressing the long years of disequilibrium in
the supply chain of the downstream sector of the petroleum
industry. Practical steps in engaging critical stakeholders in the
sector pursuant to the implementation of the policy is a sine qua non
towards a joint identification of social safety net that will cushion
the effects of the policy in the event that the global oil prices rise
astronomically to avoid a repeat of occupy Nigeria mass action in 2013.
A
complete deregulation policy in the downstream sector that will result
in government’s outright removal of fuel subsidy remains the only
antidote to addressing the perennial scarcity and arbitrary price
increases in petroleum products by ambitious petroleum marketers in
the country. It is by so doing that market forces shall become the
major determinants of the prices and distribution of petroleum products
for the teeming consumers in Nigeria. A move that will not only address
the country’s economic challenges but will ensure that savings that
would accrue from fuel subsidy removal and other revenues from
the stimulated economy could be put into addressing the ailing
infrastructure and human capital in the country. The nexus between
deregulation policy of the Nigerian Petroleum sector and development is
confirmed by data presentation and analysis. The introduction of
measures to tackle corruption, reduce cost of governance, and
earn citizens' trust are part of the prerequisites for development in
Nigeria. It is through these measures and deliberate efforts at
strengthening institutions, transparent and accountable public
governance that the country can be on its way to development.
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