Legal Framework Issues on Deregulation and Commercialisation of the Downstream Oil Sector in Nigeria - II

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.

Commercialisation of the Downstream Oil Sector in Nigeria

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 characterised as follows:

  • 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[9]. 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 bring these benefits.
1.  It will 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.
2.  The present sellers’ market will become buyers’ market and customers will be king.
3.  Sizeable job avenues would be created for skilled, semi-skilled and unskilled workers.
4.  The NNPC would explore the international market by selling off excess products and import the right raw materials best for its operations.
5.  Government savings from deregulation could be channelled to other  productive  ventures  and  social  amenities  that  would make  life  better  for  the  people.  For  example,  education, shelter,  employment,  transportation,  electricity  and  enhanced salaries.
6.  Building of small and medium refineries  by  private  sector  actors  which  will  inevitably  bring down the prices of petroleum products.
7.  Discourage smuggling across the border which presently benefits other countries.
8.  There will be a transfer of 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.
9.  There  will  also  be  localization  of  industry  an  upswing  in 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.

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