A Review of the Nigerian Energy Industry

Nigeria’s unending flirtation with deregulation


*Govt pleads mounting cost of subsidy
*Plans social safety net
*Labour bandies threats

Hector Igbikiowubo

3 October 2011, Sweetcrude, Lagos – Nigeria has once again resumed its unending flirtation with deregulation while the dramatis personae – representatives of the federal government and that of organised labour rev up rhetoric around the subject. This round of rhetoric over deregulation of the downstream oil industry was sparked in June when the Governor’s Forum led by their chairman, Governor Rotimi Amaechi of Rivers State visited President Goodluck Jonathan to plead their inability to pay the proposed N18, 000 minimum – wage. The governors suggested the removal of fuel subsidy to guarantee more revenue receipt into the federation account which would subsequently be split among the three tiers of government.
In August, as though on cue, Dr. Ngozi Okonjo Iweala, the minister of finance and head of the federal government’s economic management team followed through with the suggestion of the Governor’s Forum when she pleaded government’s inability to sustain payments of petroleum subsidy anymore.
“There has been a lot of debate on fuel subsidies and we have all resolved that (removing it) is a good direction to go on. You have to leave it to us to decide when it is prudent to do so,” she told reporters.
In its reaction to the minister’s comments, the Nigeria Labour Congress, NLC restated its opposition to any attempt to remove fuel subsidy noting that the proposition was provocative, especially considering the struggles the average Nigerian had to go through daily.
“In the midst of mass suffering in spite of our huge natural resources and income, it is provocative for government to want to further increase the price of fuel. In fact, this is as good as cruel injustice against the Nigerian people,” a statement quoted Abdulwaheed Omar, the NLC president saying.
Nigeria’s flirtation with deregulation actually started in the early 1990’s with Mr. Funsho Kupolokun, then Group Executive Director in charge of Corporate Investment at the Nigeria National Petroleum Corporation, NNPC, traversing the country to plead understanding over government’s plans to increase the pump price of petrol by a slim margin to meet rising refining costs. Thereafter, government’s inability to manage the four refineries and persistent smuggling of petroleum products across the border birthed massive importation and the element of subsidy as we know it today.
Even though all manner of public commentators including Professor Tam David West, a former minister of petroleum resources who described government’s subsidy payment claims as a fraud and Sam Aluko a renowned economist who also took exception to subsidy payment claims advancing arguments underscored by low refining costs, have successfully fed the unending cycle of arguments for and against subsidy removal, it would appear the worst culprit in this unending saga is the government.

President Obasanjo’s pursuit of deregulation & 13 pump price hikes:

While the military administrations of the past could be excused for not being duly elected representatives of the people, same cannot be said of the democratically elected government of President Olusegun Obasanjo whose administration on the 14th August 2000 set up a 34 member Special Committee on the Review of Petroleum Products Supply and Distribution (SCRPPSD) drawn from various stakeholders and other interest groups to look into the problems of the downstream petroleum sector. Chief Obasanjo’s 8 year rule would subsequently witness 13 increases in the pump price of fuel, a whimsical implementation of the recommendations of the SCRPPSD and a glaring lack of political will to implement full blown deregulation.
Prior to the setting up of the Committee, the downstream sector was characterized by the following problems: Scarcity of petroleum products leading to long queues at the service stations; Low capacity utilisation and refining activities at the nation’s refineries (poor state of the refineries); Rampant fire accidents as a result of mishandling of products- products adulteration; Pipelines vandalism; Large scale smuggling due to unfavourable economic products borders’ prices with the neighbouring countries; and Low investment opportunities in the sector.
In October 2000, the Committee submitted its reports and some of the far-reaching recommendations of the committee accepted by the Government in its white paper includes: Stakeholders (marketers, transporters, dealers, industrial converters and others) are unhappy because of the shortages and the prevailing cost and price structure which lead to low returns on capital investment and encourage malpractices, which in turn hamper an efficient supply and distribution system; operational facilities at the depots and the pipelines should immediately be repaired; to prevent further malpractices, all coastal supplies of AGO through nominated company vessels should be stopped as subsidies to the target group (NEPA, Rigs operators) were not justified; restructuring of the NNPC and its subsidiaries with the setting up of the committee on that in the first quarter of 2001; dualisation of all roads leading to the refineries and depots to allow easy access and improve efficiency of operations; current efforts to resuscitate the Nigeria Railway system by Government should be sustained.
Other recommendations adopted in the white paper are that: Government should deregulate and liberalise the import of petroleum products by other parties and that prices of products should be based on import parity to enhance and encourage the participation of other players other than the NNPC; privatisation of all four government refineries and encouragement of the establishment of private refineries; expansion of loading capability of all marined-fed depots; establishment of a pipeline management authority for the management of pipelines and depots, which will charge both private and public users a tariff per throughput litre of products; downward review of NPA ports charges to a comparable level with other ports in the world; immediate setting up of a Petroleum Products Pricing Regulatory Agency with sufficient autonomy to superintend the various phases of the proposal embodied in the report (SCRPPSD) especially the liberalisation of the downstream sector of the petroleum industry.
In line with the government white paper, a Presidential Technical Campaign Committee on liberalisation of the downstream sector of the petroleum industry, headed by the then Special Assistant to the President on Petroleum and Energy matters, Funsho. Kupolokun went into action to sensitise the Nigerian public on the need for deregulation and liberalisation of the downstream sector.
The result of that campaign which cost the state billions of naira, saw the Committee visiting State Governors, traditional rulers, various interest groups including labour, was that deregulation and liberalisation were the only viable options the Government could adopt to attract investments into the sector and to remove the recurrent and endemic problem plaguing the sector.
On march 8th 2001, the Government set up the Petroleum Products Pricing Regulatory Committee (PPPRC) as an interim measure to carry out the functions of the PPPRA as recommended by the SCRPPSD while waiting for the enactment of the Act by the National Assembly for the setting up of the Petroleum Products Pricing Regulatory Agency (PPPRA).
After series of meetings with the stakeholders and the interest groups, the PPPRC recognised that pricing is a condition precedent for deregulation and liberalisation. It therefore, commenced a phased liberalisation of the downstream sector by announcing the selling prices for PMS, AGO and HHK at N 26, N26 and N 24 per litre respectively on January 1st 2001. The consumption tax N 3.00 per litre of product was abolished while the import duty of N 1.50 per litre was introduced. The sale of crude to NNPC at $9.50 per barrel was raised to $18.00 per barrel.
On 2nd July 2003, the import tax of N 1.50 per litre of products was removed to stabilise the selling prices earlier announced to encourage importation of products by other marketers.
In June, 2003, the board of the PPPRA was inaugurated after the Act had been passed by the National Assembly and accented by Mr. President
With the law establishing the PPPRA, the road to full deregulation and liberalisation of the downstream sector became open for all the stakeholders in the sector to play their parts according to the rules and guidelines as would be unfolded by PPPRA based on its functions.

Mounting cost of subsidy:
Sweetcrude checks revealed that FUEL subsidy cost the Nigerian state N1.3 trillion (about $8.38 billion) in the 2010 fiscal year alone, about 25 per cent of the entire budget expenditure for the year under review. Last year, the approved amended and supplementary budget amounted to N5.159 trillion (about $33.2 billion). Investigations have revealed that fuel subsidy incurred by the federal government may have exceeded the N1 trillion mark by the end of the third quarter, with indications that payments to petroleum products marketers may surpass 2010 levels at the end of the year.
Government regulates the sale of Premium Motor Spirit, PMS and House Hold Kerosene, HHK, selling both at N55 and N40.90k per litre, ex-depot price respectively at the depots of the Petroleum Products Marketing Company, PPMC, a subsidiary of the state owned Nigerian National Petroleum Corporation, NNPC. The government, through the instrumentality of the Petroleum Products Pricing and Regulatory Agency, PPPRA allots quarterly imports quotas to the NNPC and petroleum products marketers and pay both parties the differential between the landed cost and the approved pump prices under a subsidy regime.
Checks however revealed that the petroleum products marketers have turned the subsidy payment regime into a huge racketeering and profiteering enterprise ripping the state off hundreds of billions each year under bogus subsidy claims for petroleum products they neither imported nor delivered to the pumps.
Three quarters through 2011, independent checks revealed that outstanding subsidy payments amounts about N1 trillion, while ongoing racketeering surrounding Kerosene supply and distribution appears set to raise subsidy payment claims to an all-time high by the end of the year.
According to the PPPRA pricing template, even though petrol is sold at N55.90k and N65 per litre, ex-depot and pump price respectively, if deregulated, consumers would have to pay N143.63k per litre. Essentially, the subsidy element on current petrol price is N78.63k per litre.
Similarly, although ex-depot and pump prices of House Hold Kerosene, HHK is N40.90k and N50 per litre respectively, if deregulated. Consumers would have to pay N155.27k per litre. Essentially, the subsidy element on current kerosene price is N105.27k per litre.

Social safety net:
In an exclusive interview with Sweetcrude, Diezani Alison-Madueke, the minister of petroleum resources disclosed that government was working on palliative measures to replace petroleum subsidy which she emphasised does not serve the purpose for which it was intended. She said the government has designed an effective social safety net system to ensure that the massive volume of resources expended on subsidy payments annually is ploughed back to the provision of essential social/health amenities and services to the common man.
“The package would help guarantee improved maternal and child health services while also providing conditional cash transfer scheme to pregnant women in the country, a package which as you know is unprecedented our history. There is also provision for primary school feeding programme, youth employment package which also entails what we call active labour market and public works programs for youth.
“The novel scheme also allows for electricity rebate, fuel voucher, equipment voucher among other items. Though details of the overall cost implications are being finalised by the Ministry of Finance, suffice it to say that experience from abroad suggests that to establish an effective national safety net system in a country as large as Nigeria would require capital outlay of $100-$200 million annually for 3-4 years window depending on the envisaged design.
As a first step, focus would be placed on designing the outlines and establishing a national registry to allow beneficiary identification. And later the focus would shift to the erection of other relevant building blocks which would spell out the conditions for eligibility, enrolment etc.” She enthused.

Labour threats:
Organised Labour has refused to enter discussions with the government over issues related to deregulation of the downstream, threatening to embark a nationwide strike action to resist attempts to deregulate the downstream. Leaders of Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN pointed out that the minimum conditions agreed with labour before total deregulation could be contemplated have not been met.
In a communiqué released at the end of a 4-day Strategic Planning Synergy workshop in Ijebu-Ode, Ogun State, PENGASSAN said government’s position that the deregulation of the downstream sector would foster private investments, participation and competition for petroleum products refining, storage, marketing and distribution was not in doubt if the appropriate environment was provided, arguing that such environment was lacking presently in Nigeria.
PENGASSAN reiterated that the Federal Government’s subtle campaign for total deregulation of the downstream sector would not to be accepted without government first meeting the minimum conditions.
“The Workshop noted the Federal Government’s subtle campaign for a full deregulation of the downstream petroleum sector. It, however, reiterated a standing NUPENGASSAN, a fusion of National Union of Petroleum and Natural Gas Workers, NUPENG and PENGASSAN, resolution that certain irreducible minimums must be put in place before a total deregulation of the downstream petroleum sector will be acceptable to PENGASSAN and the Nigerian masses.”
Some of the requirements before the total deregulation of the downstream sector by the Federal Government included; socio-economic relief measures to assuage the impact of import driven deregulation with affirmative enabling policy to stimulate local production and efficiency within a defined timeframe, affirmative arrangement for the provision of affordable mass transit buses, rail systems and water transportation, and effective maintenance and repair of roads for affordable alternative means of transportation of people and goods.”
The conditions also include, “dredging and expansion of products loading and receiving terminals/jetties and fixing of other related facilities to overcome delays and demurrage, stronger commitment to increased local refining with specific date to end importation of petroleum products.”

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