Importance of full deregulation in a post-PIB era

Yemie Adeoye

27 July 2012, Sweetcrude, LAGOS – THE most topical issue in Nigeria’s oil and gas industry – arguably the most vibrant in Africa – right now is the Petroleum Industry Bill, PIB, and the only reason it should come before full deregulation of the downstream oil sector: it has been programmed to encapsulate the subject matter.

The PIB has since been approved by the federal Executive Council and has been forwarded to the National Assembly for proper scrutiny and ratification after which full implementation is expected. This report however takes a look at the prospects of a full downstream sector deregulation after the passage of the bill as well as its importance especially in the face of in-depth corruption currently ravaging the downstream oil sector by virtue of the Petroleum Subsidy Fund (PSF).

On January 1,2012 the Goodluck Jonathan led federal Government announced a shocking and unexpected stoppage to the Petroleum Subsidy Fund,(PSF) thereby signaling an immediate sharp increase in petrol pump prices across the country.

This action could be so described because the federal government seemed to have allowed an atmosphere for dialogue with the people as governments selected representatives made up specifically of the economic team and a few other notable individuals met with the peoples unelected representative consisting of the civil society groups, human rights activists and the media to discuss the all-knotty issue of subsidy removal/deregulation.

However the government’s action was sudden as it was generally presumed that dialogue on the matter was still ongoing, but the of that action is all history now. The action of government was to signal moves towards deregulation of the downstream sector, but analysts were of the opinion that deregulation cannot achieve its aim when implemented in piecemeal and as such the removal of fuel subsidy alone cannot address the issues and should have come at the tail end of the deregulation exercise.

This report however is more concerned with the importance of deregulating the downstream oil sector after the passage of the much awaited PIB. The downstream sector has lived on importation for far too long and the reason for this is traced to the neglect over the years of oil pipelines earlier constructed to transport refined products across the country as well as the total collapse of almost all the nations refineries situated at Warri, Portharcourt and Kaduna.

Now questions have been asked on why the country cannot simply shore up its refining capacity to meet local demands, but rather chooses to depend solely on importation of refined products even to detriment of economic growth and in the face of 2.4 million barrels of daily oil production.

It is important to note that the PIB when passed would be incomplete if the issue of deregulation is not treated with the importance it urgently requires. It is also of note that in view of recent happenings and discoveries in the oil industry, the country must deregulate if it must be rid of the corruption which have so badly permeate the system.

Current state of the Nation
Nigeria, Africa’s highest exporter of crude currently consumes approximately 60 percent of all petroleum products imported into Sub Saharan Africa. In 2010 alone, over 6 Million Metric Tons of petroleum products was imported into the country. Of this volume, The majority (73%) was for PMS importation. As a Nation, The subsidy on Premium Motor Spirit (PMS) amounted to 25 percent of the government’s total expenditure in 2010. This mode of public spending has however with recent developments proved to be grossly unsustainable.

Dependence on Import
The Nation produces its own crude, and also has 4 refineries in port-Harcourt, Warri and Kaduna with a combined capacity (at full operation) of 450,000 barrels per day. The initial plan was to leverage on this production and refining capacity to supply petroleum products to the nation.

Unfortunately, a combination of factors such as the growth in population and therefore demand, the ineffectiveness of existing product transport infrastructure as well as the inefficiency of the refineries has led to a situation where the country is a net importer of petroleum products.

It is a fact that even in a case where all the refineries operated at a hundred percent efficiency, they would barely meet half of the existing national demand and this is what has originally brought about massive importation of petroleum products into the country.

However, an industry analysts who spoke to this writer on the condition of anonymity posited that the measure was originally thought to be temporary to enable ample time for the repairs and rehabilitation of the nations refineries and pipelines, this, according to him would in effect bring down the volumes of imported products into the country.

“This was to be done while government is also building more refineries to at least meet up with national daily consumption demand, but all of this was not implemented therefore encouraging corruption through the PSF scheme and the rest as they say is history”.

Deregulating the downstream sector would however put an end to the following, Lack of investment in refineries , Excessive, dependence on imports, Supply and demand imbalances leading to shortages, Smuggling/Leakages, Inadequate Port and Reception Capacity, High Distribution and storage costs, Uncompetitive market structure, Inefficient Pricing structure

Rent seeking, Budgetary pressure from unsustainable subsidy payment, these factors amidst others are the reason our economy only grows theoretically and never practically and the cheapest and most sustainable way to check these is through by deregulating the downstream sector of the oil industry and allowing different investors both foreign and domestic to invest across the value-chain, from refining to pipelines to storage depots etc.

Reasons for subsidy
Given the fact that importation of petroleum products is inevitable, the nation would be exposed to extreme price instability due to the volatility of international markets. If we couple this with the fact that Nigeria is one of the largest producers of crude oil, a justification may be made for the subsidization of the refined crude oil products for Nigerians.

Unfortunately, this subsidization has come at the price of economic development and has become an untenable position for the nation. In 2010, the subsidy contribution from the Federation was 1.2 Trillion Naira ($8 Billion) and the 2011 Subsidy payment is projected to approach approximately 1.5 Trillion Naira ($10 Billion).

It is clear that these funds may be channelled towards better causes that will accelerate economic development and allow the nation to better plan its expenditure, and as can be seen in recent happenings in the sector, subsidy has brought about intense corruption such that a developing nation which is in dire need of resources for developmental and other projects even as it is currently indebted to foreign nations is now having controversies over 403 billion naira, about 2.458 billion dollars, and how to recover this sum. This money would have been better utilised if there was deregulation.

Notable Challenges/ Solutions to deregulation

There have been concerns raised over deregulation as it would signal the removal of subsidy. It is however notable that nothing comes without challenges, and if allowed to succeed with intense supervision on the multiplier effect it would turn as the best decision for the country. Some of the concerns raised includes:

Increase in Transportation Cost: It is a common assumption that transportation cost will increase along with the removal of the subsidy. While this will be true in the case of passenger vehicles, most interstate transportation is run on Diesel fuelled vehicles. Some states, e.g. Lagos, also have intercity transportation that is fuelled by Diesel powered buses.

Diesel is a deregulated product and as such will not undergo a price increase based on the removal of subsidy from PMS.
Increase in Prices for Goods and Services: The perceived increase in the price of goods and services is also a concern that must be quickly addressed to avoid an actual increase based simply on the expectation of one.

Goods such as farm produce are transported across the country on diesel powered trucks. Many services rely on generators due to the frequent interruptions to power supply but even these organizations run on diesel powered generators. In a case where petrol generators are used, a switch campaign to diesel generators should be undertaken so people realize the advantages of diesel over petrol for power generation.

Hence the small and medium scale services which can only depend on petrol generators for obvious reasons would have need to review their costs, and as such government may want to consider initiating a policy that would bring down the cost of diesel engine generating sets so small income businesses which hitherto was running on petrol would switch diesel in order to reduce costs.

Misappropriation of Public Funds: This concern can be addressed by simply articulating the uses for the realized funds. The Sovereign Wealth Fund has been mentioned as a replacement to the Excess Crude Account which funds the Subsidy. This fund would address the nation’s Infrastructure deficit and drive down the price of all goods and services (including PMS), stabilize the Naira, and also allow the federation to plan for future generations.

The final word on these challenges simply put, is that the benefits of subsidy removal are not in dispute, once the methods of converting the realized savings to greater value for the populace is agreed upon, articulated to the nation and implemented to the letter, this and only this is what would make the deregulation exercise work, and it would also attract investors as the government need not travel the world to woo investors, these ones can see how serious we are economically and would be willing to invest uninvited if the atmosphere is suitable and government is seen to keep to its words at all times.

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