Fixing PPMC supply and distribution network

Atlas Cove jettyDr. Chijioke Nwaozuzu

30 November 2013, Sweetcrude, Abuja – The Government’s Transformation Agenda, instituted by the President, Dr Goodluck Ebele Jonathan to cover the period 2011 – 2015 is anchored on Nigeria’s long-term economic development blueprint as encapsulated in Vision 20: 2020. The transformation agenda isolates a set of key priority policies and programmes which when executed are expected to yield outcomes that are consistent with present and future needs of the Nigerian people. It is already a known fact that Nigeria operates largely a mono-product economy presently, and it is expected that further developments in, and transformation of, the oil & gas sector will lead to a diversification of the Nigerian economy into agriculture, information and telecommunications technology, aggressive manufacturing activities, etc.

In this light, it is important that foundational issues relating to the oil and gas sector are dealt with. One of these is the supply and distribution network, made up of pipelines, depots and tank farms, jetties, terminals, etc. Taken together, this infrastructure behaves like a natural monopoly because it links up all current and projected productive entities within the oil industry. This infrastructure is the foundation upon which existing refineries and petroleum products’ supply and distribution nation-wide hinges on. It is also the foundation on which new refineries, new storage facilities, etc could be brought on stream, so repair and rehabilitation work on supply/distribution infrastructure should be pursued as stridently as the need to construct new refineries. National refineries and indeed nation-wide distribution of petroleum products cannot operate effectively and efficiently where the supply and distribution (S/D) infrastructure is compromised by vandals.

Consequently, the current Petroleum Minister, Mrs Diezani Alison-Madueke has taken some urgent and laudable steps to address the most critical of these facilities. Interventions to maintain national refineries have been accompanied with S / D infrastructure upgrade nation-wide. The Port Harcourt – Aba product line, which hitherto was inoperable due to pipeline vandalism has now been re-established and rehabilitated. The Warri – Benin product line has been recovered, and the Benin depot has been re-commissioned. The Aba product depot has now been re-commissioned after nearly seven years of dormancy. The Aba – Enugu product pipeline is expected to be re-established by year ending 2013. A major product depot, the Atlas Cove has been revamped, and petrol tanks 11 & 12 have been reconstructed.

Project Aquila (i.e. electronic monitoring of petroleum products distribution) which was recently introduced by the current Petroleum Minister has encouraged increased investments in the downstream sector resulting in the construction of new depots (from 44 depots in 2010 to 71 depots presently), representing a 62% increase in the number of depots nation-wide. This development has lead to new investments of N53 billion resulting from construction of the new depots, 1000 new petrol retail outlets, and procurement of 800 new fuel delivery trucks. The above actions taken by the Minister indicate that the Petroleum Ministry is serious about tackling this fundamental issue.

However, the Minister would agree that the measures taken so far are only incremental, and so a far more transformational set of actions need to be initiated post-PIB. The reason is that according to PPMC’s figures around $2.8 billion in required for minor repairs of S / D infrastructure, whereas a study carried out by AON Energy Risk Engineering estimated that $8.9 billion would be required to achieve a full rehabilitation of PPMC supply /distribution network.

It may be pertinent to note at this juncture that the passage of the Petroleum Industry Bill (PIB) and the Gas Master Plan Bill by the National Assembly are thought to hold the key to further transformation work in the oil and gas industry. Their passage would enthrone a transparent regulatory framework and competitive fiscal regime necessary to transform the petroleum industry in Nigeria. Consequently, the Ministry of Petroleum Resources has been building consensus around the main features of the PIB in order to encourage the National Assembly to speedily pass this critical piece of legislation.

The huge investment required to address the S/D infrastructure rehabilitation issue has led to calls for immediate privatization of these national facilities. However, it is the view of the writer that in the near- term government will be ill-advised to privatize this infrastructure because together the S/D infrastructure behaves like a natural monopoly. Several actions need to be taken before these can privatized because of national security issues involved. Therefore, in the interim, these facilities should be repaired under a ‘Downstream Petroleum Infrastructure Rehabilitation Plan’. In the medium- term, a government agency (through an Act of National Assembly) can be set up under a truly independent regulator (with the requisite character and integrity) to rehabilitate and operate this infrastructure on a truly commercial basis (i.e. cost plus). Such an agency will be invested with the responsibility to set tariffs for users of these facilities.

Only to the extent that it should be a long- term measure, I concur with a professional colleague’s recommendation (Dr John Erinne) that PPMC’s S/D infrastructure should be privatized into 4 companies along the following lines: West (Mosimi Area); Central (Warri Area); East (Port Harcourt Area); and North (Kaduna & Gombe areas). He further recommends that in the national interest, NNPC should retain at least 40%, but no more than 49% equity in the privatized companies. He advocates further that in the national interest the privatization exercise should be broad enough to include a variety of stakeholders, such as major marketers, independent marketers, depot owners, refining companies, independent oil producers, major oil producers, oil service companies, State & Local Governments, and the general public at later stages (via the stock exchange). This makes sound logic, because given the special nature of petroleum products and its unique economics care should be taken to ensure that monopoly situations does not exist in order to protect strategic national interests. Safeguards must be put in place!

However, prior to privatizing these petroleum transport and storage facilities, the requisite regulatory agencies, i.e. Department of Petroleum Resources (DPR) and Bureau for Public Enterprises (BPE) should work together to nail down some guidelines. The guidelines / safeguards put in place for the privatization of S/D infrastructure should also apply to the privatization of national refineries.
*Dr Chijioke Nwaozuzu, a petroleum expert wrote from Abuja. Email: Tel: 070 6874 3617 (SMS only)

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