A Review of the Nigerian Energy Industry

Private sector, PIB issues affecting downstream funding

30 October 2014, Abuja – In Nigeria alone, the downstream sector of the petroleum industry requires about $20bn annually to support the industry activities and add requisite value for growth, but issues bordering on the Petroleum Industry Bill delay and private sector indifference are seriously constraining funding.

The country is yet to get it right as far as petroleum product supply within Nigeria and the African region are concerned; hence the Minister of Petroleum resources, Mrs. Diezani Alison-Madueke, raised the alarm this week that there was the need to “chart a strategic way forward in ensuring a bright future with respect to petroleum product supply within our region.”

She also admitted that private sector participation remained crucial to attracting additional funding at all levels, saying the Federal Government was not relenting in institutionalising appropriate policy framework to foster investment and competition.

The most critical challenge facing the Nigerian downstream sector today, according to the Federal Government, is petroleum products thefts as well as petroleum pipelines vandalism.

Nigeria has witnessed increased pipeline vandalism and oil theft which at times lead to significant amounts of shut-in production at onshore and shallow water fields. It is also believed that the issue of efficiency in distribution will greatly affect the future of petroleum products supply in the sub-Saharan Africa region.

Alison-Madueke, on Tuesday, said, “There is the need for collaboration as it is of great necessity to upgrade the pipelines, encourage more trucking by rail and also reduce as it were the road transport of product supply because this is majorly hampered by poor road networks, congestion, among others, in order to reach the unreached.”

The minister also admitted that the stunted growth of the downstream sector was attributable to the distortion introduced to the market as a direct result of the regulated regime in the country in form of subsidies, stressing that there is the need to eliminate the convoluted price subsidy and stimulate competition across the value chain.

She said, “The issue of subsidy is important. According to the World Bank, subsidy on petroleum products in Nigeria and other oil-producing African countries would be unsustainable in the medium term. The truth is that heavy subsidy is an unsustainable expenditure even on the long term. It generally promotes energy inefficiency and imprudent consumption.

“Over the last 10 years, Nigeria has taken important steps towards a more deregulated downstream sector. To provide a competitive market environment and sustain supply, the downstream should be fully deregulated. This is one of our proposals in the Petroleum Industry Bill awaiting passage by the National Assembly.”

According to the International Monetary Fund, the Gross Domestic Product for the sub-Saharan Africa region is projected to grow from 4.78 per cent in 2012 to 5.57 per cent in 2014; and Nigeria is said to be the biggest economy in Africa, with the largest population. The country also has one of the largest reserves of natural resources on the continent.

Foreign Direct Investments into the region is projected to increase in the medium term and this is expected to open up opportunities for the region.

The minister had also said the petroleum downstream remained of great importance to every economy that aspires to develop, as the sector impacts virtually all segments – since fuel is needed to power economic growth.

Official Organisation of Petroleum Exporting Countries figures reveal that in the last seven years, crude oil price has seen a peak of $140 per barrel in 2008 and a dip of about $40/bbl in 2009. Prices had remained stable at about $100/bbl until more recently. There are growing concerns as oil prices fell below $90/bbl for the first time since mid-2012 fuelled by weakening demand amidst ample supply.

Global demand growth accelerated to 1.5 million b/d in 2013 as economic recovery took hold in major Organisation for Economic Cooperation and Development countries and average annual demand growth to 2020 is forecast to be 1.2 million b/d.

Demand has been growing strongly in the developing world, but weak in the developed world. Over 90 per cent of demand growth in this period is in developing countries including the sub Saharan African countries.

It is expected that demand growth will continue to lag behind supply growth over the next seven years with the result that overcapacity will continue to weigh on margins unless further rationalisation occurs. Experts say utilisation rates will remain particularly low in Europe, where refiners are faced by weak demand growth, rising costs and a loss of competitiveness versus other regions.

Although the downstream sector has plenty of growth potential, in order to ensure sustainability of the sector, some prevailing challenges like: delivery infrastructure, security, funding, high cost of operations, obsolete legislative framework and weak institutional and human capacity which require new approaches, among others, must be addressed, experts say.

Despite these challenges, the Executive Secretary, Petroleum Products Pricing Regulatory Agency, Mr. Farouk Ahmed, claimed that the activities in the downstream sector had facilitated a net inflow of investment in the excess of N60bn.

PPPRA is the apex downstream regulatory agency in Nigeria saddled with the onerous task of ensuring uninterrupted supply and distribution of petroleum products in the country.

He said having provided the necessary institutional framework for serious downstream business, government expected a reciprocal gesture from all stakeholders, with the intent to further aid the growth and development of the downstream sector.

– The Punch

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