A Review of the Nigerian Energy Industry

Fuel crisis and the debate on downstream deregulation

08 March 2015, Lagos –  The latest crisis in petroleum products marketing in Nigeria has again raised the debate on the deregulation of the downstream sector of the oil industry.

When fuel queues resurfaced in Lagos and Abuja penultimate Saturday, some of the stakeholders fell into the familiar frenzy of blame game. For many people, fuel users who were caught napping as endless wait at filling stations became the order of the day could not understand why petrol could suddenly dry off from marketers’ tanks overnight.

IPMAN-fuel pumpInterestingly, the blame game continued till the weekend as officials of the Nigerian National Petroleum Corporation (NNPC) claimed they were running from pillars to posts to ensure adequate volume of petrol is pumped into the affected parts of the country without further delay.

Given the prevailing tense political atmosphere on the run up to the March 28 election, members of the economic community were not surprised that the blame game is taking some political colouration with several allegations being thrown up by the two major political parties. These include alleged sabotage by the opposition said to have incited fuel marketers to halt importation. It also includes allegation of corruption and the failure of the government to pay marketers their outstanding subsidy fund.

In the midst of this cacophony of voices came a more scientific explanation for the current fuel scarcity, with fingers being pointed at the recent devaluation of naira which makes importation very expensive. The unfavourable exchange rate is said to have wiped out marketers’ margins, a development they said make importation of petrol at the current price unprofitable. Added to this is the grievance over unpaid subsidy differential by the government.

However, oil marketers, who are at the centre of the current controversy believed the only antidote to frequent scarcity of fuel in Nigeria is an outright deregulation of the downstream sector.

According to an oil industry expert, Mr. Abubakar Ibrahim, the NNPC was quick to dissociate itself from the scarcity thus: “The long queues have nothing to do with the unavailability of products in the depots as erroneously being speculated. The NNPC/PPMC fuel supply chain remains robust with enough products to last till the end of the year and beyond.”

The NNPC explained that “the artificial scarcity has its roots in a recent directive issued to Petroleum Tanker Drivers, (PTD), by the national leadership of the National Union of Petroleum and Natural Gas Workers, NUPENG, to stop bringing to Suleja and also to stop product supply to Abuja to protest a long standing contractual issue between the management of MTEL and Petroleum Tanker Owners. The tanker drivers and NUPENG are also demanding the repairs of access roads to the depots as a pre-condition to resuming loading of products”.

The half-hearted and ad-hoc measure, has not addressed the issue at stake, namely bad roads for which the government should not have waited to be raised by tanker drivers. Tanker drivers have protested many times before now over bad roads across the nation that hampers their smooth operation, especially during the rainy season.

While the issue remains totally unresolved, NUPENG and the Petroleum and Natural Gas Senior Staff Association of Nigeria reportedly kicked off a nationwide strike to protest failure of the Federal Government to carry out turnaround maintenance of the nation’s four refineries and reduction of the pump price of petrol following the slump in the global prices of crude oil. While some of the reasons advanced for the strike are understandable, they are not something that could be addressed overnight.
Calls for Deregulation Resurface
Although, the Federal Government had on several occasions tried to make the industry market driven, a combination of poor consumer education, lack of transparency and politicisation of the policy aborted the move.

The argument is, a regulated market cannot attract private sector participation, a development attributed to the reluctance of local investors to commit their resources to the construction of private refineries.

It is an irony that Nigeria, with its crude oil deposits and four refineries was recently adjudged to be the biggest importer of refined petroleum products in the African continent, creating a lucrative market for refineries particularly in Europe and the United States (US).

Its refineries include two in Port Harcourt. These are Port Harcourt Refining Company (PHRC 1 & 2), Kaduna Refining and Petrochemical Company (KRPC) Warri Refining and Petrochemical Company (WRPC). Nigeria’s four refineries with a combined capacity of about 445,000 barrels per day (bpd) have for long been operating far below their installed capacity as they are in various states of disrepair. The four refineries operated at an average of 31.1 per cent of capacity in 2012, according to recent data from the Central Bank of Nigeria.

It imports more than 80 per cent of its refined petroleum products for the servicing of its economy, because of its inadequate domestic refining capacity.
The country’s fuel needs is put at 35 million litres daily, equivalent to 279,000 bpd, while crude oil production averages about 2 million bpd.

Despite gulping billions of dollars, successive rounds of turnaround maintenance (TAM) have failed to expand domestic refining capacity, while the subsidy structure of fuel sales incentivises the import of premium motor spirit (PMS) from EU refineries, which oversupply the European market.

As KPMG notes in its 2014 Africa Oil and Gas Report, problems in the refining industry on the continent include corruption, poor maintenance, theft, and other operational problems. “Subsidies have also contributed to low capacity utilisation at refineries. In Nigeria, for example, current subsidy schemes lead producers to sell crude overseas rather than to local refineries and therefore add to increasing volumes of refined product imports, which present a large cost to the economy.”

A number of private companies have expressed readiness to step in to build and operate their own refineries, but their efforts have often been delayed or cancelled, partly due to uncertainties around the government’s plans to deregulate the downstream sector.

Private Initiatives
Aliko Dangote, Africa’s richest man and business mogul, who has taken concrete steps in building a $9 billion refinery/petrochemical/fertiliser complex in Nigeria, is one of the leading lights in the private sector ready to invest in refineries. Dangote’s refinery will initially have a capacity of 400,000 bpd, doubling Nigeria’s refining capacity as well as cut imports of refined petroleum.

However, the fuel marketers who are leading the current campaign for the deregulation of the downstream sector of the petroleum industry also wants a strong regulator in the mould of the Nigerian Communications Commission (NCC), which is the apex regulator in the telecoms industry.

According to Executive Secretary, Major Oil Marketers Association of Nigeria (MOMAN), Mr. Obafemi Olawore, only deregulation would encourage the establishment of private refineries in the country.

“There is one vital step that needs to be taken and that step, if not taken, there is no grammar anybody can speak that will encourage local refining. That step is that you don’t cap any product and expect any businessman to go in there. Once you cap the price at N97 per litre, then what you are saying is that no matter somebody’s production cost, he should not sell above N97 because N97 is sacrosanct. If he sells above N97, he will be in trouble,” he said.

He called for the passage of the Petroleum Industry Bill (PIB) to usher in deregulation, adding that even if the current PIB is not perfect, it can be amended after the passage.

“Once you deregulate, these refineries will be coming up. So, we will plead that we get the National Assembly to pass the Petroleum Industry Bill (PIB). We believe that the PIB will go a long way in encouraging deregulation but if we want a PIB that will be faultless before it will be passed, and then we are thinking that we are not human beings. Why do we have the word amendment? How many amendments have they done on the American constitution?
American constitution has experienced so many amendments. It is better to pass it and as we go ahead, if there is any need to do amendment, we do the amendment,” he explained

“But I need to also add as I always tell you that deregulation should not mean that marketers can do anything they like with pricing. There must be a framework for regulation and that is why I prefer what NCC does to the telecommunication industry, instead of what our own regulators are doing. Our regulators should be empowered and should be bold and they should be able to call people to order. It is not saying on the pages of newspapers that “I have shutdown petrol station.”

He added that “there must be a framework. I don’t know whether they actually got their money back or not but there was a time I read that NCC fined some of these telecoms companies some huge amount of money for breaching some rules. That should be it. So, there should be complete deregulation and the regulators should be empowered to carry out their functions,” Olawore added.

According to him, the government should not interfere in the works of regulators so as to ensure that erring operators are sanctioned appropriately.

“When you have this interference, then you have a situation where if marketer A is sanctioned by a regulator, then he now goes to the government and before you know it, the sanction is reversed. It should be such that when a regulator applies sanction, it stands by the sanction and let the company that erred pay the price for it,” he added.

More Commitment
In the midst of this strident call for deregulation and the setting up of a regulator to monitor the activities of fuel marketers as reported by THISDAY last week, analysts believe more commitment of the federal government will also be needed to drive the policy.

This is because, the over 50 per cent drop in the price of crude oil in the international market, which effectively forced a decline in the prices of petroleum products, oil marketers has failed to deter fuel marketers from selling Automotive Gas Oil (AGO) or diesel at exorbitant prices, taking advantage of the deregulation of the product to defy the Petroleum Products Pricing Regulatory Agency (PPPRA).

With the drop in the international crude oil price from $115 per barrel in June 2014 to less than $60 per barrel, the expected  market price of Premium Motor Spirit (PMS) or petrol also dropped from  N141 per litre to N97.90, prompting the federal government to reduce the official pump price from N97 per litre to N87.

As diesel is a deregulated product, whose price is dictated by market dynamics, the PPPRA also recommended the expected open market price to reflect the slump in the price of crude oil but the marketers have consistently ignored the PPPRA’s directive and have continued to sell diesel at high costs.

For instance, the PPPRA recommended N129.08 as the expected open market price in its latest pricing template released shortly before the weekend.

But THISDAY gathered that since the slump in the price of crude, the price of diesel has never dropped as it is still being sold between N156 and N145 per litre by the marketers.

The marketers, it was gathered, took advantage of the fact that since diesel is a deregulated product, the government cannot control the price.

The government had in January 2009 deregulated the prices of diesel and Low Pour Fuel Oil (LPFO), thus leaving the prices to the dictates of the forces of demand and supply.

Exactly two days after the deregulation, the ex-depot price of diesel rose from N60.16 per litre to N73.50 per litre while LPFO, otherwise called black oil, used by industries to generate steam for their boilers, also rose from N25.40 per litre to N44.70 per litre.

Since diesel was deregulated, the pump price has been going up, despite the volatility of crude oil prices.

But Olawore, who rose in defence of the marketers, argued that the price of diesel did not go down because of the devaluation of the naira.

“The unfortunate situation in which we find ourselves is that as the price of crude oil was dropping – as the international price of diesel was dropping, we devalued the naira,” he said.

-Festus Akanbi, This Day
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