17 May 2001

Nigeria: Deregulation of the Downstream Sector of the Petroleum Industry


Lagos — The debate on the deregulation of the downstream sector of the petroleum industry continues to rage, to the extent that volumes have been said and written about it.

Because of the enormous amount of written material that appears daily on the subject, a lot of the resigns, for and against deregulation are being recycled. As a result, many readers most of what is written less enthusiastic and some have given up on reading most of what is written today on the subject. I am one of such readers, and one strong reason why I do not read many articles on the subject nowadays is that I was convinced long ago that deregulation of the downstream sector of the petroleum industry is the best option we have to move our economy forward.

My approach in this contribution is to present a realistic view of what constitutes regulation, what we had before regulation, where we are now, where we should be heading and how we can get there.


Deregulation of the downstream sector of the petroleum industry means freeing the sector of all government involvement, except of course in the areas of national policy articulation and the policing of the industry to ensure the safety and security of life, property and the environment, and the assurance of equity and fair dealing among all the stakeholders in the sector of the economy. It is obvious from this definition that there cannot be complete deregulation of the downstream sector of the petroleum industry. In fact, there cannot be complete deregulation in any sector of the economy. Specifically therefore, the deregulation that is desirable is where Government is freed of its current involvement in the production, buying and selling, supply and distribution of petroleum products.


Let us consider for a moment, what was before the "regulation" that we now seek to dismantle. An ideal point in time to recall would be 1966, before the civil war. We had only the Port Harcourt Refining Company Limited (PHRC), owned by Shell Petroleum and British Petroleum, including a minority interest holding by the Federal Government and the Government of Eastern Nigeria.

The petroleum products marketing companies, which were Shell, BP, Esso, Mobile, Texaco and Total bought crude oil which was then refined for them at the Port Harcourt Refinery and for which the marketing companies paid refining fee. They then collected the products, which they distributed through their outlets scattered all over the country. Of course, in those days, the market for petroleum products was small and restricted to the major trading and industrialising centres of Lagos, Ibadan, Port Harcourt, Enugu, Kano, Kaduna etc. But with the civil war over and with the rapid growth in the Nigerian economy in the early seventies principally due to the rising importance of crude oil production and exports, the Federal and Regional Governments began to plan for the rapid social, industrial and economic development of many parts of the country. By the mid-seventies, gaps began to appear between t he supply and demand for petroleum products in the country. That started the Federal Government involvement in the downstream sector with the building of downstream infrastructures like the Warri and Kaduna refineries, the crude oil and product pipelines and the products storage depots all over the country.

Government's Record in Business

With the benefit of hindsight, there is no longer any argument about the fact that governments particularly military governments are the most inefficient, wasteful and incompetent of managers of men, materials and resources, as exemplified by the way that successive military governments mis-managed the downstream sector of our petroleum industry, and indeed the entire economy, which is why we are where and what we are today. It certainly would be most welcome to be back to the pre-civil war era, where the private sector, without any Government involvement, delivered to consumed all over this country, all the petroleum products that they needed. To get back to this desirable state of affairs, we need to deregulate the downstream sector of the petroleum industry. We need to get Government and its delivering petroleum products to the consumer wherever and whenever he wants it in this country. The poor performance of the refineries and the pipeline and depots, and the resultant acute shortages of petroleum products, the growth of a small clique of dollar-denominated multi- millionaires, the scourge of corruption in the system and the affront of big time smugglers who are now a law unto themselves are all products of Government involvement in refining crude oil and petroleum products supply and distribution in this country.

I am convinced that after what we have been through, especially since the Abacha phenomenon, we should all be glad to relieve Government and its agencies of the responsibility for delivering petroleum products efficiently to consumers throughout the land. In reality, our refusal to deregulate and our insisting that Government should continue to be the sole or major supplier of petroleum products in t his country is a sure way to perpetuate a corrupt, inefficient, and very costly petroleum product supply and distribution system. It facilitates the growth of a class of millionaire criminals and young school drop-outs who thrive in illegal deals in the petroleum product business. It also assures a future of continuously rising and unpredictable petroleum product prices. The ultimate result is a dying petroleum products sector, a pauperised citizenry, a comatose economy and a chaotic and insecure environment where life and property are constantly endangered.

The desired goal

To address the yearnings and aspirations of our people, what do we want of our downstream sector of the petroleum industry? There should be no argument that what the ordinary Nigerians wants is to have quality petroleum products delivered where and when he wants it an affordable price. The only item in that statement on which there might be no agreement is, the definition of affordable price of petroleum products.

Clearly it is more than the =N=22 per litre which is the current regulated price. The reason I make this claim is because, right here in Lagos, motorists are quite willing to pay a little more than that price if it assures no delay to their movement. If there are queues, a majority of motorists are willing to pay up to N30 or even a little more.

It is infect the norm these days to buy petrol for upon to =N=40 or even =N=50 per litre once you are outside the watchful eyes of the officials of the Nigerian Police Force and the Department of Petroleum Resources and OPC. If a motorist could not afford such a price, would he pay it?

Please understand that I am not advocating a price increase to =N=40. I am not even advocating a price increase per se. I am advocating the deregulation of the supply and distribution of petroleum products in Nigeria, and the best way to do that is to quickly e as Government and its agencies out of that business, while vigorously encouraging many organised groups of entrepreneurs to take over the business of refine crude oil, and of distributing and supplying petroleum products to consumers throughout the land. This will initially result in a unavoidable price increase, which need not be excessive, and which we can deal with.

But I must repeat that the deregulation that I advocate is in the best interest of the nation's economy.

Deregulation with minimal price increase

With today's economic realities, any price increase on petroleum products is bad news for the ordinary Nigerian, and this is why there appears to be such strong resistance to the deregulation of the petroleum products supply and national business. It is my opinion that it is in our best individual and national interest for the advocates and opponents of deregulation to harmonise or at least close the gap between their positions, and I honestly believe that it is possible to do so. I feel confident that both camps can find agreement in a deregulation strategy that initially caps any price increase arising from the deregulation exercise at no more than thirty to forty per cent of the current regulated prices.

Any excess over that cap should be absorbed (i.e. subsidsed) by the Federal Government and as the economy and the fortunes of the ordinary Nigeria improves, the subsidy should be gradually reduced until it is totally removed.

Matters arising from deregulation

Let us now look at a number of issues that have been often been raised in the deregulation debates.

Building New Refineries

Building new refineries by the private sector has been proposed as the answer to the poor performance of our state-owned refineries. A medium size to large refinery cannot be built any where in Nigeria in less than twenty-four months. Down we have to wait for that long before we have help from privately owned refineries to stem the shortage of petroleum products? A variant of the private refinery promotion is that we should build many mini-refineries in most of the states of this country. I am not so sure if these mini-refineries will be viable by the time we factor in the cost of building of crude oil delivery lines or of hauling crude oil by tankers to the refineries.

Licencing private Refineries

With those reservations, I am also a strong advocate of liberalising the issuance of licences for private refineries.

Government should stop creating the notion that you have to be special person or group in this country to earn a licence to build a refinery in Nigeria. Government should spell out clear guidelines and conditions for the issuance of licences to build refineries, such that anybody who can afford the application fee of say, fifty thousand U.S. dollars and meets some prescribed minimum conditions should automatically be granted a licence that is valid for two years. Knowing us Nigerians, there will of course be an avalanche of applications, for licence, and perhaps any number close to a hundred would pre- qualify to be issued licences to build refineries. It would be a miracle if up to five percent of the licensers would achieve anything before their licenses expire.

Obsolete Local Refineries

I have heard some so called expert expatriates claim that our refineries in Warri and Kaduna are now obsolete having been commissioned over twenty years ago, and that the best option for Nigeria is to scrap them and build them ones. I have also heard our local experts on privatisation argue that the Government will either not find buyers for the refineries, or they will be sold as scrap at the colossal loss to the country. I do not buy any of these two arguments. In 1998, India's oldest refinery celebrated one hundred years of service to that nation where refineries demand for petroleum products is such that all their refineries run at over ninety five percent efficiency with close to ninety-eight per cent availability. These refineries are run and maintained by home-grown Indian managers ands engineers.

That country has effectively domesticated the technology for efficiently operating its petroleum industry. In contrast, we in Nigeria perpetually bring in expatriate contractors, vendors and constants who charge us an arm and a leg to procure spareparts and do the turn-around maintenance that have been most notorious in recent years.

It is my conviction that we need to invite Petroleum Indian International to joint venture with Nigerian companies and contract them to carry out the maintenance of all our refineries, petrochemical plants, petroleum depots and pipeline network. Once we have refineries operating routinely at over ninety per cent efficiency, we can then privatise them to good profits to the nation.


Smuggling of petroleum products is a regulated market phenomenon, but the deafening questions being asked are, "Who are these smugglers?

Why are they not arrested and brought to book?"

Indeed Government must do something bold and effective to let everyone know that it means business. Government should raise a crack "Economic Defence Military Forces" where honest and patriotic Nigerians, drawn from the Police and Armed Forces, are give special training and only half of the kind of salaries and conditions that out representations in the National Assembly enjoy, so that they will guard our boarders faithfully and shoot every smuggler at sight. Simultaneously, the Federal Government should negotiate agreements with our neighbouring countries to supply all their petroleum products requirements at prices that will discourage the smuggling of the products to those countries. This strategy is in line with ongoing discussions, in ECOWAS for also economic cooperation among members states.


So much has been heard for so long about sharp practices at out ports and territorial waters that one cannot comfortably ignore the rumors.

The insinuation is that a powerful mafia of economic saboteurs located close to high level functionaries in Government and the military operate to clause delays and bottlenecks to vessels bringing petroleum products to out ports. It is alleged that the huge demurrage costs incurred by the Nigerian importers, and which are ultimately passed on to the Federal Government and the consumer in a regulated market, are shared between the vessel owners and the mafia. Government should investigate these rumors and clean up that segment it their is truth in the allegations.

Illegal Service Stations

I saw an interesting report in the failies recently, to the effect that the Federal Government has compiled at list of all the approved and licensed petroleum products outlets throughout the country, and has directed that any petrol station that is not licensed cannot legally seep petroleum products. Any such station found dispensing petroleum products will be shut down and the owner and operators prosecuted.

This is a step that will discourage diversion of petroleum products by tanker operators and driverse.

But what about the licensed marketers who still indulge in sharp practises that causes shortage of petroleum products? A deregulated market will benefit from a much smaller number of players than we currently have in the thousands of independent marketers in the country. In their own form well organised, professionally managed and disciplined associations of cooperatives who will have the clout to command financial support from the banks and buy products in bulk from both local and foreign sources and then allocate such products to their members. Malpractices in the petroleum products trade can be checked through self-policing in such associations and cooperatives.

"Subsidy Winfall"

A major worry of many Nigerians is what Government will do with the huge funds that will flow into its coffers from the removal of subsidies. All the promises made by Government on this issue in the past did not materialise. This time around, Government should select some very distinct programmes in which to invest the monies realised from the deregulation and privatisation of the downstream sector of the petroleum industry. Such programmes should include:

* Completely fixing all our refineries to assure over ninety percent efficiency and availability

* Investment in extending the gas distribution infrastructure to different parts of the country

* Subsidising the private sector to construct CNG filling stations in cities like Lagos, Port Harcourt, Warri, Aba, Benin and any other sizeable urban centre that is not too far from existing gas pipelines

* Subsidising private sector investment in factory build CNG Taxis and mass transit buses that should be deployed for mass transportation in our highly populated cities

* Subsidising private sector investment in "mass transit vehicles," which will be defined as vehicles with sitting capacities of not less than thirty passengers.


In conclusion, I would like to summarise by repeating again that deregulation is the solution to our problems of petroleum product shortages in this country. As a people, we have suffered in a regulated regimen for so long that we tend to want the status quo and let the suffering continue. We should not allow the easy way out of holding on to the past, even when it hurts, to frighten us from taking the hard decisions that will bring us permanent solutions and ultimate success, which is what deregulation guarantees. But like in all desirable goals, we must plan properly to deregulate and do it right the first time.

Chief Aret Adams is a former presidential adviser on petroleum and energy

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