15 February 2005

Nigeria: Deregulation of Downstream Sector of the Nigeria Economy


Warri — The deregulation of the petroleum industry ought to be done cautiously so that the poor are not further impoverished.

DEREGULATION cannot be detached, in a developing economy, from globalization, privatization and commercialization. However, the focus here is on deregulation, which is the removal of restrictions or regulations from the sale of petroleum products at users' end. By the time Nigeria became politically independent in October 1960, agriculture was the dominant sector of the economy, contributing about 70 per cent of the Gross Domestic Product (GDP), employing, and accounting for about 90 per cent of foreign earnings and Federal Government revenue.

Crude oil was first discovered in commercial quantities in Nigeria in 1956, while actual production started in 1958. It became dominant resource in mid 1970s. On-shore oil exploration accounts for about 65 per cent of total production and it is found mainly in the swampy areas of the Niger-Delta, while the remaining 35 per cent production involves drilling for oil in the deep waters of the continental shelf. Nigeria has proven reserves of about 32billion barrels of predominantly low sulphur light crude, which at current rate of exploitation could last another 36 years. The intention is to expand the reserves to 40 billion barrels and production capacity to 4 million barrels per day (mbd).

The massive increase in oil revenue as an aftermath of the middle-East War of 1973, created unprecedented, unexpected and unplanned wealth for Nigeria. Then began the dramatic shift of policies from a holistic approach to benchmarking them against the state of the oil sector. The official thinking is that the NNPC, with the major and independent marketers, will be able to sustain a steady flow or availability of refined petroleum products throughout Nigeria at a competitive price, which will be regulated by the basic economic principle of supply and demand. The fact, however, is that it was conveniently forgotten that corruption has virtually destroyed the backbone of Nigeria's economy.

Painful reforms

The oil-rich Nigerian economy, long hobbled by political instability, corruption and poor macroeconomic management, is undergoing substantial economic reform under the new civilian administration. Nigeria's former military rulers failed to diversify the economy away from over-dependence on the capital-intensive oil sector, which provides 20 per cent of GDP, 95 per cent of foreign exchange earnings and about 65 per cent of budgetary revenues. The largely backward agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now must import food.

The oil boom of the 1970s led Nigeria to neglect its strong agricultural and light manufacturing bases in favour of an unhealthy dependence on crude oil. In 2000, oil and gas exports accounted for more than 98 per cent of export earnings and about 83 per cent of Federal Government's revenue.

The low capacity utilisation of Nigeria's state- owned refineries and petrochemical plants in Kaduna, Port Harcourt, and Warri; the sorry state of disrepair, neglect and repeated vandalisation of the state-run Petroleum Products Pipelines and oil movement infrastructure nationwide; the collateral damage of institutionalized corruption; the frightening emergence of a local nouveau riche oil mafia that controls, and coordinates crude oil, and refined Petroleum Products Pipeline sabotage and theft (illegal bunkering) nationwide; the insatiably corrupt military task force operatives that assist diversions of both crude oil and petroleum products, have worsened the situation.

As expected, public opinion about deregulation in Nigeria covers a wide spectrum, and cuts across all sides of the argument. Some Nigerians hold the view that deregulation cannot be complete whether in the downstream sector of the Nigerian Petroleum industry, or indeed in any other sector of the national economy.

However, deregulation is seen as desirable in freeing government of its concurrent control and involvement in the business of refining, importation and distribution of refined petroleum products in the Nigerian market. In their opinion, the deregulation of the Petroleum industry in Nigeria should be implemented in phases, so as to enable the state-owned monopolies regain efficiency, before their full privatisation.

Past governments conceived either "appropriate pricing" or "price adjustment". Those were mere palliatives and not the solution to the comatose process of supply and distribution of petroleum products in the country. By the time this government opens the sector for competition, scarcity will be a thing of the past. The present proposal will allow for competitive pricing which will break up the monopoly being enjoyed by the Nigeria National Petroleum Corporation (NNPC), government further argued.

Further justifying the need for a full deregulation of the downstream oil sector, the NNPC Group Managing Director (GMD), Engr. Funsho Kupolokun, said that given the rate at which the corporation was dipping into its reserve base to subsidise petroleum product prices, it might be unable to pay salaries at the end of the month, if the trend was not checked. Kupolokun made this known at a workshop on Economic Reforms and the Civil Society perspective on privatisation, liberalisation and deregulation, organised by the Civil Rights Congress (CRC).

It should be noted that the initial enforcement of the deregulation of the downstream sector of the Petroleum industry was so sudden that, overnight, a selected few had extraordinary financial windfalls only to use their new found wealth to further exploit Nigerian consumers through the building and/or hiring of storage facilities to store, and where convenient, hoard imported refined petroleum products for speculative and extortionist sales.

The recent hike in the prices of Petroleum Products disguised as the effect of deregulation of the downstream sector, is the immediate cause for this reflection on the legality and morality of the deregulation. There is no disputing the fact that the government and its controversial agency, the Petroleum Products Pricing Regulatory Agency (PPPRA), chose a most inauspicious time to give effect to a most unpopular policy.

Civil rule and tears

The real immorality of the action taken by government as far as many of us are concerned, is the possible association of democracy with sorrow and government's irresponsibility by an overwhelmed majority of our people. True, the few sophisticated ones among us may appreciate the fact that civil rule is not necessarily the same thing as democracy, but they are not the ones that will troop out to the street to welcome some misguided soldiers who may want to capitalise on the manifest unpopularity of this administration.

Conditions for effective, fair and stable deregulation of the downstream sector of refined petroleum products are basically two. These are: the building of refineries, which will produce far above the projected level of domestic needs of the products and a genuine commitment to the regular and effective maintenance of the refineries. It does not make economic sense to initiate deregulation activities in this strategic sector with the nation relying on the importation of refined products from countries to which we sell crude oil.

This opens the door to all sorts of 419 operations, corruption, massive thefts, capital flight, money laundering e.t.c. without lifting the financial burden and stress caused by spiraling inflation of pricing on consumers.

Five likely scenarios, or probable modes of implementation of the deregulation process in Nigeria are summarized as follows:

·Supply side deregulation

·Demand side deregulation

·Complete deregulation

·Phased deregulation, starting from the upstream sector.

·Retention of the status quo.

The time frame of implementation of workable Petroleum industry reforms, the potential effects on both major and independent petroleum products marketers, the role of both the currently dysfunctional state-owned refineries and prospective private refineries, salient factors of acquisition of the existing state-owned facilities and the criteria for identifying suitable players in a deregulated downstream sector of the Nigerian Petroleum industry, are all crucial to the success of the deregulation process.

The effort by the Nigeria Labour Congress (NLC) to protect Nigerian consumers against arbitrary petroleum pump price increases at filling stations, is salutary. But I always ask the question about who the Labour-led initiative is organising a strike action against? As the president has said, it is either we accept deregulation or we don't. But we know that deregulation is already an accomplished fact under the kind of skewed democracy that we have in Nigeria today. This is why a strike action on every occasion that the pump price is raised will always be tasking, risky and uncoordinatconsider to be a better terminology for action) will not be as result-oriented and as safe as expected.

What has become clear is that, despite the flood of applications for private refinery licenses in Nigeria, in the end, because of the high costs and risks involved, only a few private refineries, (whether Nigerian or foreign owned), may ever emerge ultimately. It is further envisaged that most of the first generation of private refineries in Nigeria (if any), may not be brand new that is to say, private investors, particularly the indigenous ones, may rather procure refurbished refineries, presumably to minimise their initial risk capital.

Earlier attempts at reforms in the telecommunications and aviation industries suggest that it could be a bit premature to provide definitive appraisals of the impact of deregulation in the downstream sector of the oil industry in Nigeria at this moment. However, in Nigeria where the LPG market has been completely deregulated as far back as 1998, as we are made to believe, the consumer price of a 12.5kg cylinder of domestic cooking gas also varies drastically, clearly the highest in the ECOWAS sub-region!

So, what exactly is it that they are doing right in Cameroon, Cote d 'Ivoire, Ghana and Senegal, and other ECOWAS country, that we are doing very wrong in Nigeria? Or have some Nigerians started "bunkering" LPG (and LNG) too?

There may be the evolution of benevolent dictator ship from a failed democratic experiment! The timing of President Obasanjo's visit to Libya, the latest puzzling romance between the executive and legislative arms of Government, the political lethargy of the Nigerian Public e.t.c. appear to speak volumes in this regard.

SAMUEL SOEZE is currently of Pan ocean oil corporation, Ogunu - Warri.

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