Deregulation as a Panacea to Nigeria Petroleum Industry, Economy

Mr. Adetunji Oyebanji, Chairman of MOMAN and Managing Director, 11PLC

…Nigeria has spent close to N10 trillion over the last ten years on subsidy and N752 billion in 2019

…Subsidy payment to marketers by government takes up to seven or eight years

…Deregulation makes Nigeria a refining hub

…MOMAN is walking closely with government for an enhanced PIB

-By Felix Douglas

Reforming Nigeria’s downstream sector involving refining and distribution of petroleum products is a concern to practitioners of the industry. The Federal Government removed subsidy leading to increment in Premium Motor Spirit (PMS) known as petrol with 10% and about N160 per litre.

The resultant effect of the increase in pump price led to condemnation by Nigerians and the labour unions, Nigeria Labour Congress (NLC) and Trade Union Congress (TUC). The grouse of labour unions was due to impact of Covid-19 that led to economy downturn. They claim the increase was not timely and the biting economy of the country will result to further hardship.

In light of this burning issue in the country, the Association of Energy correspondents of Nigeria (NAEC), an association that reports happenings in the energy sector of Nigeria held its first Webinar Series to dissect the issue of deregulation of Nigeria’s downstream industry. The aim of the Webinar is to analyse the econometrics of the challenges and impact of a deregulated downstream sector on Nigeria’s economy.

In his Guest Speaker remarks, Mr. Tunji Oyebanji, Chairman, Major Marketers Association of Nigeria (MOMAN) and Managing Director of 11PLC spoke on the theme: ‘Challenges and Impact of a Deregulated Downstream Sector on Nigeria’s Economy’

Oyebanji made it known that industry stakeholders have been clamouring for deregulation long before the government took action on it. For instance, products like Automotive Gas Oil (AGO), Dual Purpose Kerosene (DPK) and AGK, have been deregulated. The only product that has not been deregulated was PMS or gasoline  but has eventually been deregulated.

Oyebanji said, it got to a point where government did not have a choice and may not be able to continue hence “we found ourselves between the devil and deep blue sea and we have no choice than to bite the bullet.”

The first issue is the excessive cost of subsidy and how much it costs to land a litre of fuel in Nigeria including the price. Nigeria has spent close to N10 trillion over the last ten years to subsidise PMS because it accounts for 70% to 80% of petroleum products consumed in Nigeria.

The MOMAN Chairman disclosed that in 2019, Nigeria spent close to N752 billion on subsidy. This means that about N1trillion of Nigeria’s revenue was going towards subsidy

The Nigerian National Petroleum Corporation (NNPC) that is the sole importer is importing PMS based on exchange rate of N360 when really the open market maybe closer to N450 or N460. Therefore, there is also an inherent subsidy in terms of how much is paid for the dollars through importation of petroleum product. Looking at the revenue profile of Nigeria with oil trading at $40 per barrel, certainly subsidy becomes a breach taken too far.

It got to a situation where it was either PMS deregulated and subsidy removed, or the country faced with scarcity of fund to import the product. Lack of fund for importation would have led to return of queues at filling stations across the country.

According to Oyebanji, what Nigerians do not understand about subsidy is that it does not favour oil traders. If petroleum products are imported and sold, marketers will wait for government to get subsidy. “This is after paying a price and bringing it to Nigeria and government insisting that it could not sell beyond a price, definitely marketers have to wait and in some cases they wait for three to four years before they get the refund, when you factor it, promissory note which is what government uses to pay marketers, it means they have to wait for another three years.”

How can a business man survive, after he has taken loan to import petroleum products and could not get repayment for seven or eight years?  “By the time you get your money it is either your business has closed down or the banks have taken over.”

The Benefits of Deregulation

Oyebanji highlighted benefits of subsidy to Nigeria, for instance, money that could have been used for subsidy will build 16 million bore holes, 1million classrooms, 300,000 fully equipped primary healthcare centres, over 20 kilometres of roads, 27,000 Megawatts (MW) of solar electricity and 600, 000 houses built for the citizens of the country.

Also, equipping the university system, the police force among others. “I will not say that is the only stake we have in the economy, there are still other key areas of wastage, however, it is clear that subsidy was a big drain on the economy and we are now in a situation where we could no longer afford it.”

Reasons for Deregulation 

Obviously, subsidy creates room for corruption, this is what led the government to make a choice and decide on subsidy removal. Nigeria population is over 200 million people and the country’s revenue has not grown sufficiently to support necessary investment in health, education and infrastructure to augment population growth as well as subsidy for petrol. These economic issues have led to a point where the government has no choice but to deregulate.

Besides, failure to deregulate the industry led to fix margin. Fix margin is a situation where the Petroleum Products Pricing Regulatory Agency (PPPRA), has a template after taking account of landed cost of petroleum products, it fixes margin from transportation to how much marketers will make per litre. Marketers were not able to make the kind of investment they needed in all the value chain.

Over 5000 kilometres of pipeline under maintenance has been vandalized therefore, it is difficult to move petroleum products across the country through these pipelines.

On the issue of trucks, numerous accidents have been witnessed on Nigerian roads involving petroleum tankers because many of the trucks on the roads are over 30 years without modern safety gadgets or devices to protect them. It is difficult to monitor movement of product from loading location to its final destination.

These gadgets cost money and they are available in new modern trucks. If a company wants to buy a new modern truck, it is a challenge in a situation where margins have been fixed because the market was regulated. This had been a major burden.

The Issue of Smuggling

Oyebanji stated further that a major problem for the petroleum industry is the issue of smuggling to neighbouring countries. The cost of petroleum products in Nigeria is substantially lower compared to other neighbouring countries because in those places there was no subsidy, therefore, the prices reflected the true market value of a litre of PMS.

There has been a wrong belief that Nigeria is rich hence PMS should be made cheap so that people will not suffer, but “it is either the country is rich or poor because comparing Nigeria’s Gross Domestic Product (GDP) per capita to other countries in its neighbourhood, it is a food for thought.”

Today, PMS sells for about N160 per litre in Nigeria and the country’s GDP per capita is $2400 compare to Ghana. Ghana’s GDP is about $2300 whereas a litre of gasoline sells for N320. In Republic of Benin, Nigeria’s immediate neighbour, its GDP per capita is about $1000 yet gasoline sells for N348 per litre. In essence, this is a country where the average person is much poorer than Nigeria but its citizens pay more for fuel.

The insensitivity was on the high side for people to smuggle petroleum product across Nigeria’s borders. NNPC estimated that when borders were closed, sales and volumes dropped by 30% which showed that after borders were shut and petroleum products could not cross the country, “a lot of petroleum products could not find their way across the borders.”

The MOMAN Chairman noted that the advantage of a deregulated environment is the “vision that Nigeria will become a refining hub because the country will be more attractive to investors to invest in refinery locally.”

For instance, the Department of Petroleum Resources (DPR) approved over 18 licences for people to build refineries, but it was a herculean task to find any prospective operator. It was arduous because with fixed margins investors do not know how to recover investment and it is unlikely that any financial institution will support such a venture because payment of loan cannot be ascertained.

However, the “benefits are that investors will be able to generate more robust margin, at least margin that reflected of practical economic realities.”

For prospective investors to involve in investment, there should be a clear picture of how loans will be repaid. Not only on refineries, it cut across other aspect of the value chain in the downstream, from petrol stations, pipeline system, terminal and depot, all these will attract more investments since investors are sure of the returns they will generate.

Oyebanji pointed out that operators in the downstream will ensure that Nigerians see the benefit of contributing towards national efforts of implementing the full market driven downstream.

He acknowledged the notion of people’s belief that subsidy was income to downstream operators which is nothing farther from the truth. “In fact, we borrow money to import fuel and a big chunk of it is outstanding by a way of subsidy cheque from the government while interests are paid from the money. At the end of the day, it turned out to be a cost borne by the people.”

Notwithstanding, oil marketers are not undermining regulation in order to exploit consumers and there is nothing to suggest that the downstream should no longer be regulated, but they are advocating on price, that the market should determine the price.

There is still need to regulate product quality for instance, oil marketers have to ensure that products that are brought into the country meet minimum standard. There is need to regulate how products are sold. “If you go to a filling station to buy N10,000 worth of fuel, the expectation should be that you get N10,000 worth of fuel, what you pay for is what you should get.”

The recent gas explosion in some parts of the country in terms of delivery or transportation from gas plant calls for rigorous regulation.

Oyebanji made it clear that deregulation creates room for competition. Where there is free market operation, there will be a watchdog, a consumer protection agency that will oversee to ensure that operators are not colluding to exploit the public. Countries like the USA and some parts of Europe, if a marketer collude to fix prices and whoever is involved in the sharp practice, will face stiff penalty and possibly jail terms hence sound regulations and legislations are not compromised.

After decades of subsidy, a change of mindset is needed which will focus on economic growth with right regulations, cultivate drive to adhere to industry standard and international best practice. Self-regulation, self-discipline and internal economic policy have to be in place to achieve the objectives of deregulation.

He asserted that the oil industry needs a virile legislation to govern it. Therefore, the Petroleum Industry Bill (PIB) which is currently under review by the National Assembly (NASS) is a significant document in terms of governance of the petroleum industry.

The MOMAN boss said, the oil association is working closely with NASS and the Ministry of Petroleum Resources so that PIB will emerge to enhance a deregulated environment without impediment.

The PIB will give birth to a new regulator that will focus more on the downstream rather than DPR which was a single entity, “one side fit all” regulating both the upstream and downstream. There will be a specialized agency which will focus largely on downstream and midstream, the industry will be better served with a regulator that is probably knowledgeable rather only one covering a wide spectrum.

Economic Policies on Subsidy

In terms of economic policies, Oyebanji submitted that the industry will emerge with strategies and ideas about how to take advantage of N1 trillion that is being spent on subsidy. It has to be harnessed with policy in place that will ensure the money is used in aspects that will alleviate suffering of Nigerian people. Thus, improving the road network, transportation systems, health, education, impact directly on the life and wellbeing of teeming population will be priority as a result of deregulation. Hopefully, this will be the kind of economic policies that will assist people to get full benefit out of subsidy regime.

Under a deregulated environment, every player or operator should have access to FOREX to import at the same transparent level. For instance, if Mr. A gets FOREX at N100 to the dollar but other players are buying for N300 to the dollar because one operator is getting an advantage, he can corner the market since his cost is going to be significantly lower than others who source FOREX at N300.

Effective policies will prevent unscrupulous elements to take undue advantage to derail deregulation and get other players out of the market.

The New Normal in Fuel Consumption

Oyebanji made a stunning revelation on fuel usage across the globe. Many years ago, the world used big cars especially American cars which do consume a lot of fuel. But surprisingly, in many African countries including Nigeria, multitudinous 4×4 SUVs cars flood the roads.

In the past, many countries in the world like Europe had more bigger cars but as price of gasoline goes up, they have adjusted to smaller cars with lower fuel consumption. People are conscious about taking long trips and journeys with their cars. They prefer public transportation systems. Nigeria should invest in good transportation system to prevent people from putting their cars on the roads.

People need to adjust instead of buying expensive cars that will need 80 litres to fill the tanks with high fuel consumption. They should emulate other countries to make economic decision to buy small tiny cars since cost of fuel is expensive, there should be positive adjustment.

Expectations of Deregulation

Going forward in future, a deregulated environment gives opportunity for level playing ground where nobody has the monopoly or dominance in the market to easily determine prices. There will be many players with free exit and entry into the market. Ineffective marketers will be dropped paving way for collaboration. Stakeholders can form alliance to work together and own terminal, share their experiences and charge less price to attract customers into their filling stations. These are the kind of benefits that Nigeria will gain if deregulation is enhanced.

Oyebanji was optimistic that the growth of local refining capacity including Dangote refinery, the expectation is that rather than Nigeria importing, the country will become a net exporter of refined petroleum products to countries in Africa. “Nigeria will not only meet its own local demand; it will extend to West Africa sub-region.” The country will no longer be spending 30% of its foreign exchange importing PMS. “If you are selling refine products, you have added value to crude oil and that brings more value to the economy and grows GDP.”

Deregulation of prices will positively affect other aspects of the industry value chain and investors can invest by bringing efficiency to raise standard. “Deregulation is a win-win for the Nigerian consumer.”   

It is a journey which the government has started by deregulating the downstream. A journey that will take some time to get to its final destination; ups and downs are associated with it.

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