Deregulation as Panacea for Economic Actualization in the Downstream Sector

Mr. Oyebanji receiving his plaque during NAEC conference in Lagos

…Deregulation encourages deployment of technology, good governance with international standard.

…Like banking and telecom industry, allowing market forces to determine the market is critical to the growth of the downstream industry.

-By Felix Douglas

Deregulation has been a key issue in Nigeria’s downstream sector for the past four decades with government subsidizing the marketing division of its petroleum industry. Over the years, it has been a subject of controversy making it a bottle neck for players in the sub-sector to survive. In the process of regulating the downstream through subsidy, almost all the International Oil companies (IOCs) have quitted the downstream since current realities show they cannot survive while government dictate the space by fixing prices.

Operators of the downstream have advocated for deregulation so that market forces will determine the price and chief among them is the Managing Director of 11PLC (former Mobil Oil), Mr. Tunji Oyebanji.

Oyebanji was the immediate past Chairman of Major Marketers Association of Nigeria (MOMAN), comprising eight companies. During the 2021 NAEC Strategic International Annual Conference, he gave a presentation on issues surrounding the downstream sector. In his opening salvo, he stated thus, “I am a capitalist to the core and I believe very much in free enterprise and capital to drive growth in the industry.” 

Oyebanji acknowledged the fact that Nigeria presently has a Petroleum Industry Act (PIA), but still have comatose refineries that are not producing with Premium Motor Spirit (PMS) known as petrol the lowest price across West Africa sub-region. Although some petroleum products have been deregulated, there is no access to foreign exchange (FOREX). There are lots of poor infrastructure in the downstream.

Where the Industry should be heading

Oyebanji was of the view that there should be a transition to a market driven environment through policy backed legislative and commercial frameworks enabling the sustainability of the industry.

Standardization and in developing Technology in the industry

“There are lots of things happening in the downstream industry outside Nigeria which cannot be applied in the country simple because there is no margin that can support such investment. There is a need to build oil industry competence business to raise them from the standard approval.”

He decried that in terms of deregulation, a lot of emphasis are always on price, but it is not only about price. The downstream deals with volatile products and the need for deregulation particularly in the area of safety and quality which is imperative.

Previously, Nigeria had state owned enterprises and entities that are moribund but competition were severely restricted but with advancement of technology, there is improvement.

Oyebanji pointed out that the economy policy of the Federal Government to control prices centrally culminated to subsidy which was a temporary measures for prices of petroleum products but it led to corruption in the system, shortages of products and inefficient market. Its adoption in Nigeria has been marred by political considerations and failure in the economy. The country spends about N10 to 12 trillion on subsidy in past ten years which may increase in 2021. Obviously, subsidy leads to deregulation and sharp argument for its removal.

Impact of Deregulation

Total deregulation is more than mere removal of subsidy. Deregulation increases investments in the oil and gas sector value chain which will result in growth of the country’s downstream petroleum sector. “A deregulated environment is a place where people are free to compete and those who are the most efficient with tendency of their businesses to grow and expand to create employment.”

Deregulation requires a competitive market environment, it will guarantee the supply of products with unrestricted comfortable investment in infrastructure and reasonable returns to investors. It also requires a virile regulator to enable transparency and fair competition among players hence “Whoever is the umpire or deregulator shows preferential treatment to one company versus the other. I think it will almost be better for you to have remain in regulated environment rather than find yourself in such situation.”

Notwithstanding, it will encourage the growth of the petroleum sector through the deployment of technology, good governance and international standard.

Impact of Lack of Deregulation

The 11PLC Managing Director revealed that Nigeria borrows money than what it spends on subsidy in other words it borrows to pay subsidy which is not a sustainable position. There is stifle growth and unemployment with enhancement of fraud and corruption, a situation where other players cannot be involved in the process of supply of major products but determined by few that can easily be compromised with pressure from unscrupulous operators within the system. Degradation of infrastructure in the industry. Decayed pipelines and dwindling industry expertise as companies are closed and a number of technical experts are reduced leading to poor quality of goods and services.

Challenges of Nigeria’s Downstream

Oyebanji highlighted some challenges in the downstream especially refusal by organized labour and civil society who are justifiably concerned about the impact of deregulation to people who might feel the negative impact.

There is absence of inadequate local refining capacity which lead to importation of petroleum products. Fear of increase of price due to deregulation with the tendencies of monopoly to be created, poor infrastructure which impedes efficiency and competition.

For the investor, reviewing the environment where the margins and price of product are fixed, it discourages investment, “Your ability to get a fair margin or a fair income on investment is such that depends purely on the whims and caprices of someone sitting in an office who is not employing anybody and does not know what it takes to run a business and who decides how much margin you are entitled to and at the end of the day you will find that investment will not just come.”

For instance, “If you go to a banker to raise $10 billion and the major product you are selling has the government regulating its price, the banker is going to ask you what if your cost continue to go up, how are you going to recover your money and be able to pay us back as bankers, sorry we cannot finance that project.”

According to Oyebanji, this is why overtime many licenses granted for refinery construction did not yield needed result due to uncertainty of return on investment.  

He advised government officials to tighten their belts and adjust to current reality to reduce cost of governance.

When price mechanism is adjusted, people resort to public protest, negotiations take place and price is reduced while normalcy returns. Crude oil prices are changing hence market forces should be determined the price. People should know that oil prices change and is not under the control of anyone.

There has been resistance on import depended deregulation rather than revamping Nigerian National Petroleum Corporation (NNPC) refineries without building local refining capacity. Hopefully, with PIA, it will encourage investments in the sector especially local refinery, eventually Nigeria will be net exporter of refined products.

Opportunities Associated with Deregulation

Oyebanji submitted that opportunities in the downstream sector are enormous such as the Dangote, BUA refineries and the Waltersmith modular refinery with several others that are coming into play in the sector. Overall, these will lead to increased investments in the industry including rehabilitation, infrastructure, storage facilities, pipelines, trucks among others. Development of open access for operators to share facilities together leading to bigger entities that are more efficient culminating to employment opportunities.

There will be improvement of operational efficiency, technology, optimization of capital structure and logistics with access of fund for importation of petroleum products.

With the passage of the Petroleum Industry Bill (PIB) into PIA, it gives opportunity to expand based on the Africa Free Trade Agreement (AFTA).

Oyebanji emphasised on local refineries that a shift of crude oil production through value realization and deliberate investment in domestic refining products will create opportunity to transform the dynamics of the downstream petroleum sector industry from net importer to net exporter spurring the growth of Nigerian economy.    

He said effective reforms and deregulations are key drivers to the growth within the refining sector. Non function refinery cost Nigeria over $13 billion in 2019. If the NNPC refineries were operating in optimal capacity Nigeria would have imported only 40% petroleum products in 2019. Full deregulation of the downstream sector remains the most glaring means for investors.

The future of Nigeria’s downstream industry needs a balance in ensuring the sustainability in the crude oil value chain both upstream and downstream and providing value for the Nigerian consumer and the economy. The philosophy is that the government should put legislation in place for the market to be allowed to develop itself.  

“As it has been experienced in other sectors like banking and telecom industry allowing market forces to determine the market is very critical to the growth of the downstream industry, he added.”

Therefore, it behooves the government to cushion the effect on the vulnerable in the society. “This will help the downstream industry to grow from strength to strength and Nigeria will not only become net exporter of refined product but will also be able to employ many of its citizens.”       

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