Deregulation of the Downstream Oil Sector in Nigeria

Deregulation of the Downstream Oil Sector in Nigeria

According to Hornby (2001:313), deregulation is the freeing of a trade or business activity from rules and controls. In his own view, it is the determination of price by the interplay of demand and supply. It means the withdrawal of government control of resources allocation mechanism, thereby allowing the forces of demand and supply to determine the prices of goods and services (Obioma 2000).
According to Ezeagba (2005:43), stated that the fundamental economic objective of deregulation can be summarized as bringing more competition to the market with its attendant increase in economic efficiency and welfare. Deregulation is the removal of government control, withdrawal of sale interference, encouraging free market operation, and simplification of government rules and regulation for greater market forces. Fawibe (2009:1) his view seems to be more comprehensive and incorporating. This is because; government does not end up in withdrawing its control and interference in the day-to-day businesses and activities, but has to prepare an enabling environment for take-off of a deregulation policy. For instance, government has to allow the price system to be determined by the forces of demand and supply. In addition, the operators should be acquainted with the rules and regulation of the game, for greater market forces.
In his own opinion, Akintola (2005:8), described deregulation as removal of government subsidy and the cessation of the price control or regulation by officials. He went further to state certain conditions that may necessitate deregulation policy in a country. They include the inability of government to continue to subsidize petroleum products because of competing national priorities and the need to curb smuggling of the products overseas, thereby unwittingly subsidizing other economics. Akintola’s view is in order as the mentioned conditions are undoubtedly prevailing in Nigeria today and that is why there are calls from different quarters in the country, to implement the deregulation policy without much ado.
According to Agu (2009:286) saw subsidy as a payment made by government to producers to enable them produce and sell at a lower price than they would otherwise. He held the view that it lowers the market price below the factors cost, so that consumers pay less for the goods than it cost the producer to make the good. In his own understanding, Ezeagba (2005:45), believed that subsidy existed in a situation when consumers of a particular commodity are assisted by the government to pay less than the market price of the very commodity they are consuming.
On the producer side, he saw it as the payment of producer of certain commodities by the government not to produce at all or to augment their income when the price of their product is less than break-even point. Subsidy was defined by Hornby (2005:1476), as money that is paid by a government or an organization to reduce the costs of producing goods or services so that their prices can be kept low. He stated that subsidies can be granted in agriculture area or housing projects. From the above definitions, subsidy is seen as a device employed by government to assist either the consumers or producers to consume or produce certain commodities at prices below the prevailing market prices. It is also an incentive given to either side (consumers or producers) to consume or produce more of the goods in question.
According to Minister of Information, Labaran Maku, one can distinguished between deregulation and privatization, where privatization can be seen as taken state-owned service providers into the private sector. Non removal of subsidy has discouraged competition and stiffened private investment. Due to lack of deregulation, investors have shield away from investments, not only in the oil and gas industry, but also in the maritime sector. According to him also, it is expected that if deregulation is achieved in the downstream oil sector, about 20 refineries would be built by the 20 companies that have received licenses to begin business over five (5) years ago. Due to regulation in the sector, these companies simply shelve their licenses.
“About 20 licenses were issued to different private investors to build refineries across the country in the past, but that did not succeed due to regulated pricing of refined crude oil but deregulation will open channels for investment in refineries. The idea is for Nigeria shippers to get set not to import refined crude oil, but export refined crude oil to other countries across the globe” Maku argued.
According to President of the indigenous ship owners Association of Nigeria (ISAN) Isaac Jolapomo, said shipping development in Nigeria was crippled at the introduction of oil subsidy. He further said that the crime of oil bunkering started when subsidy was introduced, adding that since the introduction of subsidy, Nigeria has not been able to determine how much fuel it consumes. He said that the products are being smuggled to neighboring countries, even up to countries like Libya.
Nigerians have not been able to participate in the international sea trading due to issues connected to presence of oil subsidy. He lamented that the continued subsidizing of fuel imports in Nigeria, had made the nation to lose billions of dollars annually through free-on-board (FOB) sale, but its removal would offer the country better opportunities to save revenue and replace those unfavorable terms of trade with cost insurance and freight (CIF).
Removal of subsidy, he believed would enable Nigeria to chart a new course for the maritime industry and shipping development and stated that about N2 trillion was being lost annually as capital flight.
According to President Good luck Jonathan, it was not going back on deregulation of the oil sector as the policy is one of the plans which the administration plans to disconnect cabals which have been holding the nation by the jugulars in the distribution and sale of petroleum products.
In a nationwide broadcast to the country last few months, the President who accused some politicians and other interest groups of going beyond the implementation of the deregulation policy to hijack the protests noted that he took the decision after consulting widely with State Governors and the leadership of the National Assembly.
According to the President  “Given the hardship being suffered by Nigerian and after due consultation and considerations with state governors and leadership of the National Assembly, government has approved the reduction of the pump price of petrol to N97 per litre.

2.2    Rationale behind Government’s Plan to Deregulate the Downstream Petroleum Sector
Deregulation of the downstream oil sector will improve the efficient use of scarce economic resources by subjecting decisions in the sector to the operations of the forces of demand and supply. This will attract new sellers, buyers and investment/investors into the market, thereby increasing competition, promoting overall higher productivity and consequently, lowering prices over time. The ultimate effect of this chain of activities is increase gains for the people of Nigeria who would be getting the most out of their natural resources. For example, following government’s deregulation in the telecommunication, there has been a reduction in call tariffs. Similar success has also been recorded in the banking sector with the emergence of stronger bank with unprecedented spread to several others African countries. These are classic examples of the kind of positive effects deregulation could have on oil sector.
Deregulation further reduces economic waste and lightens social burdens caused by government control. For several years, Nigeria experienced scarcity of petroleum products that crippled national economic activities and increased the cost of doing business, several times over. The resulting scarcity inevitably leads to a flooding of the country, particularly outside of the big cities and towns, majority of Nigerians have been forced to buy petroleum products at 300% higher than their original price. Deregulation will help address this price scalping and a host of associated problems related to the sector.
Deregulation of the downstream oil sector promises to be the way forward in expanding opportunities for economic growth and a competitive downstream petroleum sector if regulation in the downstream sector in limited to oversight and supper story functions, aimed at guaranteeing quantity of products and preventing customer exploitation, then the process of deregulation could help achieve greater cost effectiveness.
2.3    The Relevance of the Deregulation and Importance of Pricing to Deregulation of the Downstream Oil Sector
According to Diran Fawibe (2009): the need for complete deregulation in Nigeria petroleum industry. He argued that Nigeria is growing into a more industrialized and urbanized country, where movement and appliances that required modern fossils fuel are becoming popular among poor and rich people. However, more than half of Nigerians are living below one dollar par day. Subsequently, the Nigeria government and subsidized these important ingredients of human lives to make it reliable adequate and affordable to the poor (majority group of people in the country). The government resolve was due to the appreciation of the fact that the poor man cannot afford the real prices of petroleum products, this came as a relief and support to the poor as the government now pays up to 40% of the price of even litre of Gasoline import into the country.
According to International Energy Services Limited, Lagos Chamber of Commerce and Industry. Appropriate pricing of petroleum products is one of the major functions that will attract private investment into the Nigerian downstream, petroleum products will be set by independent marketers based on demands and supply of the products. Like every other goods and services in market place, independent oil marketers would lead to further reduction in prices for refined oil product until an appropriate market price is attained continued subsidization by the government will not help achieve such appropriate pricing. Deregulation through subsidy removal will lead to adjustments that will push prices towards its market determined level. Appropriate pricing achieve through this policy will make activities in the sector more profitable and attractive to private domestic and foreign investors.

2.4    Obstacles and Trend of Deregulation of the Downstream Sector
According to Jide Akintunde (2009) in general terms, a big obstacle to formulation of public policy that will have effect on the market in Nigeria is the burden of policy implementation failures of past and subsisting government. But repetition of government policy on the basis of past implementation failures will potentially deny the country of benefit of new policy insights.
There are evidences from the recent past even if they are few where government had recorded successes in implementing policies that have impacted the market. Liberalization of the telecommunication industry which saw entry of GSM operators is a fact example. This fact is not only a strong argument for people on the policy side of the debate on the deregulation, but it also points to the likely models or approaches that have worked. Conversely, the array of negative outcomes of public policies provides evidences of what will not work, or (old) approaches that are bound to fail.
Quoting more extensively from the RSA’s Petroleum, Coal and Gas policy Directorate white paper, it is found that the many examples of deregulation usually showed the success stories that occur immediately after deregulation. This is always a period of price – slashing and better service as companies complete to attract more customers. But there is always more that lurks behind the story, which often takes years to play.
In the latter stages of deregulation, the following trend is observed.
    There is a perpetual elimination of the weakest companies, even when only strong ones are left.
    During the heated competition phase, the name of game is not prosperity but survival.
    Corporations became desperate to cut costs wherever possible to maximize profits.
    Consumer and workers safeguards are reduced or eliminated.
    Environmental safeguards are reduced or eliminated.
    Wages are reduced
    Workers are laid off by the thousands.
    Production and workloads are pushed to the limit, often at the risk of life and limb.
    Entire markets, for example rural areas are dropped if they are deemed low profit.
    In the final stages, a monopoly or oligarchy emerged, after which prices are raised, services dropped, quality reduced and corruption, anti-competitive practices and abused of power became common place.
    Workers from failed companies continue working in their fields by either joining the few surviving giants (usually at lower wages). In other words, a monopoly or oligopoly will dominate the market, but hundreds of nickel and dime operations may work around the edges.

2.5    Potential Benefits of Deregulation of the Downstream Sector of the Oil Industry
According to President Good luck Jonathan on a media broadcast to the Nation on the 12 Jan 2012. “He promised to fix all the existing refineries and bring foreign investor to invest in building new refineries”. As the debate over deregulation of the downstream sector of the oil industry in Nigeria is deadlock, so also has further progress in the sector nearly stalled. Removal of government fiat on product pricing is expected to bring in more private investment into the sector. The product refining segment of the market is expected to be the key beneficiary. Apart from the likely privatization of the existing four refineries, ill-managed by the government, new ones are to be built, with the potential that Nigeria will end importation of petroleum products and consequent imported inflation.
Should this happen, significant savings in foreign exchange will result when the (privatized) new refineries begins operation. That naira currency will most likely strengthen. Local and foreign private capital flows into the downstream sector of the oil industry will create new economic values across many sector of the Nigerian economy. Several hundreds of jobs would be created and not a few expert commentators have said that this will be the cue for industrial development in the country.
A less proven benefit is that competition and efficiency that hallmark private investment drive down prices of petroleum products under new regimes of deregulation (Jonathan’s administration). It has been observed that deregulation only promotes competition in the early stages.
Collusion, an anti-competition strategy, sets in the later stages of deregulation to eliminate competition as rivals are driven out of business.

2.6    The Effect of Deregulation of the Downstream Oil Sector to Nigeria Economy
2.6.1 The Positive Effects
According to (Sarah 1994) disruptions in the Nigerian downstream sector have deeper and more immediate domestic and political implication for the country than those that may occur in the upstream sector”. Hence the need to regulate the downstream sector. Rationale for National regulation is that uniform national regulations are generally more efficient for nationally marketed consumer products (Viscusi, et al 2005). Generally, government intervention in the petroleum sector either through public ownership or through regulation could be justified to ensure adequacy, reliability and affordability of the petroleum products in a country. Nigeria is not in expectation, as part of the effort to ensure energy security the government provides subsidies on its critical petroleum products to guarantee the following. Traditional energy had dominated Nigerian Energy sector until the last forty years when fossil fuel especially oil and gas were discovered in the country. To transit to new and more energy intensive sources, the Nigerian government introduced subsidies on these fossil fuel to encouraged people to start using them as they are more flexible and energy saving. This worked out effectively as the traditional energy sources were replaced with fossil fuel in the country, although traditional energy is still been utilized in the rural areas. However, due to provision of the subsidies the people over concentrated on the exhaustible fossil fuel in their energy consumptions; this will be elaborated in my next article.

2.6.2 The Negative Effects
The Nigerian government like its counter parts in some developing countries has always communicated the potential benefits of deregulation in absolute terms. In the case of Nigeria, a gradual approach to withdrawal of subsidy which has seen petrol price rise by more than 49% between 1999 and 2007 had failed to deliver promised infrastructure or improved funding of the social sector. Yet the same argument comes to the table even in the present episode. This has tended to introduce the negative adjective of insincerity in the view of government’s failure to deliver on past promises. Simply put, the current effort at deregulation of the downstream sector of the oil industry is seen as already the beaten track.
2.7    The Impact of Deregulation of the Downstream Oil Sector in Nigeria
According to World Bank, Africa and Technical Department, Industry and Energy, Division Note No. 14, 1992, P. 3 – 5). The Nigerian government has decided to go ahead with the policy even against widespread disapproval on the part of ordinary citizens. The government though is taking note of other countries that have privatized, particularly those in South America.
It is worth noting that the biggest gain will be in savings generated from divesting in the sector. As mentioned earlier in the paper, this will free up government funds for other activities. “Potential savings in the downstream sector are defined as the difference between the actual cost of supplying petroleum products to consumers (either through imports or by refining crude) and a benchmark cost corresponding to the procurement of these products from world markets under competitive conditions; and are subdivided into three categories: procurement, refining and distribution”.
The government claims that despite the huge amount spent, the subsidies did not reach the targeted individuals, but rather few higher income groups, it further claims that continuation of subsidies on petroleum products limits its ability to deliver its statutory functions such as power generation, security, education, health etc.
Consequently, the government found it imperative to resort to selling the refineries and invited other local marketers to apply for license to build private refineries. This was not achieved because the marketers who are profit motivated decline their interest to apply as the government still regulates the pump price. Subsequently, the recent government considers it necessary to deregulate and privatized the downstream sector in the country. However, the deregulation process is now facing serious challenges and criticism especially from labour and trade unions, parliaments and the public. It is against this backdrop that this analysis seeks to examine this controversial issue with a view to discovering whether deregulation could be important and relevant to the country? My analysis employs empirical literature in discovering and analyzing the issues surrounding deregulation and its feasibility in Nigeria.

2.8    The Roleand Economic Implication of the Deregulation Of Government In The Nigeria Oil Industry
Government should provide institutional capacity to govern competition practices in country. Such institution like the South Africa competition commission should be independent of government, and have legislative backing to carry out its mandate without fear or favour. Generally, government intervention in the petroleum sector either through ownership or through regulation could be justified to ensure adequacy, reliability and affordability of the petroleum products in a country. Nigeria is not exception, as part of the efforts to ensure energy security.
In many economic sectors in developing countries, deregulation has been implemented with mixed outcomes. Whether in transportation, telecommunication, mining or the downstream sector of the oil industry, practical benefits of deregulation to the economy are limited by evidence. In many cases, the downstream of the policy easily over shadow the stated policy benefits. This has meant that the debate about the desirability of deregulation.
The oil and gas industry provides the most polarized debate about deregulation in Nigeria, pitching policy makers against labour and civil society bodies. An attempt by the President Musa Yar’Adua administration to deregulate the downstream sector of the oil industry has sparked another round of problem.
However, the sustainability argument seems more plausible now, when the slump in the global economy and the militancy in the oil producing areas of Nigeria had seen revenue from crude oil export plunge by up to 60 percent in the last twelve months, compared to the year before. The current price level is even a significant improvement on the $40.00 a barrel threshold of quarter one, 2009.
To the organized labour subsidy on petroleum products is a penalty the federal government should pay for its inefficiency in managing the country’s oil industry. Any attempts to make the people pay for this inefficiency to be resisted, as Nigeria already rank very low on human development indicators, including high rate of poverty, material mortality, adolescent deaths and very limited access to modern health care etc. Furthermore, a percentile increase in petrol price would translate to higher increase in food prices and cost of transportation, whereas wages will largely remain the two positions lies the possibility that deregulation might unlock the industrial sectors in Nigeria as more investments in the downstream sector would see the take off of private refineries, with multiple value addition to the economy.

2.9    Government Strategy for Deregulating the Downstream Petroleum Sector
According to Jide Akintunde (2009) the country’s refineries have worked relatively well in the last 12 months, and this has led to increased capacity utilization from 30% to the current 60%. This means that for 12 months now, the country’s refined petroleum production capacity has been steadily on the increase. To further improve on this to an internationally accepted level of 90% capacity utilization in the next 24 months, the original contractors responsible for building the refineries have been contracted to carry out a Turn Around Maintenance (TAM) of those refineries. Specifically, TAM for the Port Harcourt refinery will be carried out in the first quarter 2012. This would be followed by the Kaduna refinery and the Warri refinery. Thereafter, the normal cycle of TAM will be respected.
However, research and analysis show that even if all the country’s refineries were to operate at full capacity, there would still be a petrol supply gap of 15million litres per day. Therefore, importation will remain inevitable until additional refining capacities are built through the on-going Greenfield refinery project. Discussions are currently underway with prospective investors who are willing to provide Foreign Direct Investment (FDI) to build additional refineries in the country to ensure domestic self sufficiency and the export of refined petroleum products within the next few years.
The Petroleum Industry Bill (PIB) contains special fiscal incentives in place to encourage the establishment of new refineries around the country. Clearly, the establishment of new domestic refineries and the rehabilitation of existing ones are crucial to ensuring a successful deregulation programme.
Although Nigerian National Petroleum Corporation (NNPC) is making effort to fix the refineries over the next 24 months. Continuation of subsidies will be counterproductive to governments effort to deregulate the sector.
The fact that subsidy would be removed would create better market incentives for the old refineries to be fixed and new ones to be built. Indeed, the downstream oil sector is deregulated; government will have no need to invest in the refineries. That becomes the responsibility of private local and foreign investors, leading to a permanent solution to the perennial problems of poor functioning of the refineries which in fact, has been one of the major reasons why private investors have been reluctant to invest in them despite the fact that 18 licenses have been granted from new refineries by Federal Government.

2.10     Success Story of Deregulation in Other Sectors of the Nigeria Economy
According to Jide Akintunde (2009), the communication, banking and aviation sectors the typical examples where deregulation has worked in Nigeria. Before the deregulation of the communication sector, the Nigeria Telecommunication Limited (NITEL), a government owned company, was the sole operator for telephone lines in the telecom sector. This period was marred by inefficiency, low telephone access, high tariffs and poor services. Once the sector was deregulated, private investor, both domestic and foreign came in with Global System of Mobile Communication (GSM) services, resulting in high competition which significantly improved services coverage, increase telephone access and drive down prices.
Similarly, deregulation of the Banking sector resulted in the emergence of strong local banks offering a variety of services, and with a high presence in several other African countries. A few of these banks are also operating in some non-African countries including the United Kingdom, the United State and France.
Prior to deregulation of the aviation sector, Nigerian Airways, a government owned and managed airline was the sole operator. This resulted in poor service such as delay in flight, cancellation, poor route network and high airfares etc.

This article was extracted from a Project Research Work/Material Topic


4 Comments on “Deregulation of the Downstream Oil Sector in Nigeria”

  1. hi.i so much love and appreciate the analysis of deregulation.u know in terms of disadvantages and advantages.thanks.

  2. Emmanuel Okechukwu says:

    Good job done. More of this. Keep it up.

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