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Has Nigeria missed opportunity to deregulate downstream sector?

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Many thought Nigeria would have deregulated the downstream sector when crude prices were less than $50 per barrel and the landing cost of premium motor spirit (PMS) otherwise called petrol was below N100 per litre. In this report, OLATUNDE DODONDAWA examines whether Nigeria has really missed the chance to deregulate the downstream sector or not. Excerpt:

Introduction

In 2016 when crude oil price was below $30 per barrel, many stakeholders called on the Federal Government to deregulate the downstream sector. At that crude price, landing price of petrol was well around N80 per litre, but pump price of same product was N86.50 per litre.

As crude price was rising, and with the inability of the Federal Government to settle outstanding subsidy debt to marketers, who were responsible for about 50 per cent product importation, petrol shortage hit the market and there was acute scarcity of the product.

Economists, analysts, marketers, and other stakeholders were practically begging President Muhamadu Buhari to allow market forces to dictate the pump price of petrol. This was because as at that time, Nigerians were wasting precious economic time waiting at filling stations to get fuel.

Besides, black market operators were having a field day and were selling at an average of N300 per litre as against N86.50 per litre  recommended pump price. It was believed that deregulating the sector at that crucial time would have eased the tension and consumers would have adjusted to the reality of a deregulated market.

Among prominent Nigerians who called for full deregulation of the downstream sector was a former Group Managing Director of the Nigerian National Petroleum Company (NNPC), Jackson Gaius-Obaseki, who advised the Federal Government to consider full deregulation of the value chains of the nation’s petroleum sector. He said it was high time Nigeria fully embraced deregulation.

According to him, “Nigeria can no longer afford to stifle growth of the oil sector through regulation which should be opened up for players to play active part therein.”

He also said Nigeria should be wary of politicians’ unbridled meddling in the affairs of the sector, adding that the nation’s petroleum sector should be treated strictly as business. “I remember in 2012 when we first removed subsidy, the country was locked down for three days. But I’m happy today that the country has succeeded in removing subsidy in diesel.”

 

Why partial deregulation of petrol was adopted

In May 2016, the federal government introduced partial deregulation of the product which saw official pump price move from N86.5 per litre to between N135-N145 per litre.

The terminology under which partial deregulation was introduced is called “Price Modulation”. It was said that pump price of petrol would be reviewed every quarter to accommodate volatility in international crude price. Two years after, price modulation mechanism has remained in limbo with no adjustment to the pump price of petrol.

In his opinion, an energy expert, Dolapo Oni, Head of Energy Research, Ecobank, stated that “Deregulate the petrol market and allow the market to regulate prices. If you look at the market, you will see that it is not economical and realistic that we will be buying at N171 and sell at N145 per litre, especially when it was realised that we were selling at N145 when crude prices were well below $60 per barrel. Oil price has risen above $60 per barrel and we haven’t adjusted our fuel prices. Our exchange rate hasn’t been adjusted either.

“Something has to give way at some point. And the ultimate solution would be full deregulation of the market. Allow marketers to sell at competitive prices and I can assure you that competition in the market would ensure the prices will eventually come down.

“Population is growing, demand is growing and we still have issues with inadequate supply. Remember that we also use petrol to power our generators. Corporate firms also require fuel for moving around and all other demanding sectors that were not captured.

“We are near an election year, and there are lots of moving around. All these increase demand for fuel and there is need to address the supply challenges. If the sector is deregulated, we won’t be having equal pricing across the country. There will be some parts of Nigeria where petrol will be selling at N160-N280 per litre.”

On his part, the Executive Secretary, Major Oil Marketers Association of Nigeria (MOMAN), Femi Olawore, stated that lack of laws that will govern the downstream sector remains a challenge.

According to him, “Over my 36 years in the downstream sector,Nigeria has no structure or legal framework that will govern the sector. What we have in Nigeria is ‘Directives’ by successive governments. That’s why such directives change as new government comes to power. Presently, we do not have a deregulated pump price of petrol. What we have is partial deregulation where the government fixes the cap of prices.”

 

Why fuel subsidy may hit N1tr by end of 2018

Nigeria imported 5,670,000,000 litres of petrol during the Q1 2018, representing an average of 63 million litres daily consumption. Using subsidy claims by the Nigerian National Petroleum Corporation (NNPC) which it puts at N26 per litre as contained in its October 2017 edition of Monthly Financial Report, subsidy claims for the first quarter 2018 would be N147.42 billion. It means daily subsidy claim is N1.64 billion per day and would be N597.87 billion by end of 2018. However, if the crude price continues to soar and hits the $100 per barrel mark, then, subsidy claim would have hit over N1 trillion by end of 2018, considering the fact that at $60 per barrel, landing cost of petrol was N171 per litre.

In the United States, pump price of petrol and other refined petroleum products move upward and downward on daily basis and it has adjusted upward by over 40 per cent due to fluctuations in the crude price and because the downstream sector is deregulated. Prices are determined by the forces of demand and supply.

 

Gains of deregulating downstream sector

Naturally, countries like Ghana, US, UK and other western countries including Russia have many private refineries due to the fact that downstream sector is deregulated is those countries.

A deregulated market would attract foreign investment in the sector, creates jobs (rather than creating jobs for foreigners when we refine abroad), and result in value creation.

The Nigeria’s four refineries have been moribund due to corruption, lack of turn around maintenance and lack of political will to make them work. The 445,000 barrels per day due to the refineries are mostly lifted by crude marketing companies for exchange with petrol.

The challenge in this arrangement is that Nigeria does not benefit from value creation from crude refining process.

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Pains of regulating downstream sector

Subsidy regime will persist. The policy has been criticised by stakeholders as being riddled with corruption. It would be recalled that the nation was taken aback when trillions of naira in subsidy fraud was discovered in 2011.

Currently, the Senate is asking the NNPC to return N216 billion unapproved money spent on subsidy in 2017.  The manner in which term contracts were awarded to crude lifters is also shrouded in secrecy because the contractors do not account for value creation (other processed petroleum products) from the refined crude. More value would have been created if the 445,000 barrels per day crude, allocated to the refineries, is being refined in Nigeria.

This policy has also encouraged fuel smuggling across the border to neighboring countries that are operating in a deregulated market. Marketers buy at N138 per litre in Nigeria and cross the border to sell at above N200 per litre in neighboring countries. NNPC GMD, Dr Maikanti Baru decried in March the activities of smugglers which according to him had led to abnormal surge in the evacuation of petrol from less than 35 million litres per day to more than 60 million litres per day which is in sharp contrast with established national consumption pattern.

The role of NNPC as sole importer of petrol in Nigeria has led to finance commissioners of the 36 states of the federation to return home empty-handed in April from the Federation Accounts Allocation Committee meeting following reported under-payment to the central purse by the NNPC.

 

Conclusion

There are strong indications that Nigeria may have missed out from the opportunity of deregulating the downstream sector. This is because the crude price is soaring and it is not showing any signs of relaxing because of the tension in the world politics. Such tension is the main factor responsible for driving crude price north. There is tension between the US and North Korea as well as the Islamic Republic of Iran. How far crude price will, no one can tell.

It is noteworthy to also state that the activities of shale gas producers may soon be felt as crude price soars.

Therefore, any attempt to remove fuel subsidy now may trigger national unrest and chaos which the present administration will not embrace because elections are near.

The post Has Nigeria missed opportunity to deregulate downstream sector? appeared first on Tribune.

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