Scenarios of Deregulation in the Downstream Sector of the Nigerian Petroleum Industry By Kòmbò Mason Braide, Ph.D. mailto:kombomasonbraide@msn.com Port Harcourt, Nigeria. Tuesday,
18 November 2003 @ 4:14 pm. Background
& Statement Of The Problem: The low capacity utilisation of Nigeria’s state-owned refineries and
petrochemicals plants in Kaduna, Port Harcourt, and Warri, the sorry
state of disrepair, neglect, and repeated
vandalisation of the state-ran petroleum product pipelines and oil
movement infrastructure nationwide, the collateral damage of
institutionalised corruption,
with 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, and large-scale cross-border smuggling of petroleum products,
all of which are the root causes
of the protracted, and seemingly intractable severe fuel crises that
have bedevilled the country relentlessly, for close to a decade now, are
all predictable outcomes of government
involvement in the downstream sector of the Nigerian petroleum
industry, over the past quarter of a century.(1 and 2) 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 (1). However, deregulation
is seen as desirable in freeing
government of its concurrent control,
and involvement in the
businesses 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 to regain efficiency, before
their full privatisation. Another
school of thought strongly believes that the Nigerian petroleum industry
must not be liberalised, or deregulated,
or privatised completely, for whatever reason, and that the
status quo should remain, maybe, with some minor fine-tuning
made, “here and there”, to
improve efficiency, as appropriate, “in
the overall national interest”. Essentially, this is the implied
position of the Nigerian Labour Congress (NLC). However,
some others insist that complete
deregulation, including the total, and final dismantling, unbundling,
and subsequent wholesale privatisation of all state-owned petroleum
businesses, should proceed without further delay, with maximum
despatch, for the continued, and meaningful survival of the Nigerian
petroleum industry in the 21st century. In short, for such
Nigerians, the benchmarks of globalisation, not nationalisation,
dictate the tempo of the new world order in international petroleum
market transactions. Since
the early days of the on-going transition
from military dictatorship to reasonable democracy, the Federal
Government set up a team, led by a technocrat in the Presidency,
(recently appointed the Group Managing Director of the state-owned
national oil company, NNPC), to explain certain key issues of liberalisation,
and to counter the arguments
of those opposed to the notion and concept of deregulation
of the downstream sector of Nigeria’s petroleum industry. Typically,
the scope of discussions covered during the “enlightenment
campaign” included such issues as the
burden of subsidies on the national treasury, the strain of financing
Nigeria’s state-owned petroleum businesses, intra- and
trans-ECOWAS smuggling of Nigerian petroleum products, the relative market prices of petroleum products in the ECOWAS
sub-region, vis-à-vis their prices in Nigeria, licensing
of private refineries, the
need to break the monopoly of NNPC,
and the general benefits of deregulation.
Reactions to the government-sponsored “enlightenment
campaign” range from outright objection, to cynical disinterest,
through cautious empathy, to dogmatic assertion of the ultimate
inevitability of the deregulation
of the Nigerian petroleum industry. Here,
we will consider and make realistic assessments of probable scenarios of
deregulation in the downstream
sector of the Nigerian petroleum industry, against the general
background of global trends in deregulation
and restructuring in the
petroleum industry, coupled with the current level of public awareness,
and government’s posturing on the issue of deregulation
in Nigeria. Five
(5) likely scenarios, or probable modes of implementation of the deregulation
process in Nigeria, are summarised as follows: 1.
Supply
side deregulation. 2.
Demand
side deregulation. 3.
Complete
deregulation. 4.
Phased
deregulation, starting from the upstream
sector. 5.
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, and are therefore considered here. Below
are highlights of the five (5) likely scenarios of deregulation
in Nigeria: Scenario
#1: Partial Deregulation Of Only The Supply Side. The
inherent assumptions of this scenario are that: ·
The Federal Government is
sensitive to the inadequacies of the existing state-owned petroleum
refining, and refined products supply and distribution systems in
Nigeria, and desires to maximise supply sources for the refined products
market in the country. ·
Federal Government monopoly of
refining, pipeline operations, and primary distribution from the
state-owned storage depots would be completely unbundled, and abolished. ·
Local and foreign private
investors would be willing to take over the state-owned facilities
(refineries, depots, and pipeline systems) in their current state of
dilapidation, disrepair and poor performance, and operate them efficiently
and profitably thereafter. ·
Private refineries would procure
crude oil at competitive rates, and sell their refined products profitably,
and at international prices, both in Nigeria and beyond, as desired by
the refiner. ·
Private importers would procure
refined petroleum products and sell such products at deregulated
prices, in line with prevailing market prices. ·
Barriers to new entrants into
private refining, pipelines and depot operations would be eliminated. Hypothetically,
with anti-monopoly policies
(which are not yet in place in Nigeria), and with competition among
private refiners, the demand for petroleum products could be met and
sustained. However, because of the low buying power of the consumers in
the Nigerian market, the demand for petroleum products, sold at
international market rates, would be reduced significantly. Profitability
of business at the retail end of the downstream sector would be dictated
mainly by economies of scale: only
the big players in the petroleum products marketing sub-sector would
survive. Consequently, up to 95% of existing Independent marketers
may cease to be in their present form. Alternatively, there could be
mergers among weaker Independent marketers (with between 1 ~ 10 outlets)
to compete with the present top Independent players, on the one had, and
individual Major marketers, on the other. In short, the market would be
segmented into individual Majors, individual current top Independents,
and groups of merged minor Independent marketers of petroleum products. The
current sorry state of the state-ran refineries, pipeline networks, and
depot operations may not encourage private investors (local
or foreign) to acquire them. And so, KRPC, WRPC and PHRC may
continue to be state-owned enterprises, which may, or may not continue
to operate under state protectionism. This scenario is very analogous to
what happened in the Nigerian aviation industry following “liberalisation”.
Essentially,
the Federal Government holds on tenuously to “fine-tuning”
an evidently inefficient state-owned business that goes through a long
drawn out process of slow and progressive extinction. In a sense, the
medium to long-term consequences of Scenario #1 on KRPC, WRPC and PHRC
is that they would decay slowly, and finally die under government
protectionist cover. The
first generation of post-deregulation
private refineries in Nigeria would be the stand-alone type: In this
scenario, private refineries would manufacture petroleum products, and
distribute them to targeted segments of the Nigerian market (most
likely, regional) from their loading facilities within the refinery
complex. In other words, there will be no
private pipeline operating companies to move refined products from
such private refineries to their markets. The
predominant mode of refined products distribution would be outlet-specific
truck loading, mainly to domestic retail affiliates of the refiner. In
short, private Nigerian refiners would initially secure their market,
built around the retail outlets of groups of Independent marketers,
while potential private foreign refiners, if
any, would preferably target their distribution at both the
Nigerian, and export markets, possibly through the Majors. Scenario
#2: Partial Deregulation OF Only The Demand Side. The inherent
assumptions of this scenario are that: ·
The Federal Government, though
fully aware of the glaring inadequacies
of the existing state-owned supply and distribution systems in Nigeria,
would prefer to restructure
the decrepit refineries, pipelines and depots, so as to enable them
compete in tandem with the proposed new refineries that would be built,
and managed by private investors. ·
Federal Government monopoly,
control, and/or coordination
of petroleum products importation would stop. ·
Private investors would have open
access to state-owned facilities like petroleum reception jetties at
Okrika, Effurun, Calabar, Escravos, and Atlas Cove (Lagos), including
the storage tanks at PHRC, WRPC, and KRPC, and at non-discriminating
tariffs, for expediting the logistics of importing petroleum products
into Nigeria. ·
Private products marketing
companies would form strategic alliances or mergers in order to optimise
operating costs. ·
Price fixing, “uniform
pricing”, and so-called “bridging”
subsidies by the Federal Government would stop. ·
Barriers to new entrants into
wholesale, or/and retail marketing of petroleum products would be
eliminated by law. Clearly,
because of the lead-time to effective attainment of improved
performance, and adequate
supply of refined products by the existing state-owned refineries,
coupled with the lead-time necessary to build and operate new private
refineries to complement existing supply sources, the availability of
refined products may not be much different from what obtains currently.
Therefore, the market segments (Majors and Independents) may also alter
very marginally. However,
opportunities exist for private importers to complement shortfalls in
product stocks. With this scenario, there may be an upsurge in private
importation of petroleum products. Recent acquisition of import
reception facilities by Independent marketers indicates a potentially
competitive market for both marketer groups: Majors and Independents.
This scenario forces mergers on the existing Independent marketers in
order for them to be cost-effective. The
emergence of post-deregulation private refineries in Nigeria would be very
dependent on the policies of the Federal government with respect to the
price of crude oil allowed both private refiners, and the state owned
refining companies. With the current disparity between the open market
price of crude oil and that conceded to the state-owned refineries, it
is not likely for private refiners to invest under such conditions. In
this scenario, the state-owned refineries would remain protected,
probably selling their products at international rates. Though pipeline
operations may still be monopolised by NNPC, very likely, “bridging”
and “uniform pricing”
could cease to apply. Potential private Nigerian and foreign refiners
would not be attracted to invest under such policy regimes.
Consequently, the only possibility for expansion of refining capacity
would be dependent on new state-owned refineries that may be added to
the existing pool. Scenario
#3: Complete Deregulation of the Downstream Sector. The inherent
assumptions of this scenario are that: ·
The Federal Government is
conscious of the gross inadequacies of the downstream sector of the
Nigerian petroleum industry. However, government would restructure all state-owned refineries, pipelines, and storage
depots, prior to their
unbundling, and final acquisition by private investors. ·
The Federal Government desires
to maximise supply sources for
the refined products market in Nigeria, including the build-up of a
so-called “strategic nation reserve” of refined petroleum products. ·
A critical mass of qualified private Nigerian investors exists that
can take over the state-owned downstream petroleum businesses, now ran
by NNPC, and manage them efficiently
and profitably. ·
Two (2) separate and independent
downstream policy formulation
and enforcement agencies would
be established by the Federal Government to monitor the sector
effectively, post de-regulation.
·
Private businesses may import
refined petroleum products and sell such products at competitive prices.
·
Barriers to new entrants into
all segments of the downstream sector would be eliminated. ·
Unnecessary (legal
and illegal) impediments, including the existing overbearing
procedures for granting licenses to private refiners, and other
potential investors in the downstream sector, must be abolished by law,
with maximum despatch. ·
There must be open
access to state-owned monopolistic facilities such as jetties,
storage tanks, and pipelines, through non-discriminatory
tariffs to private operators. ·
Price fixing in any guise, by
government, must stop. As
in Scenario #2, because of the lead-time to attainment of improved
performance and adequate supply of refined products by the existing
state-owned refineries, the availability of refined products may not be
much different from what obtains currently. Therefore, the market
segments (Majors and Independents) may only alter very marginally in the
short to medium terms. However, if and whenever full price deregulation
starts to apply, opportunities could emerge for private investors to
move in and compete effectively. With
this scenario, there would be an initial inertia
in private sector participation, to be followed by a trickle of private
refiners, and operators of existing state-owned product pipeline
networks (if any). With such private refineries, effectively competing
at global pricing and other standards, refineries would be retail
outlet-specific. This scenario forces mergers on the existing
Independent marketers in order for them to be cost-effective. The
scenario would also result in Major marketer refiners preferentially
directing their distribution to their own outlets. In this scenario, the
supply and primary distribution of refined petroleum products in Nigeria
would very likely be under the control of the Major marketers,
ultimately. Scenario
#4: Phased Deregulation Starting From The Upstream Sector: The inherent
assumptions of this scenario are that: ·
The Federal Government would
ensure the effective implementation of a planned
phased transition to comprehensive deregulation
of the entire petroleum industry
(upstream and downstream) in Nigeria. ·
The Federal Government would
enforce applicable conditions for stimulating competition in the market, while concurrently discouraging monopoly
behaviour in the domestic retail market. ·
Private
suppliers of crude oil to Nigerian
refineries would be encouraged. ·
Prices of crude oil and refined
products would be set in line with international benchmarks, and
prevailing foreign exchange rates. ·
All NNPC Joint Venture contracts
with multinational E&P companies operating in Nigeria would be
replaced with Production Sharing contracts. ·
Crude oil produced by private
operators would be theirs to sell at competitive market prices in
Nigeria or overseas. ·
NNPC and its subsidiaries would
be restructured in phases and subsequently broken up. ·
Regulatory role of the DPR must
be redefined to enhance its capacity to effectively monitor and enforce
compliance as an independent agency of the Federal Government. With
a well-articulated plan of phased
deregulation of the entire
petroleum industry in Nigeria, starting with the upstream sector, the availability of crude oil to the local
refineries would be based on competition among private suppliers. This
would encourage private E&P investments, particularly local marginal
field operators. With the removal of both monopoly
advantages, and mandatory JV contracts with multinational E&P
companies from NNPC, the state-owned company would undertake more PSC
contracts with foreign and Nigerian partners in the short to medium
terms, if ownership of the crude oil were reviewed in favour of the
producer. At
the stage of full deregulation
of the entire oil industry, private crude oil marketers could compete to
supply feedstock to the local refineries, either as affiliates, or as
independent suppliers. Private pipeline companies could operate the
existing petroleum products primary distribution networks, and storage
depots. This scenario forces mergers on all players in order for them to
be globally competitive. The
scenario would also result in Major refiners preferentially directing
their distribution to their outlets in Nigeria and overseas. Supply and
primary distribution would ultimately be under the control of the big
players in this scenario. It appears rather strange that, to date, very
little or nothing has been said or done by the Federal Government about
the deregulation of the upstream
sector of the Nigerian oil industry. The implication of this
observation is not trivial, and could in fact adversely influence the deregulation
process in the downstream sector if not addressed quickly. Scenario
#5: The “Do Nothing Option”: The inherent
assumptions of this scenario are that: ·
Deregulation
of the Nigerian oil industry is not in the “security,
and overall national interest” of the country, and therefore, not
desirable. ·
Existing inefficient government-owned facilities in the downstream sector can
be satisfactorily upgraded. In
a sense, the “Do Nothing
Option” represents the worst-case
scenario, and is also the most probable scenario in Nigeria. In this
scenario, the status quo remains: i.e. “Business
unusual, as usual”. Private
players are not, (and will not be)
motivated to invest under the prevailing state-protectionist regulatory
framework. The chances of improved performance in the state-controlled
petroleum refining, and refined products supply and distribution
systems, are near-zero, with no meaningful competition to the existing
sick, and severely dilapidated refineries, and product pipeline
infrastructure. Predictably,
the entire Nigerian petroleum industry becomes progressively moribund,
unattractive to both Nigerian and foreign investors alike, in both the
upstream and downstream sectors, then comes to a grinding halt, and
finally collapses. Conclusion: The role of the
Federal Government, vis-à-vis the Nigerian petroleum industry, is being
redefined, little by little. Possibly, state-owned monopolies
like NNPC may, in the end, be dismantled
completely. State interventions,
such as the Petroleum Equalisation
Fund (PEF), price fixing, uniform
pricing, including the
so-called “bridging reimbursements” may, one day, cease to be, and, hopefully,
the Nigerian petroleum products market could be meaningfully
reformed and effectively deregulated
ultimately. Maybe. Indeed,
opening up crude oil and petroleum products markets to transparent competition is
not easy. Nevertheless, it is central to the successful implementation of petroleum industry reforms worldwide.
This involves facilitating
access to capable importers
and exporters of both crude
oil, and refined petroleum products, consequently forcing the local (private
or state-owned) refineries, and products marketing companies to face
serious and meaningful competition, which must be in place, a
priori, for the deregulation process to succeed. Deregulating
the downstream sector of the Nigerian petroleum industry requires a change
in pricing policy. Product prices, before tax, must be set in line with economic border prices. Taxation must not discriminate between local
and foreign investors. However, several sub-Saharan, Latin American,
Caribbean and Asian countries have allowed for a short transition phase
that ultimately led to full
deregulation in the downstream sector. It is therefore necessary to
design a systematic basis for introducing economic pricing before price deregulation, so as to ensure the continued meaningful participation
of private operators in the business. Distortions in
the prices of petroleum products need to be reviewed. For Nigeria, as sub-regional integration
progresses within the ECOWAS sub-region, cross-border prices will become
increasingly harmonised, while
the usual excuses, indeed, the very notion of smuggling
of petroleum products within the sub-region will become progressively
meaningless. Below are key
characteristics of the regulatory environment of an energy industry
under reform: ·
Unnecessary legal impediments
and bureaucratic procedures that inhibit meaningful participation of
private companies in the petroleum industry must be dismantled and
abolished by law. ·
There must be open
access for private investors to use state-owned
facilities such as jetties, storage tanks, and pipeline operations.
Tariffs for such access must be non-discriminatory. ·
The functions policy
formulation and regulation
enforcement must be explicitly separated
and assigned to different and independent agencies. ·
The number of supply sources
must be maximised. Creating
minimal conditions
for market competition takes
time, depending on the country, the size of its markets, and its
national economic and political priorities. It takes time for a market
to respond to new rules. A transition
stage is thus unavoidable. The
following are important features of a market in transition: ·
Depending on the size of the
market, a minimum number of
private players must be involved. ·
Government must be sensitive
in its relations with private
investors in the petroleum industry. ·
Prospective private operators
must have the necessary financial
and technical capacity, and be
liable to applicable environmental, community relations obligations,
safety, quality and other standards. They should also be able to
maintain a minimum national strategic supply
stock, in case of emergency. ·
Independent
agencies, (at least two (2), one technical,
the other economic), must be
established to monitor the market continuously, and to react quickly to
any deterioration in product quality, or/and monopolistic
tendencies. In principle,
Scenario #4 is the most optimal, given the size of the Nigerian
petroleum industry. However, judging from the posture, and public
pronouncements of the Federal Government, and placed within the context
of prevailing political and national economic priorities, the most
likely outcome of the deregulation
of the downstream sector of the Nigerian petroleum industry could
involve a combination of Scenario #2, and Scenario #3. Depending on
the effectiveness of implementation, the deregulation
process could subsequently either progress along the general direction
of Scenario #4, or degenerate along the lines of Scenario #5. It is
relatively unlikely that Scenario #1 would apply. The above
projections are based on the following: ·
Although the Federal Government
is fully aware of the underperformance
of the existing state-owned petroleum refining, supply and distribution
systems in Nigeria, it would prefer to restructure
the domestic refineries, pipelines and petroleum products storage
depots, so as to enable those refineries operate side-by-side with the
proposed new refineries to be built, and managed by private investors.
Top policy makers in government still
believe, tenaciously, that the existing inefficient
government-owned facilities in the downstream sector can be
satisfactorily upgraded, despite the glaring evidence to the contrary. ·
Barriers to new entrants into
private refining, pipelines and depot operations may not be eliminated.
However, Federal Government monopoly and/or coordination of petroleum
products importation may stop in the long term. ·
There are no clear indicators
that private investors would have open
access to state-owned facilities like storage tanks, and products
reception jetties, at non-discriminating
tariffs, for importing petroleum products into Nigeria. ·
Unnecessary (legal
and illegal) impediments, including overbearing
procedures for granting licenses
to prospective private refiners and other potential investors in the
downstream sector may continue to remain, given the nature of the
bureaucracy in Nigeria today, and the seeming lack of political will to
open up the petroleum industry to transparent
transactions, and open competition. ·
The Federal Government could
establish, in the medium to long-term, two
(2) separate and independent petroleum industry policy formulation and
regulation enforcement agencies that would monitor the sector
effectively. ·
The Federal Government may not
encourage private supplies of crude
oil to Nigerian refineries. The definition of ownership of produced
petroleum may not be revised in favour of private E&P investors. ·
Resistance by the Nigerian
Labour Congress (NLC) to the complete
deregulation of the Nigerian petroleum industry remains defiant. ·
Private local and foreign investors may not be willing to take over the
state-owned facilities (PHRC, WRPC, KRPC, Eleme Petrochemicals Company (EPCL),
twenty-one (21) petroleum products storage depots, and nine (9) LPG
storage depots) in their current state of abject inefficiency, and
disrepair. ·
There are possibilities that
private petroleum products marketing companies, both Majors (as
with TotalFinaElf) and Independents, would continue to form strategic
alliances or mergers in
order to optimise their operations, and sustain profitability. ·
Private importers may supply
refined petroleum products and sell such products at competitive prices.
·
Prices of crude oil and refined
products could be set in line with international rates and, maybe,
prevailing naira exchange rates. Price fixing, uniform pricing and bridging
subsidies by government could stop in the medium to long-term. 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 (3). For
example, consumer prices of mixed LPG (domestic
cooking gas) vary from a low of US$336 per metric ton (N588 per 12.5 kg cylinder), to a high of US$652 per metric ton (N1141
per 12.5 kg cylinder) in some countries (Cameroon, Côte d’Ivoire,
Ghana, and Senegal) within the ECOWAS sub-region. 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 12.5 kg cylinder
of domestic cooking gas,
varies between N1,600 and N2,000
today, clearly the highest in the ECOWAS sub-region! Definitely, the
differences in subsidy levels
in the respective countries contribute significantly to the observed
spread in consumer prices across the sub-region. So, what exactly
is it that they are doing right
in Cameroon, Côte d’Ivoire, Ghana, and Senegal, that we
are doing very wrong
in Nigeria? Or have some Nigerians started “bunkering”
LPG (and LNG) too? Kòmbò Mason Braide (PhD) Tuesday, 18 November 2003 @ 4:14 pm. I welcome your comments (via e-mail: kombomasonbraide@msn.com). However, this article may not be reproduced, published, photocopied, scanned, faxed, reprinted, reformatted, broadcast, digitised, uploaded or downloaded, in whatever manner or form, without written permission. References: 1.
Adams,
G. Aret:
“Deregulation of the Downstream Sector of the Petroleum Industry”;
Post Express Newspaper, Lagos,
Nigeria; (17 May 2001). 2.
Braide,
K.M: “Guaranteeing
Petroleum Products Self-Sufficiency in Nigeria”;
Annual Dinner Guest Lecture of the
Nigerian Society of Chemical Engineers, held at Shell Club, Port
Harcourt, Nigeria; (29 November 1997). 3.
Braide,
K.M.: “Deregulation:
An Executive Guide for Elder Statesmen”; (24 August 2003) 4.
Mayorga-Alba,
E.: “Deregulation
and Reform of Petroleum Markets”; Energy Issues; FPD Energy Notes # 6; World Bank Group, Washington D.C.; (September 1995). 5.
Niskanen,
W.A.:
“The
Peculiar Economics of Bureaucracy”;
American Economic Review;
Papers and Proceedings; 58; 298; (1968).
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