By Raymond Mordi

 

After several months of flying the kite, the federal government is yet to make up its mind to deregulate the downstream sector of the oil industry. Early last week, it announced November 1 as the terminal date for the removal of fuel subsidy. But late last week, reports had it that the government had put the planned deregulation on hold for now. The announcement and its reversal sparked a controversy which may put the number one citizen under considerable pressure. The Umaru Yar`Adua-led government, which earlier insisted that there is no going back on the November 1 date, may find itself fighting an army of protesters called out by the labour unions and their civil society allies. Critics say the federal government is in a haste to remove the subsidy, without making adequate preparations to make the policy work successfully.

Hence, there are fears that the issue may plunge the country into a fresh crisis; not just because of the nationwide industrial unrest that is looming, but owing to the fact that it could further pauperise a large percentage of the population already groaning under the pressure of the current global economic crisis.  This fear is reinforced by the notion that the law of demand and supply, which guides the operations of the free market, in most cases, does not apply to the Nigerian situation.

Ordinarily, the deregulation of the downstream of the petroleum sector should be a straight forward matter, bothering on the viability of the controversial petroleum subsidy. But those fighting government

over the deregulation issue do not look at the other side of the argument. Most Nigerians believe that since government cannot provide electricity, education and medical care for its citizens, then it ought to, at least, subsidise petroleum products. Indeed, observers believe that the matter is a Catch-22 situation for Nigerians, who are groaning under the weight of the current economic crisis. It has been established that more than half of the amount that goes into subsidising petroleum products ends up in private pockets. At the same time, a good majority of Nigerians do not buy the products at regulated prices, thereby making a caricature of the whole programme. The concept of fuel scarcity is a relative term in Nigeria. Apart from Lagos, Abuja, Port Harcourt and some major commercial cities in the country, PMS is sold at a far higher price than the official N65 per litre in several other parts of the country. In places like the East, the far North, the Middle Belt and even within the Niger Delta where crude oil is produced, there is always an artificial scarcity throughout the year, such that the product is sold higher than the official pump price.

Government`s grouse is that it had spent about N2 trillion in the last four years in sustaining the subsidy package, with nothing to show for it. According to Mansur Muhtar, minister of finance, N255.74 billion and N290.47 billion were spent on subsidies in 2006 and 2007 respectively. “The subsidy payment in 2006 was about 50 per cent of the size of federal government`s capital expenditure, while in 2007 the amount was 40 per cent of the government`s capex,” he had said. Simila

Similarly, in 2008, N654.76 billion, representing 133 per cent of the federal government`s capital expenditure, was reportedly spent on subsidies, while N602.51 billion have been so far been spent on subsidies this year. Based on the figures reeled out by government, it has become obvious that it does not make much economic sense. The government was only compelled to come to terms with this reality because of the negative impact of the global economic crisis.

The justification for dumping the policy is that the Petroleum Products Pricing and Regulatory Agency, PPPRA, the subsidiary of the Nigerian National Petroleum Corporation, NNPC, charged with regulating the pricing of petroleum products has virtually turned itself into an agency for the cartel that is feeding fat on the subsidy issue, as its activities are now fraught with inefficiency and corruption. Muhtar, who gave this indication, had this to say: “We have found out that we are really subsidising inefficiencies, fraud, racketeering in the whole production chain and in that context basically given the competing needs for scare resources, government felt we needed to do something. We are also subsidising other countries.”

Considering that the amount of money accruing to government coffers has dwindled in recent times, the thinking is that the huge chunk of money that goes into subsidy could be directed to vital areas where they are needed in the economy. The magazine also gathered that because of the relatively cheap prices of petroleum products, as fallout of subsidy, smuggling across the borders has continued to flourish. Yet, go

government is forced to import more at a higher price which is another strain on its finances. This situation creates a lucrative business for importers, who are often said to have a hand in the poor state of the nation`s oil refineries. In 2002, Olusegun Obasanjo, the immediate past president, explained that government`s continued importation of the shortfall of 17 million litres per day was not only too costly, but was also benefitting only a few individuals and their trade partners in neighbouring countries through smuggling. Such money, he said, could have been saved and used in providing education, health, water supply, roads, security and food.

In spite of the foregoing, the prevailing feeling among stakeholders is that the current plan to institute full-scale deregulation is doomed to fail, due to inadequate preparation on the part of government. Obafemi Olawore, executive secretary, Major Oil Marketers Association of Nigeria, MOWAN, is of the view that there is nothing on the ground to show that government is ready for deregulation. “If government wants full deregulation to succeed, there should be consistent and reliable policy framework, which will guarantee investors` confidence, a level playing field for all players and an empowered industry and regulator,” he explained. Similarly, Bimbola Onafowokan, chief executive officer, Eskay Petroleum Limited, a member of Independent Marketers Association of Nigeria, IPMAN, is wary about the whole thing. “What the government has put in place is yet to be very clear to us. We are still gathering information from government on how it would be implemented to ensure that a

a cabal in the industry does not hijack it,” Onafowokan told the magazine.

Elijah Okougbo, general secretary, National Union of Petroleum and Natural Gas Workers Union, NUPENG, also observed the lack of preparedness. “By now government ought to have started organising seminars, workshops for stakeholders and place the cards on the table about what it wants to do, so that they too can make inputs. This is because the oil we are talking about is a national resource; it belongs to all Nigerians. But rather government is doing everything like a closed shop,” he told the magazine. However, Aminu Babakusa, group executive director, NNPC, is confident that the exercise will be a success. “We are ready for it. Deregulation will ensure that there will be no more shortages of supply throughout the country,” he enthused. 

One of the things government ought to have done, experts say, is to tackle the issue of infrastructure and put a seal on the Niger Delta settlement, as a way of preparing the ground for investment in the downstream sector of the oil and gas industry. With the country`s low-ranking in the global business index, uncertainty over the outcome of the amnesty deal with militants, poor infrastructure and the lingering controversy over the Petroleum Industry Bill, PIB, which is currently being considered by the National Assembly, oil majors have been exploring other frontiers in recent times in search of stable and secure sources of crude oil. For instance, reports last week suggest that Exxon Mobil Corporation has agreed to buy a $4 billion stake in an oil field off

off the coast of Ghana. The situation in the Niger Delta has driven investment that would have ordinarily come to Nigeria to neighbouring countries like Angola and Ghana. Indeed, the recent visit of President Barack Obama to Ghana has been interpreted as a strategic move by the United States, US, to ensure that there is continuous supply of oil to the country.

Peter Akpatason, president, NUPENG, agrees. “We will be very positive about the option of deregulation if it is hinged strictly on local refining. If its objective is to promote local refinery, then definitely, we are for it. But as it stands now, what we are seeing is just an import-oriented policy and we believe that is not going to be in the interest of Nigerian people,” he warned. Private sector participation in the refining business in Nigeria has been needlessly made cumbersome, because government control of the sector has become a meal ticket for those in the corridors of power and their cronies in the private sector. Since the nation started witnessing acute shortage of supply of petroleum products in the 1990s, the government has been under tremendous pressure from investors wishing to take advantage of the nation`s huge market for refined petroleum products.

The situation at present is not a cheery one for investors generally, particularly multinational companies who place premium on strategic business development planning in all their operations. Thus, none of the multinational oil companies in the country would want to invest in refining because it is not likely to be in line with their strategic business d

development plans. Oliver Mordi, chief executive officer, Starways Energy, sympathises with Shell and Chevron, who are said to be relocating part of their operations from Nigeria to Angola. “The multinationals have been having series of problems as far as exploration is concerned, particularly with the surge of militancy in the Niger Delta in recent times. It becomes increasingly difficult for oil majors to project the level of profit they are going to make in the near future, because of the constant fear that their facilities may be blown up anytime,” he told the magazine, adding: “They have been spending more and more money to refurbish their facilities as a result of the restiveness in the region, not to talk of the man-hours usually lost to such stoppages of work. It`s a phenomenal loss as far as the oil majors are concerned; so why should they compound their woes by investing in refineries? ”

As the sixth largest oil producer in the world, Nigeria has no business relying on importation of refined petroleum products. Okougbo said the federal government should give special incentives to the multinationals to set up refineries in the country. “Instead of giving out licenses, government should call the multinationals, like Shell, Mobil and Chevron, to set up refineries in the country. They should come up with a good policy, with incentives for investors. What government ought to do is give away land on lease to prospective investors who want to build refineries, with an additional incentive of buying crude 20 per cent less than the world market price on completion. Fifty per cent of the products of such re

refineries should be for export, while the remaining 50 per cent should be channelled towards local consumption,” he told the magazine.

Other Organisation of Petroleum Exporting Countries, OPEC, member-countries such as Saudi Arabia, Iran and Kuwait, which subsidise the petroleum products for their people, have devised means of doing it because they have a thriving downstream sector. Call it patriotism or tenacity of purpose, but an overview of refining operations in other OPEC countries suggests that it does not really matter whether the refineries are government or privately-owned. In Saudi Arabia, for instance, Saudi Aramco, the kingdom`s equivalent of the NNPC, runs all the five refineries that service the domestic market; whereas the kingdom`s two refineries dedicated for export are jointly owned by Saudi Aramco and ExxonMobil, as well as Saudi Aramco and Royal Dutch Shell. 

Saudi Arabia has long maintained a downstream oil industry strategy of refining its crude, as well as getting involved in its distribution. As a result, the country, which has seven refineries with a combined capacity of 2.05 million bpd, now has one of the largest refining and distribution systems in the world. The biggest oil producer in the region, Saudi Arabia also ranks as the largest refiner in the Middle East and is a growing exporter of refined products, particularly liquefied petroleum gas and naphtha. A multi-billion dollar refinery expansion project is making this growing capacity increasingly important to global oil markets. The Saudis are cashing in on the fact that, apart from rising oil prices, the g

global energy market is also facing a shortage of refined products due to an almost total embargo on new refineries in the US and Europe, because of strict environmental rules. Thus, annually, there are increased demands for refined petroleum products, especially from China and India, two of the world`s most populous nations. The scale of Saudi Arabia`s commitment to meeting market needs is shown by its decision to build the new export refinery at Yanbu on the Red Sea, which produces 400,000 bpd of clean fuels. The refinery, which was built at the cost of about $8 billion, is targetted to supply the US east coast market with high-quality petroleum, while the low-sulphur diesel it produces is exported to Europe and naphtha to East Asia. As indicated earlier, ExxonMobil and the Royal Dutch Shell are joint owners of the Saudi export refineries, with Saudi Aramco. In the final analysis, the kingdom`s combined capacity from domestic refineries is around 2.05 million bpd. In addition, Saudi Aramco maintains 1.6 million bpd of refining capacity overseas.

The scenario in Venezuela is even more intriguing. That country has 12 refineries, some of which were built as far back as 1949, 1950, 1954, 1956 and others as recent as 2000, 2001 and 2004, with eight of them being government-owned and the remaining four being joint ventures with multinationals such as ExxonMobil, Total, ConocoPhillips, Statoil and  ChevronTexaco.

Obasanjo realised so late in his administration that government had no business running the refineries and decided to privatise some of the nation`s existing refineries, because he was dissatisfied wi

with the unending importation of refined petroleum products at huge costs to government. On the advice of the economic team, he sold the Port Harcourt and Kaduna refineries to Bluestar Consortium backed by Aliko Dangote, billionaire businessman and a Chinese firm, at a cost of $720 million in May 2007, shortly before he left office. However, Yar`Adua reversed the sale within only two months of assuming office, in keeping with his penchant for policy reversal.

Abubakar Yar`Adua, the then group executive director, refinery, NNPC, obviously angling for the then vacant position of group managing director, was alleged to have deceived the President into believing that the NNPC was capable of reviving the refineries. The President fell for Yar`Adua`s scheming and appointed him to re-engineer the corporation once listed as one of the Fortune 500 companies in the 1980s, but now better associated with inefficiency. The President was also said to have succumbed to pressure by the Nigeria Labour Congress, NLC, which was opposed to the privatisation of public enterprises. The reversal of the sale of Kaduna and Port Harcourt refineries to the Bluestar Consortium by the Bureau for Public Enterprises, BPE, was said to negate the core principle of privatisation which aims at making the private sector the engine of growth. Over two years after, the refineries are still comatose and Yar`Adua has since been booted out of office.    

Like the deregulation of the telecoms sector, experts say the deregulation of the downstream sector of the oil industry would unleash the potential of the priv

of the private sector to develop it for Nigeria. Experts who spoke to the magazine insist that the country should not be an island, as the private sector is the engine room of development in most developed and emerging nations. “Deregulation is the ultimate; if the generality of Nigerians are made to see the benefits of deregulation they would welcome it. We only hope that the government would be able to follow it to the letter,” Akintunde Maberu, a finance and investment consultant told the magazine. He said the difference between government and the private sector involvement in business is the attitude. “Government does not enter into an enterprise and make profit, and the private sector does not venture into any enterprise and make losses. The private entrepreneur knows that when he incurs losses he dies; therefore his policies and organisational acumen are always superb. It is a matter of attitude,” he said.

Sam Ohuabunwa, a member of the Presidential Steering Committee on the Global Economic Crisis which recommended the policy as one of the measures to stimulate the economy, said it was a fallacy to liken deregulation to increase in price. “Deregulation allows many things to happen; first of all, you have appropriate pricing. Just like any other product, when the price of crude oil rises in the international market, the price of petroleum products will rise; when the price of crude oil is lowered, the prices of petroleum products would also be lowered. So, that way, there would not any fixed price,” he told the magazine.

Ohuabunwa said deregulation would encourage

competition, which would ultimately bring down the price of petroleum products. “Under the new dispensation, importation of petroleum products would be put on open license for any operator that wants to venture into it, as against selecting a few firms to do so; this would bring about competition in the market and force price down,” he said, adding that the only way Nigeria solved communication problem was by deregulating it. He said unless the sector was fully deregulated, the country`s four refineries may not work, because those bleeding the economy under the subsidy regime would not let it work. “But if it was a private refinery, it would work. Number two, if we do not allow prices to be deregulated, new investment would not come. The reason they would not come is, nobody would like to put up investment in an atmosphere where he cannot recover it in good time,” he argued.

Bisi Ogunjobi, an economist and former vice president of the Africa Development Bank, ADB, thinks there is a glimmer of hope for Nigeria; provided the Yar`Adua administration can intensify the reforms it is now embarking on. “We have no other choice but to strengthen and deepen the reform process. This country cannot be an island, particularly against the background of our dwindling resources. The current reforms are meant to stop the leakages, improve the management of the available resources and then determine our priorities,” he told the magazine. He added: “My own perception is that at one point or the other we must assess the viability of subsidy to the economy. What the government is saying is that the subsidy is not

is not helping the economy as envisaged, because it is not going to the right people. This is one of the demerits of subsidy anywhere in the world, and in this particular case, it is only the wealthy and the marketers that are taking all the benefits from the subsidy provided by the government; it`s not reaching the man on the street.”

But given the growing rate of poverty, Nigerians would certainly be caught between the devil and the deep blue sea over the subsidy issue. The idea of abolishing it and channelling the funds into other critical areas of need in the economy is a laudable one. But with the high level of corruption and thievery in official circles, it sounds like a hard sell. A source at the Budget Office told the magazine, “Harmful as subsidy is to the economy, abolishing it abruptly without adequate protection of the beneficiaries would be disastrous socially and politically.” Therefore, the move to phase it out should have been preceded with enough public education. But, ultimately, government should as a matter of urgency remove all impediments to make the operation of private refineries possible in the country.