Deregulation Of The Downstream Petroleum Sub-Sector: Challenges and Prospects by Iyeomoan Emmanuel
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| Minister of Finance, Dr. Ngozi Okonjo Iweala |
As in most developing countries, the super-abundance of crude-oil deposits in Nigeria has not translated into improved standard of living. As a result of the high level of inefficiency, corruption, abuse of natural monopoly powers, bureaucratic red-tapism; and existence of a distorting subsidy regime, the sector has progressed backwards against expectations. The total supply of refined Premium Motor Spirit (petrol) and other closely associated products has been marred by hiccups in the system.
The Nigeria oil industry is divided into two sub-sectors, viz:
Upstream sector: deals with exploration and production
Downstream sector: refining, distribution and marketing
In this essay, I intend to focus on the downstream sub-sector as it has a great impact on the lives of all Nigerian citizens. This is not to say that the other sector should be relegated to the background. Therefore, a synergy of the two sectors is inevitable.
In a bid to improve the economy, the government of the Federal Republic of Nigeria decided to deregulate the downstream sub-sector. By deregulation of a sector, we mean liberalizing and opening up entries into that sector by all well-meaning investors; removing restrictions which including the removal any form of subsidies.
OUR REFINERIES: INEFFICIENCY OF MANAGEMENT.
The first oil refinery built in the country is located outside PortHarcourt in the southern part of Nigeria, and it started major operations in 1965 with a capacity of (38,000) thirty eight thousand barrels of oil per day. Three other refineries were built located in Warri, Kaduna and a new Portharcourt Refinery. Let's get something clear here. How can you extract resources from the South with the accompanying environmental hazards/disasters and transport same to the North for refining. This is one of the issues that have characterizes the politicization of the sector.
In the 1990's, total population grew at a geometric progression and the nation was caught in a situation where domestic “demand” for petroleum products outstripped supply because the badly managed refineries were operating far below installed capacity.
RESULTANT EFFECT OF IMPORTATION:
International financial institutions and donor organisations danced to the tune of lending excessively to Nigeria who borrowed heavily to subsidize for rapidly declining income from oil exports. Unfortunately, because of some periodical non-servicing of loans by the past administrations, Nigeria found herself in trouble and was heading for insolvency. By 1992, when Nigeria took her last loan, things were looking bleak and the country pleaded the Organisation of Petroleum Exporting Countries (OPEC) for a larger quota of Exporting rights so as to generate more revenue.
The Olusegun Obasanjo's government of 1999 found out that that government expenditure funding was a mountain too difficult to climb, since a substantial part of the revenue generated from oil exports is used for servicing debts incurred from importation of petroleum products. This left little funds in the vaults of other needy sectors including welfare, education and defence.
GOVERNMENT'S RESPONSE TO THE CHALLENGES
After analysing the problems, the government realised that it will be necessary to boost domestic production but at a high cost, and therefore decided to invite investors to apply for licences to build local refineries.
This approach failed as the so-called investors driven by the “profit maximization motive” were not interested because of the low incentive to invest as a result of the existence of a subsidy regime. Government therefore decided that it was necessary to deregulate and privatize the downstream sector in the country. This led to overhauling and maintenance carried out to enhance effectiveness in the refineries. “This was to make them attractive for private acquisition” (vanguard, 19 march 2006)
CHALLENGES OF DEREGULATION (OIL SUBSIDY REMOVAL)
Gas prices increase affects all strata of people in the Nigerian economy (both poor and rich). The CIA world fact book has estimated that in 2000, 60% on Nigerians live on less than a dollar (1$) per day. (khan, 1994) notes that “disruptions in the Nigerian downstream sector have deeper and more intermediate domestic and political implications for the Nigerian than those that may occur in the upstream sector”
WHAT NIGERIA STANDS TO BENEFIT
The goal of the Nigerian government to adhere to the principles of privatization and liberalization is born out of the success of other countries in doing same.
Major gains to be derived from deregulation:
1. Reduction in cost of subsidising the sector which run as high as $1.5 billion annually. Consequently, it would free resources to meet the socio-economic and welfare needs of the Nigerian people.
2. Boost in foreign direct investment.
3. Potential for innovation and growth of indigenous technology.
4. Potential for employment generation.
Iyeomoan Emmanuel is a 200 level student of the department of Economics and Statistics, University of Benin.
