Importation Pricing of Petroleum Products in Nigeria: The Shame of a Nation by Daniel Chimezie
BACKGROUND TO THE
ESSAY
Nigeria is the largest producer
of Petroleum in Africa and the sixth largest OPEC producer with proved reserves
of more than 23 billion barrels. Nigeria's proven oil reserves are estimated by
the U.S. United States Energy Information Administration (EIA) at between 16
and 22 billion barrels (3.5×109 m3) but other sources claim there could be as
much as 35.3 billion barrels (5.61×109m3). Its reserves make Nigeria the tenth
most petroleum-rich nation, and the most affluent in Africa (US E.I.A 1997).
However,
as oil prospecting continues in the Lake Chad basin and with new discoveries
along the Anambra-Kogi basin, Nigeria’s proved and probable reserves are
expected to be reviewed upwards. Over the years, the structure of the Nigerian
economy had evolved to position the petroleum sector as the mainstay of the
economy. The Petroleum industry currently accounts for more than 95% of the
country’s foreign export earnings, over 80% of government revenue according to
the International Monetary Fund (IMF) (EIA, 2012). The Petroleum sector also
contributes well over 20% of the nation’s Gross Domestic Product. Econometric
simulations (Iyoha (1995), Orubu (2003)) had established a strong linkage
between the value of Nigeria’s oil export earnings and her economic
performance. Following this, Scholars including Oriakhi (2003) have argued that
oil in the next 20 years or so will continue as an independent variable in the
economic growth and development of Nigeria. Not only is petroleum economically
relevant, it remains a strategic national product providing the internal energy
requirements of the country for both domestic and industrial use.
There are many products as well as by-products
of Nigerian Crude including but not limited to the Premium Motor Spirit (PMS)
commonly known as petrol, Automotive Gas Oil (AGO) commonly known as diesel
fuel, and Dual Purpose Kerosene (DPK) for household and aviation uses (Orubu,
2003).
 |
| Minister of Petroleum Resources Diezani Alison Madueke |
PETROLEUM PRODUCT
PRICING AND ADMINISTRATION IN NIGERIA
Nigeria is a Country with a very
high demand for all categories of petroleum products. Although figures vary,
official sources show average demands are put at: PMS 30-33million litres per
day; AGO 12million/d; Kerosene 10million/d;
and ATK (Aviation Turbine Kerosene commonly known as aviation fuel) 1.6million
-3million/d depending on the season (Vanguard, January 26, 2011). Nigeria also consumes a high level of both
Automotive Gas Oil (AGO) and the Dual Purpose Kerosene (DPK). The Ministry of
Petroleum Resources (MPR) remains the overall coach of the Nigerian Petroleum
industry with the Nigerian National Petroleum Corporation (NNPC) under the MPR
serving as an industry operator and a direct handler of government interests in
the sector. However, the NNPC first existed as the Nigerian National Oil
Corporation (NNOC) which was established in 1971 (Orubu, 2003). The NNOC was
established to strengthen Nigeria’s control over the petroleum industry (In
view of the activities of powerful Oil Multi-National Corporations) and given
responsibility for both up-stream and downstream activities in the sector. The
NNOC also looked after Government’s participation in the activities of the oil
companies. Before 1977, the Ministry of Petroleum Resources (which also had regulatory
functions) operated side-by-side with the NNOC. That year, they were merged to
form the Nigerian National Petroleum Corporation (NNPC). The NNPC combined the
commercial functions of the defunct NNOC (that is, exploration, production, transportation,
processing of oil, refining and marketing of crude oil and its refined
products) with the regulatory functions formerly exercised by the Ministry of Petroleum
Resources (National Bureau of Statistics, 2010). In March 1988, the NNPC was declared
a commercial, integrated international oil company whose functions were to
explore, develop,produce, process and market crude and refined petroleum, its
by-products and derivatives at internationally-competitive prices in Nigeria
and abroad.
Today, the NNPC has many
subsidiaries but it is the Petroleum Products Pricing and Regulatory Agency
(PPPRA) that was established in 2003 to determine the pricing of Petroleum
Products and to regulate the supply and distribution of petroleum products
(PPPRA 2013). The PPPRA is supposed to work in conjunction with other
subsidiaries of NNPC to attain a strong, vibrant downstream sub-sector of the
petroleum industry, where refining, supply, and distribution of petroleum
products are self-financing and self-sustaining.
THE WOBBLING STATE OF
THE DOWNSTREAM PETROLEUM SUB-SECTOR
After about 56 years of
commercial oil exploration and production (E&P), it could be argued that
the upstream sub-sector of the Nigerian petroleum industry has been moderately
successful owing largely to the massive investment of Oil Multi-National
Corporations (OMNCs). Oil exploration and production (E&P) which is the
source of crude oil has immensely contributed to Nigeria’s economic growth by
serving as a major source of revenue and foreign exchange.
But this is probably where the
good news ends for the Nigerian Petroleum industry. The downstream sub-sector
of the industry which comprises of Refining (although sometimes placed under
the so-called mid-stream sub-sector), Distribution and Marketing could best be
described to be in a wobbling state. This is as a result of the high level of
inefficiency in the sub-sector in terms of low value addition on crude oil.
The fact that bulk of Nigeria’s
crude oil is refined abroad is a pointer to this fact. Although, Nigeria has
about four Refineries including the old Port-Harcourt Refinery (1965), the
Warri Refinery (1978) , the Kaduna Refinery (1980) and the new Port-Harcourt
Refinery (1987) but these Refineries are functioning at sub-optimal capacity
and the country continues to spend substantial foreign exchange to import fuels
for domestic consumption (Orubu, 2003).
THE RESULTANT
IMPORTATION PRICING POLICY
Domestic refining in Nigeria
cannot meet up with domestic consumption so Nigeria resorts to importation of
refined crude – This is actually the tragedy of the story of the petroleum industry.
According to NNPC sources, Nigeria’s four refineries have a combined installed capacity of 445,000 bpd but using less than 30% of their installed
capacity (Vanguard, January 23, 2012). For almost the whole of 2010, the four
refineries with a combined capacity in excess of 445,000 barrels per day could
only refine a mere 80,757 metric tonnes of petroleum products. These are 19,967
of premium motor spirit, PMS or petrol; 53,223.4 MT of automotive gas oil, AGO
or diesel; and 7,567MT of liquefied petroleum gas, LPG or cooking gas.
The rest volume of 8.1 million
MT of petroleum products that came into the downstream sector was imported. But
for the Federal Government/ Nigeria LNG LPD Domestic Supply Programme, only LPG
was not imported (Vanguard, January 26, 2011). With this low domestic refining capacity,
Nigeria has no choice but to depend on importation of refined products to meet
domestic energy requirements.
What this means is that Nigeria
exports raw crude only to import refined petroleum products. To import these
refined products, Nigeria would have to pay at the international price per
metric ton plus other costs of landing the products in Nigeria. This explains
the concept of importation pricing policy. More succinctly, we can explain the
concept of importation pricing policy of petroleum products as the situation
where Nigeria imports refined petroleum products (in millions of metric tonnes)
at the prevailing international price plus other costs of landing the products
in Nigeria as indicated in the PPPRA pricing template. This importation is
usually undertaken by both the Nigerian National Petroleum Corporation (NNPC)
and independent marketers. Not only do we import refined products, the process
of importation is fraught with irregularities with high level of corruption
including the inflation of figures of imported products (in order to make high
subsidy claims) at huge costs to both the government and the Nigerian
citizenry. It is worthy to note that the crude refined in Nigeria is supplied
to end users at the same price with the imported products.
To understand how petroleum
products are priced in Nigeria, we need to take a cursory look at the pricing
template of petroleum products in Nigeria.
THE PETROLEUM PRODUCT PRICING
TEMPLATE IN NIGERIA AS PROVIDED BY THE PPPRA
The PPPRA products pricing
template (Daily & Monthly) is a pricing information sheet detailing the
components used in deriving the PPPRA daily/monthly guiding products prices. It
employs Import Parity Principle and this includes:
(i) Landing Cost of Products
(ii) Margins for the Marketers,
Dealers, and Transporters
(iii) Jetty-Depot Through-put
(iv) Other charges and Taxes.
The objectives of the pricing
template are to ensure transparency, full cost recovery, Fairness and
efficiency in the importation process but how far this template has fulfilled
these objectives could be called to question because of the secrecy,
conservatism and non-disclosure in the practical sense.
DESCRIPTION OF
COMPONENTS ON THE PRICING TEMPLATE.
According to the PPPRA, with effect from
February 2009, the components of the petroleum product pricing template
include:
1. PRODUCT COST ($/MT)
This is the monthly moving
average cost of products cost as quoted on Platts Oil gram. The reference spot
market is North West Europe (NWE).
2. FREIGHT ($/MT)
This is the average clean tanker
freight rate (World Scale (WS) 100) as quoted on Platts. It is the Cost of
transporting 30, 000mt (30kt) of product from NWE to West Africa (WAF).
Trader’s margin of $10/MT is also factored into the Freight cost.
3. LIGHTERING EXPENSES ($/MT)
STS/Local Freight charge is the
cost incurred on the trans-shipment of imported petroleum products from the
mother vessel into daughter vessel to allow for the onward movement of the
vessel into the Jetty. This charge includes receipt losses of 0.3% in the
process of products movement from the high sea to the Jetty and then to the
depot. The mother vessels expenses are based on the allowable 10 days demurrage
exposure at the rate of $28,000 per day.
The Lightering Expenses also
includes the Shuttle vessel’s chartering rates from Offshore Lagos to Lagos and
Port Harcourt which currently stands at N2.00 per litre and N2.50 per litre
respectively. Trans-shipment (STS) process is as a result of peculiar draught
situation and inadequate berthing facilities at the Ports.
4. NIGERIA PORT AUTHORITY (NPA) CHARGE
($/MT)
It is the cargo dues (harbour
handling charge) charged by the NPA for use of Port facilities. The charge
includes VAT and Agency expenses.
Currently, NPA charge attracts
$10.50/MT on the pricing template.
5. FINANCING
It refers to stock finance (cost
of fund) for the imported product. It includes the cargo financing based on the
International London Inter- bank Offered Rates (LIBOR) rates+5% premium for 30
days (for Annual Libor rate of 2.07%, LIBOR cost would be 7.07%). Also included
in the Finance cost is the interest charge on the subsidy element being awaited
for an allowable 60 days period at Nigerian Inter Bank Offered Rate (NIBOR)
rate of 22%.
6. JETTY DEPOT THRU PUT
This is the tariff paid for use
of facilities at the Jetty by the marketers to move products to the storage
depots. The value is currently N0.80/litre.
7. STORAGE CHARGE
Storage Margin is for depot
operations covering storage charges and other services rendered by the depot
owners. The charge is currentlyN3.00/litre.
8. LANDING COST
It is the cost of imported
products delivered into the Jetty depots. It is made up of components
highlighted above (1, 2, 3, 4, 5, 6 and 7).
9. DISTRIBUTION MARGINS
These include Retailers (N4.60
per litre), Transporters margins (N2.99 per litre), Dealers margin (N1.75 per
litre), Bridging Fund (plus Marine Transport Average) (N6.00 per litre) and
Administrative charge (N0.15 per litre). This amounts to N15.49 per litre on
the template. The overhead cost and other running costs have been considered in
the determination of these margins.
10. TAXES
These include highway
maintenance, government, import and fuel taxes. It has the overall objectives
of revenue generation, social infrastructure investment and servicing and
efficient fuel usage. Presently, all these attract zero taxes.
11. RETAIL PRICE
This is the expected pump price
of petroleum product at retail outlet. It is made up of landing cost of
imported product plus reasonable distribution margins.
THE PRICING TEMPLATE: USING
PREMIUM MOTOR SPIRIT (PMS) AS A CASE STUDY.
Given the high usage of Premium
Motor Spirit (PMS) commonly known as Petrol in Nigeria, we use it to provide a
clue on how petroleum products are priced in Nigeria. Following the description
provided above, the pricing template of PMS as provided by the PPPRA is as
follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Source: PPPRA
A HISTORY OF PETROLEUM
PRODUCT PRICING AND FUEL SUBSIDY ADMINISTRATION IN NIGERIA
Over the years, the Nigerian
government has intervened in the pricing of petroleum products. The Nigerian
government unilaterally determines the pricing of petroleum products through
the administration of a subsidy regime under the Petroleum Support Fund (PSF).
Of all the essential products, only the Automotive Gas Oil (AGO) commonly known
as gas is not being subsidized as it has undergone complete deregulation. The
government periodically reviews the subsidy regime (and by implication the
price of petroleum products) as determined by government’s fiscal position.
Although, the government views the subsidy regime as a huge fiscal burden but
attempts to completely remove the subsidy is usually met with very stiff
resistance by labour unions and the general public (who see the subsidy as the
only thing the masses benefit directly from government) through strikes and
mass protests. So, the approach of government has been to increase the prices
of these products marginally and then negotiate with labour unions. In January,
2012, President Goodluck Jonathan announced a full ‘deregulation’ of the
downstream sector but still pegged the price of PMS at N142 per litre. With the
new price tag of N142, many Economists including Professor Milton Iyoha have argued
against government’s use of the term ‘deregulation’ as anti-economics since
government still fixed the price of the products. He argued that the better term
to describe the scenario was a fuel price increase (The Economist magazine,
November 2012). Today, as reflected in the PPPRA template above, the official
price of PMS is fixed at N97 (although the price varies across the country
despite the existence of a Petroleum Equalization Fund (PEF) due to the high level of
inefficiency and profiteering in the downstream sector) as against a total cost
of N146.59 per litre (landing cost of N131.10 and distribution margins of
N15.49) effectively giving a subsidy figure of N49.59 paid by government per
litre imported.
Although, the purpose of the
subsidy is to reduce the retail price of petroleum products for end users (and
thus increase welfare gains) but this is argued against based on the premises
that government’s activities in the downstream sub-sector have been largely
distortionary. Below is a chronological presentation of petroleum product
prices in Nigeria as administered by different political administrations since
the 1970s:
Gowon, 1973: 6k to 8.45k (40.8%)
Murtala, 1976: 8.45k to 9k
(0.59%)
Obasanjo, October 1, 1978: 9k to
15.3k (70%)
Shagari, April 20, 1982: 15.3k
to 20k (30.71%)
Babangida, March 31 1986: 20k to
39.5k (97.5%)
Babangida, April 10 1988: 39.5k
to 42k (6.33%)
Babangida, January 1, 1989: 42k
to 60k Private vehicles.
Babangida, December 19, 1989:
moved to uniform price of 60k (42.86%)
Babangida, March 6, 1991: 60k to
70k (16.67%)
Shonekan, November 8, 1993: 70k
to N5 (614%)
Abacha, November 22,1993: petrol
price drops from N5 to N3.25k (-35%)
Abacha, October 2,1994: N3.25k
to N15 (361.54%)
Abacha, October 4,1994: price
drops from N15 to N11(-26.67%)
Abubakar, December, 20, 1998:
N11 to N25 (127.27%)
Abubakar, January 6,1999: N25 to
N20 (-20%)
Obasanjo, June 1, 2000: N20 to
N30 (50%)
Obasanjo, June 8, 2000: Petrol
price reduced to N22 (-10%)
Obasanjo, January 1, 2002: N22
to N26 (18.18%)
Obasanjo, June to October, 2003:
N26 to N42 (23.08%)
Obasanjo, May 29, 2004: N50
(19.05%)
Obasanjo, August 25, 2004: N65
(30%)
Obasanjo, May 27, 2007: N75
(15.38%)
Yar’Adua, June 2007: N65
(-15.38%)
Jonathan, January 1, 2012: N141
(117%).
January 28, 2012: N97 (-31.20%).
Source: Eme Okechukwu and Onwuka
Chukwujekwu (2011)
6.0 WHY NIGERIA PURSUES A POLICY
OF IMPORTATION PRICING OF HER PETROLEUM PRODUCTS.
From our analysis so far, it is
very obvious that Nigeria pursues a policy of importation pricing of petroleum
products essentially because she imports bulk of her products from abroad due
to the fact that domestic refining capacity cannot meet up with domestic
demand.
There seems to be an age-long
conspiracy to ground the refineries or keep them at sub-optimal capacity so
that the lucrative business of petroleum product importation will continue to
boom. This is a grand conspiracy by past and present political leaders and
their stooges in oil agencies (including the NNPC) and rapacious oil magnates
to keep feeding fat on oil subsidy at the expense of the development of the
downstream sub-sector and the Nigerian project as a whole.
The high level of general inefficiency
(and specifically, inefficiency in the management of refineries) and corruption
in the sector is mind-boggling. The Petroleum industry is one that is run like
an elite secret society leaving the operations of the industry to be shrouded
in secrecy ( largely because activities of the Nigerian Extractive Industry
Transparency Initiative (NEITI) is inhibited) with lots of non-disclosure and
false disclosure. This fact was recognized in a town hall meeting during the
heated days of the fuel subsidy crisis by the President of the Trade Union
Congress (TUC), Comrade Peter Esele when he described the operations of the
NNPC and its subsidiaries as “the more you look, the less you see.”
The argument therefore is that
as long as Nigeria’s domestic refining capacity cannot meet up with local
demand, Nigeria would always resort to importation pricing of petroleum
products. This is not an option for any inward and forward-looking country but
that is the situation with Nigeria.
THE IMPLICATION OF THE
IMPORTATION PRICING POLICY: A THEORY OF WELFARE LOSS.
Nigeria’s policy of
importation-pricing has wide-ranging national implications. Here, I attempt to
capture these implications in a theory of welfare loss. The welfare loss
includes losses being incurred by the masses, the private sector, the
government and the general economy. These losses are captured below:
`
i.
By buying petroleum products at imported prices,
the Nigerian citizenry incurs a loss in standard of living despite the existence
of a subsidy regime. This is because even with the subsidy, Nigerians are still
buying petroleum products at a higher price than it would have been if the
products are refined internally. When compared with other members of the
Organization of Petroleum Exporting Countries (OPEC), we find that Nigeria has
the second highest price of PMS per litre at N97 after Iran (N102.05). Yet Iran
pays a national minimum wage of N86, 585 while about 18 states of the
federation have not complied with the national minimum wage act provision of N18,000.
OPEC Member
|
PMS Price/Litre
|
Minimum Wage
|
Population
|
Production '000 bPD
(2007)
|
3.61 Nigerian naira
|
95,639 Nigerian naira
|
29,105,632
|
2,340
|
|
34.54 Nigerian naira
|
161,461 Nigerian naira
|
3,566,437
|
2,340
|
|
25.12 Nigerian naira
|
99,237 Nigerian naira
|
27,136,977
|
9,800
|
|
102.05 Nigerian naira
|
86,585 Nigerian naira
|
75,330,000
|
3,700
|
|
34.54 Nigerian naira
|
101,250 Nigerian naira
|
1,696,563
|
810
|
|
78.18 Nigerian naira
|
8,264,070
|
2,500
|
||
63.55 Nigerian naira
|
55,957 Nigerian naira
|
36,423,000
|
1,360a
|
|
26.69 Nigerian naira
|
23,813 Nigerian naira
|
5,670,688
|
1,650
|
|
59.66 Nigerian naira
|
25,813 Nigerian naira
|
30,399,572
|
1,481
|
|
140–200 Nigerian naira
|
18,000 Nigerian naira
|
167 million
|
2,250
|
Source: Wikipedia
As of 28 January 2012, the exchange rate was 1 United States dollar = 160.9561 Nigerian naira
As of 28 January 2012, the exchange rate was 1 United States dollar = 160.9561 Nigerian naira
The table above when analyzed lead us to conclude that Nigeria has the lowest standard of living among all OPEC countries as far as petroleum product pricing is concerned.
ii. As long as importation and thus importation
pricing of petroleum products continue, the country is indirectly exporting
jobs and importing unemployment and poverty. The more worrisome is the fact
that the products are even imported from non-oil producing countries like
Amsterdam, India, Korea, Finland, Singapore, France, Israel, Portugal, Italy,
Sweden, Tunisia and many more. Worst still, majority of the products are
ex-vessels rather than ex-depots (Vanguard, January 26, 2011). If all of
Nigeria’s oil is refined in Nigeria, lots of jobs would have been created in
the value chain of the downstream sector and this would alleviated the high
level of unemployment and poverty in Nigeria. This is a welfare loss to the
Nigerian masses.
iii. The continuous importation of petroleum products
also orchestrates a loss for the private sector. The private sector is losing possible
profits it could have recouped by investing in building private refineries. The
continuous importation pricing and particularly the regulation of the
downstream petroleum sub-sector by government is a dis-incentive for private
sector investment in domestic refining. This is a loss to the private sector.
iv. The government is also at the losing end as far as
the subsidy regime (which is a result of the importation pricing policy of
petroleum products) is concerned. The government views the subsidy regime as a
fiscal burden and (only as a necessary evil) as huge funds that are supposed to
be pumped into development efforts are diverted into a corruption-ridden
subsidy regime. Nigeria spends so much on the subsidy regime despite her
infrastructural deficit. The sadness of the imports as well as the subsidies
that go with them, made a former Minister of National Planning and former PPPRA
Board Chairman, Chief Rasheed Gbadamosi, to declare, “Trillions of naira which
should have been used to develop other sectors by providing basic
infrastructure such as water, roads, schools, hospitals are being wasted,
because the downstream allowed monumental laziness.” (Vanguard, January 6,
2011).
Figures from a factsheet presented by the Finance
Minister, Dr. Ngozi Okonjo-Iweala (during a parley between government officials
and opposition political parties) show that between 2006 and 2011, the country
spent N3, 655.17 trillion to subsidise fuel. According to the Minister, the
cash is 30 per cent of the total expenditure, 118% of the capital expenditure
and 4.18% of the GDP.’ The Minister observed that in 2011 alone, about ‘N1.348
trillion was spent between January and October and it is expected to reach
N1.436 trillion by the end of the year.’ Obviously, it is seen that the subsidy
on imported petroleum products is a huge constraint on government finance
expenditure since much of the funds that should go into infrastructural
financing is swallowed up by the callous subsidy.
When Nigeria cannot play the role of a
developmental state because of diversion of much-needed funds to a callous
subsidy, then it could be argued that both the government and the society are
incurring losses.
v.
As importation and thus, importation pricing of petroleum
products continue, the whole society is incurring a loss. With a distortionary
subsidy regime, there is no incentive for private sector investment in the
downstream sector (particularly in refining). The dearth of such investment
denies Nigeria the possible value addition to the larger economy that a buoyant
downstream sub-sector could have triggered. This is therefore a loss to the
whole Nigerian society.
WAY FORWARD –
ALTERNATIVE POLICY ACTIONS TO AVOID THE IMPORTATION PRICING POLICY PETROLEUM
PRODUCTS IN NIGERIA.
Given the detrimental
implications of the importation pricing policy of petroleum products especially
with regards to the huge national welfare losses being incurred, it becomes
necessary for Nigeria to seek alternative policy actions to avoid the
importation pricing policy of petroleum products. The following alternative
policy actions are recommended:
EFFECTING THE TURN AROUND
MAINTENANCE (TAM) OF EXISTING REFINERIES
Nigeria’s four refineries have
an installed capacity of 445,000 bpd but are currently operating far below
capacity. There is need for Nigeria’s existing refineries to be repositioned to
function at optimal capacity.
In this regard, Government
should ensure that the overall Turn Around Maintenance (TAM) of our refineries
as announced by the Minister of Petroleum Resources is properly supervised to
allow the refineries function at optimal capacity and augment domestic supply.
It is to be noted that the Federal government had announced that it had signed
a contractual agreement with the original designers and builders of the
existing refineries to effect a turn-around maintenance that will allow the
refineries function at 90% capacity. It is important for the government to make
true its words in this regard. This will serve at least as a short-run solution
to reduce the quantity of imported petroleum products and reduce the imbroglio
of importation pricing policy of petroleum products in Nigeria.
BUILDING NEW REFINERIES
It is unfortunate that all of
Nigeria’s four refineries were built by the military. It is important for the
government to invest in building new refineries especially the so-called
green-field refineries.
Many
analysts have argued that the way out of the current downstream quagmire is not
only to get the four refineries to be truly operational, rather than mere
political pronouncements as well as invest more in Greenfield refineries
(Vanguard, January 26,2011).
In a lecture delivered during
the heated days of the fuel subsidy protests, the Managing Director/Chief
Executive Mobil Oil Nigeria Plc, Mr Yemi Oyebanji argued that what import money can buy
based on current value, the $7.6bn used to import petroleum products between
January and November 2010, can comfortably build at least 10 green-field refineries (Vanguard, January 26,2011).
However, there is a caveat here
and that is the fact that from the Nigeria’s experience, government and her
agencies are bad managers. Therefore, these new refineries should be handed
over to the private sector to manage to ensure that they function efficiently.
The erection of new refineries would raise local refining capacity and Nigeria
would be able to avoid the importation pricing of petroleum products in Nigeria
FULL DEREGULATION OF THE
DOWNSTREAM SUB-SECTOR
The dearth of private sector
investment in the downstream sub-sector of the petroleum industry has been
attributed to government’s regulation of the downstream sub-sector and the
administration of a distortionary subsidy regime.
The existence of the oil subsidy
has obviously stifled the much-needed private sector investments in the
downstream sector of the oil industry. This goes with the attendant loss of
potential jobs because of the dearth of investments in the sector. This is
particularly disturbing especially in an economy with a very high unemployment
rate as ours. Yet, we do know how much unemployment has contributed to the
current wave of insecurity across the country. The oil subsidy as currently
administered is neither helpful in capacity development nor building industry.
Rather, by subsidising imported oil products, Nigeria only creates jobs for the
exporting countries. If the subsidy is removed, it will enhance market
competition and create the environment for private domestic refining to sustain
domestic demand. As much as rudimentary economics tells us, no rational
investor will put his investments where Government arbitrarily administers a
regulatory price.
The Managing Director/Chief
Executive Mobil Oil Nigeria Plc, Mr Yemi Oyebanji, argued at a recent
conference in Lagos, “As long as it is easier for people to secure import
licenses even when it is difficult to judge their capacities, and as long as we
cannot have competitive pricing and better standard for all, the downstream
will remain at the development stage (Vanguard, January 26, 2011).
From the foregoing, it is obvious that the oil
subsidy regime has a very gigantic opportunity cost in terms of loss of
employment generation, investments and value addition to industry.
The Deregulation policy has
globally been embraced by several countries, in order to lessen public sector dominance
and for developing a liberalized market while ensuring adequate supply of products.
Such is the story in Peru, Argentina, Pakistan, Chilean, Philippines, Thailand,
Mexico, Canada, Venezuela, Japan and USA, all of which have systematically dismantled
their State-owned oil companies, for a significant turning point in the success
story of their oil industry reform efforts. (Loretta, 2004)
SANITIZING THE PETROLEUM SECTOR
Before embarking on building new refineries and full deregulation, there
is need for the petroleum industry particularly the downstream sector to be
sanitized. This is because of the high level of corruption and secrecy in the
sector.
In this regard, government
should adequately implement the reports of the various committees set up by
government including the Mallam Nuhu Ribadu-led Petroleum Revenue Special Task
Force; the Mr. Dotun Suleiman-led Taskforce on Governance and Control; and the
Dr. Kalu Idika Kalu-led National Refineries Special Taskforce.
In the same vein, government
should legally and administratively empower the Nigerian Extractive Industries
Transparency Initiative (NEITI) to go beyond preparing reports and
recommendations to implementing them to ensure sanity of the petroleum industry.
OVERHAULING THE NIGERIAN
NATIONAL PETROLEUM CORPORATION (NNPC).
If the NNPC must still exist after full
deregulation, then the Corporation must be ready to play in a competitive
industry with no special attention from the government. NNPC must be overhauled
to operate in a level-playing ground with other industry operators and not a
situation where government’s bias for the corporation has fuelled inefficiency
and poor performance making it to be ranked as one of the 10 most failed
corporations in the World.
In this regard, the NNPC has a
lot to learn from the success stories of the national oil corporations of other
developing countries including the Aramco (Saudi Arabia), Petrobras (Brazil)
and Petronas (Malaysia) of this World.
CONCLUSION
At this stage of our national
life, Nigeria should not have any business with the importation pricing of
petroleum products but this has become inevitable due to the high level of
inefficiency that characterized activities of the petroleum sector
(particularly the downstream sub-sector). The huge national welfare loss being
incurred is particularly devastating. The way forward for Nigeria is for
government to provide the enabling environment for the private sector to build
new refineries, ensure full deregulation, sanitize the petroleum sector,
overhaul the NNPC and make efforts to diversify the country’s economic base. It
is hoped that when these measures are put in place, Nigeria would be able to
avoid the importation pricing of her petroleum products and reposition the
Nigeria’s petroleum sector for maximum productivity and efficiency. Government
must be sincere in efforts to avoid the importation pricing of petroleum
products which has become the shame of our nation and a huge national tragedy.
REFERENCES
Adenikinju, A (2009). Energy
pricing and subsidy reform in Nigeria. A presentation at the Global Forum on
Trade and Climate Change. OECD Centre, June 2009.http://www.oecd.org/dataoecd/58/61/42987402.pdf.
Ayoola, K.A. & Salami, O
(2010). The 'War' of Appropriate Pricing of Petroleum Products: The Discourse
of Nigeria's Reform Agenda.
http://www.linguistik-online.de/42_10/salamiAyoola.html
Loretta O.(2004). Deregulation
Of The Nigerian Downstream Oil Sector Keeping Faith With A Global Trend
ww.pppra-nigeria.org/articledetails.asp. Also at www.vanguardngr.com/.../why-oil-sector
deregulation-is-imp... - Cached
21 Dec 2011
National Bureau of Statistics
(2010). Petroleum Statistics .
Ojameruaye, Emmanuel (2011):
“The Political Economy of the Removal of Petroleum Products Subsidy in Nigeria:
Part 1- The Politics.” Available at
http://www.chatafrik.com/articles/economy/itemlist/user/149-emmanuelojameruayephd.html
Oriakhi, D.E (2003). “OPEC and
the Development of the Nigerian Petroleum Industry.” In Nigerian Economy:
Structure, Growth and Development. Mindex Publishers, Benin-City.
Orubu, C. O (2003). “The
Development and Contribution of the Petroleum Industry to the Nigerian
Economy.” In Nigerian Economy: Structure, Growth and Development. Mindex
Publishers, Benin-City.
PPPRA. 2013. Petroleum Products
Pricing Template. Available at http://www.pppra-nigeria.org/index.asp
PPPRA. 2013. Petroleum Products
Pricing Template: PMS.
Social Development Integrated
Centre (2012). Fuels of Dissent: Politics, Corruption and Protest over Fuel
Subsidy in Nigeria. Published by Social action @ www.saction.org.
The Economist Magazine (November
2012). 4th edition, volume 4. A Publication of the Nigerian
Economics Students Association (NESA), Uniben Chapter.
The Energy Information Agency
(EIA,), United States: Nigeria .Last updated on October 16, 2012. Available at http://www.eia.gov/countries/analysisbriefs/Nigeria/nigeria.pdf
Vanguard. 2011. “Petroleum
Imports: Shame of a Nation.” January 6, 2011.
Uzoigwe, Chimezie Daniel is an Author and Social Commentator. A final year Student at the University of Benin. E-mail: uzoigwechimezie92@yahoo.com. 08179741950
