Realities facing headlong deregulation

It is no longer news that the Federal
Government has developed cold feet
over going ahead with the planned
removal of petroleum subsidy, which
will herald the full commencement of
deregulation of the downstream
petroleum sector.
Government’s indecision follows
mounting criticisms against the plan,
which many believe would increase the
hardship of the common man. This is
because if allowed to run, the price of
petrol would be as high as N140/ per
litre, while kerosene, the fuel for the
common man will be as high as N155/L,
according to the latest market data on
the Petroleum Products Pricing
Regulatory Agency, PPPRA’s website.
Both petrol and kerosene are currently
enjoying subsidy, which put their retail
prices at N65/L and N50/L respectively.
By removing subsidy, government said
it would be saving about N1.3 trillion per
annum, which it plans to use to shore up
other sectors of the economy, such as
infrastructure provisions particularly for
effective downstream operations.As
shown in the table above, between
2006 and 2011, the Federal Government
of Nigeria has spent in excess of N3.56
trillion, a huge burden that has weighed
heavily on its finances in view of
numerous needs.
Apart from being a huge resource drain,
the subsidy regime is open to
corruption, with the Minister of
Petroleum Resources, Mrs Diezani Alison-
Madueke, admitting that checking
marketers’ sharp practices had become
intractable.
According to her, rather than the masses
benefiting from the system as originally
intended, “the majority of the subsidies
were actually going to the middle line
operators.”
Against this backdrop she added, “It has
become pertinent that we find other
ways to utilize vast resources that are
being channelled into subsidy, which are
not reaching the masses.”
Going forward, she said government
would set up an advisory body or a
think tank, “who would monitor and
advise,” as government would not
handle the implementation of these
benefits.
How prepared are stakeholders for
deregulation?
As the arguments go back and forth on
the wisdom of the subsidy removal,
many believe that the downstream
sector is not fully prepared,
infrastructure-wise for deregulation.
For instance, what are the states of the
refineries, can the Nigerian National
Petroleum Corporation, NNPC, the
operators of the four refineries cope
with the fuel needs of Nigerians?
If not, can the Federal Government cope
with continuous products importation
and the attendant capital flight and
attendant offshore jobs creation
associated with it?
In terms of infrastructures are
petroleum marketers – majors or
independents or depot operators fully
prepared for the challenges of
deregulation in terms of depot and
storage facilities, jetties and a host of
others?
Are the regulatory authorities – the
Department of Petroleum Resources, DPR
and the PPPRA fully equipped to enforce
market discipline, and check sharp
practices, so that consumers do not
suffer unduly on account of operators’
recklessness?
These unanswered questions make
market analysts believe that
government is putting the cart before
the horse, as these issues should have
been dispensed with before announcing
the intent to deregulate.
Current demand/supply reality
Local Refining – the existing four
refineries have combined capacity of
445,000 barrels per day, bpd. Over the
past five years the refineries only
contributed between 4% and 20% to
the national PMS/petrol consumption,
according to PPPR calculations.
Products Importation – the tempo of
importation activities have increased
due to lack of local refining capacity and
the guaranteed cost recovery for
importers through the Subsidy Scheme,
PSF.
National Consumption – there has been a
noticeable increase in the national
consumption of petroleum products.
PMS national daily consumption for
example currently stands at 35 million
litres from the initially observed 30
million litres, and Kerosene 8million litres
up from 6 million litres in previous years
respectively.
NNPC embarks on refineries
rehabilitation
The NNPC enjoys monopoly on refining
in Nigeria, as it is the operator of the
nation’s existing refineries. However, in
view of current realities, the corporation
is not deriving maximum benefits from
its monopoly status, as it should because
of the very poor state of the refineries.
NNPC’s Group Executive Director,
Refining and Petrochemicals, Mr. Phil
Chukwu, in a no-holds-barred interview
with Sweetcrude, is the first to admit
that NNPC cannot cope and compete
effectively under the current state of the
refineries.
He said, “The question has been asked
that can we survive deregulation. And
the answer is that the way we are
today, no! For us to survive we must
look at how can we make the refineries
efficient.”
Chukwu disclosed that the search for
efficiency plunged the NNPC into a
rehabilitation programme that will
revamp, maintain and prepare the
refineries for possible future capacity
expansion.
The rehabilitation programme is
expected to last for a couple of years,
because according him, it goes beyond
mere turn round maintenance, TAM, a
routine structure that the refineries
have not enjoyed for decades.
He explained, “Although we have
invested, we’ve done some turn around
maintenance, but you find that these are
usually very far in between.
Instead of doing them in three year
cycles, we wait till sometimes 10 years
and more. So, many things have
happened and what we are trying to do
today is to look at the problems from
different angles. We look at the plant
itself, the different ones I have
mentioned, we also look at the supply
chain because crude comes from the
fields and tank farms into the refineries.
They go through pipelines and all that
and when the petroleum products are
produced, they also go through
pipelines into depots, tank farms or
hauled by road to where they are
needed. These are all areas we must look
at.
“Then the third bit of the problem is the
people. How have we been operating
these refineries, do we have the
necessary skills to achieve the objectives
of these refineries. So we look at the
plants, we look at the supply chain and
then we look at the people. So, in our
rehabilitation efforts, we are going to
address these three key elements.
“For us to survive, we must move away
from our current production levels of
60% and the fact that some of the units
downstream are not functioning very
effectively, so we must fix them. In
fixing them, it is not a one-day thing, it
is something that must be planned
properly – gathering data, doing
feasibility studies, scoping, doing the
design and all and at the end of the day
you are guaranteed the time when you
finish and you are also guaranteed your
costs. But if you don’t do it very well,
you are bound to mid-way start to go
here and there, trying to solve problems
that should have been solved before
you started.”
Regulators perspectives
Downstream regulators in the DPR were
weary to comment on the planned
deregulation when contacted severally
by Sweetcrude, but its PPPRA
counterpart had a whole lot of
arguments in favour of deregulation.
According to the PPPRA, “Deregulation
and price liberalisation of the
downstream oil sector constitutes the
basis for medium to long term reforms
within the downstream petroleum
sector.”
This, it noted, will to introduce
competition, enhance efficiency, and
improve products supply, just as
appropriate and liberalised pricing
framework will help reduce
inefficiencies in sourcing, refining,
marketing, supply and distribution of
petroleum products.
It further argued that “the elimination or
reduction of unsustainable subsidy
burden on government and allow
deployment of resources to fund critical
infrastructure and vital social sector
spending is critical to revamping the
sector.”
It also said that a deregulated sector will
facilitate the operation and management
of pipelines and storage facilities under
the Open Access, Common Carrier
regime.
Notwithstanding its numerous
advantages, the PPPRA was quick to
note that “Deregulation/liberalisation
must be accompanied by infrastructural
development, institutional and
regulatory reforms,” to encourage
prospective investors.
Some of the areas begging for
infrastructure upgrade in the
downstream the PPPRA enumerated
include, adequate import reception
facility, which it said will reduce the
demurrage exposure experienced in
products handling.
• Investment in storage facility and
network of pipelines as we move
through the creation of a National
Strategic Fuel Reserves, NSFR
• The existing pipelines need to be
refurbished and adequately maintained.
• There is no pipeline network in the
North West region. Could be an
opportunity for investment
• Also, developing surveillance system
of the pipeline network in view of the
incessant pipeline vandalism.
Marketers also keep mum
None of the representatives of the
various marketing groups were willing
to speak on their level of preparedness
for deregulation and challenges ahead.
The Major Marketers Association of
Nigeria, MOMAN; Independent Petroleum
Marketers Association of Nigeria, IPMAN;
Depot and Petroleum Products Marketers
Association, DPPMA; and the Jetty and
Petroleum Tanker Farm Operators of
Nigeria, JEPTFON, all had nothing to say.
But under the condition of anonymity, a
DAPPMA member insisted that
deregulation is the only way forward,
adding that the only issue at stake is,
“the sincerity of government to pull it
through because we have been on the
process for over 10 years now.”
He noted that the only reason why
deregulation has suddenly become a big
issue is because “government is cash-
strapped, and because of increasing
pressure from state governments for
increase in allocation in the light of the
new minimum wage, government is
trying to save from every possible
way.”
He argued that his members have
invested heavily in storage facilities and
were waiting to get on with the process
and begin to reap the dividends from
their investments.
But most marketers of the petroleum
products marketers had borrowed from
the banks at very high interest rates to
finance their projects and may not start
making profits anytime soon. With the
clamp down on administrative
recklessness by the Central Bank of
Nigeria, CBN, banks are under pressure
to recover their loans.
Moreover, with the acquisition and
takeover of some of the distressed
banks by new management and some
with international affiliations, the fear of
these downstream facilities being placed
under receivership has heightened.
In the face of these challenges,
government may well continue the
burden of subsidy longer than expected,
except it takes the drastic step of full
blown deregulation after certain
structures have been put in place.