Downstream Oil Sector: Motion, No Movement
-By Gideon Osaka
There appears to be no end in sight to the challenges facing Nigeria’s downstream oil sector. Issues of subsidy payment, inadequate refining capacity of the nation’s refineries and liberalisation of the sector continue to reverberate as the nation’s economy beckons for revival.
Despite denial by the Federal Government, it was learnt that the country may have spent about N10 trillion in the provision of pump price subsidy on imported petroleum products from 2006 to 2018. According to report by BudgIT, a public finance-focused Non-Governmental Organisation, the amount came from the price shocks in the international energy market as well as the exchange volatility. It also stated that the subsidy regime has opened Nigeria’s public finance to huge corruption and illegal exportation of petroleum products to neighbouring countries. The report titled, “Nigeria’s Petrol Subsidy Regime: Dilemma of the World’s Most Populous Black Nation”, stated: “Nigeria currently imports an average of 91 percent of its daily petrol needs, thus disproportionately exposing local petrol prices to price shocks from international factors of production and exchange rate volatility. “There is a near perfectly inverse relationship between the fall in the value of Naira and the rise in the cost of imported petrol. That is, when next the Naira is devalued, Nigeria’s subsidy bill can be expected to jump.”
It stated further: “The continuation of petrol price regulation perpetuates safety nests for exceptional forms of corruption within the country’s subsidy regime. Import subsidy creates petrol price arbitrage – the differential between the regulated price in Nigeria and the high petrol prices in neighbouring countries – which is big enough to incentivise smuggling of subsidized products to neighbouring border towns.” On the implication of the adverse development, the report stated: “BudgIT notes with dismay that fuel subsidy deprives Nigeria of funds needed for critical socio-economic development as it discourages investors, who generally prefer a deregulated industry, from investing in the downstream sector especially in the area of refinery construction and operation. For instance, the 10 trillion consumed by the subsidy regime is sufficient to construct 27,000MW of electricity or build about 2,400 units of 1000-bed standard hospitals across 774 local government areas of Nigeria, from our research. “We equally note that the Nigerian masses worship low oil prices. More so, the political class fears that increases in petrol price (and in the cost of living by extension), occasioned by a deregulated price regime, could become a flashpoint for mass uprisings and political instability. Nonetheless, we can never shy away from the opportunity cost of the corrupt subsidy regime.”
BudgIT report seems to be in tandem with the submissions of immediate past Minister of State for Petroleum Resources, Ibe Kachikwu who said that appropriate pricing of petroleum products, fixing existing refineries and encouraging private investors to build new ones are some of the ways to permanently address the challenges in the downstream oil sector. He however called for caution as he said that care must be taken to ensure that people are not made to suffer unduly while attempting to review the prices of petrol and other commodities. Kachikwu, who spoke at the Nigeria International Petroleum Summit, NIPS, in Abuja, said: “Ultimately, the greater challenge that this country would have and still has is that of pricing. “Everybody wants power, available gas and freely delivered fuel with no queues, but people are not willing to make the sacrifices that are essential for these things to happen. “Sometimes, it is a pricing issue. We have got to get to a point where we got to deal with some of these issues in a manner that doesn’t hurt our people but at the same time create the level of efficiency as to remove arbitrages and patronages that are inbuilt in them. “Refineries and local production are key. We expect between 12 and 18 months corridor of construction and hopefully, at that point, we would get our refineries back. However, if we get refineries back by 2019, does that solve the problem? No, it doesn’t. You still have to deal with the pricing issues, because nobody is going to build a refinery and sell products at a loss.”
Indeed, the downstream sector of the Nigerian oil and gas industry is in desperate need of reform as unresolved challenges continue to dampen private sector players’ appetite to make further investment. In December 2018, the Chairman of Forte Oil Plc, Femi Otedola, announced his decision to sell all his shares in the firm’s downstream business, the latest in a series of divestments from the downstream oil sector in recent years. The firm said Otedola would “divest of his full 75 per cent direct and indirect shareholding in the company’s downstream business.” Before then, ExxonMobil had divested its 60 per cent stake in Mobil Oil Nigeria Plc to Nipco Plc, leaving the French energy major Total as the only international oil company operating in the nation’s downstream sector.
According to Muda Yusuf, Director-General, Lagos Chamber of Commerce and Industry, LCCI, the challenges facing the sector include policy uncertainty (as the Petroleum Industry Bill has been stalled), funding and indebtedness to marketers with regard to subsidy payment, absence of a level -playing field, failure of refineries and dilapidated pipelines. “Perhaps, the most troubled sector of the Nigerian economy today is the petroleum downstream sector. The policy and regulatory environment are stifling, making it difficult to unlock value and the huge investment potential in the sector.”
“The outcomes of these are the spate of divestments and the inability to attract new private investment into the sector. Currently, the private sector players have been practically crowded out by the state-owned NNPC, which currently supplies over 90 per cent of petroleum products in the country.
“The reform of the oil and gas sector would definitely be a game changer for the Nigerian economy. We need to put an end to the regime of petroleum subsidy, which is evidently not sustainable. An innovative framework is imperative to make this happen because of the extremely contentious nature and citizens’ perception of subsidy withdrawal,” he added.
