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AFRICA OIL & GAS TODAYNigeria Bites the Bullet
11/06/09, Biodun Omojola
Nigeria's Petroleum Resources Minister Rilwan Lukman
Africa's leading oil producer finally decides to fully deregulate the industry despite strong resistance from labour and other pressure groups.
There appears to be no going back on the decision to deregulate Nigeria's petroleum industry's downstream sector, although there is confusion on when it would start. Originally schedule for take off November 1, according to Petroleum Resources Minister Rilwan Lukman, government then backtracked and moved the take-off date first to January 1, 2010, and then later to December 31, 2009.What is clear, however, is that, as confirmed by Finance Minister Mansur Muhktar, full deregulation will be the new order in Nigeria sooner than later.
Deregulation, the lifting of certain government controls (such as price control) on several aspects of a specific industry, has always been a sore issue with Nigerians over the years. Already organised labour has called the idea an "unpopular decision" and has vowed to resist its implementation saying it will lead Nigerians to revolt against the move. It has also said the country should hold President Umaru Yar'Adua responsible for whatever crisis that might trail the implementation of the unpopular policy.
With deregulation, prices of petroleum products will definitely skyrocket. Petrol, the most commonly used petroleum product in the country, is expected to retail at N103 per litre up from the current price of N65. Kerosene will sell for N108 per litre, up from N50 according to industry watchers. Diesel may be unaffected since it is already deregulated. With deregulation, government will be finally removing the last vestiges of what Nigerians say they enjoy from being an oil-producing nation. The country produces about 2 million barrels of crude oil but imports refine petroleum products because its refineries are not operating optimally to meet domestic demand.
Petrol pump at one of Chevron's numerous forecourts
Official figures indicate huge sums of money, nearly N2 trillion, has been spent on subsidy in the past couple of years. N255.74 billion and N290.47 billion were spent on petroleum subsidy in 2006 and 2007 respectively while in 2008 it gulped N654.76 billion, representing 133 percent of government capital expenditure. According to Lukman, removing the subsidy on petroleum products would enable government use the saved funds in other productive sectors of the economy. He said with the over N600 billion spent by government on petroleum subsidy (equivalent to about 50 percent of the nation's capital budget) this year alone, Nigeria has no option but to deregulate its downstream sector. "For an effective and competitive domestic petroleum products market to be developed in Nigeria, the downstream petroleum sector must be deregulated" adding "this will encourage investment in refining and marketing infrastructure".
Although there are some who support government's decision to deregulate, they, however, say the policy must be implemented only after certain structures, one of which is provision of adequate facilities, have been put in place. Implementing the policy without adequate facilities, they say, will negate government's reasons for deregulation. Among their concerns are the poor handling facilities available at Nigerian sea ports which, they say, are not designed to handle massive importation of petroleum products. Importers will need adequate off-loading, transportation and storage facilities which cannot be provided simply by deregulating the sector, they argue. Lack of these facilities is also why the two unions in Nigeria's petroleum industry, the National Union of Petroleum and Natural Gas Workers (NUPENG) and Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), have said they will not support government's deregulation plan.
Both unions have petitioned government saying their position on the issue is that it must be guided deregulation. The petition titled: NUPENGASSAN position on deregulation policy of the Federal Government reads in part: "We noted that lack of competition in the downstream sector of our industry has stalled growth and affected job opportunities. We have also noted that any policy that guarantees competition and delivering of products to consumers will be encouraged on the ground that the enabling environment is provided and appreciated. Such policy must seek to promote local refining and discourage reliance on importation to eradicate the obstacles that could render any policy ineffective, be it regulation or deregulation. Some of the most prominent obstacles we have reasoned include inadequate receptive and storage facilities such as jetties and depots, absence of good rail system, roads, functional pipeline networks, and above all, the existence of a power cartel that manipulates policy implementation for their selfish benefits. We, therefore, maintain our support for guided deregulation and shall not hesitate to vary our position if the aforementioned conditions precedent to deregulation is not met."
Both unions had originally supported the policy after an emergency joint meeting, abandoning the NLC in its opposition to the policy. They withdrew their support after the National Economic Council endorsed a procedure for the implementation which differed from their position.
Shell supplies aviation fuel. Will deregulation raise prices further?
Labour is not the only organisation tackling government on the issue. A political party, Progressive Peoples Alliance (PPA), has appealed to President Umaru Yar'Adua to desist from any act that would further exacerbate the tense economic and social situation in the country. The party said "the people of this country have suffered enough of inhumanity and degradation such that violent crimes are obvious results of the malfunctioning policies of government." The PPA said "it is important to point out for the umpteenth time that deregulation is not tenable in our economy which had failed long time ago. Rather, what government should be doing now is providing subsidy for every sector of the economy in order to generate the much-needed employment opportunities, the essence of which is to restart the system."
But government is sticking by its guns despite growing opposition. Oil minister Lukman reiterated government's intention to pull the plugs at a recent media workshop in Abuja. He categorically denied reports that government was having a rethink on the policy saying deregulation was inevitable and the decision irreversible. "Of course, deregulation is inevitable. What we are talking about is when and how," the minister said.
Currently, refined petroleum products are imported under a subsidy regime through the Petroleum Support Fund, managed by the Petroleum Products Pricing Regulatory Agency. This has created room for corruption in the system. With deregulation, the market will be opened up to the forces of demand and supply, where marketers are allowed to recoup their investment under a healthy competitive environment. Odein Ajumogobia, minister of state for petroleum, said "We believe that these aspirations can be realised through the twin-process of deregulation and liberalisation of the downstream petroleum sub-sector. Two strategies are currently being pursued in this regard: completing the deregulation process in the short term and implementing the recommendations of the Oil and Gas Reforms Implementation Committee (OGIC) in the medium-long term."
NUPENG president Peter Akpatason said deregulation at this time would spell suffering for millions of Nigerians. He argued that by deregulation, government is trying to transfer the liability of massive importation of petroleum products blamed on mismanagement of petroleum wealth to the already impoverished masses. The deregulation plan, he said, was a threat to Nigerians, adding that the desperation to implement the policy at this point was an affront on the people. He added that oil workers would align forces with other labour unions to resist any attempt to withdraw subsidy when the market is still fed with over 80 percent imported products. His comments, in a way, confirm fears that the country might, again, witness turbulent times brought about by petroleum product issues. The last time Nigeria witnessed trouble associated with petroleum products' subsidy was during the term of former president Olusegun Obasanjo. When he became president, May 1999, a litre of petrol sold for N19. By the time he left eight years later, a litre sold for N75. It is the Yar'Adua administration which reduced it to N65 per litre.
Surprisingly, support for the deregulation policy is coming from overseas. Organisation of the Petroleum Exporting Countries (OPEC), through its secretary-general, Abdallah El-Badri, has described the policy as a welcome development, promising that OPEC will support government for it to succeed. "The reform programme is really good to shake up and wake up people so as to make things work. This will help you to look into your industry to revive what is not working because in the oil sector you have to shoot at the right time," El-Badri said in Abuja recently.
Major stakeholders believe deregulation is the key in as much as the refineries cannot meet domestic demand. The four refineries have a combined refining capacity of less than 500,000 barrels per day, but actual refining capacity is about 30 percent. Problems associated with the refineries include management inadequacies, corruption and lack of the regular Turnaround Maintenance (TAM). To meet needs, estimated at about 20 million liters per day, Nigeria imports spending billions of dollars in the process. And because of budgetary pressures, from unsustainable subsidy payments, lack of investment in refineries as well as uncompetitive market, deregulation has been touted as the way out. Analysts say the uncompetitive environment is largely responsible for the underdevelopment of the downstream sector which, strictly speaking, does not reflect progress in the upstream sector. In fact, none of the 18 licenses granted years ago, by government to prospective investors to build and operate private refineries has taken off because of the uncompetitive environment in the downstream sector.
Deregulation has been a contentious issue for a long time in Nigeria. Successive governments have implemented the policy with limited success. Usually organised labour is at the front of resistance to the plan. Deregulation, over the years, has translated to price hikes not only of petroleum products but for goods and services too. First hit is usually transportation, followed by foodstuffs and other essential commodities. In the end, ordinary Nigerians are faced with rising costs and a static income. However, government has proposed a N100 billion "palliative package" for the revitalisation of key infrastructure in the transport, railways and power sectors of the economy. This, government says, is to lessen the impact of expected higher prices due to deregulation. The proposal, which will be captured in the 2010 budget estimates, is, however, subject to the approval of both the Senate and House of Representatives.
The case for deregulation has always been built around the fact petroleum products are smuggled out because the price in Nigeria was cheap. So with an increase in price, policy planners believed, the incentive to smuggle would cease and the result would be the availability of petroleum products at competitive prices with a possibly of lower prices after the initial high prices. Profit margin would then be enhanced, driving in investors to the sector for the overall benefit of the economy.
Another point usually canvassed by the proponents of oil subsidy removal was that it would curb scarcity. But often times, the realities on ground negated this argument. Scarcity has always been prevalent in Nigeria. Even now there is a hint it will rear its head after oil workers demanded government pay the debt, estimated at about N70 billion, owned petroleum marketers or risk industrial unrest. Government has, however, said it would release N40 billion, being part of outstanding amount owed them.
Nigeria is the only OPEC member country that imports virtually all its domestic refined petroleum products requirement.
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