Oil marketers ask FG to back downstream deregulation with law
… as Nigeria spends $63bn on subsidies in 12 years
The Nigerian government says it has deregulated the petroleum downstream sector since March to allow oil marketers resume importation and sale of petrol, but marketers say without the requisite legislation to back the policy, the sector cannot truly be deregulated.
At a virtual conference of the Nigerian Petroleum Downstream Consultative Summit held on Thursday, panellists said government pronouncements on deregulation may indicate intent but it must be backed by law to be effective, attract investments into the sector and this must be done quickly.
The continued existence of agencies that were created to support a regulated price environment, like the Petroleum Equalisation Fund (PEF) which tries to ensure uniform retail petroleum price across Nigeria by subsidising distribution to remote locations, would need to be disbanded to indicate a seriousness to deregulate.
“In regulated deregulation, what should obtain is a regulation of technical standards and ensure quality control,” said Timothy Okon, managing director, Teno Energy Resources Ltd. Okon also said that monitoring and enforcement would become more effective.
The panellists said that a fully deregulated market would require tweaking the laws setting up the functions of government agencies like the PPPRA and price board, which is yet to be done.
Adetunji Oyebanji, managing director, 11plc and chairman of Major Oil Marketers Association of Nigeria (MOMAN), said one way to prevent a situation where a rise in crude oil prices puts the government under pressure to keep prices low is to back the intent to deregulate by a law.
While deregulation has been touted as effective, it has not always yielded the best outcomes in the sector. Many argue that the diesel market which has been deregulated for several years does not see lower prices when oil prices fall, a major argument in favour of deregulation.
However, Huub Stokeman, managing director of OVH Energy Marketing Limited, said the reason is that diesel is mainly used in power production and only a small percentage, about 5 percent, is sold in retail outlets, hence the margins are low and it takes a longer time to be sold, sometimes over four months to clear stock, at which time any temporary gains from crude oil price decline would have been eroded.
Okon said that subsidies are not sustainable after Nigeria has spent over $63 billion from 2006 to 2018 on it, funds that could have been used to build thousands of kilometres of roads, or hundreds of hospitals and schools.
Some participants echoed the concerns of some government officials that a fully deregulated market could lead to bad behaviour by oil marketers, including price gouging and morphing into a cartel to exploit Nigerians.
In 2012, lawmakers and law enforcement agencies investigated corruption by oil marketers and found a huge discrepancy in the volume of oil they actually imported and how much subsidies were claimed. Some collected subsidies for petrol that was never delivered. They were accused of stealing over N2 trillion from government following which some of them were sanctioned and imprisoned.
Now the government is staring down a fiscal crisis as oil income dwindle and debts mount and can no longer afford wasteful subsidies, which is why it is even considering the proposal. Worse still, the
policy benefits only the elites who are basically in two of Nigerians important cities, Lagos and Abuja, who buy the most fuel, according to NBS report of petroleum products supply across Nigeria.
A fully deregulated market, the panellists said, would translate to healthy competition in the sector and attract badly needed investment. Within the last decade, all the multinational oil companies have divested from the downstream sector and even those who bought their assets are fleeing the sector.
The NNPC which took on the role of the sole importer is now buckling under the weight of the bruising subsidies and is leading the charge to abolish them, as the subsidies continue to rubbish its finances and keep alive a robust fuel smuggling enterprise across Nigeria’s porous borders.
”Our argument for moving for full deregulation is that it will benefit the industry and country by attracting the kind of investment that is needed,” Oyebanji said.
Yet, the marketers’ motivation is not only on account of the national loss subsidies represent, but Nigeria’s regulated downstream environment has also crippled their investments as they cannot recover the cost of N3-5 billion they spend building depots with the margins NNPC allocates to them to make a profit on N2 per litre.
Amina Maina, group COO, MRS Holdings Ltd, said the margins are too small to recoup their investments let alone make a profit. Poor returns in the midst of huge costs in maintaining depots, paying salaries, and keeping trucks on the road are the reasons only a quarter of the registered depots have managed to stay in operation in Nigeria.
Nigeria’s Federal Government said in March that it has bowed to long-standing pressure to restructure the downstream oil sector and has as such removed oil subsidy after the country was hit by lower oil prices which placed more pressure on its reserves.
The Muhammadu Buhariled administration moved the petrol price peg of N145/litre to N125 in March 2020. It was the first time the price would be adjusted since it was reviewed from N86 per litre to N145 by President Buhari in 2016.
However, this is only a half-hearted attempt brought on by dire economic realities rather than pragmatic policy, hence it has kept the structures that aided a regulated petrol price environment and the PPPRA will continue to issue petrol prices at intervals.
“It is one thing to deregulate and it is another thing to have laws that back the deregulation,” said Maina.” “We have to really mean it.”