Ayoola-Daniel: Buhari Requires Clear-cut Consensus on Deregulation
Prof. Niyi Ayoola-Daniel is the President of the International Institute for Petroleum, Energy Law and Policy. He told Chineme Okafor that the removal of fuel subsidies remains an imperative policy that the incoming government must pursue with clearcut co
Nigeria’s hydrocarbon industry has sort of stagnated, what exactly is wrong? At the top of my head, I can think of three major issues that affect Nigeria’s oil industry today. At the top you have funding, pipeline vandalism and products shut-ins, as well as the collapse of the crude oil prices.
Funding upstream for instance, Nigeria should be able to find a commercial structure for its upstream operations.
I am thinking of a situation where the petroleum upstream industry will be able to do away with continuous reliance on appropriation from the government to fund upstream operations and we are suggesting very strongly that the government should look at the incorporator joint venture arrangement wherein upstream operations can be funded through incorporated joint venture.
In the 2012 Petroleum Industry Bill (PIB), the proposal that we recommended to government was that it should look into incorporated joint venture as a way of getting the industry to be commercially driven, while allowing government to stay away from getting involved with funding options and issues in the upstream.
Government should be able to commit its resources in providing other social amenities and other high priority issues.
We think that it is an unnecessary drain on the nation’s resources for government to fund upstream operations. It also creates unnecessary distortions when you allow government to intervene and thus make the upstream tied to begging from the National Assembly for funds.
We believe that the upstream should be able to run itself by creating incorporated joint venture. Our belief is that, that is one of the critical problem that the upstream industry is facing today and the most significant intervention that is needed now. Let the oil industry run itself on a commercial structure and government collect royalties and taxes and leave the funding of upstream operation to commercial structure via this instrumentality.
We also consider pipeline vandalism as a key challenge before the industry today. The rampant destruction of critical infrastructure in the industry today is a major challenge. Repairs of these infrastructure cost so much money, invariably these repairs run into several millions of dollars and as such, it will contribute to underfunding of the industry in a very tight fiscal time.
When the upstream industry requires huge funding, continuous destruction of these critical infrastructure will further compound the underfunding of the industry and that alone makes Nigeria uncompetitive due to high costs of operations.
Collapse of crude oil price also means that there will be need for government to engage in new thinking because these are going to be hard times for Nigeria.
Government will have to find a way to manage costs now that the industry with all its faults is further challenged with the collapse of crude oil prices. The industry will by this means not have sufficient revenue to carry repairs of damaged infrastructure and these are hard challenges that calls for hard-nosed solutions. What kind of thinking cap do you then suggest to the government now? Well, following the collapse of oil prices in 2011, the recurring theme of Nigeria’s prospects has being how to manage Africa’s largest economy in a declining oil revenue situation and Nigeria as you know has a great dependence on oil revenue. Government has to devise a better fiscal management regime now before it is late.
The declining rate of our crude oil production is quite high, why is it so? Clearly, pipeline vandalism is high in the country and like I said, funding challenges which are combined issues here.
Every oil reservoir has a natural decline period and where you need to continually invest to maintain a level of production but you have funding challenges, it means that you will have production declines that are high and that is why we propose that alternative funding to sustain maintenance of these reservoirs be pursued by the government.
It is important for the NNPC to be insulated from been held down by the National Assembly who can short-circuit their request for finds in their joint venture partnerships.
A decision of the Supreme Court in 2002 had ruled that it is unconstitutional for the government to fund joint venture operations from the federation account and I agree with that ruling because the three tiers of government that can benefit from the federation account is the federal, state and local governments. NNPC’s cash-call obligation is not mentioned in under Section 162 (3) of the constitution that lists the beneficiaries of the federation account.
This has shown clearly that funding of NNPC’s upstream operation from the federation account is unconstitutional, illegal and at the same time creates a disruption in the system because exposes NNPC to begging for funds and that is not how to run a corporation.
We are supposed to create a commercial framework that will make it run itself as done in other climes that don’t go to the parliament to source for funds and I think that the new government should look to this to fix this rate of production decline with bespoke solutions. Indeed, the queues are back at our filling stations, what does this tell of our downstream sector? It says that clearly, the downstream sector of our petroleum industry is completely dysfunctional. We are in a dysfunctional state which is caused by the fact that it is not commercially sustainable. The industry needs a commercial structure that should facilitate and enable investment to be done in such a manner that allow open market enterprise to thrive.
Government will have to stay clear of the downstream petroleum sector because it can run itself but when government decides to interfere, it creates a dysfunctionality in that the subsidy regime is a key problem to the sector.
Subsidy is strangulating free market enterprise and when government does not fix the price of the primary product which is crude oil, how then does it intend to fix the price of the by-products.
When government do not allow the downstream sector to operate in a commercial framework that allows for healthy competition as we have seen in the telecoms sector, there will continue to be queues at our filling stations.
The arguments mostly proposed in support of subsidy and which is always at the heart of its continuation is that it is pro-poor, it may be a fair one but as long as there are long queues in our filling stations, then we are compounding the problems of the poor because the real beneficiaries of the subsidy are not the poor at all but the middlemen and rent seekers.
Subsidy in Nigeria has created a monstrosity that has been given a new face of politics that is not supported by data or empirically driven, neither is it sustainable.
It must be understood that the poor are not benefitting from this because they are buying petrol above the regulated price.
When people queue at filling stations for two days to buy fuel, you have effectively taken out their sources of livelihood because those days are wasted. If subsidy continues, it can shut down Nigeria’s economy because we cannot continue to subsidise such consumption to the detriment of our economy.
Importation of petrol into the country from another country is a suicidal economic policy and for you to subsidise consumption as against production means that you are creating another economy elsewhere and we think that it is a policy that is capable of making Nigeria broke and so government will have to seriously look at