SEMINAR TOPIC: DEREGULATION OF THE DOWNSTREAM SECTOR OF NIGERIAN

OIL INDUSTRY: PROSPECTS, PROBLEMS AND CHALLENGES (2000 - 2016)

BACKGROUND OF THE STUDY

Petroleum products supplies have always been an acid test for successive
Governments in Nigeria. With the new democratic dispensation, the supply
and distribution of petroleum products improved but this was without a price
frequent increase in petroleum products prices. Virtually all administrations
both military and democratic administration have had cause to increase
petroleum products prices in Nigeria. In his nine years in office as Head of
State, General Yakubu Gowon took the price of petrol from 6 kobo to 9.5 kobo
per litre. General Olusegun Obasanjo took fuel price by a leap moving it from
9.5 kobo to 15 kobo. The regimes of Shehu Shagari and General Muhammadu
Buhari maintained the status quo as they never increased fuel price (Adagba,
et al. 2012).

Former military President Ibrahim Babangida moved the price of petrol from 15
kobo to 70 kobo in his eight years of governance. But by far the greatest leap of
oil price in Nigeria was introduced by Chief Ernest Shonekan, an interim Head
of State who took the price from 70kobo to N5.00 within the 87 days of his rule
(Adagba, et al. 2012). Late General Sani Abacha moved price of petrol from N5
to N11 within his five years in office while General Abdulsalami Abubakar
increased the price of petrol from N11 to N20 within the ten months that he
ruled Nigeria. President Olusegun Obasanjo under democratic regime raised
the price of fuel from N20 to N70 within eight years he spent in office.
However, late Umaru YarAdua reduced the price from N70 to N65, but
President Jonathan increased the price from N65 to N141 per litre.
Negotiations between the Presidency and the Organised Labour led to the
bringing down of the price from N141 to N97 per litre after eight days of strike
and street protests (Adagba, et al. 2012). Under every democratic
administration, the ugly incidence of petroleum scarcity surfaces, and one
begins to wonder if there is any solution to this problem.
The contemporary passion and tension that usually characterise petroleum
discourse is due to inexplicable deprivations and sufferings of Nigerians amidst
plenty and abundance of these products. As the sixth largest oil exporter in
OPEC (Balouga, 2012), Africas second largest producer of crude oil after Libya,
eightieth largest exporter in the whole world (Ovaga, 2012) it is a paradox that
in the past decade, supply of all products has been erratic and on sharp
decline. Ironically, as supply declined, products prices have been on the
increase as successive governments searched for appropriate pricing.

The combined impact of erratic and inadequate supply and unending price
increases have brought untold hardship to the citizenry (Ovaga, 2012) and
worse too, prevented economic recovery as promised by the present
democratically elected government given that capacity utilization in the
manufacturing sector nose-dives due to shortages of industrial products.
Indeed many industries have been compelled to close due to non-availability of
some of these products.

In the bid to solve the problem in many developing countries, structural reform
of petroleum markets has become a critical component of macroeconomic
liberalization policies (Ojo and Adebusuyi, 1996). The role of the government in
the petroleum sector is being redefined, and markets are being deregulated (i.e
state interventions such as special treatments of state-owned oil companies,
price controls and monopolies are being broken up). According to Ikponmwosa
and Odogwu, (2012) the objective of deregulation and privatisation of the oil
and gas industry is to enable private investors to invest in the sector in other to
eliminate constant shortages of fuel and gas in the country. The arguments for
this is that: subsidized pricing scares away investors, increased consumption
and higher energy prices at the international market is weighing more the
government budget and denying infrastructural development, the rich benefit
more from fuel subsidy, parts of the subsidy is being corned by cabals
(Balouga, 2012).
But unexpectedly, the outcome of the deregulation has not been encouraging.
There has been continuous increase in petroleum prices with persistent
scarcity of petroleum products. The government posited that the prices would
only rise in the interim. Comparing the situation to the development in the
telecommunications industry, the government argues that the only way to
arrest and correct the structural distortions in the sector is liberalization that
would encourage businessmen to invest in building refineries and importing
products to sell at prices dictated by the market (Onyishi et al., 2012). However,
this is an argument not supported by empirical evidence. Diesel and engine oil
prices have been deregulated for years. Yet, unlike the situation in the
telecommunication industry, the prices have been going up. It was expected
that deregulation would give room for competition which would transform to
price reduction and excellent supply and distribution network. A number of
factors have been cited to be responsible for the low investment and
competition in the sector. The most crucial of the factors is the delay in the
passage of the Petroleum Industry Bill (PIB). This study is devoted on the
evaluation of the deregulation exercise; critically appraising its impact on
petroleum pricing, consumption and the general living standard of the people.

BURDEN OF SUBSIDIES: The Case for Nigeria Downstream Oil Sector

Deregulation

By Ahmed Adamu

Despite the huge amount of money spent in Nigeria to fund subsidies, its cost
is observed to outweigh the social benefits and environmental improvements.
Other adverse effects of subsidies include the following:

DEMAND GROWTH:

Providing subsidies tend to encourage individuals to consume more even

inefficiently due to the lower petroleum products prices they face in the
market. Over-consumption of fossil fuels will lead to environmental
degradation. This is observed in major Nigerian cities where pollution is highly
concentrated in the atmosphere and congestion across the cities. Moreover, no
one pays for the environmental degradation hence negative externalities.
Similarly, the cost of addressing the environmental challenges could also be
more costly. Therefore, removing subsidies will help address the environmental
issues because consumption of fossil fuels will reduce relatively.

BUDGETARY BURDEN:

Despite the billions of dollars Nigerian government gets from exporting crude
oil, the country faces deficit budgeting due to the heavy subsidies on fossil
fuels; this has restricted the government commitments and concentration on
some other basic infrastructural projects. Subsequently, the government has to
borrow from international financial institutions to fund the budget and pay for
the continued increasing interest on previous loans thereby adding more
burdens on the government. The Nigerian government claims that, if relieved
from funding subsidies it will use the money to pay back these loans and
deliver its statutory functions effectively.[1]

HINDERED GROWTH OF ALTERNATIVES:

Due to the heavy subsidies on the fossil fuels in the country, petroleum
products tend to be more attractive and highly concentrated in terms of
consumption. Oil consumption constitutes 53% share of the total energy
consumption in Nigeria[2]. This has discouraged the discovery and
development of some other alternative energy like Solar, wind, geothermal,
biomass and hydro. Subsequently, the country is exposed to the imminent
predicament of fossil fuels depletion. This justifies the necessity to embark on
deregulation so that the savings could be used to develop other alternative
energy source for energy security in the country.

TARGETED INDIVIDUALS NOT ACHIEVED:

As earlier mentioned, subsidies are aimed at providing support to the poor.
However, due to the fact that fossil fuels have dominated every aspect of
human lives whether rich or poor, the Nigerian government provides subsidies
to make the petroleum products affordable to the poor. But practically, in
Nigeria only the rich people who could conveniently afford the real petroleum
products prices enjoy the subsidies because the poor cannot afford to buy
some of the appliances or equipments that require fuel, for example if Gasoline
has been subsidised, it ends up that only the rich benefit from it, because the
poor man cannot afford to buy a car or motorcycle. Therefore the targeted
individuals do not benefit from the subsidy.

REGULATED PRICE NOT REFLECTED:

The petroleum products prices are being regulated in Nigeria but still
consumers pay beyond the regulated prices, this could be due to corruption,
inefficient regulation and monitoring. For example, Gasoline price is regulated
to be fixed at N65 (43 cent) per litre[3] but some of the marketing and
distribution agents sell at a higher prices. Dealers sometimes deliberately
hoard the Gasoline and later sell it when it is scarce at higher prices sometimes
higher than N100 per litre. Despite the huge amount of money Nigerian
government spends to provide the petroleum products at subsidised prices,
the aim is not achieved. It is only at the NNPC retail outlets which are owned by
the government that sell at the regulated prices.[4]

WHY DEREGULATE NIGERIAN DOWNSTREAM SECTOR?

Reform and change are difficult undertaking in any nation. Poor economic
performance in the 1990s, therefore, sparked a vigorous domestic debate over
the need for government administrative reform, economic deregulation , new
accounting rules and other changes to spur more efficient corporate
behaviour (Edward 2001). Nigeria, like other developed countries decided to
reform its downstream sector to achieve the following:
AVAILABILITY OF PRODUCTS

The deregulation proposal is based on the assumption that in freeing the

Petroleum products market from its current quantity and pricing restrictions,
the market forces of supply and demand would invariably operate to
determine the delivered quantity and price which would prevail in the
domestic consumer market. A further addition of this logic claims that the
operation of market forces would ultimately intervene to ensure that the right
quantity of products demanded would be supplied at the cheapest market
price. [5]

INCREASED GOVERNMENT SAVINGS:

The government, and indeed a large school of informed public and petroleum
industry opinion, generally subscribe to the belief that the proposed market
liberalization policy would upon implementation, lead to the recovery by
government of significant economic benefits including the opportunity to
dissociate from the difficult burden of subsidy payments, which restrict it from
concentrating on the provision of the major infrastructure in the country.
Recently, it is estimated that the projection for the level of subsidy
commitments which the government was constrained to underwrite for fiscal
2009 amounts to a huge N675 billion or roughly about a quarter of the entire
national budget for the year. The sum of N675 billion recoverable by way of
subsidy cost savings from the proposed deregulation of the petroleum
products market could be used to buy a tremendous amount of goodwill, social
security and welfare if properly utilized in the development of infrastructure
and facilities which benefit the Nigerian working class/struggling class. [6]

ENVIRONMENTAL STANDARD:

Environmental degradation which is largely believed to be as a result of too

much consumption of fossil fuels is believed to be doing harm to the society,
and managing that could be costly as well. By deregulating and removing
subsidy, there will be an efficient and reasonable level of fossil fuel
consumption in the country thereby mitigating the countrys vulnerability to
pollution and global warming.

ENERGY SECURITY:

Speculation is continuing to spread on the imminent fossil fuel depletion, this

could be substantiated by the fact that the world is increasingly relying on the
fossil fuels in meeting energy needs and its production is proportionally
reducing. This has given a signal to most of the developed countries which have
started to develop some other alternative energy sources for energy security.
Nigerian government if relieved from the burdensome funding of subsidies
could be able to develope its potential alternative energies especially
renewables.

OTHER ECONOMIC BENEFITS:

Apart from the potentials which exist for the elimination of the governments
current subsidy burden, there are also other significant economic benefits
which are expected to accrue from the implementation of the market
liberalization policy. There will be efficiency in terms of operations in the
refineries and also improvement in investment thereby creating job
opportunities to some Nigerians. The deregulation will also help to provide
correct price signals to the investors as all prices will be set by the invisible
market forces.

CHALLENGES OF DEREGULATION

LOSS OF JOBS:

It is possible that in the short term unemployment may arise due to price
increases and the attendant problem of potential job losses by workers in the
refineries; this will be done by investors who aim to maximize efficiency, once
they acquire control.[7] Schipke (2001) notes that, Countries in which
government was a dominant player in terms of both ownership and
intervention are also likely to have highly regulated labour markets. Hence, a
reduction in government ownership without the simultaneous liberalization of
the labour market will lead to increases not only in temporary but also
permanent unemployment.

INFLATION:

An abrupt removal of subsidy may cause dislocation to prices of petroleum

products because with high demand, and not enough supply the price would
sky rocket. Similarly, prices of other inputs and commodities will increase due
to the increase in the transportation cost; this may lead to labour strikes and
chaos. This may encourage the military to try and take over governance using
the threat of insecurity to justify their actions as it use to happen in some
developing countries.

RESURGENCE OF TRADITIONAL ENERGIES:

Due to the fact that majority of Nigerians are poor, people may resort to revive
the use of traditional energy sources after the subsidies have been removed,
because the people may not be able to afford the un-subsidised prices of fossil
fuels. Usually this may happen in some of the developing countries.

MARKET EXPLOITATION AND LACK OF TRUST IN GOVERNMENT

The deregulation constitutes selling of refineries to investors, while in Nigeria

only few individuals could be able to buy a major part of the shares, this
exposes the consumers to market exploitations and collusion among the
suppliers. Similarly, most of the Nigerian government have been criticized for
corruption and in-sincerity; therefore if the present administration exhibits
these habits then it may end up benefiting few groups of individuals and
exposing the masses to difficulties. 0

NUTSHELL:
This is the second of a 3-part analysis on Deregulation in the Nigerian
Downstream sector. The first instalment focused on the deregulation question.
In this article, Ahmed has outlined the case for Nigeria Downstream Oil Sector
deregulation by focusing on the burden of subsidies. Given the recent bruhaha
in Nigeria over a stymied full deregulation from January 1, 2012 do you agree
that the Nigerian Government should press for full deregulation; or is it a
question of application- Shock Therapy versus a Gradualist approach on an
inevitable policy imperative? Let us know. For more information on this article
and to view Ahmed's professional profile, Click here -->

[1] Kupolokun, Funsho, (2005); Liberalization: the experience of the Nigerian

Petroleum Sector, Alexanders Gas and Oil connections, volume 10, issue No. 2,
27 jan.

[2] EIA US energy information administration (2009); Nigeria , country analysis

brief, http://www.eia.doe.gov/cabs/nigeria/background.html

[3] Petroleum Products and Pricing regulatory Agency (2010); official website,
http://wwwpppra-nigeria.org/

[4] Hary, O. C., (2006); Nigerias petroleum market segements: characteristics

and financing requirement in oil gas financing in Nigeria: issues, challenges and
prospect. Lagos, Nigeria; CIBN.
[5] Emmanuel, Ihenacho, (2009); who is afraid of deregulation of petroleum
sector, news paper article, daily trust 7th November.

[6] Supra Notes 7, at 13.

[7] Ifiok, Ibanga, (2006), The Economics of privatizating and deregulating the
Nigerian Downstream oil sector, florin.com

STATEMENT OF THE PROBLEM

Historically, major petroleum marketing companies were the main sources of

petroleum products supply. The companies transported and distributed the
products relying on their distribution and retail outlets (Ojo and Adebusuyi,
1996). This was an era of deregulation in which Nigerian paid market-
determined prices for products. However, this arrangement was not
sustainable given that it was dependent on the profit and market imperatives
of the oil marketers.

The countrys economic activities expanded in the seventies such that private
companies could no longer cope with increase demand for products. This
resulted in erratic supply of petrol and kerosene and ultimately acute scarcity
of the product. The shortage was endemic and created social and economic
dislocation in the country. This market failure made government to venture
into petroleum products marketing and distribution (Ozumba, 1996).

The concern by government to overcome this lack of policy and total

dependency on oil companies led to policy shift towards regulations.
Government therefore introduced uniform pricing to satisfy domestic demand,
strengthen self-reliance and avoid a situation in which the oil companies could
hold the country to ransom.

The nation witnessed adequate supply of petroleum products up till 1986.

Thereafter, due to the sustained devaluation of the Naira on account of the
implementation of the Structural Adjustment Programme (SAP) coupled with
the non-maintenance of the refineries, domestic production was soon
undermined making it imperative for demand to be met through imports. The
shortages of petroleum products escalated in spite of increases in prices of
products since 1990.

The Obasanjo administration on coming on board decided to gradually

withdraw the subsidy on petroleum products to allow the mechanics of market
forces to take its full course. This again, resulted to frequency increase in
petroleum products prices and its consequential effects. Yekini (2011)
attributed scarcity of Kerosene in Nigeria to inadequate importation of the
product and its diversion from domestic uses to other areas. He therefore
posits that subsidy is injurious to the Nigerian economy and therefore
recommends the removal of all petroleum product subsidies and the
liberalization of all the downstream activities in the petroleum industry.

Balouga (2012) notes that as far back as June, 2003 government figures
indicated that for each litre of petroleum products, N12 was spent on subsidy.
This implied a subsidy of N74 billion or 1.42% of GDP. He stated further that by
the end of 2007 with subsidy shooting up to N450 billion, it went up to 3% of
GDP. Balouga (2012) argues that there is no doubt that the country was really
subsidizing inefficiencies, fraud and racketeering in the whole production and
distribution chain and in that context, given the competing needs for scarce
resources, government felt the need to do something.

SIGNIFICANCE OF THE STUDY

This study is significant in the followings ways:

a. It would use a market structure-conduct-performance framework to analyse

the industry, both before and after deregulation, as a means of judging the
impact of deregulation in terms of petroleum products prices.
b. The significance of this study also lies in the fact that it would contribute to
existing literature on the subject matter by providing an expository analysis of
the pattern of increase of petroleum products prices in Nigeria. This would
enhance policy formulation in the downstream oil sector with the intention of
alleviating the suffering of the masses.

c. It would also be an invaluable tool for students, academic, institutions and

individuals that want to know more about the deregulation of the downstream
sector of the Nigerian oil industry.

AIMS AND OBJECTIVES OF STUDY

The aim of this study is to appraise the deregulation exercise that was carried
out in the Nigerian downstream oil sector.

The specific objectives of this study are as follows:

(i) To evaluate the pattern of petroleum products prices in Nigeria;

(ii) To examine the consumption pattern of petroleum products before and

after the deregulation;

(iii) To examine the impact of the deregulation of downstream oil sector on

petroleum products pricing in Nigeria;

(iv) To investigate the effect of the deregulation of the downstream oil sector
on the living standard of the people;

(v) To examine the pre- and post-deregulation era and make critical comparism;

(vi) To explore the reasons why deregulation has not yielded the desired result
in terms of prices and supply.

RESEARCH QUESTIONS

The study would examine the following questions:

(i) What is the pattern of petroleum products pricing in Nigeria over the years?
(ii) How has the deregulation exercise impacted on the consumption pattern of
petroleum products in Nigeria?

(iii) To what extent has the deregulation of the downstream oil sector impacted
on petroleum products pricing in Nigeria?

(iv) How does the regulated downstream sector differ from the deregulated
era?

(v) Why are we still witnessing petroleum products prices increases after
deregulation?

RESEARCH METHODOLOGY AND SOURCES OF DATA

The method of data analysis to be used shall be a time series showing the
pattern of the petroleum products prices before, after and during the
deregulation exercise.

Secondary data shall be the basis of analysis in this research work. The data
shall be sourced from the publications of Nigerian National Petroleum
Corporation (NNPC), Petroleum Products Pricing Regulation Agency (PPPRA),
Central Bank of Nigeria, and National Bureau of Statistics. The secondary data
shall cover the period between 1986 and 2011.

SCOPE OF THE STUDY

This study examines economic rationality behind deregulation of the

downstream sector of the Nigerian oil industry. The study seeks to investigate
the effect of the deregulation on the prices and consumption of petroleum
products as well as its impact on the living standard of Nigeria. The empirical
analysis is restricted to the period between 1986 and 2011 because it was
during the period that policy was implemented.
One of the major limitations of this study is that the period of time given by the
institutions authority for the study would not allow for an in-depth coverage of
all the issues connected with the topic under study, and collection of related
information.

Also, certain information required in order to highlight and analyze some

observation may not be accessible e.g. Independent oil marketers operation
records may be regarded as strictly confidential and would not be divulged to
the research. And lastly finance is another constraint to an indebt study of this
topic.

ORGANISATION OF THE STUDY

This study shall contain five chapters. The first chapter shall contain the
background of the study, the statement of the research problem, the objectives
of the study, the research questions etc that would guide the study. Chapter
two would present the literature review on the subject matter. The
methodology to be adopted in the study would be stated in chapter three.
Chapter four shall focus on the presentation and analysis of collected data. The
last chapter chapter five, would present the summary of the findings,
conclusion and appropriate recommendations.

REFERENCES

Adagba, O.; Ugwu, S. C. and Eme, O. I. (2012) Deregulation and Anti-Subsidy

Removal Strikes in Nigeria, 2000 -2012. Arabian Journal of Business and
Management Review (OMAN Chapter). Vol. 1, no.7, pp. 69-83.

Balouga, J. (2012) The Political Economy of Oil Subsidy in Nigeria.

International Association for Energy Economics. Second quarter, pp. 31-35.

Ikponmwosa, A. N. and Odogwu, C. C. (2012) Deregulation and Privatisation of

the Upstream and Downstream Oil and Gas Industry in Nigeria: Curse or
Blessing? International Journal of Business Administration. Vol. 3, no. 1, pp.
16-20.

Ojo, M. O. and Adebusuyi, B. S. (1996) The State of the Nigerian Petroleum

Industry: Performance, Problems and Outstanding Issues. CBN Economic and
Financial Review. Vol. 34, September.

Onyishi, A. O., Eme, O. I. and Emeh, I. E. J. (2012) The Domestic and

International Implications of Fuel Subsidy removal crisis in Nigeria. Kuwait
Chapter of Arabian Journal of Business and Management Review. Vol. 1, no. 6,
pp. 57-80.

Ovaga, O. H. (2012) Subsidy in The Downstream Oil Sector and the fate of the
masses in Nigeria. Kuwait Chapter of Arabian Journal of Business and
Management Review. Vol. 1, No. 6, pp. 15-34.

Ozumba, C. C. (1996) Harnessing the potential of the Nigerian Oil and Gas for
Economic Development. CBN Economic and Financial Review. December.

Yekini, O. L. (2011) Kerosene Adulteration in Nigeria: Causes and Effects.

American Journal of Social and Management Sciences. Vol. 2, no. 4, pp. 371-
376.