Understanding that the central issue in the topic before me is deregulation, it would be wise to set forth a working definition before going any further. According to Investopedia, Deregulation is the:
‘…reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry’
It is the opposite of regulation which is the case where government through its agencies maintains control over business activities, usually with the goal of protecting the interests of the customer. But it has been said that the worst actions usually come from the best of intentions. The downstream sector of the petroleum industry is the customer-facing sector of the industry, and as such, its health largely goes a long way in determining the health of the entire industry. It has over the years been plagued with multi-faceted challenges such as poor supply chain leading to perennial fuel scarcity, industrial disputes, uncompetitive pricing template coupled with a shabbily administered subsidy regime, and the inability of the government to run its own refineries to boost availability of refined products, amongst others.
This has led to the conclusion amongst many that deregulation is the blade that can slice through the Gordian Knot of challenges that besets the downstream sector.
In line with this, this article will first of all, seek to engage deregulation within the context of the petroleum industry and show what the relevant stakeholders think about it. This would be followed by a presentation of an overview of the downstream sector of the Nigerian petroleum industry as it is today. A picture would then be painted of how the downstream sector would look like if it were fully deregulated.
At this point, it would be only expected to discuss what stands in the way between our current realities and the possibilities. This article would discuss the laws and other relevant regulations that need amending and need to be promulgated. A walk down history lane would then be undertaken to the legal mechanisms proposed to chart the course of successfully implementing deregulation in the downstream sector. A conclusion will then summarise the paper and state the way forward.
DEREGULATION IN THE CONTEXT OF THE NIGERIAN DOWNSTREAM PETROLEUM INDUSTRY
Energy financing, anywhere in the world is a capital-intensive project, requiring leverage to plan for the long-term and requisite technology. To achieve this, the right set of socio-political and economic policies must be in place to encourage and deepen investment. An environment where investors are not able to set prices for their products, and have to follow a government-stipulated price does not augur well for increased investment plans, especially if the pricing template does not fully accommodate their costs or intention to beat down their prices in order to gain a competitive edge. A regulated industry like the one we have in Nigeria cannot accommodate this. This is why even the Central Bank of Nigeria has given its support to the ‘total deregulation of the energy sector and government involvement restricted to regulatory and oversight functions’.
But it should be noted that deregulation is a bitter-sweet pill, and as such, should be administered with caution. This is why the News Agency of Nigeria in 2012 reported that the best approach towards deregulating the downstream sector should be in phases, rather than in one fell swoop.
First mooted in 2003, deregulation as a policy alternative is not just about the removal of fuel subsidies, although this is what most people reduce it to. It is also about the removal of restrictions on the establishment of refineries, jetties, and fuel depots, allowing private sector players to be fully engaged in the importation and exportation of petroleum products and allowing market forces to prevail.
AN OVERVIEW OF THE NIGERIAN DOWNSTREAM SECTOR
The Nigerian oil and gas industry follow a three-chained structure made up of the upstream, midstream and downstream sectors. The country’s national oil company and regulator, the Nigerian National Petroleum Corporation (NNPC), is operative in all sectors as a regulator and market participant.
The upstream sector is composed of exploration, oil and gas production and joint venture activities. The midstream sector is largely driven by the NNPC through initiatives such as the Greenfield Refinery, Renewable Energy, Gas to Power and the Nigerian Gas Master Plan. The downstream sector comprises of the nation’s four refineries, namely:
- Eleme Petrochemicals Company Limited (EPC), Rivers
- Kaduna Refinery and Petrochemicals Company Limited (KRPC), Kaduna
- Warri Refinery and Petrochemicals Company Limited (WRPC), Delta
- Port Harcourt Refining Company (PHRC), Rivers
These refineries have a total installed refining capacity of 445,000 barrels per day. The downstream sector also consists of the Pipelines and Products Marketing Company (PPMC) Limited, which oversees the infrastructural structure of the retail market. Through an extensive network, this company supplies gasoline, jet fuel, diesel, fuel oil and liquefied natural gas to its bulk customers, who then resell to the Nigerian populace. the Petroleum Products Pricing Regulatory Authority (PPPRA), which carries out oversight function.
The downstream activities of the NNPC are divided into three aspects namely:
- RETAIL SERVICES: This is driven by the NNPC Retail. This subsidiary operates through 37 Mega filling stations, 12 floating mega stations and over 500 affiliate stations across the length and breadth of Nigeria. They commenced activities in August 2002 with the first retail outlet opened in Lagos. Its establishment was a strategic move to serve as a vehicle of direct government intervention in the retail sector during periods of emergency and supply interruptions. It is also expected to serve as a benchmark or standard bearer for the retail aspect of the downstream sector and an outlet for the NNPC to operate in a deregulated environment
- PRODUCT DISTRIBUTION: This arm of the NNPC is driven by the Pipelines and Products Marketing Company (PPMC) earlier mentioned. It is responsible for ensuring that petroleum products are easily sourced throughout the country, at a uniform price. It receives crude oil through a division of the NNPC known as National Petroleum Investments Management Services (NAPIMS). This division is overseeing the government’s investment in exploration and production companies operating in the upstream sector. It supervises the Joint Venture activities of the Joint Venture partners and markets the government’s share of crude oil produced. It also engages in direct exploration services in new oil fields relinquished or new oil fields that have been explored. The PPMC takes the crude received and supplies it to the four refineries owned by NNPC. Where the production of the refineries is not enough to meet local needs, which is usually the case, the PPMC undertakes the importation of refined oil products supplement local production.
- RESEARCH & DEVELOPMENT: This aspect is handled by the NNPC Research & Development (R & D). It was established in 1977 to solve the operational and technical problems of the oil and gas industry through the application of the results of scientific research and the development of technology. It services both the upstream and downstream sector, its capabilities include collaborative research services with national oil companies, the Organization of Petroleum Exporting Countries (OPEC), and independent oil companies. It also offers technical services to oil & gas companies such as process simulation studies, troubleshooting of plants operational problems, new products development in fuels and petrochemicals, catalysts characterization, toxicological studies, air monitoring of virgin industrial areas, amongst others.
Some of the major challenges plaguing the downstream sector of the oil and gas industry are as follows:
- THE SUBSIDY REGIME: Initially designed with the intent to reduce the landing cost imported refined products in Nigeria, its humongous cost and administrative burden has made it more of a curse than a blessing. Its negative effects are far-reaching and as such will be discussed in subheadings, namely, the macroeconomic, the environmental, and social implications
- Macroeconomic Implications: Oil subsidies create economic distortions that make it difficult to access the true health of the economy by creating false impression of the cost of goods produced with the refined products, or the goods that rely on refined oil products to be produced. This inability to gain a clear picture of the state of an economy serves as a disincentive to foreign investment which Nigeria badly needs.
Subsidies constitute an unprofitable drain on public funds that could have been applied in sectors with a greater impact on the quality of living of the average Nigerian, such as education, health, or transportation. According to Tell Magazine of 2012, the sum of N245 billion was budgeted for subsidies, but over N2.5 trillion was disbursed as subsidy payments. Out of this amount, over N1 trillion was paid to sham or non-existing companies that obtained contracts to import fuel but never imported anything.
Subsidies make refined oil products in Nigeria cheaper in comparison to prices available in neighbouring African countries. This has over the years created a profitable black market in the cross-border smuggling of Nigeria’s oil products to countries where they can be sold at the prevailing rates for a high profit margin. The result is that a deficit in local oil supply, the government has to import and distribute at a subsidised rate to cover the gap. In sum, the more we spend on subsidies, the more we keep spending. It is a vicious circle of subsidization with no positive results.
- Environmental Implications: Subsidies make fuel products relatively cheap, thus creating an incentive for unchecked consumption, leading to higher carbon emission rates and global warming. Because the fuel is more affordable, it leads to increase in vehicular movement, higher road damage and road accidents.
- Social Implications: The intendment of the subsidy scheme is to make it more affordable for the poor in the society, but without a subsidy on the items that will use the cheaper fuel (cars, generators, stoves etc.) it hardly benefits them. Mostly the rich benefit from the subsidies, despite the fact that they can afford to buy it at the actual prices.
In fact, it may be said the calls for the deregulation of the downstream are largely directed towards the abolition of the failed subsidy regime
If our refineries were working at full capacity, we might not need to subsidize fuel at all. Our daily consumption of fuel is put at 257, 861 barrels per day, while we have an installed capacity of 445,000 barrels per day. We would have more than enough to export for profit rather than subsidizing at a loss. Unfortunately, this is not the case – the Warri Refinery in 2017, operated at an average rate of 10.3% of its installed capacity (12,885 out of a potential 125,000 barrels per day). The Port Harcourt Refinery operated at an average rate of 24.5% of its installed capacity (51,450 out of a potential 210,000 barrels per day), while the Kaduna Refinery operated at an average rate of 15% of its installed capacity (16,500 out of a potential 110,000 barrels per day) for the same period. The total of this is 80,835 barrels per day to service a population of 180 million people.
Over the years, huge sums have been allocated in the name of Turn Around Maintenance to no avail, largely due to the obsolete infrastructure that the refineries are built with. As far as local refining is concerned, the biggest hope of Nigerians, government and people alike, is the Dangote Refinery undergoing construction at Lekki Free Zone, Lagos. It is expected to kick off operations by 2020. With an installed capacity of 665,000 barrels per day, it is the world’s largest single-train refinery and has capacity to not just cater for Nigeria’s fuel needs, but also export.
If Dangote Group can be so close to achieving such a feat for the Nigerian state in a heavily and negatively regulated environment, it only goes to show what economic potential if the government took its hands out of the downstream sector and left everything to the private sector, except for oversight functions.
A PICTURE OF A POST-DEREGULATED NIGERIAN DOWNSTREAM SECTOR
Imagine being able to patronise a particular filling station because it offers the cheapest fuel amongst its local competitors. Or another filling station that offers fuel at a slightly higher price but, but guarantees for its regular customers a litre of free lubricating oil for every 20 litres of petrol purchased. Because there is no subsidy, players in the downstream sector are free to set their prices as they wish, based on the cost of purchasing, other charges and their profit margin. Initially, the prices skyrocket. The result is that Nigerians leave their cars behind because it costs more to take them compared to taking public transport. There are fewer vehicles on our roads, road congestions are a thing of the past in most Nigerian towns, there are significantly fewer road accidents, and Nigeria’s carbon footprint is significantly lighter. Due to the increased patronage, Nigerian transporters have more disposable income and can gradually afford to pay the increased cost of fuel.
Queues at filling stations are now a thing of the past. It is the stuff of jokes now, not our reality. Petroleum products are readily available at every filling station across Nigeria. It is now a thing of the past for motorists to go around with jerrycans to buy fuel or to hoard petrol and kerosene in their houses. Why do so when you can get it anytime you need it? The incidence of fire outbreaks in homes has also dropped significantly because of this.
In a bid to corner the market, retail brands in the downstream sector seek cut their prices to gain an advantage and attract increased patronage. The customer is now treated as the king whenever he goes to top up his tank, unlike now when he is subjected to shabby treatment, despite the fact that he is paying for the product with his hard-earned money.
The NNPC Retail has a comparative advantage over market participants because of their operation in all tiers of the petroleum industry. The result is a lower cost to Nigerians. To match them, other market participants are encouraged to invest their increased profits in the upstream sector to gradually cut out the middlemen that supply them fuel. In other words, deregulating the downstream sector will lead to increased investment and participation in the upstream sector gradually. As an indirect consequence of this, the Pipeline and Products Marketing Company (PPMC) gradually loses its relevance. Since there is no subsidy, there is no need for the Petroleum Products Pricing Regulatory Authority (PPPRA), the agency that is usually in charge of fixing and reviewing the price of petroleum products. As a result of this, the aforementioned agencies are either scrapped or reorganised to focus on oversight functions. Either way, incidence of bureaucracy is reduced and ease of doing business in the petroleum sector in Nigeria is enhanced, encouraging further investment.
Nigeria’s population and deregulated downstream sector encourage investors to invest in constructing refineries or buying the government’s refineries and modernizing them. They are willing to provide the huge financial outlay because they are sure of profits that will exceed the cost of production. When Dangote Refinery and other refineries kick off production, retailers and the consuming population quickly find that the locally produced fuel is significantly cheaper than imported fuel. They thus prefer to purchase this variant. Importers of fuel products, in the face of steadily falling revenue are forced to radically change their business models – they either switch to exporting the locally produced petroleum products or invest in refining, retail, or other aspects of the downstream sector. They now invest in new facilities such as tanks, retail outlets and trucks, resulting in new employment opportunities for Nigerians.
By this time, Nigeria no longer occupies the ignominious position of Africa’s largest oil producer and largest importer of petroleum products. Rather, we are Africa’s largest oil producer and its largest exporter of petroleum products. The incentive to smuggle has also been eliminated in one fell swoop, as the price of petroleum products in Nigeria is now comparable with that in neighbouring countries and the global community.
What about the government? The savings from the abolished subsidy regime and increased foreign earnings from the sale and exports of Nigerian petroleum products can now be deployed to other sectors of the economy.
With the image of a deregulated economy successfully portrayed, what are the hindrances standing in the way of its actualisation? This is the next issue for consideration in this article.
STUMBLING BLOCKS IN THE PATH OF DEREGULATION
On the 19th of March, 2013, a Federal High Court sitting at Abuja, gave an order restraining the Federal Government from continuing with the deregulation policy it had embarked upon. This was based upon a suit filed by the late Bamidele Aturu, lawyer and human rights activist before the court to ascertain whether the deregulation exercise embarked upon was constitutional and lawful. The court ruled that it was unconstitutional, illegal, null and void. The order issued by the presiding judge, Justice Adamu Bello, restrained the Federal Government from deregulating the downstream sector or failing to fix prices of petroleum products as required by Section 6 of the Petroleum Act and Section 4 of the Price Control Act, which provide respectively that:
‘The Minister may by order published in the Federal Gazette fix the prices at which petroleum products or any particular class or classes thereof may be sold in Nigeria or in any particular part or parts thereof’
‘Price control shall continue to be imposed in accordance with this Act on any goods which are of the kind specified in the First Schedule to this Act’
The First Schedule to the Price Control Act lists the controlled commodities eligible for price control as follows:
- Bicycles and spare parts
- Motorcycles and spare parts
- Motor vehicles and spare parts
- Petroleum products
It would thus be safe to say that the Petroleum Act and the Price Control Act are some of the laws constituting a stumbling block in the way of a successful deregulation exercise in the downstream sector. The relevant sections must therefore be amended to lay a sound legal foundation for deregulation to take place.
Going back to the court decision earlier cited, the learned Justice also held that the deregulation exercise was contrary to the provisions of Section 16(1)(b) of the 1999 Constitution (as amended, 2011) which provides that the government should control the national economy in such a manner as to ensure the maximum welfare, freedom and happiness of every citizen on the basis of social justice and equality of status and opportunity.
However, the court failed to aver itself to the fact that the above section is not justiciable by virtue of the provisions of Section 6(6)(b) of the same 1999 Constitution. Even if it were justiciable and thus enforceable before any court of the land, the currently regulated landscape has failed to deliver ‘maximum welfare, freedom and happiness’ to all Nigerians. In a country that is oil-rich yet its citizens have to accept fuel scarcity, low quality of petroleum products, and few employment opportunities as their reality, this is hardly the reality that the drafters of our constitution had in mind when they penned those immortal words into our constitution.
Besides, deregulation does not mean imply total absence of regulation, or in the words of the constitution, lack of control by the government – this is not the case. Instead, it means minimal regulation. The government would be restricted to enforcing quality and quantity standards. Besides, the government can still participate in the downstream sector through a restructured and fully commercialized NNPC.
DEREGULATION IN NIGERIA: THE JOURNEY SO FAR
In 2001, the Olusegun Obasanjo administration presented the Petroleum Industry Bill to the National Assembly for its assent. Amongst other things, the Bill proposes to transform the current NNPC from a government agency to a limited liability company (NNPC Ltd) which shall be a successor company to the assets, liabilities, licenses, leases and interests of the current NNPC. It will also inherit the assets and liabilities of the current NNPC in all ongoing joint ventures.
Some of the departments that are currently under the NNPC such as the Petroleum Products Pricing Regulatory Agency (PPPRA) will be extricated from it to serve as an independent regulatory body, alongside the Department of Petroleum Resources (DPR). The new NNPC Ltd will then be subject to the regulatory oversight of these bodies. It would also set up a National Petroleum Inspectorate, which would operate as a technical regulator. This agency would be in charge of granting technical licenses for design procurement, construction and operation of all facilities including refineries, process plants and petrochemical plants. These licenses would cover activities such as:
- Establishment, construction or maintenance of process plants.
- Establishment, construction or maintenance of petroleum transportation pipeline
- Establishment, construction or maintenance of petroleum transportation network
- Establishment, construction or maintenance or petroleum distribution network
The Petroleum Products Pricing Regulatory Authority (PPPRA) would also be able to grant commercial licenses in respect of:
- Owning and operating a downstream petroleum pipeline transportation business
- Owning and operating a downstream petroleum transportation network business
- Undertaking the supply of downstream natural gas
- Owning and running a downstream products or natural gas distribution network business.
It would also be empowered to:
- Determine the methodology of calculating petroleum products prices
- Set benchmark prices for petroleum products
- Regulate bulk storage and transportation
- Set rules for common carrier systems
A major benefit of this bill if passed into law is that it will lead to the financial buoyancy and independence of the NNPC. Currently, it is constrained by inadequate federal allocations, which make it unable to invest and expand as it should. But once it is privatized, it will able to raise capital through equity or debenture holdings, just like the Nigeria Liquified Natural Gas (NLNG), which is today one of the subsidiaries of the NNPC.
The bill also ensures that the NNPC Ltd will be solely owned by the Federal Government, while its subsidiaries like the Nigerian Petroleum Development Company (NPDC) Ltd., Nigerian Liquified Natural Gas Company (NLNG) Ltd., and the Pipeline and Products Marketing Company (PPMC), can be partially owned by other parties. Notwithstanding this, the Federal Government would be expected to divest some of its shares in NNPC Ltd to the public three years after it has been incorporated.
Another innovation that this Bill creates is the National Transport Logistics Company (NTLC), which will be wholly owned by the Nigerian Government. It will take ownership of the depot systems, products pipelines and gas pipelines, currently owned by the Nigerian Gas Company (NGC). It will go further to break the gas pipeline systems and the product pipelines and depot systems into segments which will be licensed to facility management companies.
The Bill repeals the Petroleum Act and the Petroleum Profits Tax Act, replacing it with a Hydrocarbon Tax. Considering the fact that host communities of oil exploration and production are usually the worse off for it, due to the activities of the oil companies, the bill seeks to create a Petroleum Host Communities Fund (PHC Fund), into which upstream petroleum companies shall remit 10% of their net profit on a monthly basis. The funds raised would then be utilized for the development of the economic and social infrastructure of the communities within the petroleum producing communities.
In fact, the Petroleum Industry Bill is not only the tool for the successful deregulation of the downstream sector of the oil industry, but a significant cure-all to all the malaise affecting the oil industry as a whole.
But if this is the case, where is the much-awaited bill? Why is still a bill in 2018, and not part of our legal corpus?
Largely due to vested interests that were not comfortable with some of the disruptive innovations that the Bill proposed like those highlighted, it languished on the floor of the National Assembly until the current Eighth National Assembly, led by Senator Bukola Saraki and Right Honourable Yakubu Dogara picked up the gauntlet to revive it. To do so, they split the Bill into 3, creating 3 new bills in the process, namely:
- Petroleum Industry Governance Bill
- Petroleum Industry Fiscal Bill, and
- Petroleum Industry Host Communities Bill
The Petroleum Industry Governance Bill has already been passed by both houses, but the President withheld his assent based on how the fact that the law if passed, will significantly whittle down the powers of the Minister of Petroleum Resources. It takes away the Minister’s powers to grant, revoke, renew, amend, extend any lease or license issued pursuant to the Act.
It also replaces the Department of Petroleum Resources (DPR) and the Petroleum Products Pricing Regulatory Agency (PPPRA) with the National Petroleum Regulatory Commission (NPRC), which will be the regulatory body for the entire petroleum industry. Its functions shall include:
- Administering and enforcing policies, laws and regulations of the petroleum industry.
- Monitoring and enforcing compliance with the terms and conditions of all leases, licenses, permits and authorisations made pursuant of the Act.
- Advising the Minister on issues relating to the petroleum industry.
- Conducting bid rounds or other exercises for the issuing of licenses or leases for petroleum exploration and production.
- Establishing the methodology for determining appropriate tariffs for gas processing, gas transportation, transmission and transportation of crude oil and bulk storage of oil and gas.
- Establishing the fair market value of petroleum products through a predetermined framework.
- Regulating the supply, distribution, marketing and retail of petroleum products.
This agency will operate independently of the Minister, and its Board, apart from those representing the Ministries of Finance, Petroleum and the Environment, shall be appointed by the President, subject to Senate approval.
The Bill also sets up some commercial institutions such as:
- The Ministry of Petroleum Incorporated (MOPI): This institution will be a corporation sole incorporated by the Government for the purpose holding shares on behalf of the Government in all successor companies to the current NNPC. The Permanent Secretary of the Ministry of Petroleum would be sole signatory for this body, a further whittling down of the powers of the Minister of Petroleum.
- The Nigeria Petroleum Assets Management Company (NAPAMC): This company will inherit all assets of the NNPC as regards Production Sharing Contracts (PSCs). The shares of the Company will be held by the Ministry of Petroleum Incorporated (MOPI), Ministry of Finance Incorporated (MOFI), and the Bureau of Public Enterprises (BPE), in the ratio 40:40:20 respectively.
- The Nigerian Petroleum Company (NPC): This company will inherit all assets of the current NNPC apart from PSCs, which the NAPAMC will be vested with. In other words, the operations of this company will extend to the downstream sector. Its ownership template will follow that of the NAPAMC, however it is expected 40% of its shares within 10 years of incorporation with the Nigerian Stock Exchange (NSE).
- The Nigerian Petroleum Liability Management Company (NPLMC): This company will inherit all liabilities of the NNPC and the pension liabilities of the Department of Petroleum Resources (DPR). Its shares shall be held by the NPC, NAPAMC, and the NPRC in proportion to their liabilities which it manages.
- The Petroleum Equalisation Fund (PEF): The purpose of this fund is to ensure balanced economic development in across the federation by ensuring balance in the price of petroleum products. It may be said that by introducing this, the goal of full deregulation of the downstream sector has been side-tracked. This body is clearly an agency for the perpetuation of the fuel subsidy, albeit in a more open form.
This article has x-rayed the deregulation within the context of the Nigerian downstream petroleum sector. To lay a foundation for this, it was necessary to effectively explain the structure of downstream sector which is currently dominated by the NNPC as regulator and market participant currently. I also tried to illustrate what Nigeria could look like if we completely deregulated the downstream sector for the benefit of all Nigerians. This article also studied the current logjams to the deregulation exercise. It also studies the proposed legal framework for restructuring the downstream sector for deregulation. The proposed laws to achieve this are the Petroleum Industry Bill, introduced in 2001 and the Petroleum Industry Governance Bill, introduced in 2017 and passed by the National Assembly. It ought to be law already, had the President assented to it.
Deregulation has come a long way in Nigeria without coming to fruition. The legal framework for its running is ready. All that is left is the political will to breathe life to it.
I am a recent graduate of the Faculty of Law, Obafemi Awolowo University. I love research, public speaking, building and managing teams towards achieving set goals, and writing