Deregulation of The Oil And Gas Industry in Nigeria. DPR recently reveals strategies for deregulated (petroleum products deregulation) Nigerian oil and gas downstream sector to deepened the oil and gas activities by private sector..
How Government Draw the Oil And Gas Industry Downstream Deregulation Road Map .
All over the world, reasons for reforms in the public sector vary from country to country depending on the objective, peculiarity and the circumstances that the country finds itself. The issue of reforming our downstream sector such as Refining and Distribution of petroleum products has been on for quite some time. It has however, become more compelling in the last few years given the trauma of petroleum products scarcity the nation had continuously witnessed. Equally compelling is the need to develop the gas sector which has the potential of doubling the nation’s revenue but has not received focused attention until now.
What is deregulation?
Deregulation generally means the lifting of government control and letting market forces work in the business by determining the market demand and supply.
What is deregulation of the petroleum sector?
Deregulation means that the Government will no longer continue to be the main supplier of Petroleum Products, but will encourage private sector to take over the role of supplying Petroleum Products.”
Downstream Deregulation: Historical Perspective
Prior to 1965, petroleum products domestic requirements were met entirely through importation under a deregulated environment. By 1965, it had become apparent that the Nation could no longer rely on importation for its products needs. Consequently, the first refinery in Nigeria – the Old Port Harcourt Refinery was built in 1965 as a commercial venture to provide petroleum products at market related prices. It was a 35,000 barrels per day refinery jointly owned by Shell (25%), British Petroleum (BP) (25%), the Federal Government (20%), and the three regional governments (10% each).
However, by mid 1970s, with the advent of the oil boom Government became directly involved in the downstream sector by building two new refineries and taking over the first. The Warri refinery was commissioned in 1978 while the Kaduna refinery came on stream in 1980. Government’s main objective was to make petroleum products available throughout the country.
With the change in the ownership structure, the pricing policy was modified and controlled to encourage national distribution at uniform prices. This incidentally introduced the issue of bridging and price equalization at government’s expense. This was later inherited by the NNPC. However, these controlled prices did not respond to the continuously changing business and economic environment. Thus, the control of petroleum products prices by government made it difficult to earn enough resources to maintain the refinery and distribution assets.
Today downstream assets include four refineries with a combined installed capacity of 445,000b\d, over 5000 km products pipelines and 21 storage depots spread across the country. Others include 9 LPG depots and the numerous retail stations all over the country.
Since the commencement of government’s direct involvement however, prices of major petroleum products such as Premium Motor Spirit (PMS), Automotive Gas Oil (AGO) and Dual Purpose Kerosene were fixed by government. This of course has been a disincentive to private sector investment in refining with dire consequences which include:
- Petroleum Products scarcity;
- Funding problems for NNPC leading to irregular maintenance of refining and distribution facilities ;
- Refining capacity under-utilization ;
- Smuggling of Petroleum products;
- Divestment by marketers;
- Adulteration of products and fire hazards;
- Social and political unrest;
- Poor economic growth; and
- Rampant pipeline ruptures and vandalization.
The question is how can the NNPC, the Refineries and the Distribution sector in particular be repositioned to respond effectively to the dynamics of the oil industry for the maximum benefit of the national economy? It is in this light, that the deregulation of petroleum products prices became a sine-qua-non to ensure full cost recovery and reasonable rate of return for any operator.
Government’s Policy on Downstream Reforms
We are aware that Government as far back as 1988 commenced a Privatization and Commercialization programme through Decree NO 25 of 1988 which focused on partial and full commercialization of some 145 selected public enterprises. It was aimed at rationalizing government expenditures and programs in response to the declining economic fortunes of the early 8O’s. Furthermore, through Decree NO 28 of 1999, government emphasized its inability to continuously subsidize inefficient and loss making parastatals and made privatization of such investments the cornerstone of its policy.
The main objectives of privatization as stated in the decree include:
– Restructuring and rationalizing the public sector in order to reduce the dominance of unproductive investments;
– Raising necessary funds to finance socio-economic development in such areas as health, education, and infrastructure;
– Putting an end to dependence on the treasury for funding of otherwise commercially oriented parastatals and encouraging them to look to the capital market to fulfill their requirements;
– Introducing the gradual transfer of control of suitable enterprises to the private sector; and – Creating jobs, acquiring technical know how and exposing the country to international competition.
Government’s Aspirations in the Downstream
The downstream reform is part of Federal Government’s Reform Agenda aimed at strengthening the country’s economic base through diversification and liberalization of the economy. It also forms part of the objectives of the National Economic Empowerment and Development Strategy (NEEDS) which encourages indigenous participation, increase in local content and technology acquisition. Thus, the downstream reform is aimed at:
- Maintaining self sufficiency in refining;
- Ensuring regular and uninterrupted domestic supply of petroleum products;
- Establishing facilities and infrastructure for the production of refined products targeted at the export market and support to domestic petrochemicals;
- Creating value added from these activities; and
- Providing gainful employment and enabling Nigerians to acquire technical know- how in refining and distribution business.
The downstream reform is therefore expected to ensure:
- petroleum products price determination by market forces;
- absence of government control in the pricing process except for tax purposes;
- freedom of marketers to source petroleum products locally and internationally;
- freedom of marketers to purchase crude oil from local and international sources for processing in the refineries;
- freedom of refineries to enter into processing agreement with marketing companies on the basis of charging fees; and
- Right of access to distribution facilities subject to transportation agreement based on tariff.
The private sector will no doubt play a prominent role in the on- going reforms in the downstream sector of the oil and gas industry. The firm commitment of the current administration to economic and fiscal reforms will stand the country in good stead in no distant time.
This was part of presentation made by Engr. Funsho Kupolokun then Group Managing Director, Nigerian National Petroleum Corporation (NNPC) in 2004.