Deregulation war: Bridging benefits and sustainability

Sopuruchi Onwuka

Solid agreement among key stakeholders in Nigeria’s distressed downstream petroleum industry has become urgent in mustering required momentum to push the deregulations of domestic market through the pricing last mile. And gap closure demands that every party should approach the roundtable with sellable principles and strategies for sustainable supply of affordable fuel to fire national growth.

Minister of State for Petroleum Resources, Chief Timipre Sylva

In series of engagements and separate statements on the ongoing market reforms, the Group Managing Director of NNPC, Mallam Mele Kyari; Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Mr Tunji Oyebanji; and the NLC President, Comrade Ayubba Wabba; all sadly took different positions that hold little areas of convergence.

Whereas their main point of agreement remains the interest of the consumer, the most visible disagreement surrounds costs and margins that build into retail price.

The mass interest in its value to the life of average Nigerian explains the central role of petroleum resources in the nation’s economy. The oil and gas sector yields over 85 percent of the nation’s total foreign exchange earnings, contributes some 70 percent of the nation’s total funding support to government’s annual budgets, and accounts for about 35 percent of the country’s gross domestic product. Oil and gas trade also represents over 95 percent of the nation’s total exports and associated balance of payments.

But while the main petroleum income flows into national coffers controlled by government administrators, social activists interpret low domestic fuel price as key resource dividend to the people. Thus, mass opposition to removal of price control and government subsidy has made reforms in the market the most sustained policy topics in the country. And attempts at price deregulation in the domestic market have been a dreaded trigger for social unrest in the country.

Unfortunately, petrol remains the king of fuels in the country, not just because of its use for firing transportation but also its importance in firing over a hundred millions of micro-electricity generating engines that power homes and small business. Thus, price of petrol has remained a critical cost input in the national productivity. It is also a major indicator of inflationary trends in the economy.

With its economic and social value in the life of Nigerians, therefore, managing the domestic fuel prices in the country has been as delicate as handling a loaded gun. The situation had in previous attempts exploded into massive social unrests that did not just claim lives but also inflicted huge losses on the economy.

Oracle Intelligence reports that the major point of divergence between the government and the social activists revolve around calculable benefits of the nation’s petroleum resources to the impoverished Nigerian masses; and while all stakeholders agree on the need to deliver value for the people, they vehemently disagree on appropriate and sustainable strategy of achieving the objectives.

The stringent and sustained demand for resource dividends to the people has stalled the prevailing efforts align domestic fuel prices with market forces even after government has withdrawn subsidy from annual budgets. And the NNPC which stands in the ring as state supply monopoly has started reporting commercial losses.

Former Minister of State for Petroleum Resources, Dr Ibe Kachikwu, had declared just before the 2019 general elections that government spent annual N1.4 trillion on domestic petrol subsidy. And by July 2020, government declared withdrawal of subsidy for petrol, marking the last mile in downstream fuel market deregulation. The withdrawal of subsidy compelled the Petroleum Products Pricing and Regulatory Authority (PPPRA) to evolve new price modulation mechanism that rolls out monthly retail price guidance. Protests from labour unions in the country have since stalled the process.

With deregulation of petrol prices still in abeyance, commercial operations of the NNPC Retail has gone cash negative and threatens sustainability of supplies. And stakeholders, including private players demand total resolution of the prevailing supply and pricing quagmire to save the market from relapsing into acute fuel scarcity.

They also call for holistic measures and reforms that would guarantee successful transition of the domestic fuel market from the prevailing state sponsored oligopoly to liberalized and competitive environment ruled by market forces. But the difficulty in achieving a balance between social benefits and supply sustainability has made adoption of acceptable pricing model a tall order.

The government had in March 2020 activated price deregulation when the Petroleum Products Pricing and Regulatory Agency (PPPRA) introduced a new price modulation scheme that did not capture the subsidy component in the pricing templates. The timing of the move during the low oil price cycle induced by the global coronavirus pandemic was strategic as the first impact resulted in reduction of domestic retail prices and provided the momentum for emplacement of new price regime.

Also in his independence speech on October 1, President Buhari told Nigerians not to expect fuel prices that are cheaper than what obtains in peer producing nations at the Organization of Petroleum Exporting Countries (OPEC) led by Saudi Arabia.

He argued that Nigerians should brace for petrol price templates in peer emerging companies, pointing at retail prices of N362 in Chad, N346 in Niger, and N326 in Ghana, N211 in Egypt and N168 in Saudi Arabia.

Again, during the recent launch of the Nigerian Upstream Cost Optimization Programme (NUCOP), government’s policy drivers pointed at the revived deregulation programme as the basis for inevitable price swings in the market.

Crude oil is the feed raw material for production of fuel and sundry products from refinery operations. Thus, rise in the cost of input directly relates to price of output.

Minister of State for Petroleum Resources, Chief Timipre Sylva, pointed out that rising international prices of crude oil would drill down to local retail prices in Nigeria.

The minister’s remarks followed an outcry from Mallam Kyari that NNPC has continued to absorb acute revenue shortfalls resulting from non-recovery of full cost and margin from massive importation of petroleum products to meet domestic demand estimated at over 52 million liters per day.

He declared in a separate media forum with executives in Abuja that the 2020 and 2021 federal budgets did not make provisions for domestic fuel subsidy, warning that NNPC which is statutorily mandated to guarantee energy supply to the domestic economy was bleeding to insolvency if it is forced to continue running huge losses to sustain market supplies.

Mallam Kyari also pointed out that the prevailing economic realities in the country, massive cross-border leakage of subsidized petroleum products and consequent inability of the government to continue sponsoring internal fuel subsidy have jointly made it urgent for the domestic fuel supply to be cost reflective. The opportunity cost of the proposal, he warned, would be return of fuel queues across the country.

He noted that cheap fuel in Nigeria provided huge incentives and commercial lucre for investments in facilities and equipment deployed in smuggling government subsidized fuel to neighbouring African countries where same products are sold with over 300 percent profit. He said that while genuine marketers in the country cry out over lean margins, cross border smugglers smile to the bank.

“Our price regime is obviously subsidizing the wrong people,” Mallam Kyari decried.

In their various propositions on healing the downstream petroleum industry of liquidity squeeze, private marketers and resource accountability groups want commercial deregulation of the market to be properly processed to enable investors in private refineries and other facilities go creative with supplies and retail competitiveness.

Major Oil Marketers Association of Nigerian (MOMAN), resource accountability groups, as well as professional groups in the downstream sector, who have provided lobby support for deregulation, now demand government to also surrender supply monopoly to allow private sector participation.

Chairman of MOMAN, Mr Tunji Oyebanji, who remains the biggest recognizable entity in the investors’ bloc, demanded in a chat with Oracle Intelligence that all commercial and operating issues that plague the domestic market be addressed along with deregulation process. He argued that whereas deregulation of petrol price remained important in the market, it has not been the only problem.

Mr Oyabanji who is the Managing Director of 11 Plc pointed at the need to dismantle state supply monopoly in the market, arguing that the prevailing playing field is still skewed in favour the public sector player.

According to him, the government is still retaining import monopoly for NNPC through foreign exchange privileges. He pointed out that whereas the NNPC secures foreign exchange at official rates of the Central Bank of Nigeria (CBN), other marketers source foreign exchange at costlier rates from the parallel markets.

He argued that full deregulation of the market and creation of equal opportunities for fuel importers to access foreign exchange from the CBN would recalibrate the market and propel competition that would moderate prices by default.

Other stakeholders that spoke on the issue called on government to seize the prevailing opportunity to fully liberalize the sector by dismantling all structures that pose toll gates in the market.

For the market to moderate prices by default, private stakeholders maintain that margin eroding tolls that include national transportation average (NTA), bridging cost, and all payments collected by PPPRA and Petroleum Equalization Fund (PEF) on behalf of service providers should be allowed into the control of market forces.

Resource accountability groups also support full deregulation of the market.

Nigerian Natural Resource Charter (NNRC) also stated that that the global market environment and domestic setting currently provide strong thrust to fully deregulate the market and relieve government the subsidy burden.

The organization’s country lead, Mrs Tengi George-Ikoli, told Oracle Intelligence that the prevailing global demand factor and domestic price correction have laid the grounds for government to permanently address the issues surrounding fuel subsidy in the downstream petroleum industry.

“I think this is the time to act. They should go ahead and deregulate. It is part of the recommendations we made and the prevailing market conditions provide momentum for it,” she commented.

However, all workers unions in the country gathered under the aegis of the Nigerian Labour Congress (NLC) and the Trade Union Congress (TUC), whose members form the Nigerian middle class, traditionally protest every increase in the prices of road transportation fuel in the country, especially petrol which is widely used for rural-urban mass transit.

The labour leaders point out that living standards and income levels in the domestic environment are extremely low while unemployment and underemployment are high.

Oracle Intelligence reports that Nigeria is officially the global poverty capital with over 70 percent of its 200 million youthful population living in abject poverty. All global economic analysts endorsed the verdict by the World Poverty Clock that Nigeria has the largest concentration of people living below acceptable poverty line.

The NNPC has maintained that resource dividend for the people could be properly preserved through operating accountability and transparent channeling of revenue receipts into the federation account for onward allocation through established disbursement models in the federating structure.

Mallam Kyari vowed that the corporation would continue to lead in accountable and transparent resource stewardship; a process which the Group Public Affairs Department has sustained through dedicated publication of the NNPC Monthly Financial and Operating Report (MFOR). The process has since earned Kyari global transparency awards.

However, the point of sharp divergence between the NNPC and organized labour remains sustained massive importation as primary source of supply in a country that is Africa’s biggest oil and gas exporter with abundant but moribund domestic refining and product distribution facilities and infrastructure.

The Nigeria Labour congress (NLC) and sister Trade Union Congress (TUC) had jointly organized mass protest against the ongoing deregulation but later succumbed to pressure by the NNPC to shelve the protests.

The September 28 protest was abandoned after the union reached a deal with the government, with assurances that the government would increase local refining capacity to ultimately reduce the cost of finished products.

Analysts put into perspective that NNPC has massive domestic fuel supply facilities and infrastructure that include four refining plants with combined processing capacity for 445,000 barrels of crude oil per day.  Total plant output nameplates are put at about 52 million liters of refined products per production day. The corporation also operated some 5001 kilometers of fuel distribution pipelines that provide flow conduits for rapid supply to all parts of the country. These are in addition to strategically spread storage facilities, pumping stations, import jetties and coastal depots.

With domestic average daily peak demand for petroleum products estimated at 52 million liters, and only marginal fields converting crude oil to fuel products with small scalable plants, Nigerian domestic economy has been fired with imported fuel since past 23 years. The bulk of the nation’s imports come from refineries at its export destinations. The paradox of net exporter and net importer has raised competence appraisal on managers of the nation’s petroleum resources.

The labour leaders are angry that government has persistently failed to revamp the nation’s downstream facilities, leading to Nigeria’s dependence on imported refined petroleum products. They argue that the situation has broadened supply cost templates with sea freight charges, international price of crude oil, cost of demurrage, numerous import taxes. They also pointed at the persistent volatility in foreign exchange rates as a result of fuel import demand.

In a communiqué issued after the National Executive Council (NEC) meeting in Abuja, President and General Secretary of NLC, Messrs Ayubba Wabba and Emmanuel Ugboaja respectively, stated that “the NEC resolved to reject deregulation as long as it is import driven.”

 “NEC reiterated the traditional position of congress that government should rehabilitate and revamp Nigeria’s local refineries as a sustainable solution to incessant increases in the pump price of petrol. The NEC posited that Nigeria’s refineries can be made to work in a short time once the government asserts the political will to do so,” the groups stated in the communiqué.

The argument by the organized labour comes at a time the NNPC is already driving plant recovery processes at its three refineries in Port Harcourt, Warri and Kaduna as part of its value optimization programme which was abandoned soon after erstwhile petroleum minister, Dr Ibe Kachikwu, had boasted to no avail that all the refineries would be on stream by the end of 2015.

Under its current management, the corporation has invited and is processing tenders for refinery rehabilitation jobs. It is also scrambling over a billion dollars from the money market to finance the contracts that entail significant retrofitting and upgrade.

A source at the refinery told Oracle Intelligence on phone that the work is designed to entail a default upgrade, explaining that new spare parts expected to be sourced from the original plant manufacturers would mean that the old plants would undergo significant modernization.

The 24 month rehabilitation programme which begins with the double plant 210,000 barrels per day Port Harcourt Refinery is scheduled in phases that include subsequent revamp of the 150,000 barrels per day Warri Refinery and the 110, 000 barrels per day Kaduna Refinery.

 An NNPC spokesman said the initial work to clean up and assess component integrity at the Port Harcourt Refinery would begin before the Easter holidays. He said the engineering, procurement, and construction (EPC) contractors are being mobilized to site and that delivery of the job is expected as early as 2023.

NNPC said that the refineries, when restreamed, would achieve 90 percent nameplate processing capacity. This indicates that the plants would then process some 400,500 barrels of crude oil to produce 46.8 million liters of refined products by 2023.

Besides the products that would churn out from the NNPC refineries, a number of private refineries of various processing capacities are also developing in the local environment to permanently address importation costs.

Most prominent is the overhyped 650,000 barrels per day Dangote Refinery whose commissioning date has remained fluid and repeatedly shifted. The refinery, when brought on stream, will produce about 79 million liters of fuel products per day, according to yield templates available to Oracle Intelligence.

Inland, proposals abound for small scalable refining programmes that will optimize value with onsite distillation plants from stranded crude oil and condensate production.

Already, the Niger Delta Exploration and Production Company and WalterSmith Petroemann have each commissioned modular refineries that produce heavier fuels from crude oil. While NDEP launched the country’s first successful modular refinery to overcome evacuation challenges at operated Ogbele marginal field, WalterSmith developed a replica at operated Ibigwe marginal field. Both have also indicated plans for plant capacity growth and upgrade programmes that would generate more value from produced hydrocarbons.

NDEP declared that it would soon start production of 600,000 litres petrol per day to complete the product range as it upgrades its plant capacity to 11,000 barrels per day.

Meanwhile, WalterSmith Petroemann which commissioned 5000 barrels per day modular plant in Ibigwe on November 24 also performed ground breaking for a total of 45,000 barrels per day of additional plant capacity to be realized in second and third phases of the refinery development.

The first phase of the WalterSmith modular refinery is expected to deliver annual 271 million litres of combined refined petroleum products including diesel, kerosene, heavy fuel oil and naphtha.

The remaining two phases of plant development are expected bring on additional capacity of 45,000 barrels per day and enable production of  annual 1.4 billion litres of combined refined petroleum products that would now competed the range with petrol, diesel, kerosene, aviation jet fuel and heavy fuel oil.

Daily peak demand for petrol in the domestic market is contested at 42 million liters. Demand for other refined fuel products is significantly less than half of average daily demand for petrol, indicating strongly that evolving plant capacity at the local refineries would far exceed local requirement.

With more plant commissioning events expected at the scalable internal refineries, it becomes understandable that government is altering commercial regulations in the domestic downstream environment towards increased liberalization and market led pricing.

However, with growing belligerence of activists against local fuel price adjustments, investors who have exposed their projects to high interest loans fret over possible roll-back of the deregulation process which could destabilize the market environment and render their operations cash negative. In the event of such dreaded circumstances, they may have no other option than to export their products to regional markets where returns are guaranteed.

The large scale Dangote Refinery is loan funded. It is also build in an export free zone, indicating that the private refinery is technically a foreign company which could decide not to sell to Nigeria. The only advantage the widely misunderstood business model offers Nigeria is basically proximity, which confers low import costs. 

Also, the NNPC refineries are also subjected to buying crude oil feedstock at prevailing international prices as part of the improving accountability profile of the industry. It means therefore that even at full capacity recovery, the NNPC refineries cannot guarantee significant price relief to the domestic consumers.

From all indications, therefore, the rising internal refining capacity emerging from a hybrid of private and public ventures will be a part of the new liberalized order which will not only eliminate import associated costs but also deepen local content value of their operations.

Obviously, the demands of the organized labour over deregulation of the local fuel market are almost delivered. 

With crude oil currently around $61 per barrel, selling 1.156 million barrels of crude oil daily to local refineries will significantly unlock more upstream production capacity outside restrictions imposed by the Organization of Petroleum  Exporting Countries (OPEC). Therefore, any arbitrary reduction in local retail prices would translate to huge foreign exchange revenue loss to the country.

Deriving higher dollar value from crude oil sales would ultimately translate to higher cost input for the refineries which will source supply from any operator in the country. Already, the Ibigwe refinery is in deal with Seplat Petroleum Development Company for feedstock for its refinery expansion plans. Such business models suggest that cost of input and price of output would all be ruled by market forces.

For the local refineries to guarantee internal market supply sustainability, therefore, all stakeholders must demonstrate willingness to provide investors the required confidence by supporting market-led reforms. This entails a binding accord to dismantle all distortions that threaten cost recovery in the market.

Dealing with these distortions entails leveling of the playing field for perfect competition. All players in the market whether public or private should and must be empowered by regulators and other government agencies with full instruments of international trade, including the required foreign exchange and permits. These will help enable them spark off competition in the market.

The biggest benefits expected from deregulation of the market are congenial investment and operating climate, competitive retail environment, and proportionate value reward system. These benefits can only guaranteed by a system that allows players to unleash value for reward while the regulator manages the rules of competition.

The foregoing throws up the point that deregulation in the context of the Nigerian situation is not limited to arbitrary price fixing and control. It does not infer that the market would be on autopilot, with players having the opportunity to fix prices themselves.

Instead, regulators should in their role of protecting national interest ensure that the emerging price environment must not confirm fears of triggering inflation in the economy and bringing suffering to the people. The emerging market scenario should, as marketed to stakeholders, mirror the liberalization in the telecommunications sector; which has empowered the people, facilitated economic growth, boosted gross domestic product, and rewarded investors.

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