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Nigeria needs to liberalise the downstream petroleum sector to drive investments
Q: Oil Marketers have been calling on government to deregulate the downstream sector for its efficient running for a while now, what is the cause of the delay by government?
I would not say it's a delay because Government is fully aware of the merits in implementing the deregulation policy; but the president believes in pursuing policies that will be beneficial to the Nigerian people, and he is consulting widely with all key stakeholders to arrive at the most ideal approach to the implementation as there are different views and arguments surrounding the method of implementation.
There are also several micro and macro market dynamics that need to be fully evaluated before taking these decisions. First will be price control, and then the effect of the global market.
Government understands that it's in its best interest of Nigeria long term to liberalise the downstream petroleum sector so it can free itself from the burden of under-recovery - monies that can be reinvested into infrastructural development, education, health care, etc to enhance the living standards of the average Nigerian. Truth be told, subsidizing consumption over production is detrimental to any economy. You will recall that a recent newspaper report puts the fuel under-recovery NNPC incurred as at December 2018 to over N600bn, for an 11-month period. That money can be put to better use.
Q: Most IOCs have divested from the sector and exited the country. Why are they in a rush to leave, what is the cause?
Most IOCs with the exception of Total exited their downstream activities several years ago. I cannot say why an IOC left, however the level of (price) regulation in the industry coupled with the fact that the government is both a regulator and a player in the same industry, could have played a role. Price regulation ensures that marketing companies cannot charge cost-reflective tariffs at the pump. Price regulation also means that when product price fluctuates with global crude oil price, marketer margins are the easiest to sacrifice to attain the stipulated pump price.
Q: How is the downstream sector presently faring in the face of low margins to the operators?
The sector is struggling amid thinning margins which is hampering investment opportunities that will boost operational efficiency, global standard health & safety practices, and improved customer service delivery amongst other things. We will not fail to acknowledge the efforts of the National Assembly to resolve the long outstanding subsidy payment but this delay has greatly impacted major marketers operational liquidity.
Q: What is the solution to the myriad of issues facing the sector?
The common factor underling the issues in the downstream sector of the petroleum industry: be it health & safety, operational efficiency, customer service delivery or other inefficiencies is the inadequate investment in the industry. This can only be solved via a liberalised market where investors feel comfortable to inject the required capital to improve the value chain.
A lot of stakeholders have been calling for deregulation as the current under-recovery is not sustainable considering the contraction being felt in the economy, so the solution would be deregulation including pump pricing.
Q: Why does it appear difficult to get the government to deregulate the oil sector despite the benefits to the GDP of the country and the consumers?
The point has been made in my earlier response. The government is looking to implement this while mitigating the impact on the Nigerian customer.
Q: How much can be saved by government if it stops subsidy and how can the amount be spread across other sectors that will directly impact the citizenry?
If we extrapolate based on the report released in 2018 that the NNPC was incurring an average of over 55bn monthly that gives you an idea of what can be saved.
These monies can boost our health care, education, electricity and other critical sectors of the economy.
Q: What is your view about NNPC being the dominant player in the sector and does it not suggest that it is tactically squeezing oil marketers out of business?
Marketers have had to stop fuel importation because of the accumulated debt owed to them from earlier imports and banks were no longer willing to offer credit lines to marketers anymore due to the huge debt profile of marketers. So it became imperative for NNPC to lead the charge.
Currently, the regulated petrol pump price of N145/litre leaves an import deficit considering today's FX rates. With the current rate, the actual pump price of petrol should be over N180, hence only the NNPC can afford to import petrol and cushion the effect of the deficit on the industry.
Q: There is the perception that oil marketers are behind the present call to increase the price of PMS that they are milking the system and getting free money through subsidy. Is it true?
Well, if you have been following the media landscape, you would have noticed that analysts, notable economists, civil societies and labour unions have seen the merit in deregulation and have joined voices in this discourse, so it is not a case of push from petroleum marketers.
In a recent submission by the Emir of Kano, he referenced his time as the CBN governor where he stated that as far back as 2011 before NNPC commenced the under-recovery initiative, Nigeria made $16bn from petroleum sales, spent $8bn importing petroleum and another $8.2bn subsidizing the product and he asked, if this was sustainable? Even the average Nigerian thinks subsidy doesn't benefit the masses and must be removed. This is not just a call by the petroleum marketers, this is for the good of everyone who is interested in a prosperous nation.
Q: How can Nigeria's downstream sector align to global best practices that will guarantee investments and the development of the country's oil and gas assets?
Regulators and industry associations like MOMAN have a huge role to play here. In South Africa for instance, SAPIA plays a strategic role in ensuring compliance with regulatory standards as well as industry transformation and skills development. MOMAN is treading that path already - ensuring regulatory Health, Safety, Environment and Quality, corporate governance, and customer service standards at the minimum are implemented.
There are opportunities in advancing technological innovation in the downstream sector. If we are able to attract investment, we can revolutionize the way trucks are receiving and delivering products with minimal losses; we can efficiently run an integrated system from the depots to the forecourts where the products are sold to the delight of the Nigerian Customer which will guarantee the quality and quantity of every litre sold at our retail stations.
Q: Has government finally paid all debts owed oil marketers?
The government recognizes the impact that the debts have had on businesses and has made immense and commendable progress towards making the monies available.
We have received promissory notes for some of the monies owed; the Debt Management Office is processing the balance which we hope to receive within weeks.
Q: How is MOMAN engaging the government to fashion out a way out of all the issues?
We have engaged government through strategy sessions, presenting our cases in the most transparent way; we have also demonstrated our capabilities to transform the industry despite the challenging business environment. We recently presented our sustainability report to the government to demonstrate our corporate citizenship initiatives.
Q: What's your message to the government and the public as regards the way forward to develop the downstream sector?
There is a symbiotic relationship between deregulation and development. If Government supports the call to deregulate, the country will experience monumental development in most, if not all spheres of the economy. In the downstream sector, the Nigerian customer will be able to access quality fuels at competitive prices.
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