Nigeria trudges on with full deregulation

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Deregulation and the attendant hike in fuel price, amid the COVID-19 pandemic, is generating controversy across the country and has pit the people against the government. This article explores the arguments in support and against the policy and changes that are expected in the short to long term.  

The Federal Government, in March 18, 2020, achieved a major milestone in the downstream petroleum sector, with the announcement of full deregulation of the industry.

This move was considered a bold step, as the issue of deregulation and fuel subsidy removal had remained controversial issues in the Nigerian political and economic space.

However, the policy was bedeviled by uncertainty and lack of clarity, especially as government had been giving conflicting information about the policy. Initially, the government had stated that it would hands off the fixing of prices and allow marketers to determine the prices.

Few days after, the Petroleum Products Pricing Regulatory Agency (PPPRA) said it would not allow marketers to be solely responsible for fixing the price of Premium Motor Spirit, PMS, also known as petrol.

Again, few days after, the same PPPRA recanted, stating that it would no longer interfere, and that marketers were now free to determine the prices, while it added that it would continue to regulate the sector to ensure consumers are not exploited by the marketers.

Announcing the policy, Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPPRA), Mr. Abdulkadir Saidu, had stated that deregulation of the sector was in the country’s best interest because competition has a way of forcing down prices and ensuring that companies place a tight rein on production cost such that wastes that could be passed on to consumers in form of high prices are eliminated.

Mr. Abdulkadir Saidu

He said: “The trillions of naira that would have been spent subsidising PMS could be injected into other key sectors such as agriculture, education, health, power and infrastructure.

 “There will also be focus on the provision of social safety nets for the poor who bear the brunt of the COVID-19 pandemic.

In addition, giving the guidelines for the policy, Abdulkadir stated that under the market-based pricing regime, products prices would be determined by market forces, adding that this explained the downward and upward movements in the guiding pump price band of PMS, which reflected market realities.

He said: “The agency shall monitor market trends and advise the NNPC and oil marketing companies on the monthly market-based guiding price which shall include the indicative retail price at which the product shall be sold across the country.

“The Federal Government would continue to monitor the price of petroleum products and advise on monthly guiding prices that guaranteed reasonable returns to operators while ensuring consumers paid appropriate prices in line with market reality and were not overcharged.

“The government’s role in a deregulated economy was to provide, through the operation of the Petroleum Products Pricing Regulatory Agency, a pricing mechanism to create a market-driven price regime.”

On his part, explaining the rationale for the policy, Minister of State for Petroleum Resources, Chief Timipre Sylva, stated that after a thorough examination of the economics of subsidising petrol for domestic consumption, the federal government concluded that it was unrealistic to continue with the burden of subsidizing PMS to the tune of trillions of naira every year.

This, he said, becomes even more relevant, especially as subsidy was benefiting in large part, the rich, rather than poor and ordinary Nigerians.

According to Sylva, when crude oil prices were down, government, through its regulatory functions ensured that the benefits of lower crude oil prices were enjoyed by Nigerians by ensuring that PMS price was lowered, adding that at that time, the government indicated that increase in crude oil prices would also reflect at the pumps.

Chief Timipre Sylva

He blamed fuel subsidy for the low refining capacity in the country, noting that subsidy made it impossible to attract the much-needed investments into the refining sector.

He said: “This is a necessary action taken by a responsible government in the overall interest of Nigerians. Indeed, one of the reasons we have been unable to attract the level of investments we desire into the refining sector has been the burden of fuel subsidy.

“We need to free up that investment space so that what happened in the banking sector, aviation sector and other sectors can happen in the midstream and downstream oil sector.

“We can no longer avoid the inevitable and expect the impossible to continue. There was no time government promised to reduce pump price and keep it permanently low.”

He called on Nigerians to ignore the antics of unscrupulous middlemen who would want status quo ante to remain at the expense of the generality of Nigerians, noting that in addition to attracting investments and creating jobs and opportunities, the deregulation policy would free up trillions of naira to develop infrastructure instead of enriching a few.

He said: “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 supplier of Petroleum Products.

“This means also that market forces will henceforth determine the prices at the pump. In line with global best practices, Government will continue to play its traditional role of regulation; to ensure that this strategic commodity is not priced arbitrarily by private sector suppliers; a regulatory function not unlike the role played by the Central Bank of Nigeria in the banking sector; ensuring that commercial banks do not charge arbitrary interest rates.

“Petroleum products are refined from crude oil. Therefore the price of crude (the feedstock) for the refining process will affect the price of the refined product.”

He, however, maintained that the government was mindful of the likely impact higher PMS prices would have on Nigerians, adding that to alleviate this, the government was working very hard to roll out the auto-gas scheme, which would provide Nigerians with alternative sources of fuel and at a lower cost.

Furthermore, harping on the alternative to PMS, Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, pledged to support ongoing initiatives by the Ministry of Petroleum Resources to provide alternate energy source to Nigerians through aggressive activation of Compressed Natural Gas, CNG, refill stations for motorists across the country.

Kyari affirmed that the NNPC had already keyed into the gas penetration agenda as championed by the Minister of State for Petroleum Resources, Chief Timipre Sylva.

He said as an energy company with focus on cleaner and cheaper sources of fuel, the NNPC would continue to work with other stakeholders in the industry to provide viable alternatives to petrol, which would ultimately lead to reduction in demand for the product and eventual reduction in price.

Mallam Mele Kyari

Kyari also shed more light on the status of the nation’s refineries, noting that the plants were deliberately shut down to allow for a robust diagnosis of the issues which have overtime made it impossible for the facilities to operate up to their name plate capacity.

He added that the shutdown also became inevitable due to difficulties in feeding them with crude oil via the pipelines that have been completely compromised by vandals.   

He said the corporation was moving rapidly to execute complete rehabilitation of the refineries under an exercise that would guarantee restoration of the facilities to at least 90 per cent capacity utilization.

 Also speaking in support of the deregulation policy, Chairman of Major Oil Marketers Association of Nigeria, MOMAN, who is also the Chairman/Managing Director, 11 Plc, Mr. Adetunji Oyebanji, said: “Despite some issues associated with it, deregulation is the best foundation to grow the industry. They should open up NNPC assets like pipelines and depots to third parties. They should also grant all players equal access to forex, so we don’t have a single entity involved in importation.

“However, we are just starting the process. It is a beginning; eventually it will bring development to the industry, attract investment, create jobs and grow the economy.

“In a deregulated environment, prices will go up and down with market forces. It is to be expected.  At times, it will go up and at times it will go down. Since we are importing almost 100 per cent, the movements will follow the movements in the international product prices.

“Only one importer is a monopoly. I don’t think that augurs well for competition. If all players have equal access to foreign exchange at the same rate, then we would have a level playing field.

“If Company A can bring in product cheaper than Company B, it can compete on price. This will not happen as long as only one entity is importing and determining who gets what.”

In its own submission, the Nigerian Economic Summit Group, NESG, also applauded government’s decision to deregulate the sector, noting that the benefits would ensure smooth functioning of the petrol market.

In a statement by Chairman of its Board of Directors, Mr Asue Ighodalo and NESG Chief Executive Officer, Mr. Laoye Jaiyeola, the NESG commended government’s actions at deregulating fuel and electricity prices and urged that proper policies, processes and procedures be put in place, to ensure that all the reforms (beyond price deregulation) necessary to facilitate the smooth functioning of market are effectively and conclusively implemented.

The NESG said: “Adequate communication to stakeholders and the general public on the benefits derivable from these actions must also be regularly carried out. NESG notes the nation’s huge exposure to the vagaries of oil price fluctuations and emphasizes the need for a better structured and effective diversification of the economy.

“However, NESG is not oblivious to the continuing crucial role of the oil and gas sector in our economy. Accordingly, we applaud the work now being done by the Presidency to see to the quick passage of the Petroleum Industry Bill (PIB), and urge further stakeholder consultations so that the resultant law will create the required enabling environment for investment flows, reserves enhancement, technology transfer and utilization efficiency.”

On his part, Ghana National Petroleum Corporation (GNPC) Professorial Chair, Oil and Gas Economics and Management, Institute for Oil and Gas

Mr. Adetunji Oyebanji

Studies, University of Cape Coast, Professor Omowumi Iledare, put the real price of petrol in Nigeria at between N200 and N215 per litre, stating that the NNPC was magnanimous to sell the commodity at N151.56 per litre, ex-depot price.

Iledare, who is a petroleum economist said: “The N160 per litre price in my opinion is social optimal price. The range to guarantee fair return, looking at foreign exchange, is about N200 to N215 per litre.

“It should be noted that 50 per cent to 55 per cent of the total accounts for crude cost, 15 per cent to 20 per cent transportation and Value Added Tax (VAT) about eight per cent, while distribution and marketing attract 15 per cent margin.

“I empathize with Nigerians on the seemingly immediate pain but this is going to be temporary compared to not deregulating. Deregulation is a necessary and inevitable decision for the government to make now to avert the eminent collapse of the energy sector.

Mr Asue Ighodalo

“With perseverance, Nigeria will be better off in the long run if this subsidy gorilla is tamed once and for all. However, the optics must meet the rhetoric and action. The executive needs to do something with Petroleum Products Pricing Regulatory Agency (PPPRA) and Petroleum Equalisation Fund (PEF) to substantiate the deregulation direction.

“People are still making the mistake of thinking the increase of PMS pump price is a removal of subsidy. It is not, as long as NNPC continues petroleum product importation via the use of federation assets (crude oil that belongs to Nigeria and not to NNPC) to meet domestic demand and equalization charges are still paid out by PEF to maintain uniform pricing nationwide, then subsidy is very much alive, perhaps indirectly.”

Professor Omowumi Iledare,

However, despite the fine points laid out by supporters of the policy, there are still  larger dissenting voices, led by ordinary Nigerians and labour bodies, who are arguing that that the hike in the prices of the commodity, which accompanied the deregulation policy, was coming at a wrong time and would further worsen the sufferings of ordinary Nigerians.

Specifically, President of the Nigeria Labour Congress (NLC), Comrade Ayuba Wabba, described the hike in the price as unnecessary and an attempt to further impoverish Nigerians.

He said: “Clearly, the action of the Federal Government is most insensitive and an affront to the Nigerian people who are bearing heavy burden of the COVID-19 pandemic. Everywhere in the world, governments are granting various types of palliative but ours is interested in piling more miseries on its citizens. We will resist this latest move to impoverish the mass of the working people.”

Wabba emphasised that the government failed to acknowledge the fact that the naira had been on free fall for many years, which had also affected the prices of commodities.

“The point we have made is that many Nigerians have been pushed to the edge and it is insensitive to increase the prices of the two commodities at the same time-petroleum products and the electricity. You can see the impact already in the prices of bread which have increased from N250 to N300,” Wabba added.

Comrade Ayuba Wabba

The President of the Trade Union Congress (TUC) Comrade Quadri Olaleye, bemoaned the fact that the increase in fuel prices and electricity bills, coming at a time people were losing jobs, when businesses were adversely affected by COVID-19, were wicked steps.

He said: “They have developed a thick skin that our pleas and cries no longer mean anything to them. No government has raped this country like the present one; ironically it has enjoyed our understanding the most. They beat us and when we cry, they send security operatives after us or force us to pay a fine of N5 million for ‘hate speech’. Our patience has run out.”

Also, the Petroleum and Natural Gas Senior Staff Association of Nigeria argued that the recent hike in fuel price was not caused by the global price of crude oil but a deliberate devaluation of the naira by the Federal Government.

The President of PENGASSAN, Comrade Festus Osifo, said: “The driver of the pump price is the currency exchange. What has necessitated this today is not actually because of the fact that the product pricing is increasing internationally. The crude oil price relatively in the last six months has been hovering between $40 and $45 per barrel.

Comrade Quadri Olaleye,

“But what has necessitated this is actually the devaluation. Today, we observe that in the last three months, we have had a 25 per cent devaluation of our currency. The government did it deliberately to have more money.

“They now have more money having done the devaluation and are now passing the burden to us because petroleum is not refined in Nigeria but abroad and everything is priced in dollars. The cost of crude oil, labour cost and all other costs that go into it, as they are priced in dollars.

“So, by the time you bring it to Nigeria and ask us to pay in naira which has been devalued, by the time you factor in the 25 per cent devaluation of the naira, you will have to pay more.”

The PENGASSAN boss further stated that the landing cost which had increased was solely determined by the Federal Government and was paid in naira; hence, it ought not to have been reviewed upwards.

“For us, this is not the best time. If as a government you have devalued your currency and you are making 25 per cent excess on top of your currency, which is fine, then, you have more money to pay workers and meet your naira need, it is fine.

“But again, you are telling us that the landing cost has increased in naira. Not necessarily in dollars, and you are also passing that unto the majority of the Nigerian citizens. I think this is double jeopardy and all stakeholders need to engage with the government.”

He argued that increasing fuel price in 2020 in the middle of the global COVID-19 pandemic and a worsening economy would exacerbate the suffering of Nigerians.

Comrade Festus Osifo

“I think the timing today is even more problematic compared to 2012 because we are battling a pandemic. I can tell you that for a lot of households, their income has diminished; a lot of businesses have been shut down since March.

“I can tell you that today, Nigerians are facing hardship. I believe that 2012 was a bit better than it is today because the pandemic has ravaged the average household in Nigeria. You have seen the recent figures from the National Bureau of Statistics. We are actually in negative Gross Domestic Product. By the next quarter, we could be in recession. This is not the right time to have done this,” Osifo noted.

Furthermore, apart from price changes, the deregulation policy has also thrown up a number of other issues, such as the role of some government agencies, going forward.

Specifically, immediate past President of the Society of Petroleum Engineers (SPE), Mr. Joe Nwakwue, called on the Federal Government to immediately find new roles for the Petroleum Equalisation Fund (PEF) and the Petroleum Products Pricing Regulatory Agency (PPPRA), stating that the downstream petroleum sector regulators would become redundant and irrelevant under the current policy of deregulation.

Speaking in Abuja, at a capacity building workshop on the Petroleum Industry Bill, PIB, Nwakwue, however, cautioned against outright scrapping of the agencies, to avoid worsening the country’s unemployment situation, with the sack of their staff.

He advocated replacing PEF with the Petroleum Infrastructure Fund, PIF, while he stated that the PPPRA, lacking in commercial regulation, would be difficult to function in a deregulated sector.

He said: “The PEF helps equalise petrol price across the country, because we had sought to provide a uniform price of petrol across the country. It is an agency that collects and disburses equalization funds. Under a fully deregulated market, the promise of a uniform price across the country is eliminated. Even under the equalization price, petrol was not sold at a uniform price.

Mr. Joe Nwakwue

“The notion that we were equalizing price was never feasible and not right. I lived in Eket for five years, there was no day that the price was uniform in Eket with other parts of Nigeria. The existing model of equalization has failed; then one would ask, why would one want to keep an institution that had failed in its duties?

“If we deregulate fully, there is no promise of uniform price, which also means there is no need for price equalization, ensuring that the body should be shut down and used for another purpose.

“I suggest PEF be restructured to an infrastructure fund that would identify commercially viable and feasible private sector project, invest and take equity stake in them, like the Sovereign Wealth Fund, SWF.

“FG would not have had any need to go borrow $2.8 billion to build AKK; it would have partnered with some investment consortia and the infrastructure fund to provide the funding for that project. The essence of transitioning it to infrastructure fund is so as not to dismiss its staff.

“What has PPPRA been doing since 2015 that Premium Motor Spirit price had been fixed at N145 per litre. However, shutting them down would create an unemployment and labour crisis; so, they need to be re-purposed.”

He further stated that the Federal Government should completely do away with the temptation to resume fixing of fuel price, stating that government should instead be concerned with regulation of the sector.

He said: “We should do away with fixing prices; let the market determine the prices. Attempt should not be made to regulate the prices, market forces should be allowed to fix the prices. The fully deregulated market option is our best bet.

“The notion that should happen is the regulation of quality and quantity, not price. People should be served the right quantity of products paid for and the quality sought.”

Dr. Billy Gillis-Harry

In addition to the issue of structure and appearance, there are still complaints by some operators in the downstream sector of uncertainty and lack of clarity in government’s stance concerning the deregulation policy.

Specifically, National President of Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN), Dr. Billy Gillis-Harry, disclosed that the decision of the marketers to hands off fuel import stemmed from the uncertainty, policy inconsistency and lack of clarity of governments’ plans and programmes for the downstream sector.

He argued that once the deregulation is properly outlined and the rules of engagement brought out, its members, comprising major and independent marketers, as well as depot owners, are ready to commence fuel import.

He said: “We can import products. Marketers, depot owners, they are all ready to get into the business and make it beneficial. But you cannot invest money in a business that you are going to lose. There is no deregulation that the government cannot still regulate some part of it. So why delay?

“In reality, there is no way any marketer, retail outlet owners, or tanker and depot owners, would invest in a business where they cannot be certain that they would make profit. It helps when the government clearly defines the guidelines of the full deregulation. Even if it is the partial deregulation that had already given us some level of authority to play in, without being able to import our own products, we have to know exactly what the rules are.”

He also stated that currently, there is the absence of a level playing field in accessing foreign exchange, and government’s failure to develop a clear policy on modalities by which oil marketers can access dollars from the Central Bank of Nigeria (CBN).

In particular, he claims that in several meetings between oil marketers and the Ministry of Petroleum Resources, the government officials would claim to have issued directives to the CBN to make foreign exchange available to marketers at certain rates, when importing fuel, noting, however, that on approaching the CBN, the marketers would be told they are not aware of such deal.

The oil marketers claimed that they are willing and ready to immediately resume fuel import, but access to foreign exchange and lack of enabling laws and guidelines backing the pronouncement of deregulation would continue to deter them from importing.

Gillis-Harry said, “We, as Nigerians, have only one guaranteed and legal source of getting funds for international trade transactions of any kind, and that is only from the Central Bank of Nigeria (CBN).

“One of the things we have canvassed at PETROAN is that all FOREX allocations for any of our transactions should be on a level playing

ground.  Nobody should access dollar at a privileged price above the other.

“Whether, it is Major Oil Marketers Association of Nigeria (MOMAN), Depot and Petroleum Products Marketers Association of Nigeria (DAPPMA); Independent Petroleum Marketers Association of Nigeria (IPMAN) or PETROAN, we should all have access to dollar at the same price. That way, the market would be properly defined by market forces.”

He maintained that oil marketers were fully in support of deregulation; noting, however, that they want the government to do the right thing to ensure that the rules are properly spelt out and policies are clear enough to enable oil marketers understand government’s plans and roadmap, to enable them know what to do at any given time.

In addition, issues surrounding the legality of the policy were also called to question.

Particularly, an energy expert and Senior Partner, Energy & Commercial Contracts, Primera Africa Legal, Mr. Israel Aye, noted that while it was within the powers of the Minister of Petroleum or his delegate to remove under-recovery on petroleum products, especially as it was in line with the oil and gas policies, until the Petroleum Act was amended, the government could not have been said to have deregulated the downstream petroleum sector.

He said: “The bedrock of the regulation of the downstream and petroleum product price control is Section 6(1) of the Petroleum Act. Until we change the law, the minister may hardwire the removal of subsidies and formally replace it with the Price Modulation template (2015), assuring bulk importers that they can sell at cost-reflective prices subject to price regulation mechanisms prescribed in the regulation.

“In order to deregulate the downstream sector, we need to amend or expunge Section 6(1) as it is currently written. We need a framework that prescribes the role and responsibilities of each institution taking decisions at every point in the petroleum producing pricing process.

“We need a framework that shows how the pricing template was arrived at, the intervals of the price modulation adjustments, whether monthly, quarterly, weekly or daily.

“There must be an agency legally empowered to handle the responsibility of modulation of petroleum products prices in the country outside the NNPC, which should be allowed to face its responsibility of handling the operations side of the business.

“We must demand an open and transparent process to handle all the issues in the price modulation value chain to remove arbitrariness and exploitation.”

He, however, explained that the much-needed reforms of the Nigerian petroleum industry would be achieved by the passage of the Petroleum Industry Bill (PIB).

However, despite the controversies and false starts, it appears the Federal Government is bent on continuing with the policy and Nigerians, despite the pains, are hoping that the policy benefits them in the medium to long term.

It is hoped that the policy would bring all the advantages promised by the government, such as grow Nigeria’s refining capacity, force down the price of petroleum products, release funds hitherto used for subsidy on other project and speed up Nigeria’s economic growth and development.

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