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Investment in downstream sector hits N500bn

Petroleum Products Pricing Regulatory Agency, PPPRA, estimates current value of investments in the downstream sector of the petroleum industry at over N500billion.

The Executive Secretary, PPPRA, Mr. Reginald Stanley, who made this known in Lagos last week, said this level of investment underscored the need to deregulate the downstream sector to attract more investments.

He said that non-functional and low capacity utilization of refineries has resulted in inadequate supply from local refineries.

According to him, the existing four local refineries with combined capacity 445,000 barrels per day, bpd, contributed only about four to 20 per cent of the national petrol consumption in the past five years.

The development, he argued, made the increasing yearly subsidy burden unsustainable, noting that “Over N2 trillion was expended on products subsidy in 2011 alone, which is  55 per cent more than the 2011 capital budget expenditure.

“However, fuel subsidies are not reaching intended beneficiaries i.e. higher income households consume more quantities of petroleum products than lower income household.”

Speaking on the opportunities of petroleum fuel subsidy, Stanley said that in spite of some negative perceptions about subsidy especially by the developed economies, there are still opportunities.

According to him, fuel subsidy serves as incentives to increasing investment inflow based on guaranteed full cost recovery or restitution through the Petroleum Support Fund Scheme.

Furthermore, he listed other benefits to include:
Allowing effective control over transportation cost as there are no mass transit system; it affords the government the opportunity to effectively monitor and protect the developing economy against vagaries of the international petroleum market

It encourages effective regulatory controls to prevent consumers from being shortchanged and facilitates the development of healthy competition among operators

It encourages waste of limited government revenue available for social services e.g. infrastructures, education, health services and others.

However, he regretted that the mechanism for administering the subsidy does not guarantee its reaching the lower income section of the economy for which it is intended, thereby, encouraging cross border smuggling of petroleum products, which cost much more in neighboring countries. This he described as arbitrage.

Stanley argued that the deregulation of the downstream sector ultimately will bring the much needed sanity and healthy competition into the Nigeria’s downstream sector. He said that there is a huge gap in demand-supply balance, and therefore, there is the need for additional investment.

Accordingly, he added that three Greenfield refineries (with a petrochemical plant) with a combined capacity of 300,000 bpd at the cost of $23billion have been proposed. “Nigeria is therefore being positioned as the future hub of petroleum products supply in the West African and Sub Saharan regions,” he said.

Stanley noted that the investment in import reception facilities, such as jetties, ports are inadequate. “It is expected that adequate import reception facility will reduce the demurrage exposure experienced in products handling. Lightering expenses currently account for about three per cent of the expected pump price of PMS.”

The PPRA scribe emphasized the need to refurbish and adequately maintain existing products pipelines, saying, “There is also the need to develop surveillance system of the pipeline network in view of the incessant pipeline vandalism. Emerging investment opportunities abound in product & gas pipelines as the sector is being prepared for deregulation. The deregulated regime will facilitate the operations and management of pipelines and storage facilities under the open access and common carrier regime.”

He added, “Deregulation will guarantee steady inflow of investments and better management of National Foreign Reserves resulting in more stable FOREX market.  It will mitigate the initial spiraling inflationary effects by monitoring the micro and macroeconomic indices. This will enable interventions by the Government to put in place mechanisms to monitor and control food prices, transportation costs and others.  It will rapidly improve power situation and aggressively promote gas, biofuel as alternative energy for the country.”

Stanley further noted that sustaining the tempo of reforming the subsidy scheme is germane to the sustainability of Nigeria’s downstream sector, saying, “Deregulation policy if ‘carefully’ implemented will stimulate economic growth and social wellbeing of the populace. The abounding opportunities and benefits far outweigh the short-run cost of discomforts.

“It is however instructive to note that deregulation without ‘regulatory controls’ leads to the development of anti-competitive practices and profiteering of operators. Regulators therefore are ’watchmen’ making and implementing policies to prevent consumers from being shortchanged and ensure that operators are adequately restituted. Regulators also ensure that there is a level playing ground for all genuine operators.”


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