Conference Hall

May 22, 2014

Liberalisation, deregulation will unlock down stream sector

Liberalisation, deregulation will unlock down stream sector

Mr. Ladi Cole, •Mr. Bayo Olowoshile, Mr. Hugo Odiogor, Mr. Ken Ogaziechi, Mr. Babatunde Oke and Mr. Henry Boyo at the Vanguard Conference Hall. Photo: Kehinde Gbadamosi

So far, participants have examined issues relating to human and technical capacities, the interplay between exchange rate manipulation by the central bank and its impact on the ability of business people to set up private refineries.

Also germane to argument is the deficit in infrastructure as well as the policy options to develop the downstream sector. In this concluding part, the crucial issues of deregulation, liberalization and privatisation are explored as the essential tools to attract investment into the downstream sector of the petroleum industry.

IF I build refinery in the country, rather than going out to buy at the same international price, you buy from me but I don’t care how you get the subsidy.

Mr. Ladi Cole,  •Mr. Bayo Olowoshile, Mr. Hugo Odiogor, Mr. Ken Ogaziechi, Mr. Babatunde Oke and Mr. Henry Boyo at the Vanguard Conference Hall. Photo: Kehinde Gbadamosi

Mr. Ladi Cole, •Mr. Bayo Olowoshile, Mr. Hugo Odiogor, Mr. Ken Ogaziechi, Mr. Babatunde Oke and Mr. Henry Boyo at the Vanguard Conference Hall. Photo: Kehinde Gbadamosi

There is one principal thing that bothers government today, that is N1.3 trillion annual subsidy is too high. So none of the dreams of government is to encourage the building of local refineries and still continue to pay for subsidy, they must be able to stop the payment of subsidy which is on the high side so long as they have built local refineries.

But even with the issuing of license to build refineries, government is still need to becareful about it. They are also spending less on subsidy this year than previous years, so they have been withdrawing. Instead of giving whole license in the first quarter of 2014, it was when people started complaining that import allocation for Q1 was released.

Even when people complained, did they did not give to the entire marketers maybe 30 per cent is what gave out, that is why you are seeing this queues in our filling stations.

Even if Dangote is coming
with his refinery, I don’t think government wants to continue with the issue of subsidy. So we need to think beyond what Dangote is thinking because government would not buy into idea of producing in Nigeria, selling at international price and still expected to pay for subsidy. So what else should be done?

What is our problem? Our problem is that we have looked at different modules of privatization. If you go back to UK you will realize that most of the things we do today is of Margret Thatcher syndrome. We saw what Margret Thatcher did in UK, we bought into Nigeria, but today some of those privatized companies are being rationalized. For instance, the railways are getting back, even their energy sector they are now rethinking if what they did is giving them what they expected.

In Nigeria, most of the things that were privatized have not really performed the way they should.

Look at the telecom sector today, what we have done there in Telecom sector is liberalization because NITEL, MTEL are still there. What Government did with Pentascope was concession, but they later realized that the N100 billion that was in the account had being squandered by Pentascope. They took back the concession and they have been thinking of what to do next. Nobody has told us the amount other agencies and individuals are owing NITEL, but they were telling us what NITEL was owing and they want to liquidate.

We have looked at the different models of privatization and some people would say; let them buy over these assets and turned it to the benefit of Nigerians, but what we have seen is that if you libralise the market, it works better than going into full privatization because has never worked the way it should.

However, if we must privatise, let us begin to work through a public-private sector so that there would be some check and there should some measure of yardstick in ensuring that most privatization gives back added value back to the country and how they are able to bring back that multiple effect otherwise they should be a way of calling back those assets that have not been properly cared for as it relates to the

However, if we must privatise, let us begin to work through a public-private sector so that there would be some check and balances there should be some yardstick in ensuring that most privatization gives added value to the country and how they are able to bring back that multiple effect otherwise they should be a way of calling back those assets that have not been properly cared for as it relates to the commitment at the time of the bidding.

On our part we had an agreement with government when they went looking for investors to buy the refineries and we all agreed that they are not going to sell them because outright sale of the refineries is not the solution. What is the solution?

First, what has been the problem that we have had with the refineries? One, we have problem of the enabling environment, we also have problem of security which is key. If the government is unable to overcome these challenges of pipeline security and how to protect the facilities, then many people would have difficulties in building refineries not to mention the issue of getting the refineries linked to the various pipelines. We need to attend to this.

Ken Ogaziechi

Ken Ogaziechi

The other issue is-how do
we support them with crude supply because it is not as if these refineries cannot produce even the Port Harcourt refinery in its current state if proper TAM (Turn Around Maintenance) is done will operate optimally.

Proper maintenance

The manufacturers of these refineries often that every two years, proper maintenance routine must be undertaken, If we miss the maintenance procedures, you can’t expect the refineries to operate perfectly. Unfortunately, the interference of government in the run of the operation, management and funding of the refineries has been the bane of this country and of course we will not agree with government to have it their way.

However, if there is a mix of public private sector just like the NLNG model where we have certain per cent going to Shell, Total and Agip while government holds 49 per cent has been the magic and success of the project. But then we would ask why is it working?

Maybe the off-take price was internationally agreed on at a concessional rate, maybe a lot of free holidays like tax concession were given and there was a guarantee of gas supply for about 20 to 30 years. So no matter what happens, the IOCs have been able to seal the agreement is such as way that fringes in their relationship with their international partners, which means they have wisely secure their business until the next 25 years.

International partners

It also has it snag because government are saying that they are not making enough revenue from the project. One of the problems why train seven has not been sign is that government said the relationship needs to be review. Government is of the view that they have had allowed the IOCs to have a free day and government has now realize that the project is more profitable than what was presented before them at the initial time of the agreement.

However, the IOCs said as far as they are concern, there is a 25 years agreement with their international partners and the agreement cannot be changed because Nigeria is not the only country selling gas, there are other parts of the world that sell gas hence there is every need to be competitive in the market.

Therefore, government feels that something needs to be done and that was why when they had a problem recently and they wanted tax waver, government told them to go and pay their tax because they have been given enough concession.

So some of these problems that are on ground, we have to ensure that we have a balance between government take, the private sector take and of course how to protect and sustain Nigerians who are meant to get the benefit of employment on a growing concern basis.

We need to tell ourselves the truth, how do we ensure that the private sector is made to align with our culture of business and over exploitation and undermining the ultimate interest and objectives of Nigerians and Nigeria because if you look at it today, the downstream is the beginning and it is going to be the end all over the world.

Like you rightly said, you would expect that we are able to produce locally but government focus is on quick money because the threshold of our budget is oil and I still believe that over 100 percent of our budget is oil dependent it is  monolithic, we are not changed that culture and where the other money is going to only God knows.

So we need a clearer un
derstanding on all the issues surrounding local refineries. Nigerians must be able to have future in their country because building the refineries, there must be some certain conditions that must be keyed into the relationship and how the whole refineries would be privatise.

We believe first you must start with libralisation. Forget about running into privatization in such a way that you want to sell the refineries because they are not carcass. Go to South Africa, Ghana, those refineries are quite old but I can tell you that they can still be sustained in the next 50 years, depending on how sincerely they are managed and the kind of managers that are kept there.

Even if they are going to sell it, those conditions must be put right, that is the right infrastructure, the right policies, the right institutional frame work is what we need. If we don’t get these things right, I don’t know where we will be and how we are going to achieve the appropriate direction toward local refineries and ensuring that we are locally dependent and in terms of petroleum products.

Oke: Let me add to what my Comrade has said. The issue of privatization in Nigeria you will notice that most of the problem that we have is that of corruption. Let’s take for example the issue of we want to sell whatever comes to place.

Babatunde Oke

Babatunde Oke

During Murtala regime and after the civil service became something else because everything has to go consultancy, contracts, and what have you. Most of these functions are performed by the civil servant in past and the same problem that we have with our members who are working in the refineries till now. Some of them are trained in Russia to maintained and repair the refineries and they have the technicality and knowledge to do the job.

When the issue of refinery came up, the Petroleum Minister mention it in London, our people came up and said ‘how can you said we should sell these refineries’ government promised that they would do Turn Around Maintenance of these refineries and they have not done it and that most of the equipment needed for the maintenance they have it in the plant. They suggested that people should be brought to supervise while the trained Nigerians will do the job but because government has not been yielding to their plans, they gave another suggestion.

They said that for these refineries to work, there some are things that needs to be done there, they said they can make it work at least about 80 capacity but they gave government the ‘must do’ which is the engineering part.

After giving their ‘must do’ to the government, they gave it to the Minister after that, they gave it to the technical committee set up by the NNPC. The prices that was in that quotation was jerked up and the workers said NO because government said that they have some items for the maintenance about 30 per cent of it on ground and they carry out the ‘must do’ with about $100million or there about.

But they said no because they have given it to a consultancy firm for $350 million and the workers still insisted that the job should be done but nothing has been done till now and no reply has been gotten from either from the NNPC or the Ministry of petroleum.

These workers are still there and they are confident that they can turn the refineries around so why can’t the government give them the chance to do it.

Now let’s look at some of
the companies that have been privatized in the past, look at NITEL, Ajaokuta case, PHCN, and Daily Times, Nigeria Airways, have we had success stories on all these privatization? No, we have not, so why do we think the government should go ahead and privatized the refineries.

What happened to PHCN was the fault of government not the fault of the managers. It is government because people were saying don’t do this, don’t do that but they left NITEL to rot and that is what the Minister said during one of our meetings with her. She said if we don’t want the refineries to be privatise then they will leave it that means they want to leave it to rot and by then just like Mr. Cole said, it would worth nothing then they will sell it at give away price to themselves.

That was what they wanted to do with Unity Schools because of the properties. It took journalists, civil societies to stop that project. They have already divided how they are going to share the unity schools to themselves before the fight started.

Supply of feed stock

The major problem with the refineries is the supply of fixed stock and that is the crude to the refineries my boss here has mentioned it but the workers also came out with another option. If they can’t pipe it after all we have been exporting this crude through barges and through vessels, so why can’t we use the same system?

They said no, every year they have allocation of crude to these refineries, who is claiming those allocations? Who have them? The crudes are not getting to the refineries, they stop piping it, then who have the allocation? Who make use of it? Nobody knows.

Corruption has to be checked first if government want, to privatize the refineries, let them start by punishing those contractors who failed to carry out the TAM, Turn Around Maintenance. At a time they the contract to Total and they accepted but government renege on the contract agreement simply because they wanted to inflate the agreement but Total said no and because they have paid Total the mobilisation fee then Total said if government does not want them to do any more they will go away and that was what happened

KEN: What am saying is that whatever is the intention of government, the idea of selling the refineries is good because it will guarantee jobs. In the past eighteen years, I have seen managers who go to the refineries without doing any work. The refineries have been shut down for most of the time and people have been earning salaries.

If you ask them to operate the refineries, they cannot because they have not had three complete years of experience of operating a refinery.

If as a businessman and I run a refinery, I will look for alternative sources to get crude supplies. If the pipelines are breached, a businessman will look for alternatives which Mr. Cole just mentioned.

You can move the crude oil through barges. The businessman would not tie down his capital because he would be paying the banks for the loan.

Private operators will be more ingenious to manage and operate these refineries. They should not want their money to be tied down unlike what we have today where the Port Harcourt refinery that the Turn Around Maintenance was given to Chyoda at the Japanese company that worked on the Kaduna refinery. They handed the job to JGG who declined because of insecurity in the Niger Delta, they handed it over to their Italian partners.

Bayo Olowoshile

Bayo Olowoshile

Olowoshile: I can tell you that typical businesses that have been sold, look at the Aviation sector, the steel sector, the shipping line the model of the private sector is either this thing work or I canibalise it and divert to my use, that is why labour is saying that if the enabling environment is frustrated. A typical businessman will begin to think of alternatives that is what I am saying.

Business cannot be straight forward business to into liquidation, get restructure, businesses are done in all kinds of way based on what you see in the environment so we have seen the environment today and we knew we cannot prescribe a one way approach, it can never work. But the environment But the environment those things will still be accomplished.

KEN: If you don’t set up the right model, look at the LNG even the PHCN that people are talking about, government still owe 49% of all the privatised plants. Government did not sell 100% rather the management has been left in the hands of the new operators and that is what they are trying to grapple with.

We need a model that should take government away from the management of the refineries, government should hands off control and financing and subsidizing crude oil sales. If government hands off, you can buy your crude at international price, you can get your crude from anywhere, refine and supply to the market.

The basic issues now is how do we get the refineries, if we do not liberalise or privatise the downstream? How does the investor recoup his investment if we do not liberalise the market or deregulate completely, the problem will continue. It has to be a gradual approach.

Olowoshile: There is something we are not getting right in this discussion. We have seen what happened in the telecom sector, the sale of NITEL was not made a pre-condition to liberalise or deregulate the sector. The sector was opened to the other sectors without privatising NITEL and we can see the success story. Privatisation and deregulation does not mean selling off public assets or transferring public sector monopoly to private sector monopoly. All we are saying is that other players can enter into the downstream sector without making the sale of the refineries and fixing of petroleum prices as the pre-condition.

We are saying that the
business environment should be made favourable to new players, there has to be proper infrastructure to support the business. If our focus on the Telecom sector was predicated on the sale of NITEL first, perhaps we would not have recorded the successes that we have seen in that sector. The point that I am making is that I am encouraged by the exploits of Dangote who is sourcing N9 billion to build his own refinery. I can tell you that a lot of value chain would arise from this effort. So let not the primary focus be on the sell off the refineries, before private sector people can come into the business. We should not make the sale of refineries the focus of deregulating the oil and gas sector. The issue of privatisation can still come to play.

Radical approach

KEN: Like I said, it should be a two prong approach. We must liberalise and we must privatise, even if we get 45,000bpd,. It will still no satisfy the local demand. We need new refineries, that is why we commend Dangote. We also have the Orient Refinery, Amakpe in Ibeno. The components for the Ibeno project is completed but because of the political issues between former Governor Victor Attah and Obong Godswill Akpabio, the components have not been shipped to Nigeria.

Walter Smith is planning a 5,000 bpd capacity refinery at Izombe from where he will do aviation fuel. So, we can say that liberalisation is already in place. We need a radical approach otherwise, we will sit down here and continue to import fuel.

Ladi Cole

Ladi Cole

COLE: I am challenged by the tone of the argument from Pengassan because I am conversant with the position of Labour and I have been listening to the argument of Mr. Ogaziechi.

Neither NUPENG or PENGASSAN is new to me because, I brought both of them into NADECO of those days. One thing is certain from their positions and that is about fiscal discipline in government. The distrust between the government and the people is because there is no fiscal discipline. I think government has a responsibility to-improve on that.

I prefer private sector led economy, not the one that government is the dominant player. I will not write-off privatisation and I like the concept of liberalisation because you have new players coming in. I think the government should also sell-off the refineries because government is budgetting money for them every year.

What you continue to hear from NNPC is that they can fix the refineries, they will tell you that they have the capacity to Turn Around the refineries but if you leave them to do it, you will hear more negative.

There will be corruption, in-fighting, etc, as long as the job will be done by Nigerians, you cannot insulate the sector from the general Nigerian factor. I feel for labour because it is either you want us to maintain the status quo or we begin a journey that can lead to increment at improvement.

I want to address the issue of exchange rate.

The arithmetic of importation is very clear. The spot oil price at Rotterdam is fixed, then you multiply that by the exchange rate, multiply by the fixed number of litres in a metric tone. For AGO, it is 165 litres and 13/14for litres for PMS.

Once the exchange rate moves, every other thing will move. Look at the financial charges, look at the pricing template, everything will move. I do not buy the argument of the price differentials across the border as a motive to encourage smuggling of product across the border. Modern businesses have given way to barriers of boundaries.

How come those products from Honeywell, LBN etc have crossed the borders and have become formalised? In Nigeria, we should plan the consumption from Lagos to Dakar.

Products from Nigerian companies move from Lagos to the entire West Coast. Take a trip to Cotonou, Lome how many filling stations do they have? Do they really have 45 stations or 50 retail outlets, I am not sure but that cannot be as much as what you can get from Oshodi to Apapa. I am not sure that the argument of smuggling is sustainable.