My Layman's View

May 15, 2015

Deregulating the downstream sector of the oil industry


By Adisa Adeleye

This week has shown some aspects of the absurd, and also, disdainful impunity.  Nigeria is one of the leading world oil producers – producing about 2.5 million barrels of crude oil per day.  And yet, motorists queue endlessly for a product that is not available at the official price of N87 per litre, but which smart guys sell around the corner at about N200.  That product is called Gasoline, known by all as Petrol.

Even before the scarcity of the white products – gasoline, diesoline and dual purpose kerosene (DPK), it has not been possible to get petrol at the official price of N87 per litre.  Perhaps, it is only in Lagos that many petrol stations do sell at the official price; many stations are in the habit of selling a litre of petrol between N100 and N150 in many parts of the country.

The problem of shortage of supply of petroleum products, especially petrol, and instability of their prices, could be attributed to the introduction of the regime of ‘Uniform Price‘ introduced by the federal government in the 1970s.

That was a policy introduced under pressure from the Northern political elites of the period who sincerely but erroneously believed that differentials in the prices of petroleum products were responsible for different industrial developments between the Northern and Southern parts of the country.  Many Northerners in the dreary 1970s thought that uniform prices of petroleum fuels throughout the country would ensure even economic development and equality of public and general welfare.

Buhari-oilUnfortunately, the advocates of “Uniform Price” of petroleum products won the battle through the Decree of 1975 (as amended by Decree 32 of 1989).  Thus, through the provision of the Decree, the federal government became responsible for fixing the prices of the main products – petrol, diesel and kerosene and also, for their supply.  To ensure the smooth working of the system, the NNPC built depots with storage tanks in many places from where marketers lifted (bought) products.  The financial aspect of the scheme was left to the Petroleum Equilisation Fund (PEF) to sort out.  Arrangements of re-imbursements were made to oil companies which incurred losses by selling at the “uniform price”.  That appears as the origin of subsidy.

Though arrangements were made to compensate oil companies for losses incurred, however, the inability of oil marketers to be adequately compensated during the military era and the increasing demand of oil products were responsible for periodic product shortage and distortions in the mechanism of the uniform price in many locations throughout the country.

It is a pity and act of irresponsibility that nothing substantial was done in the last sixteen years to save Nigerian motorists from the sufferings associated with periodic shortage of the product, inspite of the phenomenal rise in pump prices.  In 1999, gasoline (petrol) pump price was N20; diesel oil (AGO) N19 and Kerosene (DPK) N17, as compared with the current price of N87, N130 and N50-N70 respectively.  Since the four local refineries could not provide enough for the fastly rising demand for the products, some marketers were selected to import petrol and kerosene under a system which allows subsidy to be paid between the landing cost of the products and the officially approved pump prices.

The question of subsidy payment has given room to suspicion of corruption in many places since it has been discovered that ghost marketers appeared on the list of importers.  Perhaps the genuine oil marketers are now mounting pressure on the federal government to demand payments due to them from importing at a higher cost than the prices they have to sell.

One of the failures of the PDP administration in the last sixteen years has been the inability to manage the oil resources pretty well.

If it is better that subsidy payment (which has cost the nation trillions of naira (in the last three years) is not in the current year‘s budget, how then, would equilibrium be maintained between the supply and demand of the product?.

It should be recollected that before the federal government took over the functions of the private sector, prices of the various petroleum products were agreed with government agencies by the local oil companies.  On local production, each company would purchase crude oil, refine it at the local refinery (owned by federal government and Shell-BP) but managed by BP, and pay agreed processing fees.  Each marketer was allocated a time limit to evacuate the refined products into its storage tanks.

The price fixing was based on ex refinery cost (processing fees and crude cost), handling charges (depot maintenance and equipment charges), government tax, transportation charges and dealers‘ margins.  Thus, the pump price would have taken into consideration all elements necessary to sustain adequate supply of the products and the profitability of the individual oil marketer. Unfortunately today, the pump price is being calculated on the landing cost of the imported product and the regulated uniform price – the difference is the subsidy paid to the marketer.

It is known that about 450,000 barrels of crude oil is allocated to NNPC for daily domestic consumption.  What has been happening to the allocation to induce importation? The officials of NNPC are not unaware of the demand pattern of each oil marketer to ensure even and adequate distribution of adequate quantity of crude oil.  A reasonable policy would be to sell crude oil to each marketer; such marketer will take the product to the refinery and pay the necessary processing fees (to keep them operational and profitable).  Each marketer would refine cheaply to its market demand.  Since each barrel of crude oil produces more than one product, the surplus bye products could be sold at home or exported.  Many analysts believe that if the downstream sector is reasonably deregulated, the economic waste of subsidy payments and maintenance of uniform price would be avoided.  But if it becomes absolutely necessary to import, the punishing exchange rate for necessary commodities should be critically examined.