March 2, 2020

Deregulating Nigeria’s oil sector: Travailing to bring forth

With the implementation of the Decade of Gas Development initiative by the current administration, indications have emerged that Nigeria has the capacity to become the highest producer of petrochemicals globally.

By Dan Aibangbe

OIL exploration commenced in Nigeria as far as 1903 under licence given to Nigeria Bitumen Company and later to Shell BP (1908). A series of realignments and some six million British pounds worth of exploration expenditure culminated in the discovery of the first active oil well in Oloibiri in 1956 and production in 1958, some 50 years later!

Incidentally, the first three refineries built in Nigeria were of the ‘Complex’ class. It is worthy of note that the three were built by government rather than private/commercial ventures. These are among the possible reasons for their current decrepit states and the refusal of International Oil Companies, IOCs, to invest in that sector. The fear of competing directly with government!

Another historical element worthy of exploration is the history of oil (PMS) price adjustment in Nigeria. From the regime of General Yakubu Gowon, right through to the current administration of President Muhammadu Buhari, there have always been price increases, except for during the short regime of the late President Umaru Musa Yar’Adua.

Most recently during this present administration, precisely at the end of May, 2020, the current administration reduced fuel price by an unprecedented 16.55 per cent, from N145 to N121! During that space, the Group Managing Director of NNPC, Mr. Mele Kyari, indicated that government had decided to scrap the subsidy regime, recently nicknamed ‘under-recovery’ by the NNPC.

The fact that this government reduced fuel price at all is an indication of the good intentions and the hope that we may yet experience another reduction if and when the parameters are right.

What was not made clear then is whether government has commenced total privatisation. It now appears government has been checkmated from the prodigal subsidy regime by a number of factors such as declining revenues from crude oil exports and worsening Naira-Dollar exchange rate, both caused by the COVID-19 economy. In addition, the Bretton Woods ‘Big Brothers’ have been watching and warning the nation of the unsustainability of the Nigerian economic anathema called oil price subsidy.

It is a grotesque economic phenomenon that government would ever consider subsidising consumption of a generic utility (energy) in an economy suffering acute under-development.

This evil has been sustained   by the warped logic that uncontrolled fuel (PMS) prices will cause untold hardship for the common man, when, in fact, it is the subsidy of the widely consumed product that actually fuels corruption, mis-allocation of scarce government revenue and most importantly, vital foreign exchange to the detriment of the development of vital infrastructure and the real sector.

The case for complete removal of subsidy is extensive. Firstly, subsidies on fuel consumption are unbudgeted and cannot be budgeted for in a scientific manner that would ensure expenditure is controllable. That is a perfect recipe for extensive corruption. Secondly, there is no doubt as to the need for complete deregulation or privatisation of the fuel supply sector of the economy.

A full analysis of this will come in subsequent parts of this article serial. Suffice to say here that privatisation magnetises foreign direct investment and creates jobs in a sustainable manner. This midstream and downstream sectors of this our God-given natural resource should have been the largest employer of labour in the last six decades!

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Thirdly, considering that the PMS consumed in Nigeria is virtually 100 per cent imported, it carries with it imported inflation due to the declining exchange rates of the naira to the dollar. This phenomenon is apparent to a basic student of accountancy. If fuel price is N145 per litre when a dollar exchanges for N360, then the price must be automatically adjusted to N156.6 now that the exchange rate has become N387 to a dollar!

What I am saying is that government has not really increased the price of PMS, but merely reflected the current reality of the increasing weakness of the dollar, which is a result of our reducing export earnings, increasing external borrowing and reducing foreign reserves. All these would have been needless had Nigeria been refining her own crude for domestic consumption!

A fourth reason for the necessity of increasing the fuel price is the need to dump this economic anathema of subsidising the consumption of a foreign good. Yes, PMS is a foreign product in Nigeria as of today; a big shame. It is even far worse than rice importation.

I had argued on another platform that government did not fully maximise the rice project. It would have been better to use the rice project to solve the petroleum issue (one stone to kill two birds). The mechanics of that model will be presented another day.

Fifthly, there must be something compelling about fuel price deregulation if all but one regime since Gowon to date have embraced it. Military, Civil-Military, Civilian, PDP, APC and any other will always return to this crossroad, unless the present regime finds the courage to go the whole hog of privatising the sector. The maxim that government has no business in business may be roaring here.

A sixth reason is that the recurring error in idea that there is any benefit in maintaining a unitary price of fuel across the Nigerian jurisdiction is desirable or beneficial to any part of the country is a mirage. For simple illustration, assuming fuel price in the North is 15 per cent higher than in the South, economic arbitrage will even out the negative impact on the North with the positive impact in the South within six months, max.

The reason is that the goods in the North required in the South will import the excess price to the South, while the goods and services in the South will export the reduced fuel price to the North. That is the power of allocation of resources, a basic economic principle!

Seventh, government subsidies are disincentive to the real sector from providing a lasting and sustainable solution to local production of fuel and derivative refinery products. By my experience in value-chains, about 60 per cent value is created between harvest of the raw or crude product and delivery of the final product for consumption. Of this 60 per cent, Nigeria loses at least 50 per cent to the external refineries in the fuel sector.

The eighth reason why fuel prices need to go up is to discourage smuggling. You may ask whether smuggling is still going on with the border closure. The answer is blowing in the wind! But outside the direct smuggling, there is indirect smuggling, the mechanics of which will be explained in later serials of this article.

I rest with a ninth reason why the current fuel price increase is a necessary travail for Nigeria to emerge unhurt from the impending doom. Government revenue has been seriously impacted by COVID-19. Nigeria is approaching her borrowing peak.

The creditor institutions are demanding for a stop to our crazy subsidies on utilities, failing which they will blacklist the nation. This may not be apparent for now, but the international financial market can be unforgiving and cruel. You do not wait for them to come calling. You better go to them before they come!

Aibangbe, a media and public relations consultant, wrote from Lagos.