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Importance of full deregulation in a post-PIB economy in Nigeria

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12 years ago

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The most topical issue in Nigeria’s oil and gas industry, ‘arguably the most vibrant in Africa’ right now is the Petroleum Industry Bill,(PIB) and the only reason it would come before full deregulation of the downstream oil sector is simply because it has being programmed to encapsulate the subject matter.

The PIB has since been approved by the federal Executive Council and has been forwarded to the National Assembly for proper scrutiny and ratification after which full implementation is expected. This report however takes a look at the prospects of a full downstream sector deregulation after the passage of the bill as well as its importance especially in the face of in-depth corruption currently ravaging the downstream oil sector by virtue of the Petroleum Subsidy Fund (PSF).
Excerpts:
On January 1,2012 the Goodluck Jonathan led federal Government announced a shocking and unexpected stoppage to the Petroleum Subsidy Fund,(PSF) thereby signaling an immediate sharp increase in petrol pump prices across the country.
This action could be so described because the federal government seemed to have allowed an atmosphere for dialogue with the people as governments selected representatives made up specifically of the economic team and a few other notable individuals met with the peoples unelected representative consisting of the civil society groups, human rights activists and the media to discuss the all-knotty issue of subsidy removal/deregulation.  However the government’s action was sudden as it was generally presumed that dialogue on the matter was still ongoing, but the of that action is all history now.
The action of  government was to signal moves towards deregulation of the downstream sector, but analysts were of the opinion that deregulation cannot achieve its aim when implemented in piecemeal and as such the removal of  fuel subsidy alone cannot address the issues and should have come at the tail end of the deregulation exercise.
This report however is more concerned with the importance of deregulating the downstream oil sector after the passage of the much awaited PIB. The downstream sector has lived on importation for far too long and the reason for this is traced to the neglect over the years of oil pipelines earlier constructed to transport refined products across the country as well as the total collapse of almost all the nations refineries situated at Warri, Portharcourt and Kaduna.
Now questions have been asked on why the country cannot simply shore up its refining capacity to meet local demands, but rather chooses to depend solely on importation of refined products even to detriment of economic growth and in the face of 2.4 million barrels of daily oil production.
It is important to note that the PIB when passed would be incomplete if the issue of deregulation is not treated with the importance it urgently requires. It is also of note that in view of recent happenings and discoveries in the oil industry, the country must deregulate if it must be rid of the corruption which have so badly permeate the system.
Current state of the Nation
Nigeria, Africa’s highest exporter of crude currently consumes approximately 60 percent of all petroleum products imported into Sub Saharan Africa. In 2010 alone, over 6 Million Metric Tons of petroleum products was imported into the country. Of this volume, The majority (73%) was for PMS importation. As a Nation, The subsidy on Premium Motor Spirit (PMS) amounted to 25 percent of the government’s total expenditure in 2010. This mode of public spending has however with recent developments proved to be grossly unsustainable.
Dependence  on Import
The Nation produces its own crude, and also has 4 refineries in port-Harcourt, Warri and Kaduna with a combined capacity (at full operation) of 450,000 barrels per day. The initial plan was to leverage on this production and refining capacity to supply petroleum products to the nation.
Unfortunately, a combination of factors such as the growth in population and therefore demand, the ineffectiveness of existing product transport infrastructure as well as the inefficiency of the refineries has led to a situation where the country is a net importer of petroleum products. It is a fact that even in a case where all the refineries operated at a hundred percent efficiency, they would barely meet half of the existing national demand and this is what has originally brought about massive importation of petroleum products into the country. However, an industry analysts who spoke to this writer on the condition of anonymity posited that the measure was originally thought to be temporary to enable ample time for the repairs and rehabilitation of the nations refineries and pipelines, this, according to him would in effect bring down the volumes of imported products into the country.
“This was to be done while government is also building more refineries to at least meet up with national daily consumption demand, but all of this was not implemented therefore encouraging corruption through the PSF scheme and the rest as they say is history”. Deregulating the downstream sector would however put an end to the following, Lack of investment in refineries , Excessive, dependence on imports, Supply and demand imbalances leading to shortages, Smuggling/Leakages, Inadequate Port and Reception Capacity, High Distribution and storage costs, Uncompetitive market structure, Inefficient Pricing structure
Rent seeking, Budgetary pressure from unsustainable subsidy payment, these factors amidst others are the reason our economy only grows theoretically and never practically and the cheapest and most sustainable way to check these is through by deregulating the downstream sector of the oil industry and allowing different investors both foreign and domestic to invest across the value-chain, from refining to pipelines to storage depots etc.
Reasons for subsidy
Given the fact that importation of petroleum products is inevitable, the nation would be exposed to extreme price instability due to the volatility of international markets. If we couple this with the fact that Nigeria is one of the largest producers of crude oil, a justification may be made for the subsidization of the refined crude oil products for Nigerians.
Unfortunately, this subsidization has come at the price of economic development and has become an untenable position for the nation. In 2010, the subsidy contribution from the Federation was 1.2 Trillion Naira ($8 Billion) and the 2011 Subsidy payment is projected to approach approximately 1.5 Trillion Naira ($10 Billion). It is clear that these funds may be channelled towards better causes that will accelerate economic development and allow the nation to better plan its expenditure, and as can be seen in recent happenings in the sector, subsidy has brought about intense corruption such that a developing nation which is in dire need of resources for developmental and other projects even as it is currently indebted to foreign nations is now having controversies over 403 billion naira, about  2.458 billion dollars, and how to recover this sum. This money would have been better utilised if there was deregulation.
Notable Challenges/ Solutions to deregulation
There have been concerns raised over deregulation as it would signal the removal of  subsidy. It is however notable that nothing comes without challenges, and if allowed to succeed with intense supervision on the multiplier effect it would turn as the best decision for the country. Some of the concerns raised includes:
Increase in Transportation Cost: It is a common assumption that transportation cost will increase along with the removal of the subsidy. While this will be true in the case of passenger vehicles, most interstate transportation is run on Diesel fuelled vehicles. Some states, e.g. Lagos, also have intercity transportation that is fuelled by Diesel powered buses. Diesel is a deregulated product and as such will not undergo a price increase based on the removal of subsidy from PMS.
Increase in Prices for Goods and Services: The perceived increase in the price of goods and services is also a concern that must be quickly addressed to avoid an actual increase based simply on the expectation of one. Goods such as farm produce are transported across the country on diesel powered trucks. Many services rely on generators due to the frequent interruptions to power supply but even these organizations run on diesel powered generators. In a case where petrol generators are used, a switch campaign to diesel generators should be undertaken so people realize the advantages of diesel over petrol for power generation. Hence the small and medium scale services which can only depend on petrol generators for obvious reasons would have need to review their costs, and as such government may want to consider initiating a policy that would bring down the cost of diesel engine generating sets so small income businesses which hitherto was running on petrol would switch  diesel in order to reduce costs.
Misappropriation of Public Funds: This concern can be addressed by simply articulating the uses for the realized funds. The Sovereign Wealth Fund has been mentioned as a replacement to the Excess Crude Account which funds the Subsidy. This fund would address the nation’s Infrastructure deficit and drive down the price of all goods and services (including PMS), stabilize the Naira, and also allow the federation to plan for future generations.
 
The final word on these challenges simply put, is that the benefits of subsidy removal are not in dispute, once the methods of converting the realized savings to greater value for the populace is agreed upon, articulated to the nation and implemented to the letter, this and only this is what would make the deregulation exercise work, and it would also attract investors as the government need not travel the world to woo investors, these ones can see how serious we are economically and would be willing to invest uninvited if the atmosphere is suitable  and government is seen to keep to its words at all times.
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Oil

FG Introduces New Incentives To Revitalize Nigeria’s Oil & Gas Industry

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1 month ago

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October 2, 2024

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In a strategic move to revitalize Nigeria’s oil and gas sector, the Federal Government has unveiled two key fiscal incentives aimed at attracting investment and enhancing energy security.

The announcement was made by Mr. Wale Edun, the Minister of Finance and Coordinating Minister of the Economy on Wednesday.

The first initiative, the Value Added Tax (VAT) Modification Order 2024, introduces critical exemptions for essential energy products and infrastructure, including Diesel, Feed Gas, Liquefied Petroleum Gas (LPG), Compressed Natural Gas (CNG), Electric Vehicles, Liquefied Natural Gas (LNG) infrastructure, and Clean Cooking Equipment.

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These exemptions are designed to reduce living costs for Nigerians, promote energy security, and accelerate the transition to cleaner energy alternatives.

The second initiative, the Notice of Tax Incentives for Deep Offshore Oil & Gas Production, offers new tax relief options for deep offshore exploration projects.

This measure aims to position Nigeria’s deep offshore basin as a premier destination for international oil and gas investments, boosting the country’s appeal to foreign investors.

These reforms are part of a broader set of policy initiatives, known as Policy Directives 40-42, endorsed by President Bola Ahmed Tinubu.

The directives reflect the administration’s commitment to fostering sustainable development in the energy sector and enhancing Nigeria’s competitive edge in the global oil and gas market.

 

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Business

Tinubu set to approve ExxonMobil-Seplat oil deal, expands CNG bus initiative

Published

1 month ago

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October 2, 2024

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By Yemie Adeoye

NIGERIA’s President Bola Tinubu has announced that the protracted ExxonMobil-Seplat upstream oil divestment will be formally approved by the Minister of petroleum within a matter of days, just as he announced his government’s intention to expand the Compress natural Gas, CNG buses initiative.

The President who stated this during his Independence day nationwide broadcast stated that the move is in line with his administration’s commitment to free enterprise, free entry and free exit in investments which is the hallmark of his administration investment policy.

“Fellow compatriots, our administration is committed to free enterprise, free entry, and free exit in investments while maintaining the sanctity and efficacy of our regulatory processes. This principle guides the divestment transactions in our upstream petroleum sector, where we are committed to changing the fortune positively. As such, the ExxonMobil Seplat divestment will receive ministerial approval in a matter of days, having been concluded by the regulator, NUPRC, in line with the Petroleum Industry Act, PIA. This was done in the same manner as other qualified divestments approved in the sector.”

The President also seized the opportunity to plead with Nigerians to be patient with his administration’s reform policies. “As your President, I assure you that we are committed to finding sustainable solutions to alleviate the suffering of our citizens. Once again, I plead for your patience as the reforms we are implementing show positive signs, and we are beginning to see light at the end of the tunnel”.

“Our energy transition programme is on course. We are expanding the adoption of the Presidential Initiative on Compressed Natural Gas for mass transit with private sector players. The Federal Government is ready to assist the thirty-six States and FCT in acquiring CNG buses for cheaper public transportation.

Fellow Nigerians, while we are working to stabilise the economy and secure the country, we also seek to foster national unity and build social harmony and cohesion. Our economy can only thrive when there is peace”. he enthused.

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Oil

ExxonMobil To Invest $10bn In Nigeria’s Deep-Water Oil Operations

Published

1 month ago

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September 26, 2024

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As part of the administration’s push to improve Ease of Doing Business (EoDB), Nigeria’s Vice President Kashim Shettima has expressed support for ExxonMobil’s plan to invest $10 billion in the country’s deep-water oil sector.

Speaking on Wednesday, September 25, 2024, during a meeting with ExxonMobil executives at the 79th United Nations General Assembly (UNGA) in New York, Shettima called the investment “a clear testament to the administration’s economic reforms and investor-friendly policies.”

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This announcement follows news that international maritime company DP World intends to develop a multibillion-dollar port project in Nigeria.

Stanley Nkwocha, Senior Special Assistant to the President on Media and Communications, shared the development in a statement on Wednesday. He quoted Shettima as saying: “ExxonMobil’s potential investment aligns with the vision of President Bola Ahmed Tinubu’s administration for a more investment-friendly Nigeria.

We are committed to fostering an environment that supports such transformative projects.”Shettima also discussed the administration’s broader efforts to improve the ease of doing business, highlighting the “Renewed Hope Agenda,” which aims to simplify bureaucratic processes, enhance transparency, and offer fiscal incentives to attract global investors.

“Our administration has taken bold steps to unify the exchange rate, remove fuel subsidies, and implement tax reforms. These measures, though challenging in the short term, are intended to create a stable and predictable business environment in the long term,” he added.

On the oil and gas sector, Shettima mentioned that the government is revising the fiscal framework for deep-water operations to attract investment while ensuring fair returns for the Nigerian people.

 

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