Concessioning downstream petroleum sector: A case for efficiency

There is no gaining saying the fact that despite Nigeria’s abundance of crude oil deposits, several challenges have over the years continued to stifle the translation of the benefits of this huge oil potential into improved standard of living for the citizens.

As in most sectors of the economy, the downstream petroleum sector continues to grapple high level of inefficiency, corruption, abuse of natural monopoly powers, bureaucratic and existence of a distorting subsidy regime.

Industry watchers in the wake of these realities have consistently expressed concern over the state of the petroleum downstream sector in Nigeria and the implications for investors in the sector; the various disruptions to the operations of other enterprises in the economy, especially the SMEs and the hardship suffered by the citizens as a consequence of the recurring fuel scarcity.

Concerned players opine that lack of clarity on the deregulation and liberalisation of the sector which has put many investments in the sector at risk continues to hamper growth. Others insists that the centralisation of petroleum products supply driven by the NNPC represents a major cause for concern for investors, especially the inherent entrenchment of the dominance of the NNPC to the detriment of private investors in the sector.

Downstream sector challenges

Industry analysts observe that the downstream petroleum sector currently suffers from overregulation which has profound negative consequences for growth and job creation in the sector.

They argue that there is the worry about the gross under-utilisation of the marketers’ depot in which huge sums had been invested by depot owners and the marketers.

Analysts express concerns about the persistent vandalisation of pipelines, perennial fuel scarcity, ambiguity and overlapping roles of the DPR and the PPPRA, poor LPG Utilization and prevalence of fake lubricants.

“High exchange rate risk exposure by depot owners and marketers as matured letters of credit [LCs] of over $1 billion are yet to be honoured, creating a major credibility problem for the fuel importers.  Many of their offshore suppliers have not been paid. Some have lost their credit lines”, they said.

Statistics further reveals the inefficiencies in the downstream resulting largely from the state of the refineries, operating at an average of 20 percent over the past ten years; absence of rail system for the haulage of petroleum products; state of the roads, low draft at the jetties and the ports, high demurrage paid in foreign exchange or naira equivalent (at parallel market rate).

Operator views

Industry experts in the petroleum downstream sector of the economy say the concessioning of product pipelines has become necessary in order to address some of the major issues affecting Nigeria’s downstream sector.

At the 2016 Business Outlook: Petroleum Downstream Perspective forum organised by Petroleum Downstream Group of the Lagos Chamber of Commerce and Industry, players observed that a complete deregulation of the downstream sector would encourage the construction of new refineries; liberalisation of fuel import and open access to oil and gas facilities such as pipelines, depots, jetties etc.

Reginald Stanley, managing director, Petrowest Energy Resources Limited in his presentation at the event opines that the country’s refineries had been producing below 20 per cent capacity in the last decade which he insist had encouraged massive importation of petroleum products in the country and fuelling inefficiency and loses of revenue.

He pointed out that 90 percent of the country’s pipelines were out of operation which had necessitated high road transportation for distribution of petroleum product. Stanley stressed on the need for NNPC fuel import to be reduced and policies put in place for marketers to drive the downstream.

He reiterated the need for NNPC refineries to partner investors based on a 51 and 49 percentage arrangements and the need for diversification in the downstream, given the excess capacity of 129 depots.

Tunji Oyebanji, Managing Director, Mobil Oil Nigeria Plc noted that easing of regulatory environment would boost investor considerations and hence bring about a competitive environment which would in turn bring about self-sufficiency in local refining.

Oyebanji observed that the supply challenges the country was experiencing would not go away until government reviewed its import allocation system, which gives NNPC a higher slot for the importation of PMS.

He disclosed that the sector had not progressed due to the pervading participation of government in the affairs of the industry, and until that was cleared, “we will not see the benefits that accrue to the consumers and the economy at large.”

The Mobil Oil Nigeria Plc boss enjoined the Federal Government to concession the pipelines and sell 60 per cent share of the country’s refineries to make them more profitable, saying the regulation of the downstream sector was the reason for all the inefficiencies and distortions in the system. He decried the low investment in the retail sector by operators and called for the consolidation of privately operated tank farms in the country.

Way forward

In their various summations at the forum, stakeholders called on the government to urgently deregulate and liberalise the downstream petroleum sector for unfettered private sector participation and investment, subject of course to an appropriate regulatory framework.  There should be a level playing field for all operators, including the NNPC.

They insist that this model will put an end to the perennial problem of fuel scarcity in the country and the hardships suffered by citizens to fuel scarcity.  This would also attract more investment, generate more jobs and reduce the pressure on foreign reserves.

In putting forth their argument industry stakeholders stressed the need for the role of the NNPC to be clearly defined.  “It should not be an operator and still have regulatory influence in the sector. An arrangement that would allow for a level playing field should be adopted for all players including the NNPC”. 

“The nation’s refineries should be made to run as commercial business entities.  Stakeholders recommend that the NLNG model should be adopted for the refineries to improve efficiency and reduce the burden of the refineries on the nations’ treasury”.

“The nation’s pipelines should the concessioned for a more efficient management and reduction of road haulage for fuel”. They added.

In charting a way forward, they expressed concern over transparency issues in the management of the foreign exchange allocations.  It therefore urged the CBN to ensure a more transparent process in the allocation of foreign exchange.

Stakeholders urged the government and the Central Bank to ensure the payment of matured LCs to their offshore fuel suppliers.  This was estimated at over $1 billion as at 2015.

“Government should put incentives in place to promote the utilisation of LPG.  Manufacturers of cylinders should be incentivized to reduce the cost of cylinders.  Public enlightenment is also recommended to reduce the reliance on kerosene and wood as source of domestic fuel for cooking”. They added.

KELECHI EWUZIE