Oil marketers say delayed liberalisation of downstream sector slows economic growth
Oil marketers’ recent industrial action demanding from the Federal Government N800 billion in arrears of subsidy payments has re-triggered conversations around full deregulation of the downstream sector to spur economic prosperity.
A Nigerian National Petroleum Corporation’s (NNPC) document presented to the Senate during the January 2018 subsidy probe exclusively obtained by BusinessDay shows that between 2006 – 2015, the NNPC claimed N170.60 billion as under recoveries in ten years while it claimed N632.20 billion in two years (2017 and 2018) representing 217 percentage difference.
Subsidies have tended to discourage the much needed investment inflows into Nigeria’s downstream oil and gas sector because it distorts the market by impairing the mechanisms of demand and supply needed to drive price movements. A cap on fuel prices at N145 per litre when the landing cost per litre is N171 means the NNPC loses money on every litre of petrol it sells.
To correct this situation, oil marketers have urged the Federal Government to fully deregulate the downstream subsector of the oil and gas industry to preserve the country’s dwindling foreign reserves and enhance economic growth.
“NNPC imports petrol at a landing cost of N171 per litre and sells at N145 per litre at filling stations. Importation of diesel was deregulated and this has created avenues for marketers to import and sell at competitive prices,” Olufemi Adewole, the executive secretary, Depot and Petroleum Products Marketers Association (DAPPMA) told the News Agency of Nigeria in a recent interview.
The marketers said the immediate removal of the fuel subsidy remained the best option to grow the oil sector, saying that over N1.3 trillion was paid on subsidy with little or no benefits to the most vulnerable members of society.
Adewole’s full liberalisation of the downstream sector would address inflation, better the economy and ameliorate the economic uncertainty that has characterised the polity. He urged the government to make consultations on the subject and decide on the ideal approach to achieve deregulation.
“If we embark on deregulation today, petrol prices will be different across the country; the price may be significantly high at the early stages, but it will reduce gradually as we move on,” Adewole said. “Petrol prices will fluctuate throughout the year, for example, in December and January prices tend to be a lot higher. This is the case in most countries around the world.”
Between November 2017 and May 2018, subsidy claims rose by 662 percent when compared to June and October 2017, according to BusinessDay analysis of NNPC under recovery claims presented in its monthly operations and financial reports published August 2015.
Deregulating the downstream sector will also enhance development of Nigeria’s refining capacity which is at an all-time low of below 30 percent four all four refineries combined. The refineries are not working because government tends to regulate prices.
“Some conditions are necessary to get the refineries working again. Access to funds is critical because Nigeria does not have the money to revamp those refineries. Deregulation of the downstream sector is critical too because no private investor will put down for as long as the sector remains as it is” said Henry Ademola, team leader, Facility for Oil Sector Transformation (FOSTER), a project under the Oxford Policy Management, an international development consulting firm.
Deregulation will create opportunities for cost reflective tariffs and attract investors because there will be returns on investments. There are no guarantees that you will get your returns on investments with the current downstream operations.
Debo Ahmed, the chairman, Western Zone of the Independent Petroleum Marketers Association of Nigeria (IPMAN) also urged the government to consider full deregulation of the value chains of the nation’s petroleum sector. Ahmed said it was high time Nigeria embraced deregulation in full.
According to him, Nigeria can no longer afford to stifle the growth of the oil sector through regulation, adding that the sector should be opened up for active participation of investors, both local and foreign.
The IPMAN boss said Nigeria should be wary of politicians’ unbridled meddling in the affairs of the sector, adding that the nation’s petroleum sector should be treated strictly as business.