DEREGEULATION OF THE OIL SECTOR

The first oil refinery built in the country is located outside Port Harcourt in the southern part of the country known today as the south- south region, and it started operations in 1965 with a capacity of 38,000 barrels per day (bpd). Since the first refinery was built in the country three more refineries were built to cater for expanding domestic needs over the last thirty years.

In the 90’s, with a fast growing population, the country was caught in the situation with domestic demand for gas far outweighing supply, and with corruption, smuggling and mismanagement, the refineries were operating at less than optimal levels. Turn Around Maintenance (TAM) was done on the refineries to improve capacity but this was not getting the desired effect and NNPC (State Owned Enterprise) had to import heavily from abroad thereby cutting actual revenue derived from oil exports.

The Nigerian oil industry is divided into two sectors; the upstream sector (deals with Exploration and Production) and the downstream sector, which deals with refining of crude oil for domestic consumption. The Nigerian government has decided to emulate other developing and developed nations by privatizing and liberalizing the country’s downstream sector which was hitherto managed by the Nigerian National Petroleum Corporation (NNPC) on behalf of the government.

The goal of the Nigerian government in adhering to the principles of privatization and liberalization is influenced by the successes of other countries in doing the same. Kupolokun (2004) the Group Managing Director of NNPC noted that the intended goals are;
• Dismantle the natural monopoly of the state owned enterprise by privatizing and deregulating price controls.
• Creation of competition in the downstream sector by encouraging more companies to get involved and eventually supplying the market at competitive pricing levels.
• Reduce the cost government spends on subsidizing the sector which runs as high as $1.5 billion annually, and can consequently used the resources freed up to handle the socio- economic and welfare needs of the Nigerian people.
• Boost in Foreign Direct Investment to the Nigerian economy.
• Reduction in transportation costs of products and people.

The Nigerian government has decided to go ahead with the policy even against widespread disapproval on the part of ordinary citizens. The government though is taking note of other countries that have privatized, particularly those in South America.

However,“Disruptions in the Nigerian downstream sector have deeper and more immediate domestic political implications for the country than those that may occur in the upstream sector” (Khan, 1994, p. 127). Nigerians believe that low gas prices are a given right and have protested vigorously through strikes each time the price of gas was increased in the last few years and are bitterly against the privatization and deregulation of the downstream sector. It is worth noting that the biggest gain will be in savings generated from divesting in the sector this will free up government funds for other activities.

Deregulation of the downstream aspect of the petroleum industry remains the best panacea to the continuous crisis of interruptions and scarcity of petroleum products in Nigeria, says Ibrahim Boyi, Managing Director/CEO, Eterna Oil & Gas Company Plc.

Boyi says the inability of the country to operate functional refineries to meet local demands has exposed both marketers and consumers to the dynamics of international prices, as the bulk of products consumed were imported from the international market.

According to him, there was no need for Nigerians to pretend that all was well with the continuous regulation of the sector, especially as the country are buying at prices far above government regulated prices.

What are the benefits: “It takes away a lot of inefficiency; it takes away a lot of wastages. It frees funds for government to do other development projects. And believe me, at the end of the day, the customer will still be better for it because products will be available, its supply line uninterrupted and facilities and services will improve,” he opined.

The question that arises is how does government stimulate competition? Well that is the challenge because since the refineries to be privatized are natural monopolies. Government must effectively make sure that collusion does not happen once the refineries are sold; government also must still be able influence price mechanism without actually fixing price ceilings otherwise the exercise of privatization would have been in futility.

The approach government has chosen to do this is quite interesting because it is novel in the third world. The Government has created a policy that affects the upstream sector; government has sent a bill to the Nigerian senate for approval. This bill which is receiving accelerated hearing makes it mandatory for major oil companies operating in Nigeria, i.e. Shell, ExxonMobil, Chevron and Elf to refine at least 50% of their crude oil in the country.

What this means is that there will be many suppliers in the Nigerian market, thereby encouraging competition and attendant lower costs. The oil majors are not too thrilled about this but it is a price they have to pay if they want to remain in the Nigerian market.

The Nigerian Labour Congress is now gearing for another strike as President Jonathan has decided to deregulate the downstream sector, future events as they unfold though would determine what happens.



I for one actually supports deregulation.


BIBLIOGRAPHY
The Economics of Privatizing and Deregulating the Nigerian Downstream Oil Sector
by Ifiok Ibanga