DEREGULATION OF THE DOWNSTREAM OIL SECTOR AND CHALLENGES OF NATIONAL DEVELOPMENT, 1999 -2012.
ABSTRACT
The oil industry has been contributing immensely to the Nigerian economy and that is why over 80 percent of the country‘s foreign exchange earnings come from this sector. Since the discovery of oil in commercial quantity, Nigeria has been experiencing consistent increase in revenue earning. Even with this increase, Nigerians are yet to enjoy the basic necessities of life. We have witnessed strikes and demonstrations against poor supplier‘s incessant increase in the pump price of refined products. In a bid to reduce the burden on the citizenry, the federal government introduced subsidy, which was to make prices of petroleum in the country cheaper for consumers to buy. But, alarmingly the price of the product continues to escalate even with the huge amount of about 1.7 million naira spent on subsidy. It is against this background that this work seeks to examine the issue of deregulation in the downstream oil sector and to find out if the partial removal of fuel subsidy has enhanced government funding on social welfare. The method data collection we used was based on observation and the sources of data collection were secondary. We also used liberal political economy theory to show the logical interrelatedness of the research question and the hypothesis During the course of this research, we found out that the enormous amount of money spent on fuel subsidy resulted to poor funding of social welfare and the partial removal of fuel subsidy has enhanced government funding on transport, health and education. This work therefore recommended that The SURE-Program of reinvestment and empowerment from the subsidy removal proceeds should be used to revamp the economy and federal government should monitor the state and local governments on how the make use of the funds.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigeria is endowed with vast resources including such minerals as petroleum, limestone, tin, natural gas and others (Anyanwu et al, 1997). All these minerals have remained untapped, except petroleum which has dominated Nigeria‘s economy since the 1970s. Today, petroleum is by far the most widely used energy resource world wide. Its production and distribution, according to Asimi (2005), affects the relations among nations and even the purchasing power of some individual citizens. The first discovery of oil in commercial quantity in Nigeria was made in 1956. Shell-Bp was the principal company undertaking oil exploration and production activities in the country, although there were sporadic explorations by other companies, prior to that date (Gidado, 1999). According to him, Nigerian government did not embark on serious oil policies for the country until 1967. The rapid inflow of oil revenue to the country in the early 1970s, led to the complete abandonment of agriculture which was Nigeria‘s economic mainstay. It was observed that since the beginning of oil production in commercial quantity, Nigeria has been rated high, the world over, such that she is declared Africa‘s second largest producer after Libya, eight largest exporter in the world and the worlds tenth largest oil reserves (Omotogo, 2010:2).
Since Nigeria‘s export of first crude oil in 1959, it has become the major contributor to the country‘s economy, and that is why over 80% of the country‘s foreign exchange earnings come from the oil sector. Nigeria has been enjoying consistent increase in the revenue from oil. For instance, a barrel of oil was sold at 3.00 dollars per barrel in 1971, 12.42 dollars and 37.00 dollars a barrel in 1971 and 1980 respectively. Following steady increases in the sales, receipts swelled as well from 300 million dollars in 1970 to 4.2 billion dollars by the end of 1974, when oil production was 2.3 million barrels per day. (Asimi, 2005). By 1976, oil revenue had risen to 6.3 billion naira and in 1980, the peak of 12 billion naira was achieved (Nigeria oil Directory, 1993) considering the current price of crude oil in the international market, which stand above 70 dollars a barrel, the revenue accruing to the country, has equally increased correspondingly. Many hold the view that for the down stream sector in Nigeria to satisfy the yearnings and aspirations of the citizenry the sector should be deregulated and privatized. Deregulation and privatization like we stated earlier is a global phenomena. They are the offshoot of economic globalization. Many developed and developing countries have experienced one form of economic reforms or the other as a result of the global economic demands. The attitude of some Nigerians towards deregulation of the down stream sector has been indifferent as many hold the notion that such government policies will lead to job losses as well as high cost of living. This negative attitude or posture; poses the greatest problem to the Nigerian economy. Many have argued that the non-deregulation of the sector will lead to negative consequences such as wanton diversion of petroleum products to neighboring countries, perpetrated in the system. The country has four oil refineries and these refineries have been bedeviled by fire, sabotage, poor-management, lack of turn-around maintenance as well as corruption. The challenges have made it difficult for the refineries to operate beyond 40% of their capacities (Adewumi & Ademugba, 2010).
From 1986 to date the debate for deregulation of the downstream sector has clouded its performance but now, it is a reality but the issue is this, does this deregulation mean well for the citizens? Many are of the view that it will bring/result to untold hardship on the poor masses. This sticky issue of oil is no longer a new phenomenon in the global politics. Oil is buried beneath the earth as debris, it had enjoyed a steady metamorphose into what we all refer to as crude oil. Oil is also a popular item because of the inevitability of its usage, which as a doubt-entendre has become a major bane contributing to a ―Rat race‖ which has reduced the entire humanity into a village. Oil accounts for 75% of the worlds total source of revenue. Nigeria, as a part of global politics has had her reforms including liberalization and deregulation in the downstream sector driven by the oil phenomenon. However deregulation policy has globally been embarrassed by several countries like Peru, Argentina, Pakistan, Chile, Philippines, Thailand, Mexico, Canada, Venezuela, Japan and U.S.A. In order to lessening public sector dominance and for developing a liberalized market while ensuring adequate supply of products.
From the countries so far enumerated Nigeria is not alone in this global trend of attempting to develop its downstream sector through liberalization and deregulation and increased private sector participation. Deregulation of the downstream sector, as conceived in 2012 involved not just the removal of government control on petroleum product prices, but also the removal of restrictions on the establishment and operations including refining, jetties and depot, while allowing private sector players to be engaged in the importation and exportation of petroleum products and allowing market forces to prevail.
In this study therefore, we shall explore the strengths and weaknesses of deregulation and the implications for sustainable development in Nigeria. 1.2 STATEMENT OF THE PROBLEM The nation spends 1.7 million naira on fuel subsidy annually according to the CBN Governor. This represents almost half of the budget for the fiscal year of 2011. This has slowed the rate of economic development. That is why Ayankola (2010) advocated for its removal and the introduction of deregulation in its place. Arguing on this Gwegwe (2012) noted that the removal of fuel subsidy would lead to a number of ripple effects which includes increase in pump price, transportation fare, school fees, house rent, food stuffs and health care services. Arguing in favor of Gwegwe, Olarnrenwaju (2012) opines that fuel subsidy removal was an invitation to anarchy, death, discomfort, anger, anguish and poverty. Stressing further on the issue of subsidy, Oketola (2010) contended that it would be difficult to get adequate financing and investment in refineries in a regulated pricing regime. He observes that this country spends approximately 600 million naira per day on oil subsidy, while government struggles to fund infrastructure, health, transport and other competing needs in the economy. Nigeria, ever before this reform had weighed its pros and cons and there is no place in the world where reforms are embraced without agitation. If statistics of nations already adopted deregulation is taken, it will be shocking to know that its take-off met with lots of road blocks.
Nigeria economy is almost singularly hinged on crude oil export and therefore, highly sensitive to internal and external market shocks in the oil sector. What this means is that a fractional rise in cost of fuel has unmitigated ripple effect on the industrial sector and key components of basic need indicators such as food, housing and health. Secondly, the ripple effects are without boundary as social liberties for example, become less accessible to the average Nigerian and well removed from the less privileged who consist the vast majority of the over 145 million population. If Nigeria should borrow a leaf from this nations and allow the down stream sector to be fully deregulated, we are sure to have a success story to tell. Otherwise, Nigeria becomes an on-looker in the polity of oil producing nations. As the recent event unfolds, deregulation becomes inevitable. There is no point running away from grasping reality, efforts should instead be made to face challenges stoically. It is of a paramount importance that petroleum tax be implemented because it is a must food to be eaten one day. Nigeria‘s daily fuel imports are down 45 percent this year, or by 27 million litres a day, on the back of the partial removal of petroleum subsidies by the Federal Government. Meanwhile government is said to have borrowed N850 billion in 2011 to import products. A look at the pricing template of the Petroleum Pricing Regulatory Agency (PPPRA) for PMS for December 2011 showed that the landing cost of a litre of petrol is N124.76 while the distribution margin for transporters, retailers, bridging fund, marine transport average (MTA) and administrative charge is put at N15.49. This however brought the total cost of petrol to N140.25.
Meanwhile, when the initial official pump price was N97 per litre, the government is said to subsidize the difference of N43.25. (Chiejine, 2012). Most of the scholars were talking about how subsidy removal will lead to employment, some are of the opinion that it would bring hardship and others were talking about the inflation rate
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going up and coming down in the long run. They failed to tell us if the partial removal of fuel subsidy would lead to increase in government funding on social welfare, if corruption is the reason why government can no longer maintain fuel subsidy and if regulation of the downstream oil sector has undermined the revenue generated from the sector. In view of the above outlined issues, we outline the following questions:
Has the partial removal of fuel subsidy enhanced Nigeria government funding on social welfare?
Is the persistence corruption in the downstream oil sector responsible for the inability of the government to maintain subsidy on fuel?
Has government regulation of the downstream oil sector enhanced the revenue generated from the sector?
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to appraise the deregulation exercise of the downstream sector and the challenges on national development. The specific objectives of this study are:
To investigate the effect of the partial removal of fuel subsidy on government spending on social welfare.
To establish if the persistence of corruption in the downstream oil sector amounts for the government‘s inability to maintain subsidy fuel.
To ascertain if government regulation of the downstream oil sector has enhanced the revenue generated from the sector.
1.4 SIGNIFICANCE OF THE STUDY
The significance of this study is both practical and theoretical. The relevance of this research will be of immense benefit to the wider society, the government and policy makers to assess and reassess the deregulation exercise of the downstream sector and partial fuel subsidy removal. This study would enhance policy formulation by exposing the huge amount spent on fuel subsidy with the intention of alleviating the suffering of the masses by government improvement on social welfare funding. Also the study will help every one in the society understand the implications of deregulation. The significance of the study also lies in the fact that it would contribute to existing literature on the subject by contributing in filling the gap that has been created by non-availability of objective text on deregulation of downstream sector and hence contribute to the store house of knowledge. Above all, it would also be an invaluable tool for students, academic, institutions and individuals that want to know more about the deregulation of the downstream sector in Nigeria and it hopes to provide basis further research on the topic.
1.5 LITERATURE REVIEW
In a bid to understand the deregulation of the down sector a review of the pertinent literature by scholars who have written on the subject matter is necessary to investigate the effect of fuel subsidy and government funding of social welfare, corruption and management of fuel subsidy and to look into the government regulation policy and revenue generation in the downstream sector. With a view to locating the gap in the literature. According to Kupoloku, (2004) sees deregulation as the dismantling of the natural monopoly of the state owned enterprises by privatizing and deregulating price controls. He argues that this would lead to the creation of competition in the downstream by encouraging more companies to get involved and eventually supplying the market at competitive pricing levels. Thereby reducing the cost government spends on subsidizing the sector. Idumange (2011) argues that deregulation would not boost in foreign direct investment to the Nigerian economy and reduce transportation costs of products and people but rather it will create a class of thieving compradors and hawks in the oil industry. He further argues that deregulation presupposes a condition of full employment or the implementation of some welfare package in an economy where so more than 85% of graduates are unemployed. Ugwuanyi (2009) sees the need for deregulation, in his argument he says that regulation and payment of subsidy encourages lack of competition, corruption and wastage because of lack of plan, which has been responsible for demurrage and other factors that inflate the cost of fuel. To him, this is because importers know the government will certainly pay the extra cost through subsidy.
Ndiribe (2011) was of two views. He opined that proposal should be carefully considered before a decision is taken on it. He supports those who do not want the deregulation of the downstream sector from the perspective of the government‘s credibility. He says that government is talking about economic growth that is not seen. On the other hand he posited that government deregulation of the downstream sector is good from the point that whatever is realized from the exercise will be ploughed back into the economy for the benefit of Nigerians. Anthony (2011) is of the view that Deregulation of the downstream sector will be too harsh to the majority of the citizens of the country. She goes on to say that deregulation in the face of the present hardship being experienced daily by Nigerians. It will also make nonsense of the new minimum wage approved by the federal government because it is just like giving something with right hand and taking it back with the left considering that the percentage of working Nigeria are below 20%. Koyi (2011) says that Nigerians are not impressed with the decision by government to deregulate the downstream sector. He calls it a political suicide and he admonished the federal government to handle the issue with caution because if not handled properly, it might cause a series that would hamper the country‘s economy. Okafor (2011) opined that the deregulation of the downstream sector would create jobs and grow the economy. She continued by saying that, it is better to manage the economy and use the resources appropriately, by using the money saved on subsidy to grow the economy. In the area‘s of huge public transportation and the railways.
Iba (2009) argues that deregulation and removal of government subsidy on products like petrol, obviously, would lead to increase in the price of the petroleum products, as market forces will determine prices. And with local manufacturers already attributing their plants because of and diesel generators to power their plants because of the inability of PHCN to guarantee stable electricity supply, and further increase in the prices of petrol and diesel would certainly wreak more havoc on the manufacturing industry. Nwachukwu (2010), is of the opinion that if the government will be prudent, committed and adhere strictly to the necessary steps and recommendations in the process, deregulation will be good for the country economically and politically. Ladan (2012) averred that the speedy implementation of the deregulation policy would go a long way in encouraging inflow of private sector and international investment in the downstream sector. He goes on to say that deregulation is the only way majority of Nigerians will derive fair deal from the abundant petroleum resources in the country. He continues by saying that, with deregulation, consumers will enjoy fair product prices and operators will be in a position to recover full cost and reasonable margins on their operations. Sobowole (2012) argues that Deregulation of the downstream sector would give rise to efficiency in product usage, product availability and effective competition among investors hence putting an end to the so called NNPC monopoly. He observed that it is only when deregulated regime is put in place that the private refineries that have been licensed can really take off, nothing that investors who have been given licenses to build refineries are scared of venturing into the multi-million naira project because of the regulated regime in Nigeria. He informed that deregulation is the bedrock for the transformation and growth in the downstream sector.
Ikuomola (2011) says that, if annual fuel subsidy money alone will equal the capital budget (what federal government budget in one year for education, health, Agric and all other forms of social services) then we are finished. Therefore he supports the removal of fuel subsidy and deregulation of the downstream sector. Though it will cause a lot of hardship for the citizens in the beginning but subsequently, it will managed to create great market competition, will cause these increased prices to find their real value level. When the economy becomes open market operational, the competitions will create more jobs. Ibikiowubo (2011) is of the view that, whatever the reason for removal of fuel subsidy and the deregulation of the downstream sector, indications are that for a country with a reserve portfolio in excess of 36 billion barrels of oil and daily output capacity put at about 3million barrels per day, a deregulated environment would engender an environment conducive for investments to thrive. Refineries would start springing up across the country, jobs would be created and the country would become a petroleum products refining and petrochemicals hub, at least in the West Africa sub-region. He goes on to say to that prices of petroleum products would increase in the short run. In the medium to long term, investment in development of infrastructure would go up owing to the large volume of human and vehicular traffic, jobs would be created, technology would be domiciled and under such circumstance, the Gross Domestic product, GDP of the country can only go up.
Okafor (2012) says that the major reason for deregulation of the downstream sector is to save the economy from total collapse, that the liberalization of the sector is to attract investors because subsidy has been a drain pipe as the poor masses that are
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supposed to benefit from fuel subsidy are not feeling the impact rather very few individuals are corruptly enriching themselves. He says that the money that will be saved from subsidizing will be used to create jobs and help in infrastructural development and also small and Medium Enterprise will be better. Ebegbulem (2011) says that Deregulation of the downstream sector and the subsidy removal will pose a challenge to monetary policy authority due to its inflationary impact in the short run. He said, ―Though the ministry of finance has plans to rein in government spending, it can only be realized in the medium to long term. He said in practice fiscal retrenchment cannot hold in the short term. He said that the implementation of this policy has a potential of pushing up prices of goods and services in the country. He said that, in the interest of the economy and the nation, there is urgent need for greater collaboration and coordination between fiscal and monetary authorities to deliver better policies to move the economy forward. Ahmad (2011) opines that the deregulation of the downstream sector would enable government to provide good roads and create employment for the youths in the country. He believes that the money used in subsidizing fuel should be channeled into infrastructure development to grow the economy in order to achieve the vision 20:2020 target. He goes on by saying that the reality about the whopping sum spent by government to subsidize petroleum products went into the wrong hands. The masses are not beneficiaries of the subsidy money to him with deregulation this issue will be addressed.
Maku (2011) opines that deregulating the downstream sector was important in growing the industry rather than the enormous amount used in subsidizing the sector by the government. He went further to say that if the sector was deregulated, it would encourage private investors in the oil industry. He also made a point about deregulation, that it would free the sector for massive infusion of capital and technology to grow it and earn more money for Nigeria and in turn create employment opportunities for Nigerians. Ihenacho (2011) argues that full deregulation of the downstream sector will encourage private sector participation in the building of refineries and bring down prices in the long run. He continued by saying that petroleum price will go up immediately after the commencement of deregulation but the removal of subsidy will encourage shell, chevron, total and other private investors to build more refineries to create employment opportunities, crash down the price of fuel and engender stability in the supply of petroleum products among other benefits. Adigun (2012) opined that with deregulation, what the federal government spent on the petroleum products refining, importation and distribution in form of subsidy which is quite colossal will be used to fix infrastructures while Nigeria moves for ward and graduate to the enviable advanced economy. He goes on to say that with deregulation competition will also set in and as many refineries come on board, petroleum products and several by products will be surplus and sold even cheaper than Nigerians expect over time.
Nati (2012) is the opinion that by deregulation the emphasis is on efficiency, the emphasis is on competition, the emphasis is on opening up market so that global sector players can come in and make market more effective and due to subsidy a lot of sharp practices have been going on, inefficiency, corruption, smuggling, once subsidy is removed and the sector deregulated. The incentives for all these ills will be eliminated and an open market will be created. Adbulaheem (2012) opines that deregulation of the downstream sector, is a radical measure aimed at plugging obvious leakages in the economy, harness revenues for capital stock formation, promote private sector investments in public-private partnerships (PPPS) to help bridge the infrastructural gap and create incentives for investment in refineries and the petrochemical industries. He further stated that he attendant savings would be channeled into the development of critical infrastructures such as power, transportation, education and health amongst others. Worika (2012) observed that with deregulation more players will come into the sector, there by leading to more rational and efficient allocation of resources in the short-term. The long term effect is to stabilize prices with increased and improved variety of the quality and quantity of petroleum products in circulation for the ultimate consumers furthermore, he asserted that it would make our petroleum prices far more competitive both locally and internationally, their will be better value for money and smuggling would be discouraged.
Oketola (2010) contended that it would be very difficult to get adequate financing and investment in refineries in a regulated pricing regime. He observed that this country spends approximately N600 million per day on subsidy, while government struggles to fund infrastructure, health, transport and other competing needs. With deregulation, Oketola stated further that government would have more resources available for the provision and financing of education, road construction and equipping of hospitals and improving the power sector. Adeogun (2010) contended that the quest to attract private investors into the petroleum refining business could only be done through deregulation. This simply implies that for there to be an existence of functional refineries, it is dependent on effective deregulation. Goodluck (2012) opines that deregulation is not a magic formula that will address every economic challenge, but it provides a good entry point for transforming the economy, and for ensuring transparency and competitiveness in the industry, which is the mainstay of our economy. He further asserts that deregulation will cause an initial discomfort, which is temporary and at the end we will reap the benefit. Ugwuonye (2012) is of the view that deregulation of the downstream oil sector will improve the efficiency use of scarce economic resources by subjecting decisions in the sector to the operations of the forces of demand and supply. This to him will attract new sellers, buyers and investors into the market, thereby increasing competition, promoting overall higher productivity and, consequently, lowering prices over time. The ultimate effect of this chain of activities is increased gains for the people of Nigeria who would be getting the most out of their natural resources.
Omoyele (2012) opines that deregulation will reduce economic waste and lightens social burdens caused by government control for several years, Nigeria experienced scarcity of petroleum products that crippled national economic activities, and increased the cost of doing business, several times over. The resulting scarcity inevitably leads to a flooding of the market with adulterated products, which usually leads to the damage of vehicles and machines. He went on to point out that deregulation will help address price scalping and a host of associated problems related to the sector. Ogheneyole (2012) asserts that deregulation of the downstream sector is a way forward in expanding opportunities for economic growth and a competitive downstream petroleum sector, if the regulation in the downstream sector is limited to oversight and supervisory functions, aimed at guaranteeing quality of products and preventing consumer exploitation, then the process of deregulation could help achieve greater cost-effectiveness. Okpole (2010) the move to deregulate will accelerate the birth of refineries and stem the flood of imported refined fuel currently estimated to cost about 1.5 trillion yearly. Okpole was of the view that successful deregulation of the downstream sector will lead to the building of new refineries. He equally believed that they (new refineries) will add some capacity of 750,000 barrels per day to Nigeria‘s refining infrastructure and position NNPC to engage profitably in the international trading of refined petroleum product. Okiti (2009) stated that the importance of the deregulation of downstream oil sector cannot be overemphasized, since its process must ensure that there are competitive incentives that serve as a platform for greater generation of wealth than savings the government hope to make. He contended that the end game of a deregulated environment should be a vibrant, competitive, investment and employment ge
