How Failure to Deregulate Downstream Sector Bleeds Economy
Deregulation. How this one word remains an enigma with regards to the downstream oil and gas sector in Nigeria must be one of the wonders of the world.
How can it be that something so glaringly and clearly the best way to go for Nigeria is not being adopted – especially when short term fixes like subsidies and pseudo deregulation policies have failed to make any impact?
The billions of naira Africa’s largest oil-producing country commits to subsidizing petrol is no longer news, but what is more infuriating is the opportunity cost forgone in a slow growing economy that could use more private sector investments for job creation and growth.
The situation concerning the opaque petrol subsidy is having such a negative impact on the Nigerian economy, that despite a 62 per cent increase in oil prices compared to the 2021 budget benchmark, every gain from oil exports is now almost entirely cancelled out by the costly subsidy regime.
Analysts have called several times for full deregulation of the downstream petroleum sector because subsidies on fuel are no longer sustainable.
Unfortunately, the government has yet to muster the political will to effect this change even when oil prices were near $10 a barrel last year.
The federal government is currently in protracted talks with labor unions who have threatened to shut down the country if the government deregulates without fixing the refineries.
However, the petrol subsidy regime and the accompanying endless corruption, smuggling and dearth of investments in the downstream sector are indicative of an urgent need to end subsidies and implement deregulation fully.
If the Nigeria National Petroleum Corporation (NNPC) does not make any contribution to the federal purse in May, it would be the first time it has happened in decades and would be a blow to the federal, state, and local governments that rely on cash from the state oil company for a significant chunk of their revenues. What this portends in an increasingly fractious state of the nation can only be better imagined.
Financial experts have raised concern about the opaque system that is bleeding Nigeria’s economy considering the high level of life-threatening hunger in a country with over 95.9 million people living in extreme poverty, overtaking India according to a 2018 Brookings Institution report, despite having only a fifth of India’s population.
According to a Department of Petroleum Resources (DPR) report on 30 September 2020, Nigeria had spent N10.7 trillion on fuel subsidies in the last 10 years.
The NNPC could have saved on these costs and passed on such savings as extra income on to the three tiers of government if customers paid market prices for gasoline, supporters of deregulation have argued.
What N10 trillion can do for the Nigerian economy
Dr Chijioke Nwaozuzu, a petroleum policy expert writing from Emerald Energy Institute, University of Port Harcourt estimated the construction cost of a 100,000 barrels per day (bpd) refinery plant at $2 billion (about N758 billion using Central Bank of Nigeria’s (CBN) official exchange rate of N379 as at April 30, 2021).
This means the N10.7 trillion spent on fuel subsidies in the last 10 years, could have helped the country construct at least 14 of such refineries instead of importing light petroleum products.
Primary health center & Education
Using Freedom of Information requests and analysis by transparency campaign group Public Private Development Centre, it would cost an estimated N28 million to build one primary health care Centre and N 17 million for a 3-block classroom.
This means N10.7 trillion is capable of building 382,142 primary health centers or 629,411 classrooms (3-block) needed across Nigeria’s 774 local governments.
The N10.7 trillion is capable of building at least 713,333 3-bedroom homes valued at N15 million each, a development that can play a big role in reducing Nigeria’s housing deficit projected at 20 million homes.
Also, N10.7 trillion can construct at least 17.83 million boreholes at N600,000 each across the country, this could have reduced the challenges of proper sanitation caused by acute water scarcity in Nigerian communities, especially rural areas.
What Experts are saying
Joe Nwakwue, a former council chair at the Society of Petroleum Engineers (SPE) said the cost of subsidy since inception is far higher than the estimated N10.7 trillion, however recent events show Nigeria is still not learning.
“Every concerned Nigerian including labor unions need to understand the opportunity cost of the current lower price of petrol, which is cancerous to the economy,” Nwakwue said.
He added, “Of course things will be tough with higher petrol prices, but the pain is less compared to the huge pain of paying for petrol subsidy.”
A professor of economics and former president of Nigerian Association for Energy Economics (NAEE), Wumi Iledare said payments of subsidy is a gorilla that has swallowed Nigeria’s economy despite benefiting the elites more than the populace.
“Beyond the removal of subsidy, the government needs to be more decisive about the Petroleum Industry Bill (PIB) and act fast because time is running out,” Iledare said.
While it is important to pass the PIB speedily, Wale Ajayi, a partner, Tax, Regulatory and People Services at KPMG recommends that the government and industry operators should periodically engage an independent consulting firm to evaluate the issues and concerns raised by the operators.
“This will greatly help to narrow the differences and enhance transparency and trust between both parties,” Ajayi said.
The latest development serves as a timely reminder of the opportunity that Nigeria missed in 2016 to abandon the wasteful practice, which richer countries began to embrace during the global oil price crash.
Contrary to the perception of many Nigerians, Nigeria is neither oil-rich nor is it able to afford the subsidy. Oil production in Nigeria is lower than during the 1970s even as its population has nearly tripled, and even though Saudi Arabia, which can be considered oil-rich, produces five times more oil than Nigeria and exports 27 times more per person, Saudis pay more for petrol than Nigerians.
The Group Managing Director of the NNPC, Mele Kyari said recently that the current system was temporary, and the government was working on a permanent mechanism to enable market-based prices, and private sector imports, while protecting consumers.
“It has become more confusing,” said Bello Rabiu, a former NNPC chief operating officer and group executive director. “Any time there is no transparency, definitely there will be corruption.”
Other experts noted that the situation is becoming unsustainable especially at a time Nigeria’s macroeconomic environment is getting significantly worse.
Inflation has accelerated to a four-year high of 18.17 percent in the month of March 2021, with food inflation (22.95%) at levels never seen since the National Bureau of Statistics started collating data.
The jobless rate in Nigeria rose to 33.3% in the three months through December 2020, according to the NBS. A third of the 69.7 million-strong labor force in Africa’s most-populous nation either did nothing or worked for less than 20 hours a week, making them unemployed,
according to the Nigerian definition. Another 15.9 million worked less than 40 hours a week, making them underemployed.
The need for deregulation is now
Most stakeholders say deregulation will bring succor to Nigeria’s downstream sector as well as to consumers of petroleum products, who have had to bear the brunt of induced scarcity and the opportunity cost spent on oil subsidy that could have been used in the health sector or provision of infrastructure services to the citizenry.
Other experts explained that deregulating the downstream sector is the only way petroleum products coming into the country will stay and not find their way to neighboring economies.
“Liberalization of the sector will quickly facilitate the development of the oil industry as it will encourage competition and the government task is to act as a regulator by preventing monopoly,” Huub Stokman, managing director of OVH Energy said at an industry event.
Stokman believes that government understands that it’s in the best interest of Nigeria in the long term to liberalize the downstream
petroleum sector so it can free itself from the burden of under-recovery, subsidy – monies that can be reinvested into infrastructural development, education, and health care among others to enhance the living standards of the average Nigerian.
Before now, Nigeria’s downstream sector was the darling of all either to the government, investors, or the public, however in the last 10 years, investors in the nation’s capital market have continued to demonstrate low appetite towards shares of downstream companies listed on the Nigerian Stock Exchange (NSE).
Nigeria’s inability to refine adequate petroleum products domestically to meet local demand has continued to render the downstream sector vulnerable to foreign exchange volatility, particularly for petroleum independent marketers.
Since 2015, Africa’s biggest oil-producing country has prioritized fuel subsidy spending over N1 trillion per annum, which is higher than funds allocated to education, health, and Defense and Agricultural and rural development that would have increased the economic growth or standard of living of its over 200 million people.
Although, for a vast majority of its 200 million people, cheaper fuel is the only benefit they see from a state that built no social-safety net for its citizens during the oil boom.