Deregulation:  Understanding the new normal, opportunities in downstream oil sector

COVID-19: FG, oil companies 've abandoned us, Niger Delta group cries outBy Michael Eboh

The deregulation of the downstream petroleum industry, despite the opposition to its implementation, evidence suggests, comes with a number of opportunities and benefits for the Nigerian economy, in the medium to long term.

While it has been agreed by everyone that the policy would, in the short term, come with an initial pain, especially in the form of rising price of Premium Motor Spirit, also known as petrol, which is presently around N162 per litre, experts in the oil and gas industry are unanimous in their views that the policy would in the long run, benefit the ordinary Nigerians, and positively change the fortunes of the industry forever.

The opposition to this policy is that its implementation is coming at a time when majority of Nigerians are already facing financial difficulties, occasioned by the COVID-19 pandemic, which forced down the value of the country’s currency; necessitated a hike in prices of utilities and essential commodities, and inhibited income of Nigerians among others.

However, the case against subsidy is enormous, ranging from the widespread corruption that trailed its implementation few years back; the loss it had caused the economy, to the opacity that had trailed the regime.

It has also been stated that government was subsidizing the product for the rich, who owns fleets of cars and run their businesses and homes with generators, compared to ordinary Nigerians, who use public transportation to go about their businesses, and who use petrol sparingly with their generators.

To start with, there was no subsidy in the 2020 budget, meaning it would have been an illegality for the Federal Government and the Nigerian National Petroleum Corporation, NNPC, to continue to pay or make provisions for it in its finances.

In addition, the removal of subsidy, it is agreed, would free up funds which could then be used for other developmental purposes, such as for the building of critical infrastructure and for investment in agriculture, education and other critical sectors of the Nigerian economy.

Specifically, Minister of State for Petroleum Resources, Chief Timipre Sylva, had in a briefing with newsmen on Thursday, stated that over N1 trillion had been saved by the country since the decision to remove subsidy and fully deregulate the sector.

According to Sylva, N500 billion was saved from the decision to expunge the same amount earlier earmarked for subsidy in the 2020 budget, while another N500 billion was saved from the discontinuation of foreign exchange differentials.

He had also stated that the government had spent about N1 trillion annually to subsidise petrol, depriving the country of funds that could have been used for other developmental projects.

Furthermore, the policy is expected to address the country’s refining challenges, as more investors would be attracted to investing in building refineries in the country, thereby, increasing the country’s petroleum products refining capacity and helping the country to end fuel importation, saving the country huge foreign exchange loss and creating jobs.

Also, it has thrown up another opportunity for the Nigerian economy, as the Federal Government is driving the National Gas Expansion Programme, NGEP, which would see gas being  used as fuel for vehicles across the country, creating a cheaper and cleaner alternative to petrol.

The NGEP would create enormous job opportunities and attract investments for Nigeria, as investors would set up firms that would convert vehicles from utilizing fuel to utilizing auto gas.

Already, the Central Bank of Nigeria, CBN, and the Ministry of Petroleum Resources, had partnered in setting up a N250 billion intervention fund to finance projects under the NGEP.

Stakeholders have also called for understanding from Nigerians, especially when petrol prices continue to go up, when crude oil prices go up; or when the prices go down, when crude oil prices dip.

Also, announcement of ex-depot prices or pump price by government would no longer be a normal, as the government had resorted to allowing market forces determine prices, while it plays its traditional role of regulating the industry and ensuring that consumers are not exploited.

Despite the deregulation since March 2020, up until now, oil marketers were yet to resume fuel import, because of the prevailing uncertainty, especially hinged on concerns that threats by labour would force the government to reverse the decision and return to the fuel subsidy era.

Continuing with subsidy, especially as the bulk of the product is imported, would contribute to the depletion of the country’s foreign exchange reserves, impact negatively on the value of the naira, and promote job losses in Nigeria, as the country would continue to subsidise production in countries where the products were imported from, creating jobs therein.

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Confirming this in a statement issued weekend, Chairman of the Major Oil Marketers Association of Nigeria, MOMAN, Mr. Tunji Oyebanji, said with the downstream sector deregulation, Nigeria had been presented with a historic opportunity to get it right this time as a country, to rebuild its economy for the benefit of all Nigerians.

He said: “We welcome government’s action in allowing the market to determine prices as we believe it will prevent the return of subsidies while allowing operators the opportunity to recover their costs. This will in the long run, encourage investments and create jobs.

“We all must remember the country is broke and can no longer afford subsidy. There is no provision for it in the budget.  With this, the incentive for smuggling will be reduced. More funds will be available to the government for investments in infrastructure, roads, health, education and power.”

Also speaking, Professor Wumi Iledare, Ghana National Petroleum Corporation’s Chair of Petroleum Economics at Institute of Oil and Gas Studies, IOGS, in the University of Cape Coast, Ghana, however, stated that with the current economic reality, petrol should be selling at N200 per litre.

He argued that the NNPC was actually doing the country a favour by fixing the ex-depot price at N151.56 per litre, while he described it as a socially optimum price.

He said, “The reality on the ground is not pretty at all with respect to what the price ought to be. At the current official exchange rate of $1 to N385, N200 is about right because of the level of demand driven by population and quality of life. Keep in mind that any attempt to invoke subsidising petroleum has unintended consequences.

“Of course, the opportunity was missed at lower crude oil price. We suggested not to set the price then, but fear of unrest predominate government action then. The economy is highly dependent on oil revenue. Salaries are low and not paid. It is double whammy for petrol to go up, but no budget to subsidise it.

“We all need to adjust and perhaps pump more money to the economy. Invoke patriotism, if the government has to, with carrot and stick to those owing government money.

“If Ghana is surviving, Nigeria’s exchange rates call for at least N200 per litre in Nigeria. In Ghana, a litre is about N325-N350 equivalent. Like Nigeria, PMS consumed are imported. Lessons can be learnt from Ghana.”

Commenting on the initial impact of the policy, Uche Uwaleke, Professor of Finance and Capital Market of Nasarawa State University, Keffi and former Commissioner of Finance of Imo State, warned that the hike would heighten inflationary pressure and worsen the living standards of Nigerians.

He said: “This is clearly a downside risk to inflation. In the coming months, I expect inflationary pressure to heighten as crude oil price recovery in the International market necessitates a hike in domestic pump price of imported fuel. This situation will be compounded by naira devaluation.”

However, Uwaleke stated that the alternative would be to return to the era of petrol subsidy which the government cannot afford now, especially as this may not have been provided for in the 2020 budget.

He said: “Again, expecting a government already saddled with huge debt to borrow to subsidize price of petrol does not make economic sense. With all the economic headwinds, there is no question about a spike in cost of living in the coming months.”

The financial expert, however, stated that the solution remained the passage of the Petroleum Industry Bill, PIB, into law to pave way for investors in the oil refining sector.

This, according to him, would also put a stop to the importation of petroleum products well before Dangote refinery takes off to fill the gap.

Vanguard

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