Nigerian energy sector privatisation could depend on clear policy

May 29, 2001 02:00 AM

The energy sector, comprising oil exploration and production activities, petroleum products marketing and distribution, otherwise known as upstream and downstream sectors of the oil industry as well as the electricity or power sub-sector, attracted huge investments from both government and private sector operators within the last two years.
In the upstream sector, the joint venture arrangements between the state-run oil firm -- the NNPC, and the foreign multinationals received adequate attention with the payment of cash calls to the ventures on a regular basis. For example, last year, NNPC operations report showed that $ 2267.22 mm and N 127.333 mm was paid as cash call to the joint ventures, accounting for over 90 % of crude oil produced and exported from Nigeria. The amount represents the foreign and local denominations of last year's oil exploration and production expenditure profile of the joint venture operations.
Contributions from NNPC amounted to $ 1253.70 mm and N 73.56 mm being the 57 % equity stake in the venture. Similarly, oil companies' contributions were $ 1013.52 mm and N 53.771 mm respectively being the foreign and local currency denominations of this expenditure. The crude oil produced from the joint venture operations, according to NNPC report, amounted to 348,348,164 barrels, which fetched the country about $ 9.616,301,411.75.

Special Adviser on Petroleum and Energy Matters, Dr. Rilwanu Lukman, said government's commitment to honouring cash calls to its joint venture operators was to instil confidence in foreign investors as well as encourage other people to go into the oil and gas business.
However, in line with the Federal Government's policy to boost oil production from the current level of 2.3 mm bpd to 4 mm barrels and proven reserve of 40 bn barrels, tender for fresh oil blocks allocation was made by the Federal Government. Special Assistant to the president on Petroleum Mr. Funso Kupolokun, had stated that the exercise was aimed at opening up the deep offshore frontiers.
After the exercise, eight oil blocks were awarded to both multinational and indigenous oil prospecting companies operating in Nigeria. According to Kupolokun, besides the competitiveness, which the exercise demonstrated, the open nature of the tender was a public relations victory for the government who is eager to win foreign investors, whose active participation in Nigeria's economy is highly required to jump-start the comatose economy.
Several CEOs of both oil prospecting and marketing companies have commended the effort, which again, has laid a solid foundation for future exercises. Attempt is currently being made to release tender for the marginal fields' development in the country and this time around, local investors would be encouraged to grasp the opportunities. Lukman said the allocation of marginal fields would pave way for the participation of indigenes in the upstream sector, while Mr. Lateef Dada-Bashua of AMNI International Petroleum Company said the guidelines needed to be looked at with a view to making it easier for the indigenous operators to participate in.
It is, however, expected that the new guidelines for the tender and operations of the marginal fields will soon be released to the would-be investors. But to further boost joint venture activities during the year 2001 period, government approved $ 3.5 bn (about N 350 bn) for oil exploration and production. The figure was $ 2.5 bn last year.

In his own assessment of the oil industry, former group managing director of NNPC, Mr. Chamberlain Oyibo noted that a lot of progress had been made in the upstream while the downstream still remained to be positively affected. "The upstream has been growing industries in the deep offshore and also improving technology on land and near offshore where production method has improved using 3-D and various new technologies," Oyibo stated.
Former chairman, Oil Producers Trade Section (OPTS) and former managing director of Nigerian Agip Oil Company, Claudio Descalzi, said government's commitment to the joint venture operations would go a long way to boosting oil production in the country. The last two years of downstream operations have been characterised by burgeoning challenges posed by inadequate supply of petroleum products, epileptic performance of existing infrastructure, illegal products marketing and distribution and the application of short term strategies by government to address the problems.
Efforts by the Obasanjo administration to tackle headlong the problems of fuel shortage through the Turn-Around Maintenance (TAM) of the former refineries have failed to impact positively in the areas of products availability and effective distribution and marketing.
Although official reports indicate that some of the ailing refineries have achieved some level of optimal performance, the real impact of this on the supply side has remained minimal even as artificial scarcity of products continued to jack up prices of products across the country -- namely those who deal illegally in petroleum products, smuggling them out of the country.

Attempts by the regulatory authorities, especially the Department of Petroleum Resources (DPR), to address the lingering crisis of products inadequacy, smuggling and product diversion have not completely achieved success as owing partly to the menace of those that have been described as "economic saboteurs".
The department, through a number of strategic initiatives, has, in the last two years, tried to sanitise the system. For instance, the last six months have witnessed the closure over 200 petrol stations for various offences, even as hundreds of illegal peddlers of petroleum products and other economic saboteurs were sanctioned.
Lacking the financial and logistic resources needed to match the illegal operators force to force, the department and other regulatory authorities' efforts to completely eliminate perceived abuses in areas of products distribution and marketing seem yet inadequate to guarantee a fraud-free downstream operation.
A cursory appraisal of government's initiatives targeted at correcting the perceived anomalies in the distribution and marketing system showed that the steps have failed to achieve their desired goals due to what an industry analyst called "absence of the political will in the leadership to block all loopholes in the system."
After one year of painstaking efforts to ensure adequate products supply in the economy at great financial costs, the Federal Government last June announced the ill fated guided deregulation of pump price policy, a step which continues to draw flak from most interest groups within the economy.

That singular measure, which led to marginal increase in the prices of petroleum products, especially Premium Motor Spirit (PMS), Automotive Gas Oil (AGO) and Household Kerosene (DPC), later turned out to be the precursor of more fundamental policy initiative -- the deregulation of the downstream sector.
Following nation-wide strikes that characterised the initial measure which raised PMS price from N 20 to N 22, AGO from N 19 to N 21, with kerosene retained at N 17, the Federal Government, on August 14 last year, inaugurated a 31-member committee to review all aspects of petroleum products supply and distribution and forward recommendations to government.
In its majority report submitted last quarter of last year and made public a few months ago, the committee canvassed a phased deregulation of the downstream sector as deregulation of the downstream sector as well as comprehensive overhauling of all infrastructure, among other major steps. In a spontaneous reaction to the report, a cross-section of the public, especially the stakeholders, faulted the timing of the proposed exercise, which, they argued, was undesirable for the economy.
Leading these groups of antagonists was the Nigerian Labour Congress (NLC), an umbrella body of trade unions in the country, which organised nation-wide labour protests to express its strong opposition to the proposed exercise, which analysts believe could usher in the desired efficiency in supply, distribution and marketing of petroleum products in the country.

Ever since the deregulation kite was flown by the government, the industrial and economic terrain of the polity have never remained the same again, as pro-and-anti deregulation groups become enmeshed in unending debates over which option would offer the people and the economy the dividends of an efficiently-run downstream petroleum sector.
Giving a background of the current debate at a public forum organised by Folu Educational Services Nigeria Limited at the University of Lagos recently, a professor of political science at the institution, Stephen Olugbemi, noted that the deregulation fallout was the direct result of several years of economic negligence that had begun to take great toll on the economic well-being of the country.
Olugbemi, who spoke on the theme: "Nigeria's nascent democracy and deregulation of the oil sector", explained that "the past 20 years or so in the life of Nigeria have been characterised by severe and disruptive shortage of motor spirit and ancillary petroleum products arising, according to official explanation, largely from smuggling and illegal diversion of these products from the low-price domestic market to higher-price markets of neighbouring countries.
"The low domestic price of the commodities is attributed to a regime of government subsidy of the cost of production and marketing aimed at encouraging even national development, among other valued objectives. "Government then reasoned that the removal of the existing subsidy to review the domestic price-level upwards was the panacea required to restore supply-demand equilibrium. Unfortunately, none of the several upward price reviews had done the magic expected causing government a considerable loss of credibility in the process", he said.

Juxtaposing the arguments on deregulation against each other, he submitted that the exercise, if transparently implemented, would usher in an era of downstream operations efficiency in the petroleum industry, stressing that "the benefits of deregulation far outweigh its disadvantages." The implications of the deregulation "cat" ever since it has been let open by the Federal Government for the economy have been a mixed one for the downstream sector in particular and the economy generally. But for some weeks now, the lingering crisis of products supply, which has characterised the sector over the years, is yet to abate even as product prices vary from one sales outlet to the other across the country.
At the micro-economic level, prices of products, especially the consumer items, have inched up following the increasing transportation costs borne by producers and sellers of goods and services. From the supply side, the last two years have not recorded any significant achievement in product refinement, or distribution and marketing. Although the authorities claim that the refineries have been enhanced, the domestic market still depends largely on products importation in order to meet the needs of domestic consumers.
Even with the increase of the daily consumption from 300,000 litres per day to 450,000 litres, there appears no end to the fuel shortage within the domestic environment. Besides, although the Federal Government continues to lay claims to substantial projects in the area of infrastructure, especially the Turn-Around Maintenance (TAM), of the refineries, nothing really serious has been done in the distribution and marketing segment to enhance efficiency in products supply.

Lacking adequate capital required to upgrading the existing facilities at their distribution and sales outlets, the major and independent petroleum products marketers have continued to bemoan their predicament even as no supportive measures appear to be coming from the government.
In the power sector, government's policy has been to privatise the industry to allow private sector participants to generate electricity for national needs. To this effect, Power and Steel Minister, Dr. Olusegun Agugu, said two committees at executive council were set up to look into private sector involvement in the power generation, transmission and distribution.
Currently, the national electric power demand level is estimated at 2,400 MV, but actual generation hovers around 1,800 to 2000 MV. Aside this, most of the distribution transformers at consumer level are overloaded while the authority is still caged in distribution facilities in adequacy occasioned by a myriad of problems.
President Obasanjo gave a 4,000 MW capacity to be generated before the end of this year, but rehabilitation work has been such that more fund is still required to strengthen the transmission network. Though, by late 1999 and early 2000, electricity supply improved due to over-flogging of the hydro-power station, NEPA officials said the nation had witnessed more national system collapses in the last two years than previous years.
But Director-General of Bureau of Public Enterprises (BPE),Ahmed El-Rufai, stressed that before Nigeria could effectively privatise the power sector, a clear energy policy and a regulatory body should be in place. This, perhaps, explains why the project has not taken off fully since the inception of the Olusegun Obasanjo administration.

Source: The PMA Online Power Report
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