Liberalization: The experience of the Nigerian petroleum sector

Dec 28, 2004 01:00 AM

by Funsho Kupolokun

Reasons for reforms in the public sector vary from country to country depending on the objective, peculiarity and the circumstances that the country finds itself. The issue of liberalization of the petroleum industry has been on for sometime. It has, however, become more compelling in the last few years given the trauma of petroleum products scarcity the nation had continuously witnessed. Equally compelling is the need to develop the gas sector which has the potential of doubling the nation's revenue but has not received focused attention until now.
In the downstream sector, our aspiration is to ensure domestic self sufficiency as well as efficient supply and distribution system.

Prior to 1965, petroleum products domestic requirements were met entirely through importation under a deregulated environment and completely in the hands of the private sector.
The first refinery in Nigeria was built in 1965 by Shell/BP. However, by mid 1970s, with the advent of the oil boom, Government became directly involved in the downstream sector by building two more refineries and taking over the first. Government's main objective was to ensure petroleum products availability throughout the country.

With the change in the ownership structure, the pricing policy was modified. However, these controlled prices did not respond to the continuously changing business and economic environment. Thus, the control of petroleum products prices by government made it difficult to earn enough resources to maintain the refinery and distribution assets.
Today, downstream assets include four refineries with a combined installed capacity of 445,000 bpd, over 5,000 km products pipelines and 21 storage depots spread across the country. Others include 9 LPG depots and the numerous retail stations all over the country.

Supply and distribution pre-1999:
This administration inherited a collapsing downstream sector in 1999. The sector was grossly under-funded and facilities were ill maintained. There were no commercial incentives for the refineries to operate efficiently, neither were there measurable performance standards.
The refineries were also characterized by high energy consumption and low capacity utilization. Furthermore, the pipelines and depots were unable to meet market requirements while the existing tariff structure was inadequate to cover expenditure. In addition marketers were divesting from petroleum products business. The resultant effect of all these was rampant fuel shortages, long queues at the retail stations, products diversion, black-marketing, products adulteration, fire incidents, smuggling.

Supply and distribution -- the issues
The issues which necessitated liberalizing the downstream sector include:
-- Non cost recovery in all the downstream chain
-- Monopoly of NNPC in products supply which created inefficiency
-- Scarcity of products.
-- NNPC import cargoes not arriving within the programmed time frame
-- Strategic stocklevels not sufficient to cope with supply disruptions
-- Failures in pipeline and depot systems caused by sabotage and low level of maintenance/investment
-- Poor import reception facilities

The downstream reform is therefore expected to ensure:
-- petroleum products price determination by market forces
-- absence of government control in the pricing process
-- freedom of marketers to source petroleum products locally and internationally
-- freedom of marketers to purchase crude oil from local and international sources for processing in the refineries
-- freedom of refineries to enter into processing agreement with marketing companies on the basis of charging fees
-- Right of access to distribution facilities subject to transportation agreement based on tariff.

Current situation
The federal government announced the deregulation of the downstream sector of the industry in September 2004 and in October ordered NNPC to pay international price for the 445,000 bpd lifted for domestic consumption. As of today petroleum products are available in all parts of the county. The long and winding queue of the past is gone and we believe for ever.
However, the nation's current premium motor spirit (gasoline) requirement of about 30 mm litres a day cannot be met by the local refineries as they can only produce about 17 mm litres per day even at the best of times thus leaving a short fall of about 13 mm litres per day for importation. This is why private sector involvement becomes imperative either through importation or the establishment of private refineries. Already, eighteen licences have been issued to prospective investors, five of which have been given approval to commence construction. In addition, a sum of $ 400.4 mm has been spent on refineries rehabilitation and $ 254.4 mm on pipelines and depots from 1999 to 2003.

As of today, the new PHRC is running at 60 % while work is in progress on the FCC unit. In the case of WRPC, the crude distillation Unit was shut down due to vandalisation of the Chanomi creek portion of the Escravos-Warri pipeline. However, I am pleased to inform that the rehabilitation work on the pipelines have now been completed and it is currently undergoing testing and commissioning and indeed crude oil receipt into the refinery commenced on 25th November 2004. Regarding KRPC, the CTU is steady at 65 %, while instrument checks on the FCCU is in progress.
However, since the commencement of the deregulation policy, the crude oil market has been very bullish with prices reaching an all time high of $ 55 per barrel in mid October 2004. The high global economic growth particularly in China, USA, India and a number of countries in Europe and Asia was partly responsible for the high price. The Iraqi conflict as well as the activities of speculators also contributed to the surge in prices.

The inability of NNPC to charge market price for its products resulted in the Corporation subsidizing fuel to the tune of about N 350 mm per day as at the end of August 2004. This not only resulted in cash flow problems for the corporation, it also affected its operations adversely.
Nevertheless, crude oil prices began a gradual fall since mid November 2004 with dated Brent falling to about $ 43 per barrel.

Merits of deregulation:
The merits of deregulation of the downstream are many and they include:
-- Full costs recovery for all operators
-- Sectoral efficiency and sustainable development
-- Fair products prices to end users
-- Prompt response to changing circumstances without political intervention
-- Fair margins to all participants as a basis for investment and keeping to international safety and environmental standards
-- Transparency and ease of administration
-- Removal of subsidy which the elite enjoy disproportionately at the expense of the poor.
-- Removal of subsidy to other nations other than Nigeria.
-- Nigeria will be able to meet the West African products requirement with liberalization and private sector impetus.

Gains of deregulation:
-- Products availability as is being currently witnessed throughout the country
-- Competition has begun to set in
-- Major marketers now investing more than ever before. (expansion of retail outlets, investment in product reception facilities)
-- IPMAN constructing large import storage facilities at Apapa. Same for DAPPMA
-- Private refinery programme beginning to take off
-- New entrants are now coming into the sector.
-- NNPC is now fully into retail business
-- deregulation has led to job creation and vibrancy in the sector.

Managing the impact of liberalization:
With deregulation, Government is able to channel funds for infrastructure that are beneficial to all as well as social schemes that are poverty focused.
As you are aware, Government attention is focused more on education, health services power sector reforms, agriculture, roads and other infrastructural schemes. This is in addition to other cushioning measures.

Natural gas:
Although crude oil will remain an important source of energy for a few more decades, natural gas will no doubt be the fuel of the 21st century.
Natural gas accounts for about 23 % of global energy-mix but it is the fastest growing form of energy at about 3 % annual growth compared to crude oil which though constitutes about 39 % of the global energy mix will grow at only about 1.6 % and coal at about 1.2 % annually.

Gas development in Nigeria:
Nigeria is blessed with an array of energy resources principal among which are crude oil and natural gas. With a reserve of about 187.5 tcf, the country ranks seventh in terms of global gas reserves and first in Africa. However, prior to the advent of the current administration, natural gas development did not receive focused attention to the extent that as much as 75 % of natural gas produced was being flared (the highest in the world) resulting in economic waste and environmental problems.
Nevertheless, within 4 years the flaring has reduced to 42.6 %. Our aspiration is to achieve zero flare by 2008 through increased utilisation. Already, total gas utilized in the country increased from about 197 mm cfpd in 1999 to about 573 mm cfpd in 2004. By 2010 domestic demand for natural gas will increase to about 1,700 mm cf while gas export is expected to reach over 7 bn cfpd.

Opportunities for gas monetisation:
A lot of opportunities have been identified for monetising gas. They include expansion of domestic utilisation as well as gas export. Export opportunities for monetising gas include the NLNG, the Brass LNG, the West African Gas Pipeline, the Gas to Liquid project (GTL) the Natural gas liquids (NGLs), as well as, LPG.
The NLNG has been one of the fastest growing in the world since Trains 1 and 2 were commissioned in 1999. Train 3 was commissioned in November 2002, while Trains 4 and 5 are expected to be on stream in the second quarter in 2005. When Train 6 is added in 2007, LNG output will total 22 tpy.

Upstream sector:
When this Administration assumed power in 1999, Nigeria's crude oil reserve was only 25 bn barrels and producibility 2.2 mm bpd. By 2003, the nation's reserve climbed to 33 bn barrels with productibility of about 3 mm bpd. The nation's aspirations in the upstream sector between 2003 and 2007 include:
(a) Growing crude oil reserves to 36 mm barrels and daily production to 4 mm bpd,
(b) Maximizing the sector's value and
(c) Improving Nigerian capacity and local content.

Our aspiration by year 2010 is to increase crude oil reserves to 40 bn barrels and producibility to 4.5 mm bpd. Already, significant discoveries have been made since appraisal drilling began in Nigeria's deep offshore in 2003. These include Shell's Bonga field, with recoverable reserves of about 1 bn barrels and Texaco's Agbami field with a potential reserve of about 1 bn barrels.
Other fields classified as world class discoveries include Erha, Ngolo, Chota, Ukot, Nnwa and Doro fields.

Source: Vanguard Media
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