Liberalisation is the answer

by Maureen Chigbo, Tobs Agbaegbu, Bayo Ogunmupe and Chris Ajaero

Funso Kupolokun, senior special assistant to the president on petroleum and chairman, presidential technical committee on liberalisation of the downstream sector of the Nigerian oil industry answered following questions:

Question: Most people think that deregulation of the downstream sector of the oil industry would lead to high prices of petroleum products. Will deregulation really lead to high prices of petroleum product?

Kupolokun: The answer is something like this: When you talk of petroleum products there are several segments of it, you have the crude input, you have the refining cost, you have the distribution cost, and you have a little bit of margin for the business to be sustainable for all the participants. You know as much as I do that crude prices in the international market swing up or down.
In 1998, just two years ago, crude price in the international market was something like $ 10 per barrel. But talking about $ 10 per barrel for the price of the product will not be quite realistic. If it goes to $ 15 it is another thing. All we are saying about liberalisation is simply that democracy is about freedom of participation and liberalisation itself is a subject of democracy.
Liberalisation is democracy in business. So, if we liberalise, it means we open up the system and everybody will be able to participate and all the segments or the supply and distribution chain must be opened up for the participants. What we are saying is that they should be able to recover cost and a little bit of margin for them to have a sustainable business.
And depending on what crude costs in the international market, which we cannot predict, price could move up or down. So, if anybody says that liberalisation means upward movement of price, that person is less than honest. Indeed, it would be the other way. Another thing is that once you open up, there will be competition. What does competition do? Competition itself might driveprices downwards. So, it does not always mean upward review of prices.

Question: The downstream petroleum industry must operate under well-defined policies and procedures based on modern economic ideas if any nation is to derive maximum benefits from the economy. Does Nigeria have such energy policy? If it does, does such a policy state with regards to liberalisation of the oil sector?

Kupolokun: You have to have a coherent energy policy and there is one. Part of that policy is that the downstream sector has to be liberalised and what we are doing at this stage is to get people to understand what liberalisation means, what are the dividends of liberalisation, and why we should embrace it.
But definitely, there is energy policy and one that is coherent. For instance, when you liberalise the downstream, then you find out that gas could come in because products will then move to their rightful place in terms of energy equivalent and you can then promote the development of that. So, all these things are inter-linked. So, there is a coherent energy policy, there is a coherent planning.

Question: You said that liberalisation will open up the downstream sector for all participants. Is it going to be an all-comers affair?

Kupolokun: The Nigerian National Petroleum Corporation, NNPC, has the monopoly today. Anywhere in the world where there is monopoly, it does not work, it has not worked and it will never work. The home of tight regulation of the economy was the USSR; but they realised much later that the centre could not hold, things fell apart. The government of the Russian federation, what is it they are doing today?
Their primary focus is the eradication of corruption and coming next to that is the complete liberalisation of the Russian economy. So, the country has found that monopoly does not work. What we are saying in this case is that we want to open up. NNPC will be free to participate, major marketers, independent marketers will be free to do their business, refiners will be free to participate.
You will then find out that the moment you liberalise the system, people will invest in new refineries and there will be a lot of private investors. So we are not going to depend on NNPC alone. You have NNPC on one hand, you have independent marketers who may wish to import, you have major marketers who may also import when they like, you will also have within three years, refineries here and there. Products will be available as and when you need them.
Once products are available, and many people are participating, competition sets in and competition itself will force prices downwards and democracy is the right to choose. If you don't like the NNPC, you don't buy from NNPC and you will have filling stations all over the place. Some could say my price is N 20 plus free gift, the other one could say my price is N 22 plus free car wash, another could say mine is N 23 plus Christmas presents. So, you decide the one that suits you most. The choice is yours because the consumer in this case is the king and that is what liberalisation is all about; freedom of choice.

Question: Most Nigerians have kicked against liberalisation of the downstream sector because of fear that it would affect the masses greatly. Would you say that government has well-articulated policies on the downstream sector and what measure will government take to ameliorate whatever effect liberalisation will have on the economy and the masses in general?

Kupolokun: That is a double-barrel shot. You say that most Nigerians have kicked against it and then what government is doing to ameliorate the effects of liberalisation. Initially, when people hear the word liberalisation, deregulation, opening up, they do not understand. And people say that with liberalisation, price will go to high heavens. People were apprehensive and it is normal.
We have been going about and that is what the Gbadamosi committee said, that we should have an enlightenment phase and that is what we are doing now. And I tell you this, we have been to several different states, so far, apart from the good job that the National Orientation Agency, NOA, is doing. We in the presidential technical committee on liberalisation of the downstream sector of the Nigerian oil industry have been to seven states and after our visit to these states, I will say that I feel satisfied.
Everywhere we have gone to make our 90 minutes presentation, at the end of the day, we have found out that virtually everybody will say it is the right thing to do. The moment you enlighten the people, the moment you familiarise them with what the gain will eventually be, the moment you assure them as to how it will be done, they quickly embrace it. Not one state said they don't want it.

In Borno, the governor of the state said it is not only good for Borno State, but he is sure that is what is good for the north. A few days ago, in Benin, Governor Igbinedion said it is the right thing to do. It should be done. The governor of Cross River State said any day, anywhere you hardly regulate any commodity and it never works and that it is economic inevitability and should be done. We were in Bauchi, the governor said that it is not only the right thing to do, that it must be done, it should be done now.
We have been to Minna and the story is the same. In Rivers State, the governor said that as soon as we liberalise, he will build a refinery. You know what? 100,000 bpd refinery will involve an investment of about $ 1.2 bn. Can you imagine sinking $ 1.2 bn into Port Harcourt? What is the implication? More jobs will be created. We are talking of unemployment. Do you know how many people that will be employed?

Now, world-wide the refining margin is an average of $ 4 per barrel, so when you compute that it gives you some $ 12 mm a month. That state government will normally have about 40 % participation. Do you know what that does in comparison to waiting for what comes up from the federation account?
When we talk about generating funds internally, liberalisation will perform the magic. What about social services and the governor did not mince words at all in endorsing liberalisation and there have been applause everywhere we have gone. So, how do you think I feel? I feel satisfied. So that is the answer to that.
Now, let me answer the second part of the question. You talk of the masses, some people are saying that they don't want liberalisation because they are protecting the masses and I want you to answer this question: My father lives in the village, very humble farmer, comes to Lagos once in a year to visit me. When he is coming, he boards one of these big buses. Between him and me, who do you think consumes more fuel?

Questioner: You.

Kupolokun: Fine. Between him and me, who is the rich man and who is the poor man in relative terms?

Questioner: In relative terms your father is the poor man and you are the rich man.

Kupolokun: Now that you agree that my father is the poor man and I am the rich, if we say we must give price support to petroleum consumption, who arewe supporting more between the two? The man who consumes more, isn't it? So, you are giving me more of the support. If this support is coming from the same pot which in this case is the federation account, one single pot we have been dipping hands into, they say one man's gain is another man's loss.
Therefore, you know what you are doing? You are robbing Peter to pay Paul. The 21st century Peter in Nigeria is actually the poor man, the rich man is Paul. Therefore, without doubt in my mind, this arrangement means enriching the rich at the expense of the poor. So, when people say they are supporting the poor, it is either that they do not understand how these things work or there's a little bit of mischief.

Question: Can you explain where the subsidy is coming from? Government talks of subsidy, the NLC and some other people say there is no subsidy. Where is the subsidy coming from?

Kupolokun: It is as simple as ABC. Crude is given to NNPC at $ 9.50 per barrel that converts roughly to N5.00 per litre. If you run 300,000 bpd for 365 days a year, the crude allocation before now, that means government will get N87 bn. However, if you take an average price in the international market of about $ 25 per barrel and do 300,000 bpd for 365 days a year, the difference between the two is a gap of $ 1.8 bn.
There are two problems in this. This gap, if available could be channelled properly to other pressing needs. Like I have said earlier, if you keep maintaining this subsidy in the name of subsidising the masses, it is either that one is dishonest or one does not understand that you are subsidising the rich at the expense of the poor. So, you can agree with me that it is unnecessary.
Also, if this remains there, you cannot liberalise the industry. The monopoly of the NNPC will remain there and people will continue to talk about the inefficiency of the NNPC. The day you liberalise, if you do not like the services of NNPC, why should you patronise the NNPC?

Question: What will be the relationship between theNNPC, PPMC, the ministry of petroleum resources and the DPR in the post-liberalisation era?

Kupolokun: We are reviewing the structure of the industry. The fact that we have liberalised does not in any way affect the role of DPR as the regulatory body for the industry. It regulates the marketers, it regulates the upstream companies, and it regulates NNPC as well. The role of NNPC will not have changed as the commercial arm and it will be doing business as usual. The ministry of petroleum resources will always be there to take care of policies and long term plans. It is only that in this case NNPC will no longer be the only participant in the downstream business of supply and distribution; there will be all others and you and I will be free to decide whether or not we want to buy from NNPC. And if NNPC does not shape up, it will slip out because you can only be in business when you do business the way others do business.

Question: When you were explaining the difference under subsidy, you put the price at$ 25 per barrel in the international market, what of when the price goes up or goes down like we had when oil was selling for $ 9 in the international market and we didn't get any difference in the price here? It didn't affect anything. Is there going to be a mechanism for adjusting the price of petroleum products once the price also drops in the international market?

Kupolokun: That is exactly what we are talking about. The reason we are not saying the upward or downward adjustment is because we have a tightly regulated system, so whether price is $ 9.50, you sell at N 22, if the price is $ 25, you still sell at N 22, if price of crude is $ 50, you sell at N 22. That is what you get in a regulated system. The moment you liberalise completely, do you know what will happen?
Marketers, refiners, including NNPC and real investors will take crude at international market price, put their refining cost on top, a little bit of the margin and that becomes the price they are going to sell. So, if crude price goes to $ 10 per barrel, that will reflect immediately at the pump. If you don't reflect it at the pump nobody will patronise your petrol station. The man who is smart will reflect his own. Let me give you an example.
The other day I got to the airport, I told somebody to buy me a ticket from the airline I like to patronise. I gave him N 6,000 and he came back to tell me it is now N 7,500. I said, ah! since when, then I paid and I got the ticket. Two weeks after, I came back to the same airport, I gave N 7,500 to the same person to buy me a ticket from the same airline and when he came back, he said, Oga, it is now N 6,000, take back your N 1,500.
I don't need to tell you what has happened. That particular airline tried a fast one, when they found that nobody was ready to do business with them, they trotted back. So, the moment you liberalise, the competition will force prices downwards because they will be checkmating one another.

Having said that, it is not as if everything will be left open likethat because you could have some areas where you do not have many participants and you do not want them to form cartel. So, there will be a regulatory body, not necessarily to regulate what the pump price will be, but will look at all the developments in the industry and know what is required. Like in Ghana, they have what is called the snake mechanism. The body will determine a channel within which your price can move.
So, if you like, you can sell close to the top of the channel but in determining the channel they will ensure that cost will be recovered by all the participants in the chain and there will be some element of profit for all the participants in the chain and for the different participants to manoeuvre, because liberation is about the right to choose.
If I have a petrol station that is fine and dandy, you may decide to buy from me even if mine is a little bit more costly. If I have just one pump in one corner outside the town, and sell at one naira less, you may decide that you would rather drive to the place and buy. So, there will be that wide channel for them to move. If you like, you can sell very close to the top of the channel. If you have enough volume, fine and dandy for you.
But when you don't have enough volume, you may decide to sell in the middle of the channel or if you really need volume you can sell at the bottom of the channel. But one thing you will not do is to put any price beyond the top of the channel. Nobody will tell you that it is N 22 or N 20, but you have a channel which will make sure that everybody is recovering cost.

Question: There is this notion that liberalisation will stop smuggling. Will it eventually stop cross border leakage of petroleum products?

Kupolokun: Interesting. Now, the prices of our neighbours is quite high. For you to completely stop smuggling you must have a price here that is comparable with the prices of your neighbours. But as long as there is a gap, as long as there is commercial incentive, there will be smuggling. Even the UStoday is still battling with drug trafficking for all the sophistication because as there is financial incentive, people will do the business.
Now, if I tell you that if we liberalise today, tomorrow, there will be no smuggling or tendency to smuggle, then maybe I am not saying it the way it is. The truth is this, the price of our neighbours, 50 % of the pump price they have is tax. On average, in these countries, the tax element is N 30.00 per litre.
The Gbadamosi committee is not canvassing that. The government is not canvassing taxing anybody. All that government is saying is, let all the participants recover their costs for doing business and having a little bit of margin so that the business can be sustainable. Therefore there will always be a substantial gap between the price in Nigeria and that of our neighbours.

That is why when people say that prices will go to the roof, they are lying. Because price will not go to the roof, there will always be a substantial gap between our price in a liberalised system and the prices of our neighbours because our neighbours are capturing tax as much as N 30.00 per litre on average and as long as there is a N 30.00 a litre difference between us, what then will happen is that there will be a gap. For instance, if you take a 30,000 litre truck from Nigeria and there is that gap of N 30.00 per litre, that is some N 900,000 a truck, so that will still be good business for people to do cross border leakage.
For us to say we want to stop smuggling, it means we must take our prices close to where our neighbours are, but that is not the intention of government. And I don't think there is any Nigerian that is ready to pay N70 per litre. So if I tell you that if we liberalise today, there will be no financial incentive for smuggling, that cannot be correct and I don't say things that I cannot stand by to confirm in two years from now.

Question: We have in Nigeria, oil-producing communities that are very strategic in the whole scheme of things. How are the interest of the oil-producing communities to be protected under this liberalisation scheme?

Kupolokun: Liberalisation means a win for everybody. As far as I know, liberalisation is one formula I have seen in so many years that means win for everybody. You go to the North, in most of the cities there, take Maiduguri, take Sokoto, they get the product supply at N 60.00, N 70.00, sometimes N 80.00 per litre. When you liberalise that will never happen.
Now coming to the riverine areas, there is this same problem. Because of the multiple handling of products in the riverine areas, you find out that if they get it to buy at all, the price is as much as N 80.00 per litre. You know the reason? Because, nobody is willing to invest in a floating filling station. The moment there is liberalisation, there will be investment in floating filling stations. Once there is liberalisation, there will be filling stations in riverine areas like Abonema, etc. And they pay a little bit higher but they will not be ripped off the way they are being ripped off now.

Question: In April, President Obasanjo met with the organised labour in Aso Rock and they agreed to set up a committee to harmonise their positions on the deregulation on the downstream sector of the oil industry. Could you tell us what the position is now?

Kupolokun: Let me tell you the good thing. The Gbadamosi committee spent three months going through all sorts of position papers. Experts, non-experts presented their position papers. Having gone through all these, the committee found that there was no other way out except to liberalise. But the good thing also is that labour agrees that liberalisation is the promised land. So, we are saying the same thing. The only slight difference is the modality. And they are talking of certain modalities. Of course, we need to talk on the modalities.
But, I am an expert in this business. I have spent the last thirty years doing nothing other than the business of petroleum and we believe that what government is saying isright. We had this seminar in Lagos recently with the business community. All the experts that came to speak, without exception including, the former special adviser on petroleum in the last government, former managing directors of refineries who have nothing to do with government today, former managing directors of marketing companies, people in business all endorsed the modality which the Gbadamosi committee proposed. And in the Gbadamosi committee, I must tell you, we are 35 in number. Four from NLC and 31 from all walks of life.
Eighty % of these 31 have never earned a penny from government before. But faced with the facts, facts are facts, you can't slant them. They decided that this is the right thing to do. PENGASSAN, NUPENG, the labour unions in the oil industry have said that they know where the shoe pinches and have said that it is the right thing to do.
The difference between us and the NLC, is not much. They mean well; we mean well. And one thing that pleases me is that we agree that the Promised Land is simply liberalisation but the modalities are slightly different. All we need is to explain things to ourselves. And what we are doing now is to enlighten the public in consonance with the recommendation of the Gbadamosi committee.

Question: How much of petroleum products do we really consume in Nigeria? I have been hearing the figure 300,000 for the past 20 years.

Kupolokun: Crude allocation to NNPC in recent past is 300,000 bpd. When the refineries are working, they could refine up to 70 % of it, sometimes they could refine much lower than that. But even when they refine much lower than that, they sell the crude and use the proceeds to procure products.
So, in a way, it still boils down to the same thing. But what is the consumption level? There are different studies. We have two studies done by different experts. One is a consulting firm in Germany looking at the consumption in the whole of Africa and the conclusion in these studies is that if there is no smuggling, if we consume rationally and there is no wastage, Nigeria should not consume far in excess of 200,000 bpd. But before now the crude allocation is 300,000 bpd and we cannot meet the demand. Currently, we have 445,000 bpd consumption.
Consumption is growing at an average of 15 % per annum and quote me on this, there is no where else in the world where consumption escalates by 15 % per annum. We must pull back and ask ourselves, what is happening? And if consumption continues to grow at 15 % per annum, five years from now, what do you think we will be consuming and where do we find money for other things?
No more schools, potable water, crisis in the NNPC product. Oh! As much as we consume these products, it does not matter whether it is going elsewhere. We wait for manna to fall down from heaven but in the 21st century there is no manna; you have to provide for yourself.

Question: Recently, President Obasanjo said that the price of petrol will not be more than N 40 per litre when the downstream sector of the oil industry is liberalised. Does this not suggest that liberalisation is all about increase in prices of petroleum products?

Kupolokun: I do not know what the price will be because like I told you, liberalisation means making sure that all the elements in the market are reflected. So, if prices of crude go down, that will be reflected, if it stays where it is today, that will be the number. But one thing I do know is that crude prices are not likely to go much further to where it got to about a year ago at about $ 30 per barrel.
Therefore, the president is quite right that in no circumstance can I today foresee a liberalised price in excess of N 40, it could be less. It would only be less but what the number is, I don't know, because I don't cross a bridge until I get there; because these things vary as the crude oil price moves in the market..