Oil&Gas Special Report

Fuel Subsidies, Deregulation and Improved Efficiency of Supply

The argument to deregulate the Nigerian petroleum sector has been based primarily on the unsustainability of subsidies and the need to improve the efficiency of supply.

Over twelve years, from 2006 to 2018 for instance, Nigeria was said to have paid subsidies of ten trillion naira on petroleum products. The regime of subsidy is also associated with corruption and distortions to the supply of the product.

And so when the opportunity of lower oil prices presented itself last year on account of the covid-19 pandemic, the Government seized the occasion to announce that it had deregulated the sector.

Former Chief Operating Officer, Upstream at NNPC, Bello Rabiu however, says deregulation is beyond removal of subsidy alone but should include a competitive environment for product supply. In his words “Deregulation means that going forward, the market determines the prices of goods and services in the sector. So once the market is deregulated, there’s nothing that will tell you what will be the price, but the market. If the oil price comes down, the price will have to go down. If it goes up, the price will have to go up. But once you have deregulation and you are now having one supplier of the product, he can determine that price on his own and that’s monopoly. Monopoly is more dangerous than regulation because it means that you are now at his mercy”.

The intermittent fuel queues in the country throw up the perennial issue of deregulation of the petroleum sector and the efficiency of the market.

At the time that oil sold at $70, the highest price in over a year, owing to the extension of production cuts by OPEC and an improving US economy, the news came with mixed feelings for Nigeria –This is because as Government expects more revenue, under a deregulated market, the price of PMS is also expected to rise.

Price of PMS will definitely go up

An Oil and Gas policy management consultant, Michael  Faniran says that given that almost all petroleum products used in the country are imported, two factors account for the eventual cost of the product in Nigeria. He said “One is the price of crude, which will determine the price at which the product is going to be sold internationally. The other one is the exchange rate at which we convert the cost of the product at the refinery where we buy them from and you can see recently, the value of naira has actually gone down, the naira has been devalued. So with this, when you do the conversion, you see that the price of PMS will definitely go up and this is because we don’t refine our products ourselves. We sell the crude and we go to buy the imported products”.

A Financial Analyst, Mr Ibrahim Shelleng said while deregulation will free up resources for investment in other productive sectors, certain structural issues must be addressed so that it doesn’t constitute an unbearable burden for Nigerians. He added that  “If we have our own refineries that are working at full capacity, then essentially, we reduce the cost of petroleum for local consumption. But if we are constantly open to importation, then we are also exposed to things like foreign exchange dynamics. So, whilst yes, we can deregulate, we have so many other structural issues that will essentially add to the price of PMS.

Again, Mr Faniran says if the downstream of the petroleum sector is properly deregulated, it will guarantee better contribution to the GDP through job creation, competitive pricing and efficiency. For him, “Deregulation goes beyond subsidy removal. Subsidy removal is just one aspect. Deregulation will require the creation of a competitive environment which will guarantee the supply of products at commercial and efficient prices to the people. Again, deregulation involves competent players across the value chain in the downstream sector. They must be encouraged so that we don’t have just one player”.

Properly deregulated downstream sector

In overcoming the obstacles to a properly deregulated downstream sector, Mr Bello Rabiu advocated a situation where foreign exchange is given equitably for the importation of products as against the status quo where the NNPC is the sole importer. According to Mr Rabiu, “If the Central Bank can give the dollar to everybody that is eligible to import products, then you’ll see many people importing the products, and that price that they are giving the dollar must be equal to everybody. Whether it is four hundred and ten or it is three hundred and fifty or it is three hundred and eighty, once it is the same to everybody, then it means it you have a level playing field and therefore the best importer is the one that will actually bring it at the best price and the most efficient way so that you can now see value for that exposition”.

Mr Bello added that the non-publication of the monthly price of petroleum products by the Petroleum Products Pricing Regulatory Agency, PPPRA also posed a big question mark to the deregulation process. He said publishing the prices would make for transparency, which is required for the buy-in of the public and other stakeholders. Efforts to get the PPPRA to respond to its discontinuation of publishing prices of products proved abortive as text messages to its spokesperson, Kimchi Appollo went unanswered.

Experts have harped on the need to follow through with the deregulation process with transparency as the watchword as this will allow competitiveness and attract many private sector players in product supply and distribution as well as domestic refining.

Writing by Biodun Dare, editing by Saadatu Albashir