Liberalising downstream oil sector will save Nigeria a lot —MOMAN
Nigeria is one of the few crude oil producing countries that rely on importation of refined petroleum products for its domestic consumption. Stakeholders in Nigeria’s downstream industry have been calling for full deregulation of the industry as a prerequisite to maximising the full potential of the industry. In this interview by OLATUNDE DODONDAWA, the Chairman, Major Oil Marketers Association ofNigeria (MOMAN), Mr. Tunji Oyebamji, explained Federal Government can save more from cost of border policing, cost of setting up task force against fuel smuggling, cost of maintaining multiple agencies at the depots and all other similar costs, if the downstream sector is appropriately priced. Excerpt.
With the coming up of Dangote refinery, Nigerian National Petroleum Corporation (NNPC) refineries and few modular refineries here and there, will there be enough space for all players to operate?
First and foremost, you have heard a term that was used very liberally, which is ‘becoming a net exporter of fuel’. That happens when your local production exceeds local demand then you may become a net exporter. All things being equal, if Dangote refinery comes on stream, if NNPC refineries are rehabilitated and working, if the modular refineries are also working, then there is the likelihood that we will have more products available than we can consume locally and that also means there will be opportunity for us to export refined products. But again, like I said, that is all things being equal. Will the refineries really come on stream as they said? When exactly will Dangote refinery really start to work, is it 2020, 2021 or 2022? All those things have to happen pari passu. And again, some of the modular refineries too are not producing all the products, some are producing more of AGO than PMS. All those have to be taken into consideration.
But do you think Dangote refinery alone can address all the downstream challenges?
I will say it will, to a large extent, because the capacity is significant. It is more than all the NNPC refineries put together. However, the demand for refined petroleum products in Nigeria is also growing. Recently, you know the borders were closed. And it became clear that some percentage of Nigerian fuel, whether imported or locally produced, is finding its way across the borders. If you had blocked the loopholes and that product is not going there again, then maybe Dangote refinery can meet all the demand. But if your pricing regime remains the same and the border is re-opened, and if people now resume smuggling of petroleum products across the border because the pricing is not okay, then, it could be that products refined by Dangote refinery supposedly for local consumption will also be finding its way across the border. That’s why it is an economic issue ultimately to set the correct and appropriate price for the products such that there will be no significant advantages in trying to smuggle the products across the border. If you make this continuous imbalance whereby product is selling for N145 per litre here and N300 per litre across the border, then naturally, product will find its way to where it will earn higher returns (arbitrage). So, all of these things are interwoven and for me, if you don’t solve the basic fundamental problem of putting the appropriate price, you will just be spending so much energy on policing borders and checking. That’s why there are so many agencies at the depots doing similar job function of verifying products to prevent them going into the wrong place.
We are talking of products but the infrastructure for distribution of products is critical to the efficiency of downstream sector. With the way it is, what do you think is the ultimate solution for willing products and making it competitive in a deregulated environment?
The most efficient way of distributing product is through the pipeline. That’s whereby you place five million litres in a pipeline, press the pump and it comes out in Enugu or Ilorin. Nobody will see the movement because it will all go through underground pipeline. No trucks on the road, that’s the most efficient means of distribution but it is quite expensive. The investment Nigeria made in pipeline network, if we are to make it today, it will be significantly higher and finding the money to do that is difficult, except by involving the private sector. But you cannot call the private sector to be part of it if they are not going to be able to determine their cashflow. They may have to go to the bank to raise loan, the bank will ask for the cost or what they will charge to move the product. If the margin is low, the bank may argue that they may not be able to recover their investment because government has placed a cap on pricing. Then the bank will tell them it can’t finance such a business.
What policy alternatives are you selling to the government to make the downstream infrastructure development a little more bankable?
Well, we have continued to canvass for a deregulated environment. Deregulation does not mean there would be no regulation in terms of quality and operations, Department of Petroleum Resources (DPR) will continue to play its roles. When we talk of deregulation, we are talking about the commercial side of things. Having said that, we also recognise that it is not easy to just wake up in the morning and deregulate, what is needed is for the government to educate Nigerians that we cannot sustain this thing. Subsidy is preventing us from investing in hospitals, roads and others, so we have to make a choice.
Then the government will roll out its plans on how to spend the money meant for fuel subsidy on infrastructure development. Set up people that will monitor the spending. You can also do it in phases and ensure you carry people along.
In MOMAN, our direction is that if in the interim, government believes that the time is not right to allow appropriate pricing, it will be good if they can allow us to have more margins so that we can make more and invest more in other areas of the downstream. This is because presently, our margins have been fixed since 2016 and before that, it was fixed for nine years. Meanwhile, inflation continues to rise every day and by implications, it means what we are earning in real term continues to depreciate. It is making life very tough for us. For us, it is about survival. Many of the things you see regarding IOCs’ participation in the downstream, they are leaving not because they can’t do the business again but it is difficult to make returns. Indigenous players can survive with smaller margins but the IOCs have standards to maintain, which is same standard they will maintain in their respective home countries. Therefore, to maintain the standard, they have to look at the equation and ask themselves, if with the current situation, they can do this business the way it should be done on the nature of the trucks, Health, Safety and Environment (HSE), et al.
For instance, a standard brand new truck may cost N70 million, which is the standard they must adhere to if they want to operate in downstream. But, in order to survive, a local player can import a 25-year-old truck because that is what the margin allows him to buy. Many people will say yes, indigenous players are playing in the downstream but people are not looking at the trucks and other safety issues.
Yes, we have several indigenous players in the industry, but do they operate with state of the art or modern equipment. The answer is that people tend to cut corners here and there. These are some of the considerations we really need to look into.
NNPC has been the sole importer of petrol for years, how do you survive currently?
We are surviving but we are at the mercy of the NNPC. There are various media houses in Nigeria and the newsprint is a very key element in that industry. Assuming Nigerian Tribune wants to import newsprint, it goes to the bank, opens an LC and because it knows how many newsprints it needs for the whole year, it will import it. If government wakes up one day and say only one government entity can import those newsprints, you know what that means. Everyone in the industry will be at the mercy of that entity. Elements of subjectivity will come into such a system. Though, they are trying, as you can see, no fuel scarcity in the country but it could have been better for the industry because this is what we are set up to do. To handle our affairs, be efficient about it and be able to maximise our operations. I don’t think it is in their own interest that they are spending much of their time being involved in product importation and so on when we as professionals can do it. I won’t necessarily say we know more than them but we are many quoted companies and we have to be efficient and do things as quickly as possible. More importantly, we are subjected to their planning, if they have hiccups, we are affected. So, those are the challenges we are facing but we are working with them. We know that energy security is important to the government, they don’t want queues and to a large extent, we have been achieving but you will agree with me that there is a cost to achieving all that those goals.