1.1 Background of the Study Area
All over the world, reasons for reforms in the public sector vary from country to country depending on the objective, peculiarity and the circumstance that the country finds itself. The issue of reform of the Nigerian downstream sector refining and distribution of petroleum products has been on for quite some time. It has however, become more compelling in the last few years given the trauma of scarify of petroleum products that the nation has continuously witnessed.
Prior to 1965, petroleum products domestic requirements were met entirely through importation under a deregulated environment. By 1965, it had become apparent that the nation, haven gained independence five years earlier, could no longer rely on important for its entire requirement.
Consequently, the first refinery in Nigeria – the old Port Harcourt refinery was built in 1965 as a commercial venture to provide petroleum product at market related prices. It was a 35,000 bard per day refinery jointly owned by shell (25%), British Petroleum (BP) 25%, the Federal Government (20%), and the three regional governments (10% each), (Kopolokun, 2004).
However, by mid 1970s, with the advent of the oil boom government became directly involved in the downstream sector by building two new refineries and lacking over the first. The Warri refinery was commissioned in 1978 while the Kaduna refinery came on stream in 1980. Government’s main objective was to make petroleum products available throughout the country (www.nnpcNigeria.com)
With the change in ownership structure, the pricing, policy was modified and controlled to encouraged national distribution at uniform prices. This incidentally introduced the issue of bridging and price equalization at government’s expense. This was later inherited by the Nigerian National Petroleum Corporation (NNPC).
However, these controlled prices did not respond to the continuously changing business and economic environment. Thus, the control of petroleum products prices by government mark at difficult to earn enough resources to maintain the refining and distribution assets.
Since the commencement of government’s direct involvement therefore, prices of major petroleum products such as premium motor spirit (PMS), Automotive Gas oil (AGO) and dual purpose kerosene were set by government. This, of course, has been disincentive to the private sector investment in refining (Kopolodun, 2004).
Also, the impression is created that since Nigeria is an oil producing nation, petroleum product must be cheap regardless of the cost of productive. This has resulted in economic dislocation with its dire consequences. Such consequences include.
- Loss of revenue to government
- Petroleum products scarcity.
- Funding problem for NNPC, leaching to lack of regular maintenance of refining and distribution facilities.
- Capacity under utilization.
- Smuggling of petroleum products
- Divestment by marketers
- Adulteration of products
- Social and political unrest
- Poor economic growth
- Rampant pipetine ruptures and vandalisation
- Inadequate and ageing conastal vessels
(NNPC News, January, 2005).
The question in how can the NNPC, the refineries and the distribution sector in particular be repositioned to respond effectively to the dynamics of the oil industry for the maximum benefits of the national economy? It is in this light, that the deregulation of petroleum products prices becomes a sine-qua-non to ensure full cost recovery and reasonable rate of return for any operator.
For many year, NNPC was not able to meet the objective for which it was set-up as a result of the underlying factors briefly mentioned above and this must have be responsible for government’s decision to deregulation the downstream sector (NNPC News January, 2005).
Government as far back a 1988 commenced a privatization and commercialization programme through decree No 25 of 1988 which focused on partial and full commercialization of some 145 selected public enterprises it was aimed at rationalizing government expenditure and programme in response to the declining economic forturies of the early 80’s. Furthermore, through Decree No 28 of 1999 emphasized its inability to continuously subsidize inefficient and loss making parastatals and stated that privatizing such investment had become the cornerstone of its policy (Kopolodun, 2004).
The immediate past administration of Chief Olusengun Obasanjo, on the assumption of office in 1999 said that it would turn the situation around through:
- Maintaining self sufficiency in refining.
- Ensuring regular and uninterrupted domestic supply of petroleum products.
- Establishing facilities and infrastructure (Refineries, storage depots, etc) for the production of refined produced targeted at the export market and support to domestic petrochemicals.
- Providing gainful employment and enabling Nigerians to acquire technical know-how in refining and distribution business.
The downstream reform is therefore expected to ensured
- Petroleum product price determination by market force.
- Absence of government control in the pricing process except for tax purpose.
- Freedom for marketers to source petroleum products locally and internationally.
- Freedom of marketers to purchase crude oil local and international source 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 (NNPC News, January, 2005).
Deregulation of the market implies that a regime of trade liberalization will be in place whereby petroleum product can be imported or exported. This will ensure abundant petroleum products in the economy and elimination of long queues at fuel stations (NNPC News, February, 2005).
Deregulation is very critical to private sector participation in refining because it ensure commercial viability of product supplies thereby enhancing profitability, which is the major business attraction. The number of marketers and retail stations is likely to increase, with their positive impacts on business expansion as well as employment generation. According to Kopokolun (2004) about 25,000 jobs will be created for Nigerians. Instead of divesting from the industry, marketers are most likely to invest more (NNPC, News, May 2004)
1.2 Statement of Problem