Every administration of the federal government since 1999 has made a hazard at reforming the country’s petroleum sector with the same objective of making it meet the dual target of satisfying internal fuel demand and fetch optimum foreign exchange (forex) income for the country.
However, whereas the role of upstream petroleum sector in earning the bulk of the nation’s forex might carry the greater scope of Nigeria’s economic burden, the downstream petroleum industry hosts the prime templates for government’s performance appraisal given the role of fuel in powering social and economic activities in-country.
Thus, providing adequate and affordable fuel supply for the country’s citizens has remained the most prized social benefit with which the petroleum sector is associated. And sustaining this benefit has been the toughest challenge recent administrations of the federal government have inherited.
Decades of experience have shown that the good intention of running costly domestic fuel subsidy programme has created unmanageable market distortions that incubated corrupt and sharp market practices, encouraged cross-border smuggling of subsidized products, created supply gaps, and ultimately sparked riots and loss of lives.
Each regime of the government had inevitably tried to adjust the internal fuel price against prevailing economic realities but none has been bold to bite the bullet like the current administration of President Muhammadu Buhari which is faced with the task of articulating decisive reform measures that must end the cycle of waste in the petroleum sector.
The bold step of the current government is supported by solid empirical premises. The Buhari-led government came into office at a period of acute fuel scarcity arising from falling capacity of the state to meet the cash call from fuel importers in the country. For months, the new government was saddled with the crisis of restoring normalcy in the economy which suffered the deep shock from acute fuel supply gaps that grounded every sector of the economy: aviation, road transportation, commerce, freight forwarding and haulage, small and medium enterprises, banking operations et cetera.
The fuel subsidy debt overhang of nearly N500 billion inherited by the new government obviously formed a big sink hole in the treasury at a time flow of income from upstream end of the petroleum industry was thinning down on accounts of declining production and falling oil prices. Thus, while the nation’s estimated daily average fuel demand was rising proportionately with the speed of economic growth, and the subsidy bill associated with high volume importation continued to escalate, federal forex income took a dive as crude oil prices plunged from over $100 per barrel to less than $40 per barrel.
Faced with acute forex crunch, meeting the high forex demand from fuel importers became increasingly unsustainable, forcing the government to quickly seek ways of cutting the nation’s volume of imports.
Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had explained that the nation’s three refineries were quickly revived to drastically displace large volume of imported petroleum products to meet multiple economic objectives creating full commercial values from the plants, weeding out importation costs from petroleum products and cutting demand pressure on the country’s lean forex reserves.
However, the cost savings and other benefits associated with import replacement from the local refineries are as much as the capacity of the plants. At full production capacity, the refineries with total nameplate for 445,000 barrels per day can only pump out some 18 million liters of while petroleum products. Average national peak demand is estimated at 32 million liters per day.
Full resolution of the entire crises, according to eminent economist, Dr. Kalu Idika Kalu, is to lay basis for sustainable local production of the country’s total daily fuel demand to weed out all the costs associated with importation. These costs, according to him, constitute great part of the disputed subsidy bills.
But investors point at any level of subsidy as major threat to cost recovery. Major multinational oil firms in the country had argued strongly against President Olusegun Obasanjo’s mandate on them to refine 50 percent of their production in-country on the basis that the domestic market was not liberalized for fair competition.
Previous governments beginning with former President Obasanjo had driven limited or partial deregulation to the extent that all petroleum products in the market except petrol were deregulated prior to 2015. It was on the basis of the substantial progress at liberalising the fuel market that investors like Dagote group, Orient Petroleum and Refining Company Limited, Amakpe Refinery, Integrated Oil and Gas Limited and Niger Delta Petroleum Resources all initiated local refineries.
To encourage more investors and guarantee commerciality of the investments, Dr. Kachikwu had taken the bold step to finish the last lap of the market liberalization process by removing the only remaining price cap on petrol. Before him, previous ministers had removed price caps on aviation turbine kerosene (ATK) also called Jet A-1, household kerosene (HHK), dual purpose kerosene (DPK), automotive gas oil (AGO) also called diesel, low pour fuel oil (LPFO) also called fuel oil, base oil and other refinery products.
Thus the role of Dr. Kachikwu in the entire deregulation process can only be interpreted as conclusion of a process he inherited in his function as a key driver of a government economic reform process. And by completing the deregulation process, the minister has enhanced the capacity of the government to meet its social service obligations to the teeming population.
Decades of subsidy regime had suppressed government’s capacity to meet other social service and infrastructure development obligations to the people. Until now, fuel subsidy had retained the highest single fund allocation in the nation’s annual budgets, weakening government’s capacity to attain appreciable level of performance even in the underfunded sectors.
Despite the huge funds pumped into subsidy in the past, the objectives were hardly met as the prescribed prices were only limited to most urban centers in Lagos and Abuja areas only.
Executive Chairman of Integrated Oil and Gas Limited, Captain Emmanuel Iheanacho had argued that fuel subsidy actually widened the gap between the rich and the poor, pointing out that the subsidy regime provided cheap fuel for rich men with large fleet of cars while the poor that use public transportation systems hardly benefited from it.
Former Secretary of the Commonwealth of States, Chief Emeka Anyaoku, had during an investment forum in Lagos declared that the Nigeria’s continued reliance on foreign refineries for our domestic fuel needs defies logic.
According to him, it is an unacceptable paradox for major crude oil exporting country to also be a major refined products importing country. He noted that the best step for the country is to lay the basis for investment in local refining.
Also, former Chairman of Neimeth International, Mazi Sam Ohuabunwa, stated at a business mentoring programme in Lagos that the acute refinery capacity gaps in the country presents commercial opportunities to investors. He called on government to level the playing ground to enable businessmen unleash their creative geniuses in competitions that would ultimately drive down pump prices of petrol.
It is therefore expected that the deregulation of the downstream petroleum market would bolster investors’ confidence in the domestic refining while the resulting boost in capacity will ultimately eliminate importation and all the associated costs that currently keep pump price at N145 per liter.
It is envisaged that when import associated costs comprising freight, insurance, demurrage, port charges, jetty charges and sundry fees are wiped from the pricing templates, rising internal competition in the domestic market will naturally find a level for petrol below N100 per liter.