An examination of the legal framework for the liberalization and deregulation of the downstream sector of the Nigerian petroleum industry

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Price: 4000 Naira (BSC, MSC)

ABSTRACT

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Nigeria, the Africa’s largest oil producer, relies largely on importation of petroleum productsas its four crude oil refineries have remained in a state of total disrepair for many years. While diesel and kerosene prices had been deregulated, the Federal Government of Nigeria still pay subsidy to make petrol cheaper at the country’s petrol stations.

Nigeria is ranked the sixth largest oil producer in the Organisation of Petroleum Exporting Countries (OPEC) because the country is blessed with vast quantities of oil that generates billions of Dollars in revenues to the Federal Government since oil was discovered in Nigeria.

Like other developing oil countries, this has not translated into an improved economy for the country, instead, it has given room for corruption, mismanagement, smuggling of petroleum products to neighbouring countries, pipeline vandalisation and excessive subsidy payments for refined petroleum products in Nigeria thereby giving room for corruption and oil revenues mismanagement among other social vices in the sector.

The Nigerian oil industry is divided into three sectors: the upstream petroleum sector which comprises of exploration, production and the downstream which deals with refining ofcrude oil for domestic consumption, marketing, transportation and the midstream which dealswith the natural gas. The study focuses on the downstream petroleum industry which has great impact on the lives of all Nigerians. Moreover, deregulation is the opening up of the oil market and de-monopolization of the state-owned oil companies which has proved to be inefficient for positive economic turnaround and stability in the sector. It is also a process of freeing the Federal Government of Nigeria of its concurrent control and involvement in the downstream oil market by relaxing the various regulations governing the sector for a free energy market where oil prices are determined by interplay of the forces of supply and demand in the Nigeria’s energy market.

However, liberalization is the eradication of monopoly and involvement of many participants in the downstream petroleum industry to guarantee healthy competition, availability of petroleum products, fair and reasonable petroleum products prices through encouragement of private sector ownership and development of downstream infrastructure such as refineries, lubricant manufacturing depots and pipelines facilities. Privatization is the total transfer of ownership of government owned oil facilities or enterprises to individuals’ investors on shareholding basis, while subsidy regime is the situation where petroleum consumers pay less than the prevailing market price of petroleum per liter with the aid of the Federal Government of Nigeria through subsidization of petroleum products prices to guarantee petroleum availability and affordability for Nigerians.

Moreover, in 1973, the Federal Government of Nigeria introduced another measure called uniform pricing of petroleum products to encourage even distribution of petroleum products in the country. Also, in 1975, the Petroleum Equalization Fund was established to combat price disparities arising from transportation of petroleum products to all part of the country at the uniform pricing policy introduced by the Federal Government with the aim of promoting sufficient refined petroleum products through acquisition of technical expertise in refining, supply and distribution of petroleum products by encouraging indigenous petroleumcompanies participation in the downstream sector. Similarly, to encourage adequate domestic supply of petroleum products at reasonable prices through appropriate storage facilities for petroleum products and transportation of refined petroleum products to end scarcity of petrol, kerosene and other refined petroleum products and to boost efficient private sector investments through elimination of NNPC’s subsidiaries market dominance in the Nigerian downstream sector.

Due to this, many countries in the world have developed their downstream petroleum sector through liberalization and deregulation concepts which have enhanced private sectors involvement in their downstream petroleum sector and have boosted investments in the sector. The problems of persistent scarcity of petroleum products in Nigeria and inconsistency of petroleum products prices have brought untold hardship on Nigerians which is a major concern for this study. Downstream petroleum sector was selected as case study due to several attempts by the Federal Government of Nigeria to develop the sector through various policies with low levels of success and also due the fact that Nigeria is ranked 10th largest oil reserves in the world with 90% of the Government’s revenue originating from the sector and 35% of the government’s Gross Domestic Products derived from oil industry and not fewer than 1% of its national Gross Domestic Products emanates from the downstream petroleum sector[1].

1.2 Statement of Problems

The Federal Government of Nigeria spent approximately N1.7million on fuel subsidyannually which is a huge financial burden on Nigeria’s treasury, the Federal Governmentinitiated subsidy programme to make prices of petroleum products in the country cheaper foreverybody to purchase. As the four government’s refineries with the capacity of 445,000 barrels have been in total state of disrepair, neglect and recurrent vandalisation by saboteurs due to unending agitations for resources control by the youths in the Niger Delta areas due to environmental degradation from oil exploration activities and absence of infrastructure that commensurate with the value of oil revenues generated in the area.

Also due to excessive dependence on imported petroleum products and failure to upgrade the existing refineries facilities to modern ones to avoid disruption in petroleum products supply. Besides, the disparity in prices of refined petroleum products in Nigeria, it encourages smuggling of petroleum products to neighbouring countries thereby enhances corruption in the sector.

Furthermore, it is incontrovertible that the Federal Government of Nigeria cannot continue to subsidized petroleum products a gesture which is unsustainable due to corruption and inefficiency in the supply, distribution, pricing and marketing of petroleum products in Nigeria. The annual budget for subsidy of petroleum products should be used to develop other critical sector such as the power sector to boost Nigeria’s economy. Rehabilitation of the existing refineries could have guaranteed healthy competition, enhances availability and affordability of petroleum products in the country but this have turned to sources of corruption.

Dilapidated refineries and inefficiency in the distribution, marketing of petroleum products due to monopolistic structure of the downstream petroleum sector among others has necessitated the need for total deregulation of the sector to end excessive dependence on importation of refined petroleum products, irregular supply of petroleum products, hoarding of petrol to end long queues in Nigeria’s petrol stations and other problems associated with the downstream petroleum sector.

1.3 Aim and Objectives

This research acknowledges the all-pervasive importance of petroleum and its derivatives. Therefore, governments the world over, excepting the United States of America, have intervention and supervisory provisions in their statute books. Not being conscious of what happens in the oil and gas sector of any nation’s economy by the government, leaves its citizens to the grip of absolute market forces which in most developing countries, such as Nigeria, are not informed by economic rules[2]. A capitalist in any market-driven economy is obsessed with the desire to maximize returns on investment without due considerations[3] as to the consequences on the poor masses in so far as profits keep climbing.

Traditionally, the petroleum sector (downstream) is one of the areas in which governments have and are intervening heavily in the developing world. This is so because governments are keen to guarantee security of supply. Public investments are made in developing the petroleum marketing and retailing infrastructure. Governments are heavily involved in refining, storage and distribution while the private sector dominates retailing. This was what informed the government’s determination of the price at which the refined products should be sold. Furthermore, of this research therefore is to bring to the consciousness of the government in particular and the public in general the inconsistencies between what is in the statute books and what obtains in reality so as to stimulate a national discourse and consciousness leading to consolidation and total review of the legal framework for petroleum products marketing in Nigeria. The term ‘consolidation’ here has the contextual meaning of not just locating the laws in one statute form or book but that the duplicity, conflicts and uncertain state of the law be properly addressed.

A further objective is also to draw the attention of the national legislature to the fact that the legislative methods adopted in enacting laws without first constituting a committee to holistically review past and existing laws with a view to eliminating conflicts and repetitions contained therein is highly defective and faulty. This has left the nation with laws which are in conflict with one another and repetitive. The adoption of the recommendation that will be made at the end of this research will undoubtedly eliminate this unacceptable trend. Finally, it is the objective of this research work to stimulate a national discourse that will throw up issues in respect of product supply and distribution. This will provide the industry with suggested solutions to the unending product scarcity and price fluctuations.

1.4 Scope and limitations of Research

This research presents an analysis and examination of the laws (legal framework) governing activities in the downstream sub-sector of the oil and gas industry in Nigeria. These downstream activities include refining of crude oil into derivates and by-products, transportation and distribution, supply and retailing of the petroleum products. In doing this, the following relevant statutes were discussed.

a) The Petroleum Act,

b) The Petroleum Regulations, 2004

c) Petroleum

a) The Petroleum Act, Cap P10, Vol. 13, LFN 2004

b) The Petroleum Regulations, 2004

c) Petroleum Refining Regulations, 2004

d) Petroleum Equalization fund Act, Cap 356, LFN 2004

e) Petroleum Production and Distribution (Anti-Sabotage) Act, 1975

f) Petroleum Products and Pricing Regulatory Agency Act, 2003

g) Hydrocarbon Oil Refineries Act, Cap H7, LFN 2004

h) Associated Gas Re-injection Act, Cap A25, LFN 2004

i) Various Amendments to the above Acts.

The examination and analysis of these and other laws, inclusive of government policies as different from the laws, elaborate on the issuance of rights (licences) to engage in downstream activities, the effect of such rights against the underlying principle of deregulation, how prices are fixed and the reason why inspite of government efforts and polices there is still hiccups in supply, distribution and marketing of petroleum products. The scope further covers the operators in the downstream sectors, including the government marketer, Nigerian National Petroleum Corporation (NNPC) as represented by the Petroleum Products Marketing Company (PPMC). The various refineries were examined with a view to locating their roles in the realization of product availability and the bridging of petroleum products.

In the realization of this research, effort were made towards visiting some operators in the downstream sub-sector with a view to obtaining hard facts concerning their activities. This involved additional expenses by virtue of transportation to various establishments both private and public. Also a thorough research involves the acquisition of research aiding devices such as CD-ROMs, cameras, videomatic tutor machines and computers. These required huge sums of money to acquire, hire and use.

1.5 Research Methodology

The study adopts a doctrinal legal research approach by relying on extant literature onderegulation of the Nigerian downstream petroleum sector with primary and secondary sources of law such as the statutory provisions and judicial authorities on downstream petroleum activities which constitute sources of information for this research. The study also makes use of comparative approach by comparing deregulation experiences of other countries such as Philippine, India, Canada, Malaysia, Jordan and Ghana to gain useful insights to recommend the reform of Nigeria’s downstream petroleum sector. The sources of information for this study were mainly from secondary sources and unstructured interview with some downstream petroleum sector regulatory authorities and some downstream petroleum independent marketers to enhance efficiency and abundant petroleum products in the downstream petroleum sector through private sector participation in the ownership of modular crude oil refineries in Nigeria. It analyzed the issues and drew inferences which culminated in the findings of this study.

1.6 Literature Review

The petroleum sector being the main source of Nigeria’s economy is bedeviled with systemicand endemic problem of corruption. This problem has impeded the economic growth of thecountry. Notwithstanding the current global trend in relation to the use of alternative energy and the de-emphasis on oil, the Federal Government is exploring various options toeffectively resolve this problem through deregulation concept. However, it is expected that the government will makes the best use of her oil revenues while it lasts, for a meaningful development of the country by uprooting subsidies payments which have given room for inefficiency and corruption in the sector. This effort of the Federal Government has necessitated the on-going private refineries initiatives such as the Dangote Refinery and Petrochemical Company, Lekki Free Zone, Lagos State and Azikel Refinery in Bayelsa State with the aim of increasing local production of petroleum products from 445,000 barrels per day to end fuel scarcity in Nigeria[4] but these efforts have not been fully materialized.

According to Gberevbie[5] deregulation of the downstream sector is the only way to fight corruption, reduce the cost of governance and earn citizens’ trust in the activities of the Federal Government and for effective downstream sector. Kadiri and Lawal[6] in their study also emphasized on the necessity for total deregulation of the downstream oil sector to promote economic recovery of the country to end continuous increase in petroleum price, scarcity of petroleum product among others. Also, Monday[7] in his study argued that increase in prices of petroleum products was not due to deregulation but increase in international oil prices. As increase in prices of petroleum products influence economic growth as petroleum products are demand inelastic in the sector. The study failed to emphasize on the benefits of total deregulation. The current authors argued that total deregulation is the panacea to petroleum products scarcity in Nigeria.

Also, Ezu-Like Maximus[8] opined that the efforts the Federal Government toreduce negative effects of incessant pump prices increase resulted to fuel subsidy regime with aim of reducing the prices of petrol in the country but, the price persists to escalate despite over N1.7 Million spent as subsidy, the sector remain inefficient due to corruption. The study fails to adumbrate on the merits of efficient total deregulation. Another eminent scholar[9] asserts that deregulation of the downstream sector will promote efficiencyin the sector by ensuring petroleum products availability and healthy competition amongdownstream petroleum investors thereby eliminating the Nigerian National PetroleumCompany’s monopoly in the sector. According to Fidelis and Michael[10] the Federal Government expects deregulation to reduce economic waste and to reduce social burdens caused by government control in the sector. This study is of no practical value to this current study because issues relating to the downstream petroleum operations were excluded.

Also, Bhagavan[11] examines the issues relating to the laws governing the marketing of petroleum products but the study is limited to the comparative analysis of the laws governing petroleum products marketing in Nigeria and other African countries. This literature itemized falls short of being relevant in the area of this research because issues relating to total deregulation of the Nigerian downstream petroleum sector were notadequately considered but only provided information for this study. As deregulation policy of the government is not in conformity with the provisions of the downstream petroleum laws.

The various academic scholars who have contributed to the subject matter of deregulation in the downstream petroleum sector failed to emphasize on the benefits of total deregulation of the Nigerian downstream petroleum sector which is the gaps in the literature that this study intend to fill by recommending total implementation of deregulation concept to end perennial scarcity of petroleum products in Nigeria’s downstream petroleum sector to enhance efficiency and transparency in the sector through institutional and regulatory reforms, to promote healthy competition by integrating and adopting stringent enforcement of both the hard and soft laws approaches in the downstream petroleum sector.

1.7 Justification/Significance of Research

Available literature in this aspect of oil and gas law (mid and downstream operations) dealt with upstream operations comprising exploration and production. With the consciousness of this imaginaryriver consisting of three streams, that is, upstream, midstream and downstream, it is academically rational for literature on both mid and downstream to be preponderant too. Secondly, this research is justifiable on the grounds also that the regulatory laws in respect of petroleum refining, distributing, supplying, pricing and retailing are distorted and compounded by the fact that the deregulation policies of government are not in tandem with supervisory and regulatory provisions in the statute books. The product of this research will benefit the government of Nigeria as an exposition of the reasons for licensees’ inability or failure to actualize the licences for the building of private refineries.


[1]Wapner A (2017) Downstream Beneficiation Case Study: Nigeria, Colombia Centre on

Sustainable Investments, A joint Centre of Colombia Law School and the Earth Institute

of Colombia University, available at: http://ccsi.columbia.edu/files/2013/10/nigeria-casestudy-

may-2017_ccsi-final-2.pdf, 1.

[2]Bhagavan M. R. (1999) Petroleum Marketing in Africa – Issues in Pricing, Taxation and Investment, 2nd Edition, Zed Books Ltd, London p. 11.

[3]Ibid

[4]KPMG (2019), Downstream Oil and Gas Sector Watch, Available at:

https://assets.kpmg/content/dam/kpmg/ng/pdf/tax/Downstream-Oil-and-Gas-Sector-

Watch.pdf (Accessed March 13, 2020),2.

 

[6]Kadiri, K.O., Lawal, S.O., (2016), Deregulating the Nigerians Downstream Oil Sector: Its

Necessity as Way Forward to Correct the Battered Aspects of the Nation’s Economy,1.

[7]Monday J.U, Ekperiware M.C., (2016), Downstream Oil Deregulation and Nigerian

Economy, Ecoforum, 5(1), 214.

[8]Ezu-Like M.C., (2012), Deregulation of the Downstream Oil Sector and Challenges of

National Development, 1999 -2012 Bing a Project Submitted to the Department of

Political Science, University of Nigeria, Nsukka in Partial Fulfillment of the Requirement

for the Award of Master of Science (M.Sc.) Degree in Political Science (Political

Economy)

[9]Sobowole, D., (2012), Oil Subsidy Removal: Please Lead us by example, Sahara (Abuja)

January 3.

[10]Fidelis, E.A and Egbere M.I., (2013), the Perception of Nigerians on the Deregulation and

Privatization Moves of the Government in the Oil and Gas Industry in Nigeria,

International Journal of Public Administration and Management Research, 2(1), 124.

[11]

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