Liberalisation and Deregulation of the Downstream and Midstream Petroleum Sector in Nigeria
Critically examine the legal and policy framework for the liberalisation and deregulation of the downstream and midstream petroleum sector in Nigeria. Consider the argument for and against appropriate pricing of petroleum products and chart the way forward in the light of experiences in other jurisdictions.
Nigeria is regarded as the continent's top producer of crude oil, yet the country depends on imports for its citizens' consumption of refined petroleum products because its four petroleum refineries have not been operating at peak efficiency for years. Despite the deregulation of the prices of diesel and kerosene, a subsidy that was meant to make fuel affordable and readily available to her residents at all gasoline stations instead opened doors for corruption and hampered the nation's economic growth and development. The country is fortunate to have abundant crude oil, which generates billions of dollars in oil income, and is listed as the sixth major oil nation in the Organization of Petroleum Exporting Countries. Even so, the government, like that of other developing nations, has not implemented any significant changes that are commensurate with the enormous oil revenues that the nation generates. Instead, it has only seen a rise in corruption, misappropriation, the trafficking of refined products to other nations, and pipeline vandalism. (Adegbite, 2015).
Deregulation refers to the opening up of the oil market by removing the monopoly of state-owned petroleum companies, which are unable to support the industry's steady and profitable growth. It also serves as a blueprint for reducing the number of regulations that now govern the sector in order to create a free oil market where the pricing of petroleum products are decided by the interaction of supply and demand factors. On the other hand, liberalisation entails the removal of government oversight and the participation of numerous investors in the downstream oil sector in order to foster fierce competition, accessibility to oil products, and reasonable and rational oil prices through the expansion of the downstream oil industry's supporting infrastructure, such as oil refineries, lubricant plants, and pipelines.
The downstream sector, which includes retailing, transportation, and trading in refined petroleum products, is currently somewhat liberalised, making it challenging to regulate fuel prices on the oil market. Through its statutory organisations that claim responsibility over the distribution or provision of refined petroleum products, the federal government maintains influence over the sector. The oil market is now an oligopolistic sector due to these regulatory organisations' dominance. Due to the rigorous structure and regulation of the oil industry, the leading dealers have a significant impact on market dynamics, forcing independent marketers to exert significant effort to meet customer demand for gasoline as a result of rivalry among oil corporations in the market.
The objective of this paper is to discuss the legal and regulatory framework guiding the liberalisation and deregulation of the downstream and midstream sector in Nigeria. This paper will go further to consider the arguments on petroleum pricing in the country, its effect on the citizens and consumers and ways to solve the issues it creates while taking a look at the framework of other jurisdictions.
The Concept of Deregulation
As there is no smoke without fire and no deregulation without original regulation, one must first comprehend regulation in order to understand deregulation. Badie (2011) defines regulation as any legal document, legislative act, executive order, administrative bylaw, constitutional provision, economic tool, or overall method of politico-socio-economic control typically implemented by government. It refers to any government initiative intended to influence interpersonal, social, and institutional behaviour. This regulatory knowledge would often lead one to believe that deregulation is the antithesis of regulation. In other words, it is the government giving up authority over how people act individually, in groups, and in institutions. This is a fundamental definition, but deregulation as a concept and a programme requires additional consideration.
Different perspectives have been used to define deregulation. Deregulation is an effort to reduce red tape (unnecessary time-consuming procedures) for firms, according to Barberis and May (1993). Deregulation, according to Barnhart (1996), is essentially a tool for the economy used to remove constraints like price or rate regulations from the creation, distribution, and sale of commodities. Understanding the rationale for deregulation is a crucial first step in comprehending it. Olashore (1991) asserts that the main objective of deregulation is often to eliminate or minimise distortions that may be detrimental to an economy (such as price control, taxes, subsidies, imperfect competition, fixed exchange rates, and trade barriers).
According to Badie et al. (2011), deregulation has been used by many developing nations (including Nigeria) to draw in foreign direct investment, although it has not yet materialised completely in the nation. Deregulation increases economic competitiveness, which promotes company growth and lowers the unemployment rate. To summarise, the fundamental tenet of deregulation is the removal, reversal, or decrease of some type of governmental restriction with the aim of addressing a perceived or real issue, typically an economic one.
When applied to Nigeria's downstream petroleum industry, the concept of deregulation implies the elimination or reorganisation of the rules that govern it. Over the past thirty years, a number of military and civilian governments have implemented the Federal Government's strategy of deregulating Nigeria's downstream petroleum industry. Agbebaku et al. (2005) (quoted in Gberevbie et al., 2015, p. 138) make the following claims to highlight the deregulation policy in the downstream petroleum sector:
“…that the Nigerian government recognises the inadequacies of the existing state-owned oil companies and desires to maximise supply sources for the refined products market in the country; that local and private investors would be willing to take over the state-owned facilities in their current state of dilapidation and operate them efficiently and profitably thereafter; that government monopoly of refining and distribution from the state-owned storage depot would be completely unbundled and abolished; that private refineries would procure crude oil at competitive rates and sell their refined products profitably and at international prices both in and outside Nigeria as desired by the operator; that private investors would have open access to state-owned facilities like petroleum reception jetties at Escravos, Atlas Cove, Okrika, Effurun and Calabar, including the storage tanks at Port-Harcourt, Warri and Kaduna for expediting the logistics of improving petroleum products availability in Nigeria; that prospective private operators must have the necessary financial and technical capacities and be liable to applicable environmental, community relations obligations, safety, quality and other standards and that unnecessary impediment, including over-bearing procedures for granting licences to prospective private refiners and other potential investors in the downstream sector that need to be removed may remain, given the nature of the bureaucracy in Nigeria.”
Also significant is the fact that Nigerian governments have been deregulating the downstream petroleum industry over the past thirty years. Although different governments have taken different approaches to deregulating the nation's downstream petroleum industry, what they all have in common is altering the official prices of petroleum products in the nation, particularly gasoline (PMS), because it is the petroleum product that is used the most in the nation (Emejuiwe, 2014). Therefore, it is tenable to claim that derelegation of Nigeria's downstream petroleum industry is equivalent to altering the price of gasoline at the pump (Ogwo & Onuoha, 2013). Deregulation of Nigeria's downstream oil industry, on a larger scale, entails reorganising the different government agencies engaged in the industry as well as the various laws and regulations that influence it. According to Okonjo-Iweala (2012), the overarching goal of changing the price of gasoline at the pump, reorganising the various government agencies involved in the downstream petroleum sector, and reorganising the regulations amounts to reforming the sector with the intention of lowering government involvement in the sector.
The Nigerian Petroleum Economy
The Gross Domestic Product (GDP) is a measure of a nation's wealth and resources as they relate to the production and consumption of commodities (GDP). The worth of goods and services generated in an economy throughout a year is referred to as GDP (Umo, 2007). Consumption, investment, savings, government spending, and net exports (exports minus imports) are the main measures of an economy's health. Foreign exchange, inflation, and unemployment rates are examples of supplemental indicators. With a 2014 GDP of $568.5 billion, Nigeria has the largest nominal economy in Africa despite having a growing lower/middle-income economy. The Nigerian economy has grown at a pace of 7% annually on average since 2004—faster than the average for West Africa.
The Nigerian economy is heavily dependent on the petroleum industry, which accounts for over 90% of the country's export revenue and about 80% of government revenue. The discovery of oil in the Niger Delta region in the 1950s led to a rapid expansion of the industry, but it has also been a source of conflict and environmental degradation. The government has attempted to diversify the economy by developing other sectors such as telecommunications and banking, but the oil and gas sector remains the backbone of the Nigerian economy. The over-dependence on petroleum that characterises Nigeria's economy is what stands out the most. Nigeria suffers from Dutch Disease, which, according to Brahmbhatt et al. (2010), is a phenomenon reflecting changes in the structure of production following a favourable shock caused by the discovery of significant natural resources and an increase in the price of an exportable good that reduces the contribution of other sectors of the economy as a result of neglect. The downstream petroleum industry and the economy have a major connection. It is impossible to overstate the connection between the deregulation of Nigeria's downstream petroleum industry and the country's economy, which is based on the relationship between the two. According to Sabiu and Reza's (2014) research, deregulation has caused changes in gasoline prices that have an impact on the nation's GDP and unemployment rates. Changes in the price of gasoline have a significant influence on the cost of commodities and power, which in turn affect living expenses and business costs. These factors together make up Nigeria's GDP (the value of goods and services produced and consumed in Nigeria)
Legal and Regulatory Framework of Liberalisation and Deregulation in Nigeria Petroleum Industry - Downstream and Midstream
In Nigeria, the deregulation and liberalisation of the midstream and downstream petroleum sector refers to the removal of government control and regulation over the pricing and distribution of petroleum products. The Nigerian Petroleum Deregulation refers to the process of removing government controls and regulations on the sale, distribution, and pricing of petroleum products in Nigeria. The deregulation was implemented in 2003 as a means to increase competition and efficiency in the Nigerian oil and gas industry.
Under the deregulation policy, the Nigerian National Petroleum Corporation (NNPC) was no longer the sole importer and distributor of petroleum products in the country. Private companies were also allowed to import and distribute fuel, and the government removed price controls on fuel prices. This led to a more open and competitive market, with private companies now able to enter the market and offer services at competitive prices. The deregulation policy also aimed to reduce the burden on the Nigerian government, which had been heavily subsidizing fuel prices to keep them low for consumers. However, the removal of subsidies led to an increase in fuel prices, which caused some initial public backlash.
This process was implemented in order to create a more competitive environment for private sector participation in the industry, with the goal of increasing efficiency and reducing costs for consumers. The deregulation and liberalization of the midstream and downstream petroleum sector in Nigeria has been a gradual process that began in the late 1980s and continues to this day. One of the key steps in the process was the removal of price controls on petroleum products, which allowed market forces to determine the prices of fuel. The Nigerian National Petroleum Corporation (NNPC) was also restructured to focus on upstream activities, while private sector companies were encouraged to enter the downstream market.
The legal and policy framework for the liberalisation and deregulation of the downstream and midstream petroleum sector in Nigeria has been a topic of much debate and discussion