• Saturday, November 09, 2024
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Deregulation dilemma: Nigeria’s balancing act between progress and pain

NGA calls for deregulation of gas value chain

One of the key things in the PIA is that the royalty structure around gas has been separated from oil which will allow investors a clear view on whether they are investing in oil or gas

“As prices surge and public discontent mounts, the question remains: is deregulation the right answer for Nigeria’s economy?”

Nigeria’s recent deregulation of its oil and gas sector marks a turning point in its economic trajectory, ushering in an era of market-driven fuel pricing. The government’s long-awaited policy shift is intended to eliminate inefficiencies and attract private investment in the sector while ultimately reducing the heavy financial burden of fuel subsidies. However, the immediate effects on everyday Nigerians, who are already grappling with economic hardship, have been severe. As prices surge and public discontent mounts, the question remains: is deregulation the right answer for Nigeria’s economy?

For decades, Nigeria’s oil industry has been burdened by fuel subsidies—meant to keep petrol affordable for its citizens—that have drained public finances. In 2022 alone, subsidy costs skyrocketed to N4 trillion, almost half of the entire amount spent on fuel subsidies over the previous decade. The subsidy regime, originally intended as a tool for economic relief, became an unsustainable drain on national resources. These funds, which could have been redirected to education, healthcare, or infrastructure, instead fuelled inefficiencies, encouraged corruption, and stifled the development of local refining capacity.

The rationale for deregulation is clear: by allowing market forces to dictate fuel prices, Nigeria hopes to create a more competitive and sustainable oil sector, attract much-needed private investment, and address the rampant corruption that has plagued the industry. Yet, the removal of subsidies has brought immediate pain to the public, who are seeing the cost of fuel and subsequently the cost of living rise steeply. Nigeria’s inflation, which was already a concern, hit 32.7 percent in September, exacerbated by increased transportation and power generation costs. Public protests reminiscent of the 2012 “Occupy Nigeria” movement have surfaced as citizens voice their frustration with the policy shift.

The challenge of deregulation, however, is not unique to Nigeria. Kenya, which deregulated its oil sector in 2010, offers a useful model. To ease the impact of fuel price volatility, Kenya implemented a price modulation strategy through its Energy and Petroleum Regulatory Authority (EPRA). This system sets maximum fuel prices monthly, allowing for a more gradual adjustment based on global oil prices and exchange rates. Additionally, Kenya established a stabilisation fund to cushion consumers from sudden spikes in global oil prices, offering a buffer during periods of high market volatility. While not a perfect solution, this approach has helped Kenya mitigate the worst effects of deregulation on its population, providing a more predictable price environment while still attracting private sector investment.

South Africa’s regulated fuel pricing system also offers lessons for Nigeria. South Africa adjusts its fuel prices monthly based on a cost-recovery formula, which includes international oil prices, exchange rates, and taxes for infrastructure development. By ensuring that fuel prices reflect real market costs while maintaining some government control over adjustments, South Africa has managed to keep its fuel prices relatively stable while securing funds for national development projects. While Nigeria’s deregulation effort aims to eliminate the inefficiencies of subsidies, the South African model demonstrates that some level of state intervention can still be useful in protecting consumers without undermining market dynamics.

But for Nigeria, the real opportunity lies in domestic refining capacity. The country, despite being Africa’s largest oil producer, imports the majority of its refined petroleum products. This dependency on foreign refineries leaves Nigeria vulnerable to fluctuations in global markets and foreign exchange rates. The Dangote refinery, once fully operational, offers a potential game-changer. As the world’s largest single-train refinery, it promises to boost domestic refining, reduce Nigeria’s dependence on imports, and ultimately help stabilise fuel prices in the long term. If Nigeria can expand its refining capacity, the country could reduce exposure to volatile international markets and ensure a more sustainable fuel pricing system for its citizens.

That said, the short-term effects of deregulation should not be overlooked. The sharp increase in fuel prices has had immediate economic consequences, disproportionately affecting the most vulnerable segments of the population. As Nigeria moves forward with deregulation, the government must prioritise the development of social safety nets to protect its citizens from the economic shock. Whether through stabilisation funds, price modulation, or tax adjustments, Nigeria must find ways to cushion the blow for its poorest citizens while still fostering a more dynamic and competitive oil sector.

The deregulation of Nigeria’s oil and gas industry represents an essential step toward long-term reform. The transition will not be easy, and the economic challenges are profound. But by learning from the experiences of Kenya and South Africa and by investing in domestic refining capacity, Nigeria can chart a path toward a more sustainable and efficient energy market—one that benefits both the economy and its people.

In the meantime, the government must carefully manage this reform, balancing the need for market liberalisation with the imperative to shield its most vulnerable citizens from economic hardship. Only then can Nigeria achieve the long-term gains that deregulation promises.

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