The Federal Government through the Nigeria National Petroleum Corporation (NNPC) has done well to remove fuel subsidy and to remove price capping but it must now woo investors with what investors call profit bandwidth. This is understood to be a form of regulation of size of profit an investor can make in the petroleum sector either by importing fuel or refining locally.
This seems to now agitate the minds of investors especially in the Niger Delta zone who are said to be angling to take a bite in the deregulated petroleum market.
Making the appeal in an exclusive interview in Port Harcourt, the president of the Rivers Entrepreneurs and Investors Forum (REIF), Ibifiri Bobmanuel said the price-decapping is a commendable scheme but that it must be followed by with creating a range of profit with which investors would roam for the interest of the nation.
Good to de-cap but activate price regulatory body
We are pleased that the FG has heeded to our calls for them to deregulate the downstream petroleum sector. They have made it clear they are no longer interested in going about making bulk purchase of petroleum products and giving subsidy. But, from all indications, in applying the declaration, they way they go about implementing the policies shows a lacuna along the line. They need to go back to the proposals we sent to them.
What we proposed is a wholesome deregulation which means deregulate, take off your hands. Now, they have allowed the marketers to set the prices, which is good. What they should do now is to activate the price regulatory body to curb the excesses possible in the market. You do this by putting a bandwidth within the profit they are able to make. For instance, if the product is sold for N50, you should expect them to make not more than N10. That should be the bandwidth. So, the importers that have huge capital and put in huge resources into it would make profit.
Every businessman is in it for profit. That is a basic rule. But they should not make this profit to the detriment of the economy. The Petroleum Products Regulatory Agency (PPRA) is a subsidiary of the NNPC with mandate to regulate the pricing regime. They would be there to protect the interest of the citizenry. So, give the range of profit even as you no longer fix price. This will give room for profit (for businesses) and protect the citizens from exploitation.
On the other hand, the bandwidth should not be too stringent. Give them leverage but there must be a cap. If a tanker load lands Nigeria at N20 per litre, you can give them a bandwidth of N22. So, within that the ones than can import at less than N20 would increase profit. The more prudent an investor is, the more profit. A good bandwidth will serve as additional incentive to attract investors. Importation implies breaking even per batch but service related business, you do not break even immediately but after some months or years. Every buy-and-sell business expects instant break even, but profit is usually slim while service profit is often higher but takes longer time. So, turnover is the key for buy-and-sell business.
All this policy can amount to nothing even there is no enough bandwidth for profit. First incentive has been done; deregulation. Next incentive is not to gag the investors with very slim range of profit because it requires billions of Dollars.
Huge investments coming
This new opening will account for next phase of investments that will accrue to the Nigerian economy. Because it will attract huge interest, let the FG quickly give the latitude to lure them into the space being created now. The investors are going to develop infrastructure such as landing base, waterfronts with lots of facilities there. The vessels are going to be coming there. The local players would now have to invest in the area and existing players already have these. They would have advantages.
The truth is that the local players are not big enough. The sector has a lot of space for more players. It will attract foreign direct investors especially in refining and distribution of petroleum products. The current investor space is to take crude out of the country and bring back refined products, but with this policy, you see more investors trying to cut that gap between export of crude and import of finished products.
Targeting Africa market
Why sale of new oil fields will look different
That brings to mind why the interest is more in the current bid round in the marginal fields in the oil and gas space. This is because most of the investors interested in the marginal fields would be looking beyond exporting the crude but at refining the product in-country. That would create more headroom for job creation.
It’s a gamut of opportunities that is opening up. The FG has taken the first step, the second is for them to look at the concessioning of the marginal fields and translate this to other products. I keep telling people that most of our petroleum products end up in the Middle East and European countries and so on, but the potential market for our product is actually in Africa. It is only in Africa that we have this huge population that end up still consuming much refined petroleum product in the world the way we do. No other continent is still so heavily dependent on petroleum products. Even most of the petroleum products that go to China and India end up back in Africa as processed products as lubricants, PMS, etc. With this policy, it gives the Nigerian government the opportunity to go to the next phase of the il industry.
The oil industry does not have much room for growth again. The major room was in export of crude, to export our raw material and cash in on the financial windfall that comes with it. But, under this circumstance, globally advanced countries are now looking away from fossil fuel. You have countries that have timelines; by so date, we do not want cars that that use fossil fuel.
Asia market not our future
In China, if you want to buy an electric car, you get a subsidy which is given to the manufacturer on your behalf. They pay a lot of interest on pollution. They have reached their limits on pollution bandwidth and so they use money to induce products that would go away from fossil fuel. So, the consumption of petroleum fuel is beginning to unwind. The only continent that still has that appetite for refined products is Africa. Nigeria being the leader in that space must aggressively push for that market.
This forms about 90 per cent of our revenue. We keep telling ourselves that the Nigerian economy is diversified, but in reality, it is not so. If you check our sources of revenue, over 90 per cent of our major sources is around the oil sector. Go and check the contributions of other sectors to the national revenue and GDP.
Agriculture helps to feed the nation and employ some persons employed, but it does not contribute significant revenue to the Federation Account. Also, we do not process the products just as in oil and gas. We produce and export and we are happy to earn peanuts. We spend three times of the income to import processed product of same produce we exported.
With this policy of processing oil and gas for the African market is a paradigm shift as we would process for Africa. Even the Nigerian market is huge. This is a big opportunity for investors by deregulating totally and creating incentives.
The big gain is that the big elephant in the house is the subsidy we spend on petroleum products (PMS and kero). In one sweep, we have taken away the elephant in the house and we have big space. It is now for investors to follow the opportunity.
We do not just expect investors to come into Nigeria to set up refineries but also to import and distribute. Investors are wired to seek out profit. That is the first rule of business.
Fuel can sell at N50 per litre
In a subsidised economy, you pay for inefficiencies but if subsidy is removed, PMS could sell for N50 per litre but we still sell at over N120. If subsidy had kicked in long ago, the price regulators would have been able to ensure that the private sector crashes the prices and we would buy by at N50 in that moment of low crude oil price, going by the proportionate decree as against the pump price.
This policy is a win-win for the FG and we commend them for that, but they need to follow the process due. If you stop a process half way, you end up not getting to the point of benefit of that same policy. The next is to sell out marginal fields because the operators would refine and not export. The cost of refining would be cheaper than cost of exporting.
Many may talk about Niger Delta militancy as a cost factor, if you check cost of exporting same product abroad and bring it back, pay the taxes, etc, it will surely be cheaper to refine in-country. So, more refineries will come in Nigeria.
After this level, the FG should begin to privatising the NNPC because it is high time. I do not know why we keep holding on to this behemoth or junk asset. I must doff my hat to the present crop running the NNPC because they seem to understand what they are doing. Let’s give them the benefit of the doubt, but they should follow the deregulation they have set in motion in a serious manner.
They should create buy-in of the private sector and it is in this buy-in that is the success of the policy. They must follow through as a channel. The first point is deregulation. Second is put the cap with reasonable profit range to attract the private sector. Along the line, they can as well tighten that phase.
Many may say capping means another form of regulation in a deregulated market, but you must regulate your market. The telecom is deregulated but the NCC still caps profit but loosely for competition to operate within the bandwidth. Competition has driven prices to zero cost for lines whereas some people bought it with phone at N145,000. That is what bandwidth does in a deregulated market.
You must use good bandwidth to lure investors into the downstream sector of the oil and gas sector. You should also cap the profit range. Incentive is like a bait for them to jump into the space. As they make profits, they will end up setting up infrastructure in form of permanent assets such as refineries, filling stations, etc. They would begin to produce different grades of PMS so buyers would have choice for his car. There is a whole lot of investments that will go into this sector. The mere fact that the FG is taking off their hand is a good thing, then creating bandwidth is next.
Despite Dangote, there is still space for others
Some say Dangote Refinery has taken up the whole refining space but I say the space is big enough for many more people. If you have a nose for investment, you can forecast easily the direction of every sector. From the day the Dangote Group decided to invest as high as $22Bn in those three projects especially the refinery, it should be clear that at date will come for the government to deregulate. If the Govt did not deregulate, the project would comatose. The Jonathan administration gave such hints then. For Dangote to invest that amount, it means he had such amount of faith in the government.
Today, the FG cannot invest as much as $22Bn to $30bn in that sector. Government is overwhelmed with other pressing issues. Now, even state governments can achieve the goals by creating enabling environment to attract private funding into their spaces for new refineries and fuel centres. FG should create the enabling environment to attract big investments into the downstream sector. They will spend little or no money of their own to drive growth in their places.
The beauty of it is that when the private sector invests in a particular sector, what the governments (Federal, state) benefit from is taxes. It’s a win-win situation.
Over the years, we have found that Govt does not have the ability to manage a business.
How Niger Delta states may position for new oil market
Some ask if governments of the Niger Delta can do anything to attract refineries and if some of us have sent in proposals to them. The basic thing that the states in the oil region can do is to focus on infrastructure and improve this. In the end it will boost ease of doing business. If I come into your space and I see that you have good infrastructure, it is seamless for me to move about securely, obviously, I want to come and do business there. It cuts down on cost of doing business. Many businesses spend very much on security and this is a big consideration.
Most investments are attached to loans with many forms of calculation of cost of funds. This cost is relative to time of breaking event. So, if security cost is very high, your area becomes not investment friendly. Now, the chicken has come home to roost. All of the states in the oil region need to now sit down and begin to look at they could key into this whole policy break and the opportunity that comes with it.
Competition is within
My friend, the EU ambassador, says in Nigeria most states keep thinking they are in contest with an external competitor such as Togo, Benin Republic or Ghana. No, they are in contest with themselves. If a governor does not understand that security is pivotal to attracting investors, then Lagos will continue to run away with the amount of IGR and Rivers State would continue to run away with the amount they reap from IGR. If Rivers State was not investment-friendly, they would not be generating about N12bn per month. So, if you want to get more, simply improve on your indices. This is not rocket science. It is in those small things you ignore. What is your narrative? What do people hear about your state? If an investor picks up a newspaper and wants to invest $1bn in Nigeria, he would ask, where is the investment going to be safe?
He presses a bottom on his computer and asks of best place to invest. Now, the computer does the feasibility study. Things have changed. You do not need to call anybody to do it. Just a bottom and it tells you cost of doing business in each location to the last kobo.
So, you pick and choose. If you want to know further to know why it is so, you now begin to look at cost of security, land, transportation, labour, etc. It will tell you that you can’t drive from Abuja to Kaduna because they will kidnap you. If you go to Lagos, they will still kidnap you but you are a CEO, you will not jump the bus where 10 out of 20 times at a certain time, you would be mugged or robbed. In Port Harcourt, if you confine yourself within Port Harcourt metropolis, but outside that, you need to carry security men to run around. This is what the computer will tell you because it is what has been fed into it through different writers.
What is your state telling the world?
So, that brings us to the issue of what your state’s narrative is. So, as governor, you have to create the narrative for your state and understand the language of business so you know what to do. When you understand these things, you are set for a prosperous period.
Competition to attract refineries to the Niger Delta has started for those that realise it. Those that don’t, they would be in the process for another five to 10 years and they realise that other states have since taken all the investments and moved on. I keep asking myself, states IGR seems not to be moving anywhere, just about three states that have run away. The other ones have not even started. You have states that are generating as much as N30bn (Lagos), N12bn (Rivers) about N8bn (Ogun), but the rest are very far, with some nothing tangible of note. You wonder if these states do not understand that they are in a competition and must sit up.
If we all do our bits where we are, investments will come and IGR will rise.