Nigeria must fix PIA contradictions for full deregulation – industry players

Nigeria has enacted a new oil sector law that prescribes full deregulation of the downstream oil sector, but for this to happen, the government must allow marketers easier access to foreign exchange and fix a provision in the law giving only refiners the right to import products, industry operators say.

For deregulation to benefit ordinary Nigerians, there must be competition, but that will be stifled if the provision restricting independent importers from importing petrol in the Petroleum Industry Act (PIA) does not make way and the gap between the official market and parallel market rate does not narrow.

Experts say both factors will impact negatively on margins of private marketers and also make sure they are still tied to the apron strings of state-oil company, Nigerian National Petroleum Corporation (NNPC).

“We are still immersed in a monopolistic structure,” Muda Yusuf, the immediate past director-general of the Lagos Chamber of Commerce and Industry (LCCI) said.

“The economy and the citizens cannot get the benefit of deregulation if the government cannot solve the wide differential between the official exchange rate and parallel market,” Yusuf said. “This development will continue to tie most private marketers to the operator’s apron strings which is unhealthy for price competition,” Yusuf added.

The difference between the official exchange rate and parallel market exchange rate as of 15 October 2021 stood at N157 per dollar. The official exchange rate of a dollar to the naira was N415.10 Friday while the parallel market rate was N572.

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“This development will continue to tie most private marketers to the operator’s apron strings which is unhealthy for price competition,” Yusuf said.

The contradictions in the PIA regarding full deregulation do not stop there.

In one breath, Section 205 (1) of the new PIA states that: “wholesale and retail prices of petroleum products shall be based on unrestricted free-market pricing conditions.”

Yet Section 317 (8) of the same law said that “The Authority shall apply the Backward Integration Policy in the downstream petroleum sector to encourage investment in local refining.”

“To support this, a license to import any product shortfalls shall be assigned only to companies with active local refining licences,” it said.

Kelvin Atafiri, who runs Cavazanni Human Capital Limited, an investment firm with activities in the oil and gas sector, said the provision “will simply enrich a small group of importers, discourage new market entrants and hold Nigerians to ransom.”

Analysts at FSDH Capital Limited, a subsidiary of FSDH Holding Company Limited say the current industry structure will continue to squeeze profitability, and deter new investment despite the signing of PIA.

“We think the fate of the downstream sector will continue to hang by the slimmest thread. Until the sector is completely deregulated,” FSDH said in its report.

Some other experts say without fixing these bottlenecks Nigeria’s downstream sector will continue to struggle with challenges ranging from undue government interference, to low operating margin for operators leading and low Return On Equity (ROE).

Findings by BusinessDay showed the sector’s nNet profit margin, which is a measure of profit a company can generate as a percentage of its revenue, has continued to come under more pressure as firms continue to record below par compared to other Africa countries.

Although Nigeria is Africa’s biggest oil-producing country, the 2019 net margin of downstream firms of Total, Ardova, and Eterna plc performed below other downstream firms in the West African market.

With full deregulation, stakeholders say Nigeria’s downstream sector has what it takes to play regional dominance in the West Africa petroleum products market and also act as an enabler to other critical industries in the domestic market.

“There is an opportunity for potential uptake by neighbouring countries if the market has Nigeria’s refined products readily available,” multinational professional services network with headquarters in London, PricewaterhouseCoopers (PwC), said in a report titled Nigeria refining revolution.

PwC noted that this shift will see Nigeria become a net exporter of refined products and the refining hub of West Africa by the start of the next decade.

The advent of Dangote refinery – which is set to produce 650,000bpd of refined products – and other modular refineries will significantly impact the current landscape in the downstream sector.

When completed production from Dangote’s refinery will exceed domestic consumption levels and subsequently export excess refined products to neighbouring African countries.

A report by LCCI also said with full deregulation Nigeria would have switched to refining more petroleum products locally and supplying them to the rest of West Africa sub-region and Africa at large, which would earn more revenue for the country.

With a comprehensive, holistic and modern downstream sector, the federal government would not only achieve its campaign promises of lifting over 10 million Nigerians out of poverty through meaningful direct and indirect employment, but it will also develop by-products that would fast-track industrialisation that would be made available for sectors like agriculture.

Economists have said fuel subsidy benefits wealthy importers and smugglers more than ordinary Nigerians.

“Lots of people were making a killing from the spiraling figure and exploiting the government,” Sanusi Lamido Sanusi, former Central Bank of Nigeria (CBN) governor said in a monitored television interview on Arise Television.

The NNPC has often claimed that it provides some form of forex relief to oil marketers in conjunction with the Central Bank. Its former Chief Operating Officer downstream, Henry Ikem-Obih, said in 2019 that the corporation had saved $1.7bn from a forex intervention scheme launched in conjunction with the apex bank for oil marketers.

A media advocacy organisation, Civic Media Lab, sent a Freedom of Information request in 2019, asking the central bank to clarify the statements made by the NNPC official and state what companies receive priority forex rates if any. The firm received no response.