Nigeria’s downstream deregulation efforts without competition lead to inefficiency

Petrol subsidy has become the poster child of Nigeria’s inefficient oil and gas industry and recent efforts at deregulating the downstream sector would fail without institutionalising competition.
Nigeria introduced petrol subsidy as a response to the oil price shock in 1973 and numerous attempts at reform have failed due to strong popular opposition.

The Buhari-led government in March 2020 announced the deregulation of downstream sector but given that the state-owned Nigerian National Petroleum Corporation (NNPC) has what private downstream operators have described as an unfair advantage, it inhibits competition and efficiency.
For instance, since the NNPC has access to foreign exchange from the Central Bank of Nigeria at the official rate to import petroleum products, puts it ahead of private players who have to source for dollars elsewhere and at higher rates than the official rate. When this happens, competition is ab-initio impaired and inefficiency creeps in.

“When one importer gets foreign exchange at the cheapest rate available without requiring any letter of credit this kills competition and encourages inefficiency. Pump price increase without competition is inefficient and will make consumers needlessly pay more for less,” Bello Rabiu, former general manager, Competitive Analysis at NNPC said during a meeting of a consortium of civil society organisations organised by the Nigerian Natural Resource Charter (NNRC).

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Inefficiencies in the on-going downstream deregulation efforts are also supported by the lack of transparency in the Petroleum Products Pricing Regulatory Agency (PPPRA) template, which has also been described as incomplete. Nobody knows how the prices are arrived at. According to Rabiu, PPPRA’s inability to provide timely market information has made it difficult for importers and consumers to understand the basis for any change in price.

Nevertheless, full deregulation does not mean the removal of government subsidy alone. It means limited government interference also. Deregulation requires a competitive market environment, which will guarantee the constant supply of products at commercial prices to customers.
It requires unrestricted and profitable investment in infrastructure, open to all players under a level playfield and which earn reasonable returns for investors. A strong regulator that effectively controls natural monopolies to protect consumers is also required.

“What we have in Nigeria’s downstream oil and gas sector is liberalisation, not deregulation. There is no level playfield. The NNPC has all the advantages, in terms of access to foreign exchange and other privileges as a state-owned oil and gas company,” Ronke Onadeko, a downstream oil and gas specialist said. “The NNPC should be a regulator not a player in the sector.”

With the Dangote Group’s 650, 000 barrels per day (bpd) refinery expected to start operations next year and BUA Groups’ planned 200, 000 bpd refinery and petrochemical Nigeria may be heading into a future where local refining sufficiency becomes a possibility.

This invokes the necessity for competitive access to pipeline systems to move products across the country. In this area too, the NNPC has a natural monopoly and advantage.
It means that the Nigerian Pipelines and Storage Company Limited (NPSC), a subsidiary of NNPC would have to be independent to guarantee open and equal access creating competition and efficiencies.

The Spanish model where petroleum products pipeline systems are owned and managed by a company that is not in the business of selling petroleum products has been recommended for Nigeria by people with decades of experience in the sector.
Up to 1984 Spain’s downstream petroleum market was fully regulated with a dominant player been the state-owned national oil company.