Seven reforms that will make Nigeria’s petroleum downstream sector competitive

Some private sector stakeholders have given some recommendations they believe would make Nigeria’s petroleum downstream sector competitive. This is coming at a time when lawmakers are reviewing the Petroleum Industry Bill.

These recommendations are contained in a document seen by BusinessDay.

The private sector stakeholders, however, crave anonymity so that these proposals could be considered on their own merit.

Ensure product supply, quality standards, and competition

The stakeholders recommend private sector participation in the procurement/importation of refined petroleum products through a transparent inclusive process as a way of reducing the current inefficiencies in the sector.

To this end, they call for the foreign exchange required to procure refined petroleum products to be made available to the Oil Marketing Companies (OMCs) and other businesses at the same competitive rate being offered to the National Oil Company (NNPC) and the process made open for audit.

However, if the government chooses to manage access to supply or limiting demand, they recommend this be done transparently by sector, allowing all petroleum downstream operators with a minimum physical asset base such as a minimum number of retail outlets (100 filling stations) and a minimum storage depot capacity (15KT) domiciled within Nigeria having equal access to foreign exchange at the same rates exclusively for the importation of petroleum products. This would encourage transparent inclusiveness and competition as well as eliminate market dominance by NNPC and round-tripping by briefcase businessmen.

The stakeholders call for strict regional fuel quality standards and specifications for imported refined products as well as for local refineries to be continuously negotiated within the subregion and upgraded to create or tap into regional cost synergies, enable more stringent vehicle emissions standards and protect the local and regional environment.

They recommend the eventual discontinuation of the Direct Supply Direct Purchase (DSDP) programme and implementation of policies encouraging local refineries to develop Nigeria into a refining hub and a more active role for the Federal Competition and Consumer Protection Commission (FCCPC) or other relevant organization to check anti-competition activities.

They also recommend the implementation of a pump pricing framework in which the OMCs or other petroleum products distributors independently set retail or pump prices for petroleum products according to their cost strategies and efficiencies without prior review or approval by any official authority.

The fuel pricing regulations should, however, provide and insist that all costs are fully recovered and all applicable taxes and levies fully paid by all market operators. No operator, including NNPC, should be permitted to sell products at a loss and risk driving competition out of the market based on market dominance, direct, exclusive or limited access to government-owned or government constructed logistics capacity.

The stakeholders also want transparent, equal, and equitable access to government-owned logistic infrastructures such as jetties, pipelines, storage facilities, and other infrastructure that should be continuously verified and guaranteed by the regulator.

“In implementing the objective of achieving full cost recovery by market operators, the determining authority shall take into account the equally important objective of minimizing considerable pump price fluctuations and towards this purpose may take a maximum of forty-five (45) day pricing periods into consideration in determining whether an operator is pricing his product below its product and operating cost price,” they say.

Safeguard stock

The private sector stakeholders also recommend that safety and strategic stocks be accorded the much-needed attention and the cost of maintaining strategic or security stock be taken into consideration when determining the product and operating costs.

“A separate Limited Liability Company with ownership by willing private sector operators with government participation could be incorporated with the mandate to own and develop a network of jetties, pipelines, storage tanks, and other bulk logistics transportation infrastructure throughout the country, mandated to warehouse strategic stock for the country for sale to OMCs through a transparent pricing mechanism guaranteeing equity,” they say.

Guarantee price monitoring and consumer protection

The private sector stakeholders want the Petroleum Products Price Regulatory Agency (PPPRA) and the Petroleum Equalisation Fund (PEF) scrapped so that the Department of Petroleum Regulation (DPR), the National Oil Spill Detection & Regulation Agency (NOSDRA), or any other Federal or State agency should have oversight powers over the downstream petroleum industry.

The former employers of PPPRA and PEF could be redeployed to other agencies outside the industry, they suggest.

“The new Authority or new downstream Regulator should be populated by downstream industry experts from the DPR and the private sector with private sector customer-friendly exposure with the objective that the regulator is progressive, supportive, technology and optimisation inclined, innovative and focused on growing the downstream petroleum industry to be more self-sustaining, autonomous and capable of generating funds for infrastructural development and improvements. This Regulator shall not intervene in pricing determination,” they say.

They further recommend market driving pricing under a strict full competition regime barring even associations in the sector from discussions relating to agreeing on pump prices directly or indirectly, openly or discreetly. A department of the FCCPC could be created solely focused on pricing in the downstream sector and in conjunction with the regulator, monitor and enforce technical and product standards and deter anti-trust and anti-competition behaviour by market operators.

“Their role would include price monitoring through close monitoring of market behaviours, also using the existing Competition Law Framework for essential products. Their objective would be to ensure fair competition within the industry,” they say.

Clarify role of NNPC and other dominant market players

They call for placing NNPC and the proposed Dangote Refinery on strict regulatory oversight as they are dominant market players to ensure transparency, equity, and inclusiveness either in bulk supplies to the market or market positioning in respect of commercial sales.

“All their prices must be commercially based. It would be considered anticompetitive if opportunities are exploited to distort the market by taking decisions that do not reflect full cost recovery inclusive of a profit margin or benefit specific market operators inequitably and without transparency,” they say.

Improve quality of regulators and regulation

They recommend the establishment of a Single Regulator for the petroleum industry whose role is to issue and oversee regulations covering from exploration/production to pump sales to ensure the development of a consistent and sustainable vision on petroleum exploitation which benefits the country and eliminates competition and infighting between regulators.

“In the event that government chooses not to have a single regulator, we recommend the establishment of a single Midstream & Downstream Regulator whose role is to regulate the midstream & downstream sector, regulating and overseeing refining, importation of refined products, product shipping, jetties, depots, pipeline distribution infrastructure, petroleum product transportation by road, petroleum product distribution and station sales,” the private sector stakeholders say.

They suggest that this regulator should make regulations to ensure safe working conditions (HSEQ) at these facilities and while products are in transit. The regulator should also be responsible for licensing and registering midstream & downstream sector operators within their operating scope. It should raise and maintain country standards by ensuring the integrity, standards, and specifications of the petroleum products imported, refined, or otherwise commercialised within the country.

“This Regulator should be made up of professionals from DPR, as well as representation from the private sector and NNPC. It is vital that technocrats with requisite professional experience from diverse and relevant backgrounds with a customer-friendly culture mindset be appointed or recruited to ensure the efficiency and transparency of the Entity,” they say.

They advise that the Petroleum Ministry should remain the policymaker and be supported by the regulators in the management of the sub-petroleum sector policies.

“Repeal of applicable legislations limiting price regulation such as (but without limitation to): The NNPC Amendment Act and NNPC (Projects) Act; Petroleum (Special) Trust Fund Act, Motor Spirits (Returns) Act; The PPPRA Act; The PEF Act. These repeals should be captured through the legislative process to pass the PIB,” they suggest.

“We recommend immediately including in the evolving regulations the international standard specification for Premium Gasoline imported into Nigeria with a maximum of 50ppm sulphur content with a timetable/deadline to get to regionally agreed improved sulphur content levels,” they say.

Guarantee equal access to national distribution infrastructure

The private sector stakeholders are calling for the conversion of the NPSC (a subsidiary of NNPC) into a commercial entity with an ownership structure, creating a public-private joint venture (quoted on the Nigerian Stock Exchange to take advantage of publicly instituted corporate governance procedures and processes) which would include operators who own significant assets in the country at the initial start point.

According to the group, this joint venture company would grant third-party access rights to pipelines and other infrastructure, in a transparent manner, subject to regulatory oversight.

“Any operator (part owner or otherwise) that requires access to the pipeline would have equal and equitable access on commercially equal terms, with due consideration to logistics and operational exigencies,” they say.

Eliminate noncompetitive equalisation programme

The private sector players are calling for the elimination of the official government institution managing this process to significantly reduce administrative costs and the propensity for corrupt practices.

“Most African countries with price equalisation do not have an official government institution managing the process and simply leave it to each operator to manage its internal equalisation process competitively.

“The second option would be to price petroleum products by location by each operator based on its competitive strategy. This approach would be more cost-reflective. However, there is a possibility that some remote areas in the country may not be served if the costs of serving those areas are too high.

“Even though the drive for inclusive growth is vital, we recommend that the price equalization fund mechanism be discontinued. This would prevent costly distortions in the market, prevent market inequalities and unfair competition as well as build the economics necessary for the eventual efficient exportation of refined petroleum products towards making the country a regional refining hub,” they say.