According to British legal scholar, H.W.R. Wade, “law exists to ensure the order which the forces in control of a society desire to impose. Its object is uniformity of action, so that one member of the society may know, how in certain circumstances, another is likely to behave. Subsidiary to the concept of order is that of justice; for society needs first stability, and secondly, the kind of stability that gives a measure of protection to all its members.”
Indeed, what Wade tried to espouse here is the point that the law is expected to provide some form of certainty, stability and protection for its citizens. The principle of legal certainty is to the effect that a legal provision must be clear and predictable, and one which enables those subject to it to be acquainted with the precise extent of the obligations imposed on them. The law must therefore be able to make for a system that allows for some form of reliability and consistency.
This is the role of the Petroleum Industry Act (PIA) 2021. The PIA was enacted to provide for the legal and regulatory framework for the Nigerian petroleum industry, to allow for seamless running of the sector and allow for consistency in practice. However, the non-implementation of certain provisions, notably, those which prescribe the deregulation of the downstream sector of the petroleum industry has been identified by some as being one of the factors responsible for the inconsistencies in the supply of petroleum products.
Deregulation in the downstream sector aims to eliminate all forms of government control or interference in the sector. For years, the government had absolute authority over all sectors of the petroleum industry. This, coupled with the incoherent valuing of oil commodities, made the industry unappealing to financiers who could have established private refineries that would ensure an adequate supply of petroleum. However, with the enactment of the PIA, which took effect from the day it was signed by President Muhammadu Buhari in 2021, the downstream sector was to be free from government control, while the upstream sector of the industry remains in its grasp.
The deregulation of the sector, especially the aspects of distribution, if implemented, is expected to tackle the shortfalls that had once plagued the supply and distribution of petroleum products thus, enhancing the quantities of petroleum commodities around the country. Another objective of the deregulation is to boost proficiency in the industry through vigorous business competition by those involved in the operations of the downstream sector such as the marketers of oil products. However, ten months after the enactment of the law, Nigeria’s downstream sector continues to struggle with challenges of undue government interference. This interference includes but is not limited to the government’s determination of the market price for petroleum products. This determination by the government is due to the fact that the government continues to subsidize the retail cost of petrol.
Section 205 (1) of the PIA provides that “subject to the provisions of this Section, wholesale and retail prices of petroleum products shall be based on unrestricted free-market pricing conditions.” Thus, the Act envisages a downstream sector where prices are determined by market conditions. Section 32 (e) also requires that the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) “provide pricing and tariff frameworks for natural gas in midstream and downstream gas operations and petroleum products based on the fair market value of the applicable petroleum products”, and not based on the fact that the government expends some amounts of money on subsidising the retail cost of these products. The Authority is also obligated to “ensure the security of supply, development of the marketers and competition in the markets for natural gas and petroleum products”; an obligation which ensures that private entities are able to set their prices based on market value and to compete fairly in the market. However, these provisions remain unrealized.
On April 14, 2022, the National Assembly passed a revised Appropriation Act which upwardly reviewed the 2022 budget cost for Petroleum Motor Spirit (PMS) subsidy from 3.557 trillion Naira to 4 trillion Naira. This is a staggering increase from the 1.43 trillion Naira (340 billion dollars) reported to have been spent on petroleum subsidy in 2021. Five months after the PIA was passed, the federal government announced its suspension and extended the life span of the Appropriation Act, an action that effectively introduced a high degree of uncertainty for industry players and prospective investors. What this meant was that the government would continue to pay the subsidy for PMS to be sold at a price below the actual market price. With this action, the government continues to effectively interfere in the market price of products and dictates what price marketers should sell.
This is the basis of the recent outburst by the Independent Petroleum Marketers Association of Nigeria (IPMAN), which led to the long queues and increased price of PMS in some of the fuel stations.
To provide background to the recent issues, the IPMAN, an association of over ten thousand wholesalers and retailers of refined petroleum products (all involved in the distribution and transportation of petroleum products) protested the continuous interference by the government in dictating the price at which marketers should sell products. Usually, the marketers should get the fuel mainly from the depots of the Nigerian National Petroleum Corporation Limited being the sole importer of refined petroleum at the cost of 160 Naira per litre. However, according to a statement by the IPMAN, none of the 21 depots of NNPC Limited has been dispensing products to the IPMAN due to the unavailability of the products in the depots.
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The marketers have had to purchase at higher prices from private depots in order to remain in the market and ensure the supply of products. The private depots sell to these marketers at a cost of 165 to 180 Naira, this is exclusive of other loading charges and transportation charges depending on the location of the fuel stations. The marketers have had to bear the cost of transporting the fuel from these depots to their fuel stations through tanker vehicles that utilize Automotive Gas Oil (AGO) whose price, including that of other commodities has surged due to the Russia – Ukraine war. Asides from this cost of transportation, these marketers also have to expend on the cost of running the fuel stations, and paying their workers, all before they speak of profit. And they are still expected to sell at the government’s regulated prices for retail at 165 Naira, as the government is supposedly paying a subsidy. As per the IPMAN’s agitation, putting the retail price of petrol at 165 Naira is no longer sustainable as the marketers would continue to run at a loss, even if they were obtaining PMS at the government’s price of 160 Naira.
Subsidy – to stay or to go?
The new PIA regime does not recognize the concept of subsidy. Section 317 (6) of the PIA mandates that the Federation shall bear the costs of NNPC as a supplier of last resort “for a period not exceeding six months” from the day the Act comes into force. This means that the idea of subsidy may persist only for six months from the date of enactment which was in August, and until this time, the payment for subsidized retail of petrol has continued. Also, Section 53 (7) requires, inter alia, the NNPC Limited and any of its subsidiaries “to conduct their affairs on a commercial basis in a profitable and efficient manner without recourse to government funds”. Clearly, the government is not to expend on any issues around petroleum products including the payment of subsidy.
It is been opined that the whole idea of subsidy, to a large extent, has not permitted the government to invest the fund set aside for that purpose in other developmental projects. According to a 2021 report by the socio-economic research firm, SBM Intelligence, the costs of subsidy in Nigeria increased by 890% over a five-year period (2017-2021) even though fuel prices only increased by 12.1%. Besides, the ability of private investors to fully utilize the potential of the sector has been greatly stifled due to the regulation of retail prices by the government. This does not only make competition difficult but makes the sector unattractive as low operating margin for operators will lead to low return on equity, in other words, bring about loss. It is the payment of subsidies that gives the government the power of regulation. If there was nothing like subsidy, the government has limited control over the price marketers choose to sell at, provided that such is within the fair market price. More so, the subsidy regime is presumed to be tainted with corruption and inconsistencies in the government’s payments.
On the other hand, the subsidy is supported based on Nigeria’s economic realities. The saying that “Nigeria has not got there yet” is perhaps what continues to sustain the concept of subsidy. The possibility that the Nigerians will be able to survive the harsh realities that the removal of subsidy would bring calls for concern, especially now that the World Bank has reported that the number of poor Nigerians is expected to hit 95 million in 2022. If the continued payment of subsidy by the government is viewed from the standpoint that the government has an obligation to ensure the people’s welfare, then the argument for continuing subsidy may stand.
How do we resolve the issues?
The fact that some of the provisions of the PIA have remained unrealized reveals the uncertainty in the future of the industry. But what remains certain is the inconsistency that will continue to plague the supply of petroleum products, especially PMS, unless effective strategies are put in place.
Refineries should be up and running: According to the NNPC, the refining capacity of the country was around 461 barrels per day in 2020, which was highly insufficient to meet current demand. The demand for petroleum products is expected to grow by 14.6 % by 2025, from 15.1 million metric tonnes in 2020 to 17.3 million metric tonnes in 2025. The refineries need to be made functional. This is a fact that cannot be overemphasised. This will enable the efficient supply of petroleum products around the country, and will certainly eliminate the regime of having one importer who all marketers must go to obtain products. More so, the government, if unable to renovate the refineries can sell them to private individuals or entities who are willing to buy and get them working. This will also be in the spirit of the PIA that stipulates the deregulation of the downstream sector, which includes the refining of petroleum products.
Systematic removal of subsidy: Perhaps, Nigeria may not be ready for the pains that will come as a result of fuel subsidy removal, perhaps it is In order to achieve a win-win for all, the government can utilise the systematic approach to subsidy removal. This simply means that just yanking off the subsidy paid by the government on petrol may be harsh on the pockets of Nigerians, but a gradual removal may not be so noticeably felt. Then, the government can invest the monies spent on subsidising petroleum retail price in other developmental projects.
This is being successfully carried out in Egypt through its Energy Subsidy Reform Facility. With fossil fuel subsidies being a major contributor to Egypt’s deficit and consuming over a fifth of the country’s budget, the reform came as a strategic priority for the Government of Egypt. The Reform began in July 2014, with the government implementing the reform by allocating $14 billion for fuel subsidies in the 2014-2015 budget as opposed to $21 billion in 2013-2014 and raising the prices of gasoline, diesel, kerosene, natural gas and other petroleum products. The government continues to execute the reform each year by raising the prices of petroleum products and reducing the budget for fuel subsidies. The reform has enabled the reallocation of monies which would have been used for subsidies into other developmental investments.
In addition, the government has been able to provide some social protection to help offset the negative impact of the fuel price increases on lower-income households. For instance, food subsidy was introduced for bread, rice, sugar, flour, etc., an increase in the public-sector minimum wage was introduced, and the country’s 2014-2015 budget on social security pensions was expanded to cover an additional 825,000 families for a total of 2.3 million families.
However, one cannot say the system is not fraught with challenges as there is the difficulty in directly targeting the poor households. This is, however, a result of the lack of a unified registry of households.
Still, Nigeria can learn from the strengths and challenges of such reform and efficiently apply them.