The PIB and Nigerian Downstream: Crisis looms – By Jerry Lazarus

July 11, 2021
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I finally had an opportunity to go through the senate and house committee reports on the PIB. The main thrust of the bill is to open up the Nigeria oil and gas industry to investment, strengthen industry governance and regulation to expand, grow and maximize value capture for Nigeria and her citizens. This is long overdue and we must commend the Executive and the National assembly for prioritizing this bill.

I however, have some concerns about certain provisions of the bill as it affects the downstream. While the bill removed price controls on petroleum products in section 205, the senate version of the bill has a clause that constrains market competition by restricting importation of products to only players with local refining capacity. This clearly counters the provision of 205(1).

“Subject to the provisions of this Section, from the effective date, wholesale and retail prices of petroleum products shall be based on unrestricted free market pricing conditions.”

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The inserted section 317(8) in the senate bill are here re-produced:

(1) The Authority shall apply the Backward Integration Policy in the downstream petroleum sector to encourage investment in local refining.
(2) To support this, licence to import any product shortfalls shall be assigned only to companies with active local refining licences.
(3) Import volume to be allocated between participants based on their respective production in the preceding quarter.
(4) Such import to be done under NNPC Limited Direct Sale/Direct Purchase (DSDP) scheme.
(5) To safeguard the health of Nigerians, imported petroleum products shall conform to the Afri-5 specification (50ppm sulphur) as per the ECOWAS declaration of February, 2020 on adoption of the Afri-Fuels Roadmap.

I think the provisions above will create a duopoly in a price deregulated price environment thereby destroying the Nigerian downstream industry as we know it today. It limits importation of all petroleum products, including PMS, diesel, aviation fuel, lubricants, base oil – products which are already deregulated, to only players with local refining capacity. In the near term, only NNPC and Dangote will have domestic refining capacity for PMS for instance, so they will be the only importers. This takes the industry back and could not have been the intention of the bill.

Moving from a state-owned monopoly in a price regulated market to a duopoly in a price deregulated market is taking the industry backward and exposing Nigerians to exploitation and further hardship. This in my humble view is not reformatory.

Rather than seek to protect refiners, we should rather seek to protect the consumers by liberalizing and expanding supply sources. That is the only way prices will be “market determined” and consumers pay fair value for the products they buy.

The viability of local refining is not determined or enhanced by locking out competition, it is rather achieved by price deregulation which has been done in section 205. This clause gives statutory unfair advantage to private players rather than through market competition. Indeed, the law and the authorities have an obligation rather to protect the market (other players including Nigerian entrepreneurs) and the consumers rather than to encourage monopoly/duopoly by locking out competition. This clause does not create a level playing field for all players in the sector, and can indeed destroy existing Nigerian businesses that engage in importation of other petroleum products like diesel, Aviation fuel etc with attendant loss of jobs and more economic misery for Nigeria and Nigerians.

Governments all over the world do not create and encourage monopolies or duopolies and that is why anti-trust laws are enacted and enforced to protect industries and consumers. Nigeria should not be doing the reverse. A case can always be made about protectionist policies for nascent or pioneer industries, but this is not the case with a long established, once-thriving Nigerian downstream.

This clause needs to be expunged from the PIB. The Authority should be left to develop regulations that are fair, inclusive and transparent for petroleum product importation that ensures open and diverse market supply and hence competition, only then would the objectives of the bill be achieved. It is worth repeating that as price control is being removed, supply must be competitive, inclusive, transparent and seen to encourage efficiency. Then, and only then will Nigerians and Nigerians win.

Jerry Lazarus is an oil industry analyst and public affairs commentator.

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