With the deregulation of petroleum downstream sector, which has now opened the space for private marketers to return to importation of petroleum products into the country, the Chairman, International Energy Services Limited, Dr. Diran Fawibe, in this interview on Arise TV, amongst other issues, stressed the need for the Ministry of Petroleum and the Central Bank of Nigeria, to guard against possible return of the dispensed petrol subsidy by thoroughly verifying claims that would be made by the marketers as costs of their importation. Peter Uzoho presents the excerpts:
What is your take on the deregulation debacle?
Let me break it down. What government has done is fundamentally in order and we have to commend the President for having the courage and political will to take this decision once and for all. It’s like what people use to say: you have tread where the angels fear to tread. This problem of petroleum prices regulation has been with us for many. Let me take you to memory lane. The uniform pricing system and fixing of price in the way we are doing it, up to the announcement of this deregulation started in October 1973 when we embarked on uniform pricing system; and that was when Nigeria was having a lot of money to throw about in meeting some obligations in Nigeria. We said that Nigeria was having control of commanding heights of the economy. But the framework for price regulation and the uniform pricing system was meant to be a temporary arrangement. But it has subsisted for four decades.
So what government has done now is to actually liberalise the industry –the downstream sector of the industry. Before the policy of regulation and uniform pricing system, it was the marketing companies that used to fix petroleum prices under the guidance of the Ministry of Petroleum Resources at that time. And it was based certain fundamentals. Even when the products were being imported into the country 1965, when the first refinery came on stream there was a pricing arrangement by the oil companies that used import petroleum products into the country. But it was under the supervision of the Ministry of Petroleum, to ensure that the marketers did not exploit Nigerian consumers.
Now, the price regulation has created a lot of problems. It started calmly but over the years we have seen what Nigerians have made of this policy, whereby we now started subsidy and the subsidy has become a conduit pipe for draining the economy of Nigeria. Now, the president now having the courage to say enough is enough, and for one thing I think we have said over time that Nigeria cannot continue with this arrangement, and not only the price regulation has impeded investment in the downstream sector in terms of refineries and some other facilities. And now that the decision has been taken, we will now see a totally different downstream sector of Nigerian economy.
It will then enable the private companies to invest and have the courage and the hope that they will be able to recover their investment and make decent returns. That is precisely what is happening. Unfortunately, many Nigerians don’t really understand what is really going, and I’m happy the media is taking the challenge by educating the Nigerian public. Many of our countrymen are playing politics with this policy. The president ought to be commended and we should be looking at the positive sides of this deregulation against the negative sides. For some time, we would be having some problems because if the products are being imported into the country as against refining our crude oil in the country there could still be a bit of some problems along the line because once the price of crude oil goes up at the world market it will correspondingly increase the price of petroleum products that we intend to import into the country. But over time and if we are able to fix the refineries, and that thanks to Dangote that is developing a refinery, big refinery, by the time these refineries come on stream, then Nigeria will witness a totally different era of petroleum price regime in the country that will alleviate the problems of the people and there will be competition, whereby the oil marketing companies will not be able to exploit Nigerian consumers. But will be under the deregulation of Ministry of Petroleum Resources as it used to be before the uniform prices system was inaugurated in 1973.
The biggest benefit the government seems to be touting here is that it will increase revenue for the government. But does it address the associated corruption, inefficiency and opaqueness in the downstream sector. Can we truly say that we have deregulated without the enabling laws –the PIB is in limbo?
You see, let’s look at it this way: if government says it will increase revenue for government, at least for one thing we know is that government will no longer pay subsidy, which has become a source of corruption. Many people have talked about it at length, so I don’t need to bore you with the details. But money that government used to pump into subsidy, whether real or scam, that will no longer be there. So it’s savings on the national treasury about revenue. In terms of direct cost, then consumers will now bear responsibility. We have always been saying, even not only in terms of COVID, we have said that Nigerians have to take responsibility for their lives and some of the things they are doing. So consumers will now start to bear responsibility for the volume of petroleum products they consume, whether for petrol or some other petroleum products they consume, whether diesel and things like that.
But let me say this: the policy will not eradicate all the ills in the downstream sector, and this is what I want to emphasise. It also depends on how we Nigerians behave ourselves because more often than not, while Nigerians don’t want to take responsibility for a number of things they do, positive or negative, and they will put the blames on government. Some people, even when their wives don’t get pregnant, they will blame on upon government or they will want government to come and help them impregnate their wives. So this is the situation we find ourselves. Yes, we have some segment of the society that are actually suffering, but then, if the economy is in a viable state, some of these people who don’t have employment and their living conditions are downtrodden will no longer be in that situation. In order words, there will be upliftment in the condition of some of these people. But government cannot provide everything for Nigerians.
So if we allow the private sector to operate as it should be without government regulation like we have seen in petroleum products prices fixing over time that stifled investment, then you will see improvement in the economy. Now, in terms of legislation, yes, as a matter of fact, many people believe that government should now put this into a legislation, and that is why the importance of PIB cannot be overemphasized. And this deregulation is coming shortly before the PIB is legislated upon. So, one will expect that PIB, when it is passed, eventually will incorporate some of the elements of deregulation of the downstream. Now, let’s look at it in terms of other areas. The PIB is supposed to inaugurate a system of accountability and probity in the management of the oil and gas industry.
Now, if we are able to put that in place, that is, the National Assembly passes the bill into law and the president gives the presidential assent, we would then be able a totally different petroleum industry –both upstream and downstream, in terms of level of investments in the sector, and it will have overall benefit to the Nigerian people and the Nigerian economy. So this is what people have been clamouring over time, and as it is coming now, Nigerians need to commend and appreciate the president for doing this.
But are there certain outstanding issues that we also need to focus on. Now we have been told that marketers and the NNPC will be playing on an open field. But there are issues: one, cost of funds, cost of Forex. Also, where does all of these lead the Petroleum Equalisation Fund?
Well, let me start with Petroleum Equalisation Fund. I will expect that by the time the downstream sector is in full swing, Petroleum Equalisation Fund should be dispensed with. The genesis of Petroleum Equalisation Fund was to provide bridging for moving products across the country because we inaugurated uniform pricing system. Let me tell you, I even have a table here that even shows the price of petroleum products across the country before we set up price equalization and uniform pricing system. The price was totally different from one place to the other. Let me give you an example. The price of petroleum products in Lagos was four shillings, five pence at that time. We hadn’t started naira currency. The price of gasoline (petrol), we used to have two types of gasoline, that is, premium and the regular.
Then, the price of premium gasoline was four shillings, five pence, whereas in Badagry, it was four shillings, seven pence. In Sapele, it was four shillings, eight pence; in Warri, it was four shillings, nine pence; in Agbo, it was four shillings, nine and half pence; in Port Harcourt, it was four shillings, six pence; in Enugu, it was five shillings; in Jos, it was five shillings, three pence; in Sokoto, it was five shillings, 10pence; in Nguru, it was six shillings; while in Maiduguri, it was five shillings, 11pence. So this price variation reflects the price of petroleum products across the country. Now, how did it work? The price of product, basically when they were pricing, whether in Lagos even before using Lagos as a basis point or Port Harcourt when the refinery came on stream in 1965, we have the same basis point price. Now, what is added to the basis price is the cost of moving the product from one location to the other.
The variation I have mentioned in the table I read to you shows this transportation handling expenses across the country. Now, the price equalisation wants to ensure that the price of petrol sold in Lagos is the same in Maiduguri, the same in Sokoto, is the same in Port Harcourt. So it was the price equalization fund that started to cushion the effect of this price variation. The problem we have had with Petroleum Equalisation Fund or bridging system over time is that it was supposed to be about 10 per cent of the price of the product in the first instance but at certain time we had 40 per cent as the bridging cost, which means that there was a time the cost of bridging now almost equaled the price of petroleum products itself. And we actually said that it was a transparent process that increased bridging at that time.
Bridging became an industry of its own and this increased the burden of Nigerian people. So if you actually want to deregulate, the uniform pricing system must be dispensed with. At the time we were putting some of these things in place, there was no refinery in Kaduna. It was only Port Harcourt refinery we had and then we were importing petroleum products into Lagos. Now, with the refinery in Kaduna, if that refinery was allowed to work, it was supposed to provide petroleum products that will be moved around the northern states. Then, the Warri refinery was to provide petroleum products for the south; and then Port Harcourt refinery in that axis. Yes, there was still some petroleum products from Port Harcourt refinery that would go to nearby part of northern states and also Lagos.
So it was in this respect that government at that time in its wisdom felt that over time we should be able to dispense with uniform pricing system without creating any problem for Nigeria and people. What did we see? Over time, we abused all these things. The refineries were not working; so we were importing petroleum products. We were moving petroleum products from Lagos to different parts of the country. So bridging would be there and pricing equalization had a full swing in terms of operations. So if we are then dispensing with price fixing and we are dispensing with uniform pricing system, now price equalisation fund will not be there. With that process, we would be able to save costs for government.
What about the cost of forex, because now that marketers are also free to compete with NNPC, won’t the cost of Forex and cost of fund be an issue?
You see, the marketers have to take responsibility for certain things. Now, when we were having seven marketing companies importing products into the country the question of cost of fund never featured. They were bearing the responsibility and that was part of the cost of the products (what we used to call landing cost of petroleum products). They were souring the products from their parent companies from wherever they could get it. So at that time it was working very well without anybody shouting about cost of fund.
Obviously, they were actually expending money and they had cost of fund which was a paltry sum of money in proportion of the cost of petroleum products and did not rear its ugly head the way we are doing it here. Now, the marketing companies who are importing petroleum products, to what extent are they transparent in terms of the cost of financing the importation of petroleum products. And to my own mind, any marketing company that is not in a position to bring in products at a competitive price that will make the price competitive for Nigerians should pack his bags and baggages, as we used use to say, and go and fold up and let people who can actually do the business with all transparency, and have the resources to do it at a reasonable costs.
These are some of the things that the Ministry of Petroleum and the Central Bank have to look into at the initial stage. But this kind of chaos can only happen between now and the time the refineries start to operate. By 2021 or thereabout, if God willing and the Dangote refinery is working and indeed, if by 2022 the three or four government refineries are working. Recently, we heard the news of BUA trying to establish a refinery in Akwa Ibom. So by time all these refineries start to operate, then there will be no need for importation of petroleum products whereby a marketer will be shouting of cost of fund and all that. But be that as it may, between now and then, there has to be rationalization in terms of cost because a lot of things could go into the cost of fund and other costs that marketers are putting on the price of petroleum products. So the Ministry of Petroleum Resources as well as Central Bank will have to do a lot in terms of verifying some of these claims because we may be having another subsidy in the form of cost of fund and things like that.
A lot of people have challenged that position that if we have more refineries, it will not reduce the pump price of premium motor spirit. What’s your reaction to that?
Well, you see, the way it works is this. I have been a player in this business for about five decades. Now, when a company buys crude oil and brings it to Rotterdam or to Caribbean or to wherever in Europe or United States, they are taking Nigerian crude for example or take the crude from wherever, if they are not the producer or FOB, some on CIF, that is, Cost Insurance and Freight. The crude taken from Nigeria is FOB, it means that it is the buyer of the crude that will now pay the cost of insurance and freight to the refinery. Now, when the products are being brought back to Nigeria, the cost of product that we import into the country reflects the cost of transportation to when the crude is taken out there and wherever the crude may be taken.
If you are taking crude from Middle East or you are taking the crude from the Latin American –Venezuela, Indonesia or whatever, the refiner will have to include the cost of freight and other associated costs. Now, when you are pricing your product, then this other costs will have to be reflected, and it is this reflected price (where we have embedded all these other costs that we have to bring it to Nigeria). Now, if we are refining products locally, that is, either Port Harcourt or Lagos or wherever, the cost of transportation will not be there. That is a cost-saving measure in terms of price of product that will be consumed locally. So we will not have exactly the cost of products imported into the country and the one that is being refined locally.
So if we are going to price accurately, then we cannot expect the price petroleum products refined locally to be equal to the price of petroleum products imported into Nigeria. Yes, it may not be drastically reduced but there will be some different, because if there is no difference, then it means there is some monkey business going on there. But when the time comes, let us wait and see because we will then be able to examine the cost at which the refinery gets its crude and the processing fee that is put on it. Because the template is this, you have the cost of the crude, you have the processing fee that is shared to refine the crude, then the product will be taken from that refinery at ex-refinery gate price.
Then the cost of transportation will now have to added, either you are taking by road or by railways or by costal tankers and so on, before you get it to the pumps; and the of course, the marketing companies will have to put some margins. So there is no way you can say that the prices at that point from Kaduna refinery, from Warri refinery, from Lagos refinery and wherever will be the same as product prices brought from the Caribbean, from United States, from Rotterdam or wherever. So we have to understand that. So anybody saying price will be the same as imported price at that time is making a bogus argument.