Focus on Downstream Sector Challenges

With the increasing challenges in the downstream sector of Nigeria’s oil and gas industry, the yearly Oil Trading and Logistics (OTL) Africa Downstream Week has provided a veritable platform for stakeholders to articulate these challenges, writes Ejiofor Alike

The downstream sector of Nigeria’s oil and gas industry is bedeviled by plethora of challenges, which have virtually wiped out the margins of the oil marketing and trading companies, as well as other importers of petroleum products.

The problems of the sector stemmed largely from the inappropriate pricing of petrol, which arose from the pricing cap imposed by the federal government on imported product.
Despite the fluctuations in the international price of crude oil and the high cost of foreign exchange, the federal government has capped the retail price of petrol at N145 per litre.
Before the price was increased to N145 in May 2016, the regulation of petrol price had led the federal government to be heavily indebted to the marketers in form of subsidy claims in an effort to ensure that the retail price of petrol was less than the landing cost from the international market.

After the most recent reconciliation, the federal government was indebted to Major Oil Marketers Association of Nigeria (MOMAN), Independent Petroleum Marketers Association of Nigeria (IPMAN), Depot and Petroleum Products Marketers Association (DAPPMA) and the Independent Petroleum Products Importers (IPPIs) to the tune of N800 billion.
The accumulated subsidy claims and the associated unpaid interest and foreign exchange differentials that had originated before the price adjustment in May 2016 has led to insolvency and rendered the marketers financially handicapped to continue their operations.
Though the price adjustment of May 2016 was seen as an incentive for investments, the marketers could not take advantage of this partial liberalisation to make investments as a result of the accumulated debt, which created liquidity challenges in the sector.
Due to these liquidity challenges, the marketers are faced with the options of either shutting down their depots or downsizing to remain in business.
While many of the oil marketing companies owed salary arrears of up to nine months, some have started retrenchment of workers and are on the verge of shutting down their tank farms.

For the banks that funded the importation of the fuel cargoes, their challenge is to see how to avert another round of banking system failure that could be triggered by this huge outstanding non-performing loans owed them by oil marketers who cannot pay because the government is yet to pay their outstanding claims.
Many banks are said to be also planning to take over some of the tank farms and companies due to their inability to pay back monies lent to import products.
The problems Nigeria’s oil and gas industry are not restricted to the downstream sector alone as the upstream business is also impacted heavily by sundry challenges.
However, most of the national and international oil and gas conferences have focused on addressing the challenges in the upstream, which of course, is the cash cow of the oil and industry, thus leaving the downstream operators to their fate.
It is against this background that the Oil Trading and Logistics (OTL) Africa has become relevance to provide a platform for the downstream and maritime operators to brainstorm on the challenges afflicting their sectors and make recommendations to the federal government.

OTL Africa
The yearly OTL Africa Downstream Week prides itself as the continent’s leading business forum for market insights, emerging opportunities, and products’ showcase.
Also called The Africa Downstream Week, it is organised in collaboration with the relevant agencies of the federal government and the industry.
Unlike other oil and gas conferences and exhibitions, which are promoted by foreign interests for commercial gains, the Oil Trading and Logistics Africa (Downstream) is a pan-African initiative with 100 per cent local content and dedicated to promotion of business, policy and stakeholder relationships in downstream petroleum markets across the continent.

OTL showcases the industry’s most important offerings, giving companies the opportunity to identify and take advantage of relevant solutions.
Participants to this yearly engagement include: lubricant dealers and suppliers, jetty operators, financial institutions, equipment suppliers, tank storage operators, ship and product brokers, providers of haulage/trucking services, ship owners and charterers.

Others include: petroleum product marketers, industry associations and groups, government, agencies/ regulators, operators of petrochemical plants and product suppliers, providers of associated industry services, international petroleum products traders/suppliers and all other interests in trade and downstream petroleum business.
Within the past few years, the conference has traditionally engaged in agenda setting for policy and industry operations and achieves its goals through strategic government and business liaison, research and advocacy.
This year’s event will hold from October 22 to 25 22 at the Oriental Hotel in Lagos Nigeria and over 2500 delegates, speakers, exhibitors and special guests are expected to attend.

Recent efforts by OTL
The most recent efforts of OTL Africa to tackle the challenges of the downstream sector were articulated in the communiqué at the end of the 2016 conference.
One of the recommendations that had featured consistently in the OTL Africa communiqué was the need for complete deregulation of the downstream sector.

Though the federal government has not fully implemented this recommendation, it has taken a major step by removing the subsidy element by increasing the pump price from N86 to N145 per litre in May 2016.
In the 2016 OTL Africa, the communiqué also re-echoed the need for the full liberalisation and deregulation of the downstream oil sector, “with removal of all hindrances and bottle necks is needed for the improvement of private investment and market competitiveness; whilst a mitigating policy that will best serve the public and cushion the effect thereof is put in place.”

The conference also recommended the adoption of a policy of low sulphur fuel specifications Afri-4 and 5 to protect the health of our people and the environment.
Few weeks after this recommendation, Nigeria, Benin, Togo, Ghana and Cote d’Ivoire on December 1, 2016 agreed to introduce strict standards to ensure cleaner, low sulphur diesel fuels and vehicle emission standards, thus denying Europe the market to export its dirty fuels and aligning with OTL Africa’s position.

The Federal Ministry of Environment had initially set July 1, 2017 deadline to begin the enforcement of the ban but the deadline was missed.
Ghana is the only regional state that has delivered on the pledge and codified rules preventing the import or transport of high sulphur petrol or diesel.
However, after missing the July 1 deadline, Nigeria, the region’s biggest fuel consumer, set up a task force to examine the issue.
The task force reportedly aimed to advise the government on a new standard by late September, with new rules possible by December 1, 2017.

The participants at the OTL Africa 2016 had also recommended a strong and independent regulator to oversee activities in the subsector, contending that a strong regulator would implement open and transparent rules for the industry.
The communiqué, which was signed by the Chairman of OTL Africa Advisory Board, Mr. Reginald Stanley and the Chairman of OTL Africa Downstream, Mr. Emeka Akabuogu also urged governments and private investors to explore and undertake shared infrastructure to ease movement of products particularly trans-regional pipelines and rail connections.
The stakeholders also highlighted the need for the federal government to reduce the duty payable on the acquisition of vessels by indigenous operators to make them competitive with their foreign counter-parts.

To minimise or eliminate oil theft, the communiqué recommended the implementation of security measures such as the Oil and Gas Protection Squad, together with full deployment of technology and observance of international monitoring standards.
The downstream players also canvassed support for quick passage of the Petroleum Industry Bill (PIB), which should cover full deregulation of the downstream sector.
In the maritime sector, the communiqué recommended that the Cabotage Act as well as well as the Local Content Law should be optimised by NIMASA and other regulatory bodies in the downstream sector to ensure more participation of Nigerians.
“Payment of charges in foreign currencies by indigenous operators to agencies like NIMASA, NPA, DPR and others should be stopped forthwith and the Naira prioritised as the means of exchange to maximise the value to ship owners and improve competitiveness at the ports,” said the communique.

To address the liquidity challenges facing the subsector, the stakeholders stated that financial institutions “should be encouraged to develop special lending arrangements that will allow players in the downstream sector access funds at single digit interest rate to facilitate and sustain growth.”
The downstream and maritime operators also requested the government to prioritise enthronement of a stable and predictable foreign exchange policy.

They also called on the Central Bank of Nigeria, the Federal Ministry of Finance and Ministry of Petroleum Resources to jointly address this as a matter of urgency to encourage increased local and foreign investment in the downstream,
“There is need to urgently review the administration of the current ineffective foreign exchange intervention in the downstream sector in view of the timing gap between the offer of forex and the opening of Letters of Credit, which often erodes the value and usefulness of the offer. There is need for government intervention by way of policy on LPG to facilitate its growth and make it easily available and accessible,” the communiqué added.

The federal government has since attempted to address some of these challenges through the CBN intervention and the new National Gas policy.
With these far-reaching recommendations, the OTL Africa has consistently placed the challenges of the downstream in national consciousness to draw the attention of the federal government.