Unleashing Potential in Downstream Oil Sector

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Operators in the downstream sector of the Nigerian oil and gas industry have once more stressed the urgent need to address issues militating against the sector and hampering the growth of the national economy, writes Peter Uzoho

The downstream sector of the Nigerian petroleum industry has over the years been enmeshed in controversy, attracting little or no investment over the years.
The sector unlike what obtains in other countries where oil and gas activity is virtually run by the private sector, has continuously remained under government’s stranglehold.

The federal government holds 49 per cent share in all activities of the oil and gas industry, which makes its decision on issues around the industry superior and final.
The government operates as both an operator and regulator, with the Nigerian National Petroleum Corporation (NNPC) and the Department of Petroleum Resources (DPR) -two government establishments, playing the operator and regulator roles respectively, excluding other agencies who constantly hound private operators for one demand or the other.

Today, the absence of predictive and clear fiscal environment has slowed down aggressive private sector participation in the downstream sector, same situation in the nation’s midstream and upstream sectors.

There have been concerns about infrastructural decay in almost all areas of the sector.
For instance, the four refineries in the country (for over two million people) with combined capacity of 445,000 have never performed up to its capacity, leading to the importation of majority of the country’s consumption demand in petrol from other countries.

However, as part of efforts to address these challenges, participants at this year’s Nigerian International Petroleum Summit (NIPS) held in Abuja recently, re-echoed the need for government to create the right investment climate to enable investors come in and rescue the sector.

Deregulation

The operators at the event reiterated the call for total deregulation of the downstream sector to enable the private operators drive it.
Contributing in one of the panel sessions, the Chairman of Major Oil Marketers Association of Nigeria (MOMAN) and Chief Executive Officer of 11Plc., Mr. Tunji Oyebanji, said the federal government should hasten up and deregulate the sector to free it from its stranglehold.

He added that petroleum products should be treated as economic issues rather than as welfare issues, adding that the government should allow a free market where market forces set the price of goods.

Oyebanji said: “We as a country have to decide whether fuel for moving people, for transporting and so on is a social welfare issue or it is an economic issue that we need to face squarely.

“As our population grows, if we want to keep petrol or even CNG as a social welfare thing then more and more of our resources as a country will have to go to keeping that price at a level that is not sustainable. So it’s a decision we need to make.”
“I think I will say that everybody has a role to play in the industry. All the various stakeholders: government, the private sector, the customers, the operators. But I think at the end of the day the government has to set the tone to allow the private sector to drive the growth of the industry.

“Government needs to decide whether it wants to be a player in the Industry or really sit down to just be the regulator and to create the policy framework for which we should operate.

“Because today, sometimes you get confused, because government in some way seems to be getting bigger and bigger as an operator and, like the director of DPR said, the effort that is needed to do the proper regulation in terms of how many staff they have, how they are financed and all that is not there.
“It does not get to the center stage, because I think government’s interest has diverted as they have become an active player in the industry.

“Like I did say earlier, I think the private sector is really the driver. If it is supported by being given adequate margins at least in the short term and also if government can go the further hug of completely freeing up the industry so that the necessary investment can come in. You don’t need to tell a Nigerian businessman to invest.

“Once you create the right environment, Nigerians are among the best and most aggressive business men in the land. So just putting it together, we need better margins to make the investment. I think government should stick to the job of regulating, providing guidelines, policy on quality and so on, and then leave the operations to the private sector to drive.”

Fixing Refining Challenge
In a special presentation at the summit, the Chairman of Integrated Oil & Gas Limited, Capt. Emmanuel Iheanacho, decried the neglect of the nation’s downstream sector.
According to him, the sector has not functioned the way it should, adding that it was with a repeat of a lot of challenges which includes questions about refineries.

He said: “In dealing with the challenges we have in the downstream, the government has tried a lot of strategies. They have tried crude oil swaps to ensure sustained supply of the refined petroleum products, we have done the DNDP and now we have NNPC who are functioning as a virtual monopoly.

“Is this helping us in terms of what we need? The answer is No. What we have managed to achieve is that all the occasional shortages that we used to have at festive period of shortage of product, we have them no more and that is one side of the equation.
“The other side is that at what cost is this been achieved at. We are not the only country who wish to invest in refineries. What is the statistics with respect to what the US has invested.

“The US is a country of 327 million people and we have 139 refineries operating in their country and have a refining capacity of 16.7 million barrels daily and that is about eight times the productive capacity of Nigeria.
“For Texas in US with a population of 28.7 million and have 47 refineries, with the capacity of 5.7 million barrels per day, this is nearly two times the productive capacity of the entire Nigeria”.
Iheanacho said the inability of the four refineries to function at full capacity raised serious questions as to whether the country was actually serious about investing in refineries or not.

He further said: “We are leaving out the real problem that we are not investing in refineries in Nigeria and we need to address that issue. For the question of how many refineries we need to invest in, I would say we should go back before refining and look at the exploration and exploitation of crude oil.

“OPEC assigned two million liters daily, we should pull out nearly four million litres and build as many refineries as we can to refine this product. This will create jobs for us, great value and opportunities for technology to transfer.”

He advised that Nigeria should try and put an end to the practice of lifting crude and sending them out for refining which would later be brought back to the country as a finished good with exorbitant cost and with no value added to the country.

He, however called for the deregulation of the sector, saying the issue was a front burner as it raised issues about subsidy.
Iheanacho added: “The reason for market structure bares on the cost and efficiency of how products is distributed. If you have a monopoly as is being experienced in Nigeria, you can be inefficient as you like and nobody is pressing operators to change operations and make it cheaper.

“But if there is competition people would strive to better their services so at the end of the day the beneficiaries the most are the consumers.
“We are suffering and government is depriving itself of huge revenues that it needs for revenues.

“More than one trillion in terms of subsidies paid. And these subsidies intended to go to Nigerians, does not get to the common man because the beneficiaries are those who goes into the filling stations to draw the fuel, drives his car and buses rather than the ordinary Nigerian. Market structure should be looked at to determine whether or not subsidy should be placed.”

Enhancing Customer Experience
Also in his presentation, the Chief Executive Officer of OVH Energy, Mr. Huub Stokman, harped on the need to improve customer experience, stressing that that was the only way Nigeria could reap full benefits of its downstream sector.

“For me, if Nigeria wants to capture the full benefits of the downstream value chain, after the enhanced refining capacity comes on stream, it needs to make improvements in customer experience, safety and operational standards and use technology to do this.
“But this can only be possible with investments. And I will be very clear, at the current margins, that will not happen,” he said.

Stokman, however, joined his voice with that of his colleagues in the call for deregulation of the sector for increased investors participation.
He added that there was need to deploy technology as quality and quantity control measures, saying such could be taking to the forecourt controllers and remote monitoring of pumps, and automated gauging.

Stokman equally advised that all ransportation networks in the country as well as operational infrastructure must be fixed to ensure safe delivery of products.
He said: “Now, there are a couple of risks plaguing the industry. On regulatory, there are two key messages. As an industry, we have got over 15 agencies that are coming to us often with conflicting demands and sometimes, asking money for the same things.

“We still have the deregulation uncertainties. I hear very positively that the PIGB will be signed into law in June, but let’s see what that means for the downstream in terms of deregulation of the PMS.

“On governance, we need to realise that we need to improve compliance. It is crucial that also you run your industry with good governance and good compliance.
“On HSE, we keep being plagued with pipeline vandalism and truck accidents.
“On supply, maybe the big product supply disruption that we have had in the past with scarcity may no longer be there but you still have them in smaller scale where pockets of the country are struggling to get the product too.

“On trade, the margins as we said have not changed for years while if you look at the micro environment, inflation keeps on going. There is an industry skills shortage”.
The OVH Energy boss warned of imminent brain drain in the nation’s oil and gas industry, saying: “to give you an example, my IT manager just gave his notice that he is moving to Canada. So Nigeria will have brain drain if it is not careful.”

Stokman added: “Then on the key needs to drive Nigeria’s downstream sector, we need a free market. I come from an industry from countries where free market works both from the supply and the consumer end.

“You need a plurality of transport and open access system both for when the product comes in.
“So it is important that we upgrade our jetties as an infrastructure but also we need to improve the other infrastructure – rail and pipelines, and especially maybe we need to look really through a Public, Private Partnership (PPP) I the development of pipelines.

“And then, healthy and a transparent competition to drive efficiency and innovation. I will say very simple: make the best person win. Make it fair and transparent and then those who are good in customer service run the companies efficient we actually win. And I believe that now is the future which will be technology driven.

“As I said earlier that we have over 15 agencies coming after us, I think that it will be great if we could reduce that and make it more of a one-stop-shop for the downstream.
“On refinery, you can’t have a conversation around the downstream industry without the refining. I have already said that we import everything. But I think that the enhanced refining capacity which is imminent both with the traditional and the modular refineries will change the paradigm from an import country to a self-sufficient country, and that’s a key catalyst for the rest of the industry.

“There are some benefits of these refineries as a catalyst. Product quality in my view will improve which will aid the environment and also reduce consumption.”