Legalising Downstream Deregulation

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Operators in the downstream sector of the Nigeria petroleum industry are demanding for a special legislation to support the deregulation of the sector and save it from the danger of policy summersault, writes Peter Uzoho

Notwithstanding their consensus endorsement of the deregulation of the downstream sector of the Nigerian oil and gas industry by the current federal government, operators in the sector are demanding for a legislation to back the deregulation up.

After years of resistance to the clamour for a free market regime in the nation’s downstream sector that would allow pricing of petrol be determined by market forces and end government’s meddlesomeness in petrol pricing, the federal government finally listened to the voice of reason. Last September, the government announced, to the excitement of a good number of Nigerians, downstream operators/oil marketers, economic policy analysts and the international economic/ monetary policy bodies, the deregulation of the sector, particularly petrol price fixing.

By that move, marketers of petroleum products can now import petrol and fix pump prices while taking into account all the market fundamentals. The new pricing dispensation equally offers marketers increased margins with which they can play and make decent returns. The downstream deregulation had been projected to open up the space for more investments, to increase local participation in the sector, bring in more money into government’s coffers, and allow government to channel its limited resources to the development of critical sectors rather than spending it on petrol subsidy.

However, as brilliant and beneficial as this deregulation would be for the nation, especially considering the present state of the national economy, downstream operators believe that there is need to legitimise it by enacting a law to back it up.

Although, the Petroleum Industry Bill (PIB) which is currently before the National Assembly provides for the establishment of a single regulatory body for the midstream and downstream sectors under the name: ‘Nigerian Midstream-Downstream Regulatory Authority (NMDRA), it does not make provision for the legalisation of the downstream deregulation.

The operators said that lack of legal provision for the downstream deregulation is a major vacuum that needs to be filled if the government wants them and Nigerians to have trust in the policy.

The oil marketers who dissected the “Post-Deregulation Agenda for Nigerian Downstream Petroleum,” at the recent virtual Oil Trading and Logistics (OTL) Africa Downstream Week, espoused the concepts of self-regulation, discipline and standard setting as important components of the new dispensation which can be driven by consultations between industry associations and the industry regulator.

They said their major concerns border on how business, laws and policy converge to deliver value to all stakeholders in the industry. These, according to them, include thoughts on competition, self-regulation, the market itself, issues of pricing, and aspirations of the PIB transiting into the Petroleum Industry Act.

In his intervention at the session, the Managing Director of OVH Energy Marketing, Mr. Hubb Stokman, raised doubts as to the sincerity of government’s intention to deregulate the market.

“While the government has categorically stated its intention to deregulate the market, removal of subsidy is not the same thing as deregulation, as deregulation has to be backed by law”, Stokman said.

He said that to have effective downstream deregulation, three building blocks comprising fair market practices, consumer protection, and sound legislation were required.

According to Stokman, “The existence of a fair interest credit market is all about operating on a level playing field to avoid market distortion. Elements of fairness in this case include market-driven pricing based on operators’ structural efficiencies; equitable and transparent access to foreign exchange and access to infrastructure such as pipelines, jetties and depots on equal terms.”

He called for the Nigerian National Petroleum Corporation (NNPC), which is present in every step of the downstream petroleum value chain, to adhere to commercial processes and play by the same rules.

“Deregulation must be built on the bedrock of legislation as the law needs to remain valid into the future. The legislation needs to be an act of parliament that will eliminate government interference and ensure that price regulation cannot be introduced under any guise.

“Consequently, there should be a review of current legislation, while the Department of Petroleum Resources (DPR) and Petroleum Products Pricing Regulatory Agency (PPPRA) need to be repurposed,” he said.

In the area of consumer protection, the OVH Energy boss pointed out the necessity of establishing an authority to ensure fairness for consumers and operators.

“The body will be required to focus on price monitoring; regulate market competition to eliminate predatory business practices; enforce compliance with technical approved standards and enforce sanctions for violations”, he explained.

Highlighting the concept of self-regulation in the new dispensation, the Chairman of Major Oil Marketers Association of Nigeria (MOMAN), Mr. Tunji Oyebanji, said the industry’s vulnerability to corruption and sharp practices also contributed to calls for deregulation.

Oyebanji warned against the erroneous notion that deregulation means lack of regulation, explaining that “on the contrary, self-regulation is the best form of regulation to encourage best practices and build confidence and trust in the industry.

“To be driven by industry associations, self-regulation must brace up over and beyond what is provided in the PIB and develop based on industry operations”.

He noted that in a deregulated market, industry associations would be required to consult and contribute to guidelines provided by the official regulator.

Oyebanji, who is also the Managing Director of 11Plc (formerly Mobil), however, referenced the activities of vibrant industry associations such as the South African Petroleum Retailers Association (SAPRA); the Petroleum Institute of East Africa and the American Petroleum Institute (API).

He outlined some action points for industry associations, among which were promoting Health, Safety, Environment and Quality (HSEQ), attracting investment, regulating standards and advising on global policy issues such as climate change.

He added that the industry associations also provide advice on business development models, lobby policy makers, facilitate security of petroleum products supply and develop sustainable standards that are widely cited by the international regulatory community.

The MOMAN chairman encouraged industry associations to establish charters on dos and don’ts for their operators, focus on HSEQ, corporate governance, services and methods of implementing rules and sanctions.

He equally tasked the proposed industry regulator to collaborate with industry associations to take appropriate action.

In a review of provisions of the National Petroleum Policy (NPP) in view of Nigeria’s ambitions in the petroleum industry, the Executive Secretary of MOMAN, Mr. Clement Isong, reiterated the significant role of industry associations in a deregulated market.

Quoting the NPP, he said: “Around the world, technical standards are usually developed by industry consultations, while standards are produced by technical committees of industry associations.

“Industry needs to engage with the regulator to develop consistent technical standards and regulations in areas such as HSEQ, consumer protection, product quality, corporate governance, and ethics and human resources development.”

Going forward, Isong said that the intention of the policy was to avoid unnecessary cost.

He further said: “If we are going to be competitive and keep prices down, the industry needs to get polices and economics right across the value chain to guarantee full cost recovery and investment in logistics optimization.

“We have not done very well in the past three decades and the petroleum sector has been dominated by state ownership and dominant market power.

“Consequently, the private sector has been constrained while the lack of regulation impacts governance and cost efficiency. As a result, state control has limited the growth of self-sustaining industries”.

Also contributing at the session, the Chairman, Energy Institute Nigeria, Mr. Osten Olorunsola, expressed optimism that the PIB, if hinged on critical success factor, would soon morph into the Petroleum Industry Act (PIA).

He listed some of those factors to include corporate governance, level playing field, commercial operations, robust regulation and effective collaborations.

Olorunsola, while asserting that the downstream petroleum industry would be primed for business when the PIB transited into the PIA, also highlighted possible benefits of the regime.

“We will witness increased revenue and an improved economy; significant impact on cost savings; and reduction in overhead costs.

“The legally backed deregulation framework will also ensure quality and security of product supply, create jobs and develop improved capacity to sustain the industry”, he said.

Examining the legal perspectives of the deregulation saga, the Senior Partner, Akabogu and Associates, Mr. Emeka Akabogu, queried the legitimacy of the deregulation regime as announced by the PPPRA and promoted by the NNPC.

Akabogu, who advocated for a full blown change of the law for deregulation to exist, stated that the removal of fuel subsidy has not changed anything.

He faulted the position of the Group Managing Director of NNPC, Mallam Mele Kyari, who posited that deregulation was a policy issue and that petroleum product pricing was not a subject of any law.

Asserting that petroleum prices in Nigeria are still controlled, Akabogu said it was important for the market to realise that against the backdrop of extant laws in the petroleum industry, the laws provide for price fixing by the government. He said until those laws were changed, anything being done now was just pandering to market and budgeting realities which may change at any time.

“If you look at section 6 of the Petroleum Act, the Minister of Petroleum is able to fix prices. In section 5 of the Price Control Act, the government can fix prices of some good including petroleum products and it can be deemed a criminal offence if products are sold above such a fixed price.

“Meanwhile, in section 9 of the Petroleum Act, the Minister can determine the amount of crude oil to be supplied to a refinery and the price at which the refinery may sell its refined products”, Akabuogu argued.

According to him, these are the realities of the situation until the industry transits from the Petroleum Act and the exiting legislation, to the Petroleum Industry Act in order to have any semblance of deregulation.

He advised that pending transition of the law, realities require the industry to conduct due diligence and ensure that government offers more guarantees for trading and increased investments within the segment.

This, he said, may come in the form of gazetting the policy and in the short-term, repealing the PPPRA Act; the Petroleum Equalisation Fund (PEF) Act; the Price Control Act; and the relevant provisions of the PIA immediately.

Akabogu also called on the industry to engage on the PIB and peruse it carefully to unearth hidden conditions which may assail the principles of the policy.

Particularly, he drew attention to clause 31 (L) of the bill which makes provision for the authority to develop and endorse a framework for tariff and pricing for natural gas and petroleum products.

He also highlighted clause 122 (6) of the bill, with the provision for the authority to, due to the exigency of the circumstances, establish a tariff methodology without a stakeholders’ consultation where it considers it necessary to do so.

Akabogu suggested that the industry needed to engage with the bill from a position of knowledge to deal with several other such ambiguities.

He stated that without doubt, investments in the sector must be made on the strength of certainties and constitutional guarantees.