Ajumogobia: Active Refineries Alone Won’t Guarantee Efficient Deregulation

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A former Minister of State for Petroleum Resources, Mr. Odein Ajumogobia, in this interview explains the conditions needed to guarantee an efficient deregulation of Nigeria’s downstream oil sector. His thoughts does not align with the position of the country’s organised labour that active refineries are exclusively needed to achieve deregulation. Chineme Okafor provides the excerpts:

You lead a resourceful team at the Nigeria Natural Resource Charter (NNRC) Expert Advisory Panel, what has your team said about Nigeria’s oil sector in 2021?

Indeed, I feel honoured to lead a team of oil sector experts, as Chairman of the Expert Advisory Panel of the Nigeria Natural Resource Charter (NNRC). NNRC was established in 2011. Its objective is to encourage necessary reforms in Nigeria’s extractive industry through its focus on the management of our non-renewable oil and gas resources, in a way that will generate economic growth, promote the welfare of the population and that is environmentally sustainable. To that end, the NNRC has been at the forefront of advocacy for the passage of the Petroleum Industry Bill (PIB), to provide a clear legal and regulatory framework that will offer clarity to prospective investors in Nigeria’s oil and gas sector. A competitive legal framework will undoubtedly stem disinvestment trends and attract new investment revenues.

A transparent legal and fiscal regime is critical for such new investments to be made in the sector. Nigeria’s grossly underdeveloped gas infrastructure continues to stunt the growth of our power sector and the numerous industries that would be enabled to flourish and to create desperately needed jobs. Given the inevitable shift away from fossil fuels, we are also encouraging Nigeria to begin to prepare for a low carbon future. Another essential emphasis in NNRC’s advocacy is about sustainability in seeking to ensure that the government properly regulates the negative effects of extraction in relation to host communities and the environment. It is especially important in the light of the reducing focus on non-renewable energy resources, that the remediation of the environmental degradation that has taken place unabated in the Niger Delta, is prioritized and accelerated.

A year ago, the COVID-19 pandemic began to mess up economies and sectors including the oil sector, how deep was this on Nigeria’s oil industry?

The oil and gas sector was hit hard by the current COVID-19 pandemic. However, prior to the pandemic, we had for several years already witnessed a disinclination by existing and new players to make new investments in Nigeria, with the deferment of several significant oil and gas development projects. As governments battle to bring the pandemic under control, it appears that the performance of the energy investments of NOCs [National Oil Companies] listed on exchanges around the world have already lost significant value, while investments in renewables have begun to increase as investor funds have rallied along with them. This has put economies like ours that remain almost solely dependent on non-renewables for their economic survival, at severe risk. Nigeria consequently risks the real prospect of permanently stranded assets. Further delays in the passage of the PIB further attenuates Nigeria’s inability to attract the investments it needs to drive exploitation of its oil resources speedily, towards the goal of a more diversified economy.

Crisis situations like the pandemic tests the ingenuity of nations and its managers. With regards to Nigeria’s oil industry, did you see that skill to protect and sustain the industry?

I daresay the government’s long overdue announcement of a deregulated downstream was in response to the pandemic and the low oil price that resulted from low demand in the shrinking global economy. Thus, in March 2020, the government made policy pronouncements that demonstrated an understanding that it could not be business as usual and that there was an urgent need to develop the downstream sector and unleashing its potential. The deregulation policy, and the consideration by NNPC of management contracts towards ensuring the efficient running of the nation’s largely moribund refineries, are examples of initiatives towards a more productive and sustainable downstream sector. However, a rebound of the oil price seems to be testing government’s will to sustain the policy of liberalization.

Perhaps a fallout of the pandemic, the government in 2020 announced an unclear downstream sector deregulation, how relevant was this?
The federal government’s partial deregulation policy was a timely intervention. It appears to have been based on the government’s recognition of the benefits that could accrue to Nigerians, if the downstream sector was liberalised. NNRC has since provided a solid framework for implementing the policy to achieve a transparent, competitive, efficient, and sustainably liberalized downstream petroleum sector in Nigeria. This framework amongst other things, addresses the structural impediments to full deregulation. For example, it highlights legal impediments through the laws that support a price fixing regime; namely the Price Control and Petroleum Acts and the PPPRC Act. The announced proposed reform is further undermined by unavailability of foreign exchange at a uniform rate to all players. Currently NNPC as the sole importer of PMS has access to foreign exchange for the import of products at preferential exchange rates, giving it an unfair advantage over other petroleum product marketers even if they were to import in a liberalised environment. In such circumstances, prices would continue to be determined by NNPC. The NNRC framework was thus developed in support of government’s deregulation policy and in anticipation of the challenges that government would face in the event of the predictable rebound in oil prices that we have recently witnessed. We recognised that a decisive plan, carrying along all stakeholders and securing buy-in was what was needed before such a rebound in the price of a barrel of crude oil. Unfortunately, the current higher crude oil prices which are obviously pleasing to the treasury, have simultaneously put the government under immense pressure to revert to the pre-deregulation fixed pump price regime with its implied subsidy.

With the government still controlling pump price, who absorbed the price shortfalls especially when there was no provision for subsidy in the budget?

Typically, the differential between the price of petrol at the pump and the actual cost, is absorbed by the importer or marketer as the case may be. Where it is imported by any organisation other than NNPC, that differential is repaid by the government in the form of subsidy payments. Let me briefly illustrate this by using current figures and prices. The current PPPRA pricing template shows the average gasoline price (FOB Rotterdam Barge) to be N169.22 per litre. That is already higher than our current pump price! To that must be added freight of N6.51 per litre; lighterage expenses, NPA and NIMASA dues, plus jetty and storage charges and financing costs – various sums ranging between 20 kobo and N4.81 per litre to produce an expected landing cost of N189.61. This is before adding wholesalers’ margins, administrative charges, transporters allowance; bridging fund (N7.51 per litre administered by the Petroleum Equalisation Fund) to ensure uniform prices of gasoline across the country; what is termed ‘marine transport average’ and retailers’ margin that together results in an expected retail price of between N209.61 and N212.61 per litre. Where NNPC incurs this high cost of importation without that predetermined budget, NNPC recoups the differential or “loss” through ‘under-recovery’, which is really a euphemism for a subsidy which it pays itself, before repatriating proceeds from the export and sale of crude oil to the Federation Account for distribution amongst the three tiers of government recognised by the constitution.

What elements make a truly deregulated downstream oil sector because fuel queues at some point returned back on our streets?

As the Minister of State for Petroleum Resources recently acknowledged, Nigeria’s downstream sector is not fully deregulated. Indeed, even what has been announced is a policy of partial deregulation. Still the minister and the government must be commended for it. The pronouncement was a first welcome step in a series of commitments and actions that need to be taken towards the implementation of a laudable policy. However, implementation requires much more than liberalisation of the pump price as is often thought. Even that requires the repeal of all price control laws and mechanisms. Current legislation gives the powers to set prices to different bodies. In addition, the downstream sector would need to be made open for all players to operate on a level playing field in terms of their access to petroleum products importation reception and transportation facilities, namely crude oil and petroleum products pipelines; access to foreign exchange at a uniform rate for all importers that I mentioned earlier. But on a structural infrastructure level it also includes expansions in port capacities to increase the scale of imports of fuel.

Can an efficient deregulation happen without the refineries in place as organised labour see this as the main condition for them to support the exercise?

As I have said an effective and fully deregulated downstream sector is not dependent on the functioning refineries or refinery downtime alone. It encompasses the other issues that make the implementation of a downstream deregulation policy the challenge that I earlier alluded to, including oil market volatility and consequent petroleum products costs and pricing. Government must address these several other directly related matters in order to create a vibrant and competitive downstream. Functional refineries are only one small component in the entire scheme of a deregulated downstream, especially when talking of the existing old refineries with dated technology and without the advantageous economies of scale that the new Dangote refinery for example will have.

The PIB is back to the parliament for legislation, what chances does it have this time, or do you think it will be another wild goose chase?

There appears to be an effective collaboration between the current ninth National Assembly and the Executive. This was absent in previous assemblies which were not as aligned. We have seen critical laws vital to strengthening the oil and gas industry passed in the life of the current National Assembly: the PSC Amendment Act to increase Nigeria’s stake in deep offshore explorations, the new CAMA to legislate and mandate beneficial ownership in divestment of Assets, update of the Finance Act to mention a few critical pieces of legislation. I am therefore optimistic that the PIB will similarly benefit from this welcome collaboration in the law-making process between the Legislature and the Executive that is required to sign a bill into law. Nigeria continues to lose ground to other hydrocarbon plays across the world, amidst the rapidly shrinking investment funds earmarked for non-renewable investments by oil companies. Therefore, the sooner the bill is passed the better.

In the PIB, the host community interests are still quite contentious, we even witnessed a brawl at a public hearing on this, what could be done about this?

Host community issues have always been predicated on the need for host communities to meaningfully participate in and benefit directly from the exploitation of resources to which they play host or are regarded as playing host in the case of offshore operations especially in shallow water. I believe that the framework in the current PIB is capable of addressing past host community neglect that gives rise to agitation and violence within host communities, through the fairly transparent process of participation that it stipulates. The purpose of a public hearing of a bill is to ensure stakeholder buy-in. That is sometimes contentious. However, the more difficult imperative of agreeing the principle of host community participation and the framework for it seems to have been agreed. All affected stakeholders must thereafter come to agreement on the detailed implementation through dialogue.

Do you consider the current PIB progressive and reflective of today’s realities in the industry, especially with regards to attracting investments and assuring returns?

Yes, I do believe it largely achieves this. I do however feel that the lack of focus on clean energy will have to be addressed. It is not sufficiently in the PIB. The NNRC’s recent work on the energy transition will be helpful to the government in considering the required policies towards embracing a low carbon transition as soon as possible. NNPC must seize the energy transition as a business opportunity to save itself as well as Nigeria from its unsustainable and dangerous oil dependence. To do so, NNPC must itself pursue deep structural reform to lead the way to diversify away from oil and invest in clean energies. To do this, NNPC must undertake critical reforms which focus on strengthening the governance of NNPC to position it as a credible actor in the energy transition in order to attract partners and investors.