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DEPARTMENT OF PUBLIC ADMINISTRATION
AND LOCAL GOVERNMENT STUDIES
Ugwoke Oluchi C.
A CRITICAL ASSESSEMENT OF THE NIGERIAN NATIONAL
PETROLEUM CORPORATION (NNPC) IN THE IMPLEMENTATION
OF THE DEREGULATION POLICY IN NIGERIA (2003-2012).
Digitally Signed by: Content manager’s Name
DN : CN = Webmaster’s name
O = University of Nigeria, Nsukka
OU = Innovation Centre
OKARAH ANTHONY CHIDIEBERE (PG/MSC/2012/64598)
FACULTY OF THE SOCIAL SCIENCES
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TITLE PAGE
A CRITICAL ASSESSEMENT OF THE NIGERIAN NATIONAL PETROLEUM
CORPORATION (NNPC) IN THE IMPLEMENTATION OF THE DEREGULATION
POLICY IN NIGERIA (2003-2012).
BY
OKARAH ANTHONY CHIDIEBERE
(PG/MSC/2012/64598)
A RESEARCH THESIS SUBMITTED TO THE DEPARTMENT OF
PUBLIC ADMINISTRATION AND LOCAL GOVERNMENT
STUDIES, FACULTY OF THE SOCIAL SCIENCES, UNIVERSITY
OF NIGERIA, NSUKKA IN PARTIAL FULFILMENT FOR THE
AWARD OF MASTERS OF SCIENCE DEGREE IN PUBLIC
ADMINISTRATION (MSc)
SUPERVISOR: DR. IKEANYIBE, M. O.
MARCH, 2014.
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APPROVAL PAGE
This research project has been approved for the Department of Public
Administration and Local Government, University of Nigeria, Nsukka.
BY
-------------------- --------------------
DR. IKEANYIBE, M.O. DR. S.U. AGU.
Project Supervisor Head of Department
----------------- ------------------------
External Examiner PROF. C.O.T UGWU
Dean Faculty of the Social Science
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CERTIFICATION
This is to certify that Okarah Anthony Chidiebere , a postgraduate student of
the Department of Public Administration and Local government, University
of Nigeria, Nsukka and whose Registration Number is (PG/MSC/12/64598)
has satisfactorily completed the requirement for the Award of Masters of
Science Degree (MSc) in Public Administration (Public Financial
Administration).
The work embodied in this thesis is original and has not been submitted in
part or full for any degree or certificate in any University or institution of
higher education.
--------------------- ---------------------DR. IKEANYIBE, M.O. DR. AGU, S.U
Project Supervisor Head of Department
------------------------
PROF. UGWU C.O.T
Dean Faculty of the Social Science
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DEDICATION
This work is dedicated to my parents for many reasons
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ACKNOWLEDGEMENT
This work came to reality by the guidance, material, financial and moral
support of many persons. First of all, my thanks go to my supervisor Dr.
Ikeanyibe, M. O. whose painstaking advice, observation and suggestions
contributed greatly to the quality of this work. I am also grateful for his
ability to correct without criticizing.
I would also want to thank my Head of Department, Dr. (Mrs) Agu S.U.
for her motherly interest and love that helped me in the successful
completion of the work. I pledge my indebtedness to the entire lecturer of
the Department of Public Administration & Local Government, especially
Prof. F.C. Okoli, Prof. (Mrs) Oguonu C. N, Prof. (Mrs) Onah R.C., Dr.
Amujiri, B.A, Dr. Onyishi A.O, Dr. (Mrs) Mabel Obi, and many others
whose scholarly lectures and academic advice enriched my knowledge in no
small measure. Similarly, I am grateful to the entire staff of the UNN library
and also the staff of the corporate headquarters of the Nigerian National
Petroleum Corporation (NNPC).
Above all, my special thanks go to God almighty for His immense
inspiration, guidance, protection, provision, and sound health granted me
and my entire family.
OKARAH, ANTHONY C.
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TABLE OF CONTENTS
Title Page …............................................................................................ i Approval Page ……………………………………………………………. ii Certification ……………………………………………………………….iii Dedication ………………………………………………………………….iv Acknowledgement …………………………………………………………v Table of Content ……………………………………………………………vi Abstract …………………………………………………………………...viii
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study ………………………………………………1 1.2 Statement of the Problem ………………………………………………8 1.3 Objective of the Study ………………………………………………….9 1.4 Significance of the Study ……………………………………………...10 1.5 Scope and Limitation of the Study ………………………………….....10
CHAPTER TWO: LITERATURE REVIEW AND METHODOLOGY
2.1 Literature Review ……………………………………………………...11 2.1.1 Concept of Deregulation…………………………………………….11 2.1.2 NNPC and the Business Arrangement in the Petroleum Industry….15 2.1.3 State of the Down Stream Sector in the Partial Deregulation Era….22 2.2 Hypotheses …………………………………………………………….26 2.3 Operationalization of Key Concepts…………………………………..27 2.4 Theoretical Framework ……………………………………………….28 2.5 Research Design………………………………………………………30 2.5.1 Population of the Study……………………………………………31 2.5.2 Sample Size and Sampling Procedure………………………………31 2.5.3 Sources and Method of Data Collection……………………………33 2.5.4 Validity of Instrument………………………………………………34 2.5.5 Reliability of Instrument…………………………………………….34 2.5.6 Method of Data Presentation and Analysis………………………..35 CHAPTER THREE: BACKGROUND INFORMATION ON THE
STUDY 3.1Brief Historical Background of the NNPC……………………………37 3.2 NNPC and the Deregulation Policy……………………………………39
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CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Data Presentation and Analysis………………………………………48 4.2 Test of Hypothesis ……………………………………………………56 4.3 Discussion of Findings ………………………………………………60 CHAPTER FIVE: SUMMARY, RECOMMENDATION, AND
CONCLUSION
5.1 Summary ……………………………………………………………..64 5.2 Recommendation …………………………………………………….66 5.3 Conclusion ……………………………………………………………67 Bibliography…………………………………………………………….69 Appendices
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ABSTRACT
This study critically assesses the Nigerian National Petroleum Corporation (NNPC) in the implementation of the deregulation policy in Nigeria (2003-2012). Because the study was historical in nature and approach, we relied more on data collected from secondary sources. From the data gathered, the study found out that NNPC major challenge in the implementation of the deregulation policy has been the inability to attain a stable price for petroleum products which had led to products unavailability and increase in price of petroleum products. Also, there is a significant relationship between deregulation, product availability and reduction in price of petroleum products. Lastly, it was discovered that thorough monitoring of independent marketers activities in the downstream would help improve the outcome of the deregulation policy in Nigeria. The study recommended among others that:
(1) For Nigeria to realize its potential and reap the benefits of the deregulation policy there is the need to tailor the formulation and implementation of reforms in manner that will take cognizance of the socio economic challenges facing Nigerians.
(2) The Government should create an enabling environment to engender private investors’ for the purpose of improving the local refining capacity to meet the ever increasing local demand of petroleum products and indeed for exportation purpose.
(3) Corrupt elements and practices in the downstream sector should be quickly identified and punished without fear of favor, so that the huge leakages currently associated with the subsidy scheme could be curbed.
(4) Finally, the full deregulation of the downstream sector should proceed with the passage of the Petroleum Industry Bill (PIB) which will help revise, update and consolidate existing petroleum sector related legislations in Nigeria.
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Nigeria is blessed with vast quantities of oil and is the sixth largest oil
exporter among OPEC members. Crude oil has generated billions of dollars
in revenues over the last forty years since it was found in Nigeria, (Ibanga,
2011). According to the figure attributed to the Energy Commission of
Nigeria (2007), Nigeria’s crude oil reserve stands at over 66 billion barrels.
Crude-oil production and export commenced in Nigeria in 1958. According
to the Federal Office of Statistics, oil accounted for 13.5 per cent of the
nation’s export earnings and by 1970, it had become the leading source of
foreign exchange, accounting for 63.9 percent. By 1979, petroleum sales had
completely overshadowed non-oil exports, as it then contributed about 95
per cent of the country's export earnings. As of 2011, oil and gas exports
accounted for more than 98% of export earnings, 76 percent of all
government revenues and about one-third of the country’s GDP (CBN,
2012).
So strategic is the petroleum sector to the Nigerian economy that crucial
aspects of this sector such as exploration, production, gas utilization,
conservation, and petroleum policy and legislation are sensitive economic
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and management issues. It is estimated that demand and consumption of
petroleum in Nigeria grows at a rate of 12.8% annually (CBN, 2012).
However, petroleum products are unavailable to most Nigerians and are
quite costly, because almost all of the oil extracted by the multinational oil
companies is refined overseas, with only a limited quantity supplied to
Nigerians themselves. The cost of importing petroleum products has
increased so rapidly in recent years that it is threatening the country’s
balance of payment and capital expenditures (CBN, 2012).
The federal government through the Nigerian National Petroleum
Corporation (NNPC) had been spending lots of money daily subsidizing
imports of petroleum products. The NNPC buys at the prevailing
international price, since its refineries are producing less than 30% of their
installed capacity. Hence, Nigeria exports and uses the proceeds to import
refined fuel for local consumption.
The Nigerian National Petroleum Corporation (NNPC) was established in
April 1977 by the Federal Government of Nigeria as a successor
organization to the Nigerian National Oil Company (NNOC). The NNPC
has the mandate to manage the operational aspects of the oil industry in
Nigeria, while the regulatory functions reside with the Federal Government.
In addition to its exploration activities, NNPC developed operational interest
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in refinery, petrochemicals and product transportation as well as marketing.
Thus, between 1978 and 1989, NNPC constructed petroleum and
petrochemical refineries in Warri, Kaduna, and Port-Harcourt (NNPC,
2007).
In the last two decades, the Nigerian National Petroleum Corporation
(NNPC), one of the largest federally owned corporations in Nigeria, has
emerged from one of the far-reaching organizational changes in its thirty-
year history. In 1978, the corporation was decentralized into twelve strategic
business subsidiaries and units covering the entire spectrum of the
corporation’s operation. This has entailed making the corporation
responsible for the commercial aspects of oil and gas activity. Also, as part
of efforts to put NNPC on a more commercial footing, the Federal
government in March 1988 introduced a new structure for the corporation.
The aim, as stated by the Federal government was to see the NNPC as a
“financially autonomous” and “commercially integrated” company.
Accordingly, in 1978 three new areas of responsibility were initiated for
the Corporation: Corporate Services, Operations and Petroleum Investment
(NNPC 2007). In 1989, two additional Subsidiary Business Units (SBUs)
were established: the Integrated Data Services Company (IDS), and Eleme
Petrochemicals Company which was established and commissioned “to
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provide the basis for the expansion of a petrochemicals and plastics
industry” (International Directory of Company History, 2005:3 Vol. 172).
Also, between 1978 and 1989, the NNPC constructed refineries in Warri,
Kaduna and Port-Harcourt (NNPC, 2007). The activities and operations of
the refineries fall under what is referred to as Downstream Operations of the
NNPC, which cover oil/gas conversion into refined and petrochemical
products. As an autonomous Federal Government-owned corporation,
NNPC is regulated by the Department of Petroleum Resources (DPR) - a
Department within the Ministry of Petroleum Resources (NNPC, 2007).
Over the years, the operations and activities of the NNPC have centered on
coping with challenges of dealing with developments in the oil industry,
particularly with regards to its products. The concern has been how to make
its products compete favourably in the world market, both in terms of
pricing and quality. As a result, the business units and subsidiaries of the
State Owned Oil firm have been reorganized and unbundled into companies
with NNPC as a holding company.
The campaign for the deregulation of the oil sector got a serious
consideration in 2001 as the likely way to solving the scarcity problem of
petroleum products. The former Minister for Information and
Communication Professor Jerry Gana in early 2001, at a press briefing,
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disclosed government’s intention to deregulate the oil industry hinging the
stance on distortion, which the smuggling syndicates exploit to cause
scarcity. In same vein, the Former Group Managing Director of NNPC, Mr.
Jackson Gaius Obaseki accused the petroleum marketers of creating artificial
scarcity via diversion, hoarding and smuggling of products to neighboring
countries. Professor Jerry Gana concluded the session by stating that the
government considered all shades of opinion, before deciding that
deregulation is the answer to the problem confronting the oil sector (Ibah
and Oladipo, 2001)
The NNPC have however come under fire by the Farouk Lawan led House
of Representatives’ Ad-Hoc committee on fuel subsidy probe of the sector in
2012. The NNPC was indicted to have promoted corruption and smuggling
that have made major independent marketers of petroleum products make
excess profit at the expense of the country and her citizens making the
payment on fuel subsidy unbearable for the government to sustain.
Full deregulation is viewed as a panacea and this is what has given rise
to the recent town hall meetings between the government and the organized
labour on the complete removal of fuel subsidy and deregulation of the
downstream sector of the oil industry. According to Ayodele (1994),
deregulation is one essential aspect of price and market reforms which entail
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both unshackling private sector development through removal of
government restrictions on private economic activity and divestiture of the
state assets particularly Public Enterprises (PEs) into private hands. The
main objectives of deregulation include: introducing a market economy,
increasing economic efficiency, establishing democracy and guaranteeing
political freedom as well as increasing government revenue (Dhaji and
Milanovic, 1991). Kupolokun (2004) the former Group Managing Director
of NNPC noted that the intended goals are to:
• Dismantle the natural monopoly of the state owned enterprise by
privatizing and deregulating price controls.
• Create competition in the downstream sector by encouraging more
companies to get involved and eventually supplying the market at
competitive pricing levels.
• Reduce the cost government spends on subsidizing the sector which runs as
high as $1.5 billion annually, which can consequently be used to handle
socio- economic and welfare needs of the Nigerian people.
• Boost Foreign Direct Investment to the Nigerian economy.
• Reduce transportation costs of products and people.
The government made the first move at full deregulation of the down
stream sector in 2003. Partial deregulation has however been in place some
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years before 2003. In order to speed up the full deregulation policy, the
Federal Government inaugurated a Special Task Force with responsibility to
produce a harmonized version of the Bill, which would be presented to the
legislature for passage. The Petroleum Industry Bill is a 223-page
legislation, which seeks to revise, update and consolidate existing petroleum
sector related legislations in Nigeria. According to Reginald Stanley (2009)
managing director of PPMC, the objectives of the Bill are stated to include:
(a) Creating a conducive business environment for petroleum operations;
(b) Enhancing exploration and exploitation of petroleum resources for the
benefit of Nigerians;
(c) Optimizing domestic gas supplies particularly for power generation and
industrial development;
(d) Establishing a progressive fiscal framework that encourages further
investment in the petroleum industry while optimizing revenues accruing to
the government;
(e) Establishing commercially oriented and profit driven oil and gas entities;
(f) Deregulating and liberalizing the downstream petroleum sector;
(g) Creating efficient and effective regulatory agencies;
(h) Promoting openness and transparency in the industry; and
(I) Encouraging the development of Nigerian content
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As expected, public opinion about deregulation in Nigeria covers a
wide spectrum, and cuts across all sides of the argument. The Save Nigeria
Group (SNG), a civil society organization during the protest on the removal
of fuel subsidy in Lagos, believes that the Nigerian petroleum industry
should not be liberalized, or deregulated, or privatized completely, and that
the status quo should remain, maybe, with some minor fine-tuning made to
improve efficiency, in the overall national interest. The Nigerian Labour
Congress (NLC) holds the view that deregulation of the petroleum industry
in Nigeria should be implemented in phases, so as to enable the state-owned
monopolies to regain efficiency, before their full privatization. However, the
Government insists that complete deregulation, including the total, and final
dismantling, unbundling, and subsequent wholesale privatization of all state-
owned petroleum businesses, should proceed without further delay, with
maximum dispatch, for the continued, and meaningful survival of the
Nigerian petroleum industry in the 21st century, (Braide, 2003).
1.2 Statement of the Problem
The deregulation policy suffers mostly from the wide resentment from
majority of Nigerians, especially as it bothers on the removal of fuel
subsidy, one of the requirements of the deregulation policy. The removal of
fuel subsidy results in the hike in the price of petroleum products, and with
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its attendant economic implications on the standard of living of Nigerians.
The legislative probe of the oil sector revealed that over N1.7 trillion subsidy
funds was looted by fuel marketers and government agencies and this has
come as a shock to Nigerians who feel sorely cheated. While the
Government was giving excuses that it could no longer fund subsidies on the
price of petroleum products and that deregulation of the downstream sector
is premised on the expectation that it will improve the efficient use of scarce
economic resources by subjecting decisions in the sector to the operations of
the forces of demand and supply and wanted to use the subsidy money for
other developmental project in the country, insisting on full deregulation of
the downstream sector of the oil industry. The subsidy money has actually
been there all along but was mismanaged by some agencies including the
NNPC. Majority of Nigerians are yet to be fully convinced of the role the
deregulation policy will play for the continued and meaningful survival of
the Nigerian petroleum industry in the 21st century.
It is in view of this, the following research questions are hereby posed as
guide to this study.
(1) What are the major challenges facing the NNPC in the implementation of
the deregulation policy?
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(2) To what extent has the implementation of the deregulation policy
addressed gross inefficiency experienced in the down stream sector of the oil
industry?
(3) What are the steps to be taken to improve the outcome of the
deregulation policy in the down stream sector of the oil industry?
1.3 Objectives of the Study
The study has both broad and specific objectives. Broadly, this study
critically assesses the NNPC in the implementation of the deregulation
policy in Nigeria. Specifically this study has three objectives deriving
from the research questions:
(1) To identify major challenges facing the NNPC in the implementation of
the deregulation policy
(2) To find out the extent the implementation of the deregulation policy
addressed gross inefficiency experienced in the down stream sector of the oil
industry
(3) To determine steps to be taken to improve the outcome of the
deregulation policy in the down stream sector of the oil industry
1.4 Significance of the Study
This study has both theoretical and practical significance. Theoretically,
the study will be of immense importance, as it will help in testing the
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validity of the findings of previous study in related area. It will also help in
improving the literature base of the area of study. The work will also serve
as sources of secondary data for further research work.
Practically, this study will help in re-emphasizing and fostering cutting
edge solutions in which the challenges encountered in the implementation of
the deregulation policy can be addressed for improved outcome.
1.5 Scope and Limitation of the Study
This research is designed to critically assess NNPC in the
implementation of the deregulation policy in Nigeria. It takes a look at
the deregulation policy from 2003 to 2012 and narrowed down to
concentrate on the deregulation policy in the down stream sector of the
oil industry to make for a realistic study. Subsequently, the researcher
had limited time and difficulty retrieving some of the research
instrument administered to respondents.
CHAPTER TWO LITERATURE REVIEW AND METHODOLOGY
2.1 Literature Review
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The two variables that are central focus of this study are the Nigerian
National Petroleum Corporation (NNPC) and the deregulation policy. To
conceptualize this review and make it relevant, the views of scholars on the
subject matter were sought. The literature review will cover opinions of
scholars on the concept of deregulation, NNPC and the business
arrangement in the petroleum industry, and the state of the down stream
sector in the partial deregulation era. We shall take these subheadings one
after the other.
2.1.1 The Concept of Deregulation
In a popular parlance, to deregulate means to do away with the
regulations concerning financial markets and trades. Ernest and Young,
(1988) posit that deregulation and privatization are elements of economic
reform programmes charged with the ultimate goal of improving the overall
economy through properly spelt out ways. For example, freeing government
from the bondage of continuous financing of extensive projects which are
best suited for private investment by the sale of public enterprises;
encouraging efficiency and effectiveness in resources utilization; reducing
government borrowing while raising revenue; promoting healthy market
competition in a free market environment; improving returns from
investment and broadening enterprises share ownership thus engendering
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capital market development (Izibili and Aiya, 2007:228). Put differently,
deregulation in the economic sense means freedom from government control
(innocent & Charles, 2011). According to Akinwumi et al (2005),
deregulation is the removal of government interference in the running of a
system. This means that government rules and regulations governing the
operations of the system are relaxed or held constant in order for the system
to decide its own optimum level through the forces of supply and demand
(Ajayi and Ekundayo, 2008).
Deregulation allows enterprises and services to be restricted as little as
possible. It includes total withdrawal of government controls in the
allocations and the production on goods and services. Deregulation of a
Country’s economy could be conceptualized as divestiture or market
economy. This refers to private participation in a Country’s economic
activities. It is to ensure competitive economic system devoid of monopoly
and allow price mechanism of demand and supply principle of the economy
to prevail. According to Ahmed (1993), deregulation entails giving greater
space to the private sector as the prime mover of the economy, contrary to
emphasis on the dominance of public sector. To achieve this objective,
greater roles are assigned to market factors as against rigid regulation by the
government. It is aimed at stabilizing and restructuring the economy for a
14
durable growth. To Ayodele (1994), deregulation is one essential aspect of
price and market reforms which entails both unshackling private sector
development through removal of government restrictions on private
economic activity and divestiture of the state assets particularly public
Enterprises (PEs) into private hands. The main objectives of deregulation
include: introducing a market economy, increasing economic efficiency,
establishing democracy and guaranteeing political freedom as well as
increasing government revenue (Dhaji and Milanovic, 1991). The goal of the
Nigerian government in adhering to the principles of deregulation is
influenced by the successes of other countries in doing the same. Kupolokun
(2004) the former Group Managing Director of NNPC noted that the
intended goals of the deregulation policy are to:
• Dismantle the natural monopoly of the state owned enterprise by
privatizing and deregulating price controls.
• Create competition in the downstream sector by encouraging more
companies to get involved and eventually supplying the market at
competitive pricing levels.
• Reduce the cost government spends on subsidizing the sector which runs as
high as $1.5 billion annually, which can consequently be used to handle
socio- economic and welfare needs of the Nigerian people.
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• Boost Foreign Direct Investment to the Nigerian economy.
• Reduce transportation costs of products and people
The concept of deregulation is based on the neoliberal school of
thought. It is based on the doctrine of competition and profit motive founded
on free market pricing and freedom from the interfering hands of state
regulation (Wikipedia, 2011). Deregulation according to this theory could
reap the advantages of the market system and competition, namely;
effectiveness, productivity, and efficient service. Privatization would thus,
strengthen market forces with some degree of deregulation, economic
liberalization, relaxation of wage and price controls (Ugorji, 1995). It is
derived from the international capitalist imposition, especially the World
Bank / IMF, which stipulated economic liberalization/privatization as pre-
conditions for providing development loans to the less developed countries
(LDCs). According to Ugorji (1995), Privatization and deregulation has
become an acceptable paradigm in the political economy of states. In
Nigeria, this theory has not gone unchallenged as its relevance to many Sub-
Sahara African countries. From the view point expressed by Professor
Aluko, the assumption of the inherent efficiency of the private sector should
be questioned. He argued that in Nigeria, much of private sector profits are
not always the result of efficient operation and increased productivity but
16
rather often represent money that private contractors make through inflated
contracts, patronage and corruption. He argues that most of the richest
people in Nigeria’s private sector make their money, for the most part,
through their public sector connections and influence. (Adeyemo, 2005).
Those who have presided over the state have tended to personalize power
and privatization of collective national resources, while being excessively
reckless in managing the affairs of the nation.
2.1.2 NNPC and the Business Arrangement in the Petroleum Industry
The Nigerian oil and gas sector plays a very dominant role in the
nation’s economy with over 98% of the nation’s foreign exchange earnings
drawn from the sale of crude oil (Atakpu, 2007). Nigeria has about 36 billion
barrels of crude oil reserve and 19.2 billion cubic meters of natural gas. It is
estimated that the country has realized about 600 billion US dollars since
1956 - when it first discovered oil in commercial quantity in Oloibiri,
present day Bayelsa state- from oil and gas (Atakpu, 2007). Besides the
large crude oil and natural gas deposits, there are also deposits of gold, tin,
talc, gemstones, kaolin, bitumen, iron ore and barites that can be harnessed
to earn foreign exchange for the country, yet, oil and gas remains the
country’s major source of foreign exchange earnings and revenue base
(Adebola, 2006).
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Indeed, over the years, oil has become the main stay of the Nigerian
economy as the earnings from crude oil are used for infrastructural
developments and other improvements on the socio-economic well being of
Nigerians (Augusto, 2002). The Nigerian government earns income from oil
through the sale of crude oil and gas; Petroleum Profit Tax (PPT), royalties
and rent from industry operators.
Three major business arrangements are operated in the industry via;
1. Joint Ventures (JV), also called Joint Operating Agreements (JOA),
between the Federal government and multinational operators, such as Shell,
Agip, Chevron and Elf.
2. Production Sharing Contract (PSC), or arrangements between the
government and operators, where NNPC acts as concessionaire, usually in
the deep offshore operations where the operator funds exploration,
development and production activities and revenues are shared between both
parties.
3. Service Contract (SC) i.e. where Oil Prospecting License (OPL) title is
held by the NNPC while the operator designated as the service contractor
provides all the funds required for exploration and production works. In the
event of a commercial find, the contractor recoups his cost in line with the
procedures stipulated in the contract. The difference with the PSC is that
18
while the SC covers only one OPL, the PSC may span more than two or
more OPLs at a time. The SC covers a fixed period of five years and if the
efforts do not result in commercial discovery, the contract automatically
terminates. (Augusto, 2004). Ariweriokuma (2009), broadly divided the
sector into two, being the upstream and downstream oil and gas activities.
Upstream oil and gas activities involve operations in the areas of Exploration
and Production (E & P) of oil, as well as services that lead to these E & P
activities. (Nwosu, 2007). The Nigerian government is a major investor in
the production activities of the upstream sector. Her activities are
coordinated mainly by the NNPC, which has shares in the major upstream
activities. The downstream oil and gas activities involve refining the
products from crude oil, and distribution until it reaches the final consumer.
There are also three main functional areas within the downstream sector -
refining, distribution and marketing of petroleum products. The downstream
sector is of strategic importance to the nation, as petroleum products
constitute a key source of energy used for various purposes (Obasi, 2003).
However, despite being a major oil producing country for decades, and
accruing huge revenues from oil, Nigeria is ranked as one of the poorest
countries in the world. Also, the lack of equitable distribution of the oil
wealth and environmental degradation resulting from exploration activities
19
have been identified as key factors aggravating actions from environmental
rights groups, inter-ethnic conflicts, and civil disturbances from ethnic
militias such as the Movement for the Emancipation of the Niger Delta
(MEND) and Niger Delta Vigilante Force (NDVF) (NDDC Report). Warner
(2007) noted that the Nigeria case is similar to a number of oil rich countries
where their governments have failed to translate their oil wealth into
economic sustainability and higher standards of living, stressing that
literature abounds on these issues of ‘resource curse’ and ‘Dutch disease.’
Apart from these oil wealth failures, there was also the problem of capital
flight from the county via monies used in servicing the industry, which was
attributed to low local content. Many therefore called for an urgent
deregulation and liberalization of the downstream sector, to enable
indigenous entrepreneurs with experience in the oil and gas sector, to come
in and fill the gap that is evident. Wunmi (2007), reinforced this point when
he called for a pragmatic petroleum development policy framework, with
serious emphasis on managing revenue flows and expectations, creating
linkages with non-petroleum sectors, expanding local capacity and
infrastructure development, human capacity building and development, and
advancing technical progress and entrepreneurship and managerial skills.
President Obasanjo had the above pragmatic policy objectives and
20
instruments in mind when he inaugurated the first Oil and Gas Sector
Reform Implementation Committee (OGIC) in year 2000. The essence of the
National Oil and Gas Policy (NOGP) that emerged from the OGIC efforts
was anchored on the need to separate the commercial institutions in the oil
and gas sector from the regulatory and policy-making institutions.
Unfortunately, Obasanjo’s administration did not completely put into
operation the recommended OGIC policy instruments, to facilitate oil and
gas sector institutional restructuring. In 2007 however, the government of
President Umaru Yar’Adua appointed Dr. Riwlanu Lukman to chair a
reconstituted OGIC, with a mandate to transform the broad provisions in the
NOGP into functional institutional structures that are legal and practical for
the effective management of the oil and gas sector. The mandate basically
called for a restructuring of the petroleum industry in Nigeria that can
facilitate the propelling of the national economy to a GDP level comparable
to the top 20 largest worldwide economies by 2020. This led to the
petroleum industry bill, which is currently before the federal legislature.
(Reginald, 2009) Furthermore, the Goodluck Jonathan administration has
called for the deregulation of the downstream sector, which is being
vehemently opposed by the civil society. Government argument on
deregulation of the downstream oil sector is premised on the expectation that
21
it will improve the efficient use of scarce economic resources by subjecting
decisions in the sector to the operations of the forces of demand and supply.
Appropriate pricing of petroleum products is one of the major factors that
will attract private investment into the Nigerian downstream petroleum
sector, thereby increasing competition, promoting overall higher
productivity and, consequently, lowering prices over time. Independent oil
marketers would be free to set their prices. This would lead to further
reduction in prices for refined oil product until an appropriate market price is
attained. Continued subsidization by the government will not help achieve
such appropriate pricing. Deregulation through subsidy removal will lead to
adjustments that will push prices towards its market-determined level.
Appropriate pricing achieved through this policy will make activities in
the sector more profitable and attractive to private domestic and foreign
investors. The ultimate effect of this chain of activities is increased gains for
the citizens, who would be getting the most out of their natural resources.
For example, following government’s deregulation in the
telecommunication, there has been a reduction in call tariffs. Similar
successes have also been recorded in the banking sector with the emergence
of stronger banks with unprecedented spread to several other African
countries. (Richard, 2012).
22
Furthermore, government expects deregulation to reduce economic
waste and lighten social burdens caused by government control. For several
years, Nigeria experienced scarcity of petroleum products that crippled
national economic activities and increased the cost of doing business, several
times over. The resulting scarcity inevitably led to a flooding of the market
with adulterated products, which caused damages to vehicles and machines.
In many parts of the rural areas, some were forced to buy petroleum
products at 300% higher than their original price (Richard, 2012).
Deregulation of the downstream oil sector, remain the path forward in
expanding opportunities for economic growth and a competitive downstream
sector. If regulation is limited to oversight and supervisory functions, aimed
at guaranteeing quality of products and preventing consumer exploitation,
then the process of deregulation could help achieve greater cost-
effectiveness. Richard (2012) further asserted that research and analysis
show that even if all the country’s refineries were to operate at full capacity,
there would still be a petrol supply gap of 15 million litres per day.
Therefore, importation will remain inevitable until additional refining
capacities are built through the on-going Greenfield Refinery Project.
Discussions are currently under way with prospective investors who are
willing to provide Foreign Direct Investment (FDI) to build additional
23
refineries in the country to ensure domestic self-sufficiency and the export of
refined petroleum products within the next few years. The Petroleum
Industry Bill (PIB) contains special fiscal incentives in place to encourage
the establishment of new refineries around the country. A viable local
refining sector will, in the long term, bring down the pump price of
petroleum products below the current import parity level.
The downstream sector of the oil and gas is currently partially
deregulated, making it difficult for prices of petroleum products to be market
determined. The sector was regulated, with government maintaining a
monopoly of supply of petroleum products and it’s dominated by few oil
majors. The dominance of these firms in the market has made the Petroleum
Marketing Industry in Nigeria an oligopolistic one. It could therefore be
described as the survival of the fittest. Due to the market structure, the
leading marketers dictate the trends in the market while the fringe
independent marketers struggle to match up with the competition (Mars,
2009). However, in line with the nation’s economic reform agenda, that was
launched in the 1980s but effected gradually till date, policy makers have
embarked on a regime of full deregulation of the sector, which was intended
to remove price control mechanisms that have undermined the growth of the
sub- sector in previous years, allowing private stakeholders to complement
24
the government efforts in developing the industry. (Aigbedion and Iyayi,
2007).
2.1.3 State of the Down Stream Sector in the Partial Deregulation Era
(a) State of the Refineries: According to Ibiyemi (2004), the downstream
oil sub-sector has been constrained by the unenviable state of the nation’s
refineries, which have being producing at minimal capacities in the past
years, despite huge expenses incurred on Turnaround-maintenance (TAM).
Poor maintenance of Nigeria three refineries located in Warri, Port Harcourt
and Kaduna with a combined installed capacity of 445,000 bpd, led to a
drastic fall in production level to 15 % of the total installed capacity. The
sudden closure of the Kaduna and Warri refineries, during this period, so as
to allow for TAM, contributed to the decrease in production of refined
products. The development led to massive importation of petroleum
products to fill demand gaps that exist in domestic consumption. According
to Maram (2012), Nigeria, Africa’s top oil producer, relies on imports to
meet about 70 percent of its domestic fuel needs, due to lack of refining
capacity. However, the huge cost associated with importation of petroleum
products was a major reason for government emergent reform and the hike
in prices of petroleum products over the years. In addition, government has
signified its intention to relinquish its holding in the nation’s refineries and
25
make its percentage holding available to the private investors. This is
expected to complement its efforts toward complete deregulation of
Nigeria’s oil industry.
(b) Product Availability: In 2003, the NNPC announced a program of
deregulation for the sector, which was aimed at stimulating adequate supply
of petroleum products, fostering appropriate pricing mechanisms and
eliminating sharp practices in the industry. The policy framework
discontinued government monopoly on the importation of petroleum
products, thereby opening the investment field for private investors and
stakeholders in the industry to source their products. However, this policy
allowed independent marketers to determine prices of petroleum products in
line with their cost of supplies. This development generated a deep concern,
particularly in the ranks of organized labor, which saw the policy shift as
capitulation of government to the demands of oil marketers against the
interest of consumers.
According to Kolawole (2012), despite the nation’s huge endowment of
crude oil and gas and the extensive infrastructures available in the sector for
distribution and marketing of petroleum products, the downstream sector has
been hit by increase instability, hallmarked by a dearth of product to supply.
During this period, sharp practices thrived in the industry with independent
26
marketers arbitrarily hiking prices beyond approved rates. Product
adulteration, diversion/smuggling, bunkering, and other illegal acts were
very common. Indeed, official prices rose sharply from 26 to 65 (naira) per
liter between 2002 and 2011 and to 95(naira) per liter in 2012. The sector is
characterized by supply uncertainty; fueled by the mismanagement of the
nation’s refineries. Furthermore, the House of Assembly probe of the Sub-
sector in 2012 revealed that in 2011, the IPMAN got less than 1% of the fuel
importation contracts, compared to the huge number of its retail outlets and
storage facilities. The association called on the Federal Government to
remove the briefcase contractors from the system and ensure that regulatory
agencies did not provide a platform that encouraged cutting of corners. This
indicated that the fuel distribution system in the nation was defective,
resulting into perennial scarcity of the products.
(c) Fraud and Smuggling: Apart from the Indigenous Ship Owners
Association of Nigeria (ISOAN) accusation that NNPC had engaged in
shady deals with foreign ship owners due to the preferences given to foreign
ship owners in the shipment of crude oil over the indigenous owners which
shortchanged Nigeria as she lost as much as N3.7trillion monthly in freight
or shipping costs. A civil society activist, Barrister Femi Falana also opined
that, while the petroleum ministry estimated national fuel consumption of 35
27
million litres a day, the government paid subsidies on 59 million litres daily
in year 2011. NNPC promoted smuggling by importing 59 million litres of
PMS when the local consumption is not more than 35 million litres per day.
He noted that some of the Marketers were overpaid for jobs done.
(d) Revenue Maximization
According to Kolawole (2012), The Nigerian Ports Authority (NPA)
claimed at the legislative probe of the sector in 2012, that it had granted
waivers to the Nigeria National Petroleum Company (NNPC) to the tune of
N1.77 billion and $135.39 million between July 2009 till date on the orders
of the Federal Government, while the corporation was owing NPA about N6
billion. The Nigerian Custom Service also stated it was sidelined in the
subsidy regime, thus, the importers were not charged for imports. These
indicated a gross lost of the needed revenue for developmental purposes.
Conclusively, according to Tosanwumi (2012), despite robust opposition
to government’s full deregulation of the Nigeria downstream sector, the
reform agenda has continued unabated. As a result, the nation’s refineries
are being offered to investor, while a number of private refineries are being
approved to commence business in Nigeria. Moreover, industry analysts
have arrived at a consensus that allowing private investors to own and
operate refineries in Nigeria’s oil industry would revolutionize the sector
28
and erase government monopoly on the refineries. There is also a
widespread agreement that deregulation of the industry, in the long run will
foster price stability and generate a regular supply of petroleum products.
This trend should usher in a new dawn in the downstream sector and
generate growth, prosperity and sustainable development in the nation’s
most strategic industry. However, there is need for the NNPC to become
more transparent and accountable to win the trust of the citizens, on its quest
for full deregulation of the downstream sector. This explanation should
come with enough integrity to win over the 160 million Nigerians. The
citizens should not be seen as bearing the brunt of government’s inability to
curb profiteering by a few bunkering cabals. The deregulation policy must
come with palliative packages, measures and interventions to reduce the
incidence of poverty, resulting from hyper inflation and widespread
sufferings among the vulnerable group in society. The issue of power supply
and other critical infrastructural facilities need to be addressed before any
meaningful deregulation can be effected to engender foreign direct
investment. The government needs to push for greater accountability and
good governance to ensure a more transparent deregulation process that will
respond to market enterprise and tickle down effect. This will evidently
reassure would-be foreign and domestic investors. Hasty deregulation
29
therefore, in a weak environment as that of Nigeria should be avoided, for
more sustainable results.
2.2 Hypotheses
The following hypotheses have been developed to guide this study
(1) NNPC’s inability to attain a stable price for petroleum products led to
product unavailability and increase in the price of petroleum
products.
(2) Ho: there is no significant relationship between deregulation, product
availability, and reduction in price of petroleum products.
Hi: there is a significant relationship between deregulation, product
availability, and reduction in price of petroleum products.
(3) Thorough monitoring of independent marketers activities will
improve the outcome of the deregulation policy.
2.3 Operationalization of Key Concepts
The assignment of empirical, observable, verifiable and measurable
values to a variable transforms that variable into an operational definition.
Hence, according to Kerlinger (1997), an operational definition is a
specification of the activities of a researcher in measuring a variable or
manipulating it. It assigns meaning to a variable by specifying the activities
or operations necessary to measure that variable. An operational definition
30
gives meaning to a variable by spelling out what the investigator must do to
measure it. Moreover, terms, if not properly defined or classified tends to
imply different connotations and misunderstanding to others apart from the
researchers. Hence, conceptual ambiguity is one of the problems researchers
strive to avoid. Therefore, certain key terms that have been used in this work
are herein defined. However, since the exercise is not exhaustive, other
relevant terms used in the work would be clarified in the course of the work
as the need arises.
Monitoring: To constantly watch over for a particular period of time.
Independent Marketers: These are firms in the downstream sector whose
business is to distribute refined petroleum products to reach the final
consumers.
Stable: To maintain a given level or quantity.
2.4 Theoretical Framework
The theoretical framework for this study is the general equilibrium
theory. A French economist, Leon Walras propounded the theory in the
1870s, while the modern concept of general equilibrium was developed
jointly by Arrow, Debreu and Mckenzie in the 1950s. The main tenets of this
theory indicates the relevance of efficient pricing in ensuring optimal
allocation of society’s limited resources for efficient production of the
31
various needs of society and efficient distribution of the commodities and
services among various consumers. Thus, the concept of perfect competition
and free market imply that the general equilibrium theory will tend to yield
an optimal allocation of resources since competitive equilibrium prices
ensures that supply and demand are equal and in the long-run, all firms
which can produce profitably will enter the industry to ensure long-run
stable and sustainable growth (CBN, 1993). It is obvious that such
optimality results cannot be achieved under centralized planning or
command economies, which depend on elaborate control. This is because
such system is hardly able to arrive at a set of efficient prices, which will
ensure that all firms maximize their profits by covering their costs and
earning reasonable margins, while consumers maximize their unity.
In recent times, there has been some ferment in economics about the role
of the state in economic life (Killick, 1989). Traditionally, the state’s
economic role has been defined in terms of a reasonability to correct or
eliminate various market failures which place serious limitations on the
allocative efficiency of the free market and justify the need for government
intervention. Foremost among these are failures of competition, existence of
externalities, incomplete markets, information failures, public/merit goods,
macro economic instability, creative failures, and poverty/inequality.
32
Although development economists no longer assume that, the existence of
market failures constitutes adequate cause for state interventions. This is
because experience, especially in the peculiar circumstances of developing
country, has taught that government has a duty to rectify these failures
through the use of taxation and subsidies to moderate if not remove the
observed distortions arising from the market failures. Even among the
Socialist Economist (Social Democrat), the case of market deregulation is
widely accepted.
At this juncture, applying the theory of general equilibrium to the
deregulation policy, it is axiomatic to posit that the implementation of the
deregulation policy in the downstream sector of the petroleum industry is
driven by the federal government intervention to the dismantling and
unbundling of the natural monopoly of the state owned enterprise (NNPC)
by privatizing and deregulating price controls in order to create competition
in the downstream sector, by encouraging more private companies to get
fully involved and eventually supplying the market at a competitive pricing
levels, as the market will self regulate itself and prices of refined petroleum
products will be sold at the natural market level as competition forces prices
down.
2.5 Research Design
33
Design implies outlining the name of the equipment, sample size and
sampling technique, study design, scope and other materials the researcher
intends using and applying same to successfully execute the practical aspect
of the research.
Odo (1992:43) opined that design serves as a plan showing what the
researcher will carry out in a step by step procedure of carrying out the
entire study. Based on this premise, the methodology adopted by the
researcher was designed in such a way as to collect data that will enable us
critically assess NNPC in the implementation of the deregulation policy.
In the course of collecting data, the questionnaire was designed to meet
the requirement of the research questions. Therefore, the Likert scale point
and other related option peculiar to the items will also be used. The data
collected for the study will be organized into frequency distribution table
and percentages and will be explained concisely. In the test of significance
of relationship we used the chi-square here to test our hypothesis.
2.5.1 Population of Study
The population of the study is basically employees of the NNPC. They
were selected to form members of the population because they constitute the
34
subject matter of the study. NNPC corporate headquarters is made up of the
Group Public Affairs Division and the Group Medical Division, located at
the NNPC Tower, central business districts, Herbert Macaulay way, PMB,
190 Garki, Abuja. It has Zonal offices in Lagos, Kaduna, Warri and Port
Harcourt with subsidiaries across the country. In view of the study, the
NNPC corporate headquarters in Abuja, with a total employee of 15,000
constitutes the population of the study.
2.5.2 Sample Size and Sampling Procedure
Sampling is a process of selecting a number of any portions of a
population for obtaining information for generalization about the whole
population. The researcher adopted a statistical formula initiated by Yamani.
The formula according to Yamani (1964:80) was stated thus;
N
n = 1 +N(e)2
where n = sample size
N = population size
E = Error margin allowed
1 = constant
35
The researcher chooses 5% (0.05) as the error margin, in substituting the
formula, the researcher noted the population size to 15000, and therefore
they translated the formulae thus;
n = 2)05.0(150001
15000
+
n = )0025.0(150001
15000
+
n = 5.371
15000
+
n = 5.38
15000
n = 389.6= 390 Approximately
The simple random sampling technique was used to administer
questionnaires. Similarly, In the course of this study, the researcher
conducted the research in the NNPC corporate headquarters in Abuja, with a
total employee of 15,000 which constitute the population of study; however
390 employees were selected as the sample size. Given the sample size, the
breakdown is as follows:
36
Category of
Employees
No Represented Percentage%
GL(15- 17) 160 41.0
GL(12- 14) 130 33.3
GL(08- 11) 100 25.6
Total 390 100
Source: Field work
A total number of 15,000 NNPC employees at the corporate headquarters
in Abuja make up the population of study, however, a sample size of 390
make up the total number of respondents. The total number of NNPC
employees GL (15-17) who made their contributions is 160 (41.0%)
respondents, which is the highest. While GL (12-14) constituted 130
(33.3%) respondents and GL (08-11) constituted 100 (25.6%) respondents.
2.5.3 Sources and Method of Data Collection
Method constitutes an aspect of methodology, which deals with
principles and details of procedures used in a given science. The data used in
this study were collected from primary and secondary sources. Under the
primary sources we administered questionnaires to our sample. The
questionnaire was structured to aid the researcher in quantitative analysis of
data. The questionnaire was delivered by hand to enhance its return rate. The
secondary sources of data we used in this study include government
37
document, newspaper, magazines, unpublished research materials, internet
articles, seminar papers, workshop papers and periodicals dealing with the
subject matter.
2.5.4 Validity of Instrument
Any measuring instrument can only possess validity when it actually
measures what it sets out to measure. Validity in this context also seeks to
uncover whether a measuring instrument conforms to the hypothesis or the
research question which guilds the work in other to achieve the objective of
the research. Validity could also refer to the degree to which a research
instrument serves the purpose for which it is constructed.
Based on the above fact, the instrument for data collection used in this
study is the questionnaire which was carefully constructed by the researcher
and was later validated by the project supervisor.
2.5.5 Reliability of Instrument
According to Odo (1992:62), the reliability of an instrument is a
process of obtaining information in the degree to which a measure will yield
similar result for the same subject at different times or under different
conditions on a consistent, dependent, stable, predictable, and accurate way.
38
The reliability of the questionnaire was determined by a test- retest
technique with a random sample piloted on 100 M.sc students in the Faculty
of the social sciences, University of Nigeria, Nsukka not included in the
study. A one month interval was given between the first and second tests to
ensure its reliability overtime.
2.5.6 Method of Data Presentation and Analysis
Taking into cognizance that data for this study were collected from both
quantitative and qualitative methods, we analyzed the data using both
quantitative and qualitative methods of data analysis. In order to ease the
explanation of the linkages between the variables of this study, we sorted
and presented data in frequency tables and simple percentages was also used
to determine each category of response. Qualitative descriptive method was
also used to analyze the data generated from secondary sources. Since the
second question of this study is concerned with test of significance of
relationship we used the chi-square here to test our hypothesis. Hence (Obasi
(1999:33) noted that “hypothesis that has to do with association and
significance of relationship are most suitable to be tested using the Chi-
square”. This can be mathematically represented as follows:
X2 = ∑(Of-Ef)
2
Εf
Where: ∑= Summation
39
Of= Observed Frequency
Ef= Expected Frequency
We stated the hypothesis 2 in null and alternative form; we choose level of
significance at 0.05%; we use the level of significance and degree of
freedom to obtain the critical value; to obtain the degree of freedom, the
formula is (n-1) where n is the number of categories; we also compared the
critical/tabulated value and obtained/ calculated value
Decision rule: If the obtained/ calculated value is less than the critical/
tabulated value, we shall accept the null hypothesis but if the obtained/
calculated valve is greater than the critical/tabulated value we shall reject the
null hypothesis and accept the alternative hypotheses.
40
CHAPTER THREE BACKGROUND INFORMATION TO THE STUDY AREA
3.1 Brief Historical Background of the NNPC
The NNOC was established under the terms of the Government
Decree No 18 of 1971. Its brief was to “participate in all aspects of
petroleum including exploration, production, refining, marketing,
transportation and distribution” (International Directory of Company
Histories, 2005:3Vol. 72). In carrying out this mandate, NNOC acquired a
“33.33 percent stake in the Nigerian Agip Oil Company, and 35 percent in
Satrap-the Nigerian arm of the French company, Elf” (International
Directory of Company Histories, 2005:3 Vol. 72). Further, and as part of
efforts to protect Nigeria interest within the context of this regulatory
framework, NNOC acquired “35 percent stakes in Shell-BP, Gulf and Mobil
on April 1 1973” (International Directory of Company Histories,
2005:3Vol.72). Also, in 1973, NNOC entered into production-sharing
agreement with Ashland Oil. On April 1 1974, “stakes in Elf, Agip/Philips,
Shell-BP, Gulf and Mobil were increased to 55 percent, and on May 1 1975,
the NNOC acquired 55 percent of Texaco’s operations” (International
41
Directory of Company Histories, 2005:3 Vol.72). From the above analysis, it
became clear that the decision to increase the equity holding of the Federal
Government consistently had to do with the intention, not just to reposition
its own oil company within the regulatory framework and the oil industry,
but also to deal with some of the observed lapses in the operations of the oil
multinationals.
This was further expressed by the Federal Government in response to the
1977 Indigenization Decree. The States oil company holdings in the oil
industry increased significantly in July 1979, when its stakes in the
exploration and production activities in the multinational oil companies were
raised by 60 per cent. By 1979, NNPC’s stake in the Shell ventures was also
raised to 80 percent. This was when “BP lost its 20 percent stake, following
disagreement with the Nigerian Government over South Africa”
(International Directory of Company Histories, 2005:3 Vol.72).
Clearly, attempts by the Government of Nigeria to reform its own oil
company rests largely on the desirability to put it on strong par with the
multinationals. Consequently, on April 1 1977, the NNOC was reconstituted
as the Nigerian National Petroleum Company (NNPC). Like the NNOC, the
“NNPC operates and functions as a holding company for the Federal
government. Decree No 33 that created it vested the assets and liabilities of
42
the NNOC in the NNPC,” (International Directory of Company Histories,
2005:4 Vol.72). Thus, by 1979, the NNPC had acquired the majority
interests in the operations of the corporations that engaged in oil business in
Nigeria. A significant development that arose from this has been the creation
and existence of what is referred to as Joint Operating Agreements (JOA),
which regulates the partnership between the NNPC and the major oil
companies (NNPC 2008). In addition, the multinationals have been
operating under what is referred to as Concession System, with NNPC being
the Concessionaire, while the companies are the Operators (NNPC 2008).
The multinational companies also operate in partnership with NNPC under
what is referred to as Production Sharing Contracts (PSCs). The prevailing
government “policy objectives in this regard are to permit the involvement
of private and public interests in the exploration and development of
petroleum resources”(Gas and Industry Regulation in Nigeria, 2000). It also
aimed at “expanding the scope of participation in Nigeria’s oil industry and
diversify the sources of investment and the inflow of funds” (Gas and
Industry Regulations in Nigeria, 2000).
3.2 NNPC and the Deregulation Policy
Deregulation of a Country’s economy could be conceptualized as
privatization, divestiture, and marketization of the economy. In essence no
43
government but private participation in the Country’s economic activities.
This is kin order to ensure competitive economic system devoid of
monopoly and allow price mechanism of demand and supply’s principle of
economy to prevail.
According to Ahmed (1993), Deregulation of an economy entrails
according greater weight to the private sector as the prime mover of the
economy’s opposed to the emphasis on the dominance of public sector. To
achieve this objective, greater role are assigned to market factors as against
the use of pervasive administrative controls. This is aimed at stabilizing and
fundamentally restructuring the economy and places it on a durable and
suitable growth path. As a major solution to the economic crisis experienced
in Nigeria, in 1986 the Structural Adjustment Programme (SAP) was
introduced with the central aim of deregulating the economy. The
government made the first move at full deregulation of the downstream
sector in 2003. Partial deregulation has however been in place some years
before 2003. In order to speed up the full deregulation policy, the Federal
Government inaugurated a Special Task Force with responsibility to produce
a harmonized version of the Bill, which would be presented to the legislature
for passage. The Petroleum Industry Bill when enacted seeks to revise,
update and consolidate existing petroleum sector related legislations in
44
Nigeria. According to Reginald Stanley (2009) managing director of PPMC,
the objectives of the Bill are stated to include:
(a) Creating a conducive business environment for petroleum operations;
(b) Enhancing exploration and exploitation of petroleum resources for the
benefit of Nigerians;
(c) Optimizing domestic gas supplies particularly for power generation and
industrial development;
(d) Establishing a progressive fiscal framework that encourages further
investment in the petroleum industry while optimizing revenues accruing to
the government;
(e) Establishing commercially oriented and profit driven oil and gas entities;
(f) Deregulating and liberalizing the downstream petroleum sector;
(g) Creating efficient and effective regulatory agencies;
(h) Promoting openness and transparency in the industry; and
(I) Encouraging the development of Nigerian content
To Ayodele (1994), Privatization in other words deregulation is one
essential aspect of price and market reforms which entrails both unshackling
private sector development through removal of government restrictions on
private economic activity and divestiture of the state assets particularly State
Owned Enterprises (SOEs) into private hands. The main objectives of
45
deregulation include: introducing a market economy; increasing economic
efficiency; establishing democracy and guaranteeing political freedom and
increasing government revenue (Dhaji and Milanovic, 1991). Kupolokun
(2004) the former Group Managing Director of NNPC noted that the
intended goals of the deregulation policy are to:
• Dismantle the natural monopoly of the state owned enterprise by
privatizing and deregulating price controls.
• Create competition in the downstream sector by encouraging more
companies to get involved and eventually supplying the market at
competitive pricing levels.
• Reduce the cost government spends on subsidizing the sector which runs as
high as $1.5 billion annually, which can consequently be used to handle
socio- economic and welfare needs of the Nigerian people.
• Boost Foreign Direct Investment to the Nigerian economy.
• Reduce transportation costs of products and people.
The deregulation policy is premised on assumption that economics
based on private prosperity are better institutions for preserving individual
freedoms than economies where the productive apparatus is socially owned
(Ijhaiya, 1999). Moreover, for government to be effective, it has to restrict
itself surely to the areas of governance and within that duty provide
46
guidelines for the operation of economic activities which can be performed
better by private individuals. These are the basis under which the
deregulation policy of the downstream sector of the economy is presented in
Nigeria.
As part of the reorganization of the State oil sector, the NNPC had in
succeeding the NNOC subsumed the functions of the petroleum inspectorate
of the Ministry of Petroleum Resources. However, by 1986 when SAP was
introduced, the petroleum inspectorate responsible for the regulation and
policy formulation for the oil industry was detached from the NNPC, and
reorganized as the Department of Petroleum Resources (DPR) (NNPC
2008). Consequently, the NNPC remains solely concerned with commercial
aspects of oil and gas activity through the National Petroleum Investment
Management Services (NAPIMS) (NNPC 2008). The NNPC, through the
NAPIMS supervises and manages government investment in the oil
industry. Thus, as noted by Akinrele (2005:763), “the prevailing policy of
direct state participation has been exemplified by the regulatory instruments
to ensure a measure of control over the operations” in the industry. The
regulatory instrument also aimed at “ensuring physical control of vast
quantities of oil, the acquisition and management of information and know-
how about the industry” (Akinrele 2005, cited in Encyclopaedia of
47
Hydrocarbons 2005:763), through the Integrated Data Services (IDS). To
date, the emergence and operational growth of the NNPC has been to
oversee and implement such policy instruments and mandate from the
Federal Government.
As part of efforts to put the NNPC on a more viable commercial footing,
the Federal Government introduced a new structure for the corporation in
March 1988. The aim, as stated by the Federal Government was to see the
NNPC as “a financially autonomous” and “commercially integrated”
company. Accordingly, three new areas of responsibility were initiated for
the corporation; Corporate Services, Operations and Petroleum Investment
Management. In 1989, two additional Subsidiary Business Unit (SBUs)
were established; Eleme Petro chemicals Company was established and
commissioned in 1989, “to provide the basis for the expansion of a
petrochemicals and plastics industry” in the country (International Directory
of Company Histories, 2005:3Vol.72). Integrated Data Services Company
was also established. Since its inception, the NNPC and its subsidiaries have
undergone “strategic restructuring”, which have kept it abreast of
opportunities in local and international operating environments. Thus,
between 1978 and 1989, the NNPC constructed refineries in Warri, Kaduna
and Port-Harcourt (NNPC 2008). The activities and operations of the
48
refineries fall under what is referred to as Downstream Operations of the
NNPC, which cover crude oil/gas conversion into refined and petrochemical
products. Under the Upstream Operations of NNPC, there is the crude oil
production which is currently managed under the Exploration and
Production Directorate.
However, President Obasanjo had the above pragmatic policy objectives
and instruments in mind when he inaugurated the first Oil and Gas Sector
Reform Implementation Committee (OGIC) in year 2000. The essence of the
National Oil and Gas Policy (NOGP) that emerged from the OGIC efforts
was anchored on the need to separate the commercial institutions in the oil
and gas sector from the regulatory and policy-making institutions.
Unfortunately, Obasanjo’s administration did not completely put into
operation the recommended OGIC policy instruments, to facilitate oil and
gas sector institutional restructuring. In 2007 however, the government of
President Umaru Yar’Adua appointed Dr. Riwlanu Lukman to chair a
reconstituted OGIC, with a mandate to transform the broad provisions in the
NOGP into functional institutional structures that are legal and practical for
the effective management of the oil and gas sector. The mandate basically
called for a restructuring of the petroleum industry in Nigeria that can
facilitate the propelling of the national economy to a GDP level comparable
49
to the top 20 largest worldwide economies by 2020. This led to the
petroleum industry bill, which is currently before the federal legislature. The
Petroleum Industry Bill is a 223-page legislation, which seeks to revise,
update and consolidate existing petroleum sector related legislations in
Nigeria (Reginald, 2009) The Petroleum Industry Bill (PIB) is currently
before the National Assembly. When passed it seeks to provide a “new legal
framework for the organization and operation of the entire oil industry in
Nigeria” (Minister of Petroleum Resources, July 2009). In this regard, there
will be “clear rules, procedures and institutions for the administration of the
petroleum industry in Nigeria” (Minister of Petroleum Resources, July
2009).
In the new regime, there will be a redefined role and character for the
NNPC. While it will still be owned solely by the government, it is expected
to be more self-financing. Under the new framework, NNPC will be
renamed National Oil Company (NOC). By this arrangement, the NOC will
pay to the Federal government the same royalties and taxes, as any other
company (Minister of Petroleum Resources, July 2009). The Bill also seeks
to create a new joint venture structure called Incorporated Joint Venture
(IJV). By this arrangement, the NOC and the foreign oil companies will join
into a single company of which they will be shareholders for the
50
development of the upstream sector. According to the Minister, this is to
remove the bottlenecks currently being experienced by NNPC in securing
funds for joint ventures operations. The new incorporated joint ventures will
pay for new projects from their cash flow and through borrowing (Minister
of Petroleum Resources, July 2009). As noted in the Minister’s speech, for
sound petroleum industry to exist in Nigeria, the administration must be
streamlined and strengthened. Under the new regulatory regime the oil
companies, including the NOC that will be involved in the upstream
petroleum industry, will be subject to the same system of rents, royalties and
taxes, depending on whether they operate onshore, shallow or deep offshore
or inland (Minister of Petroleum Resources, 2009). This also implies that all
oil companies will be treated equally regarding the payment of the taxes and
royalties. In this regard, the “PIB will represent the largest overhaul of the
government petroleum revenue system in the last four decades” (Minister of
Petroleum Resources, 2009).
The framework also seeks to make natural gas production an important
resource for Nigeria. In this regard, the Bill will create what is referred to as
“Gas Master Plan, whereby maximum support is hoped to be given to
domestic gas production under the arrangement of what is to be referred to
as “Midstream Agency” (Minister of Petroleum Resources, 2009). As noted
51
in the Minister’s Speech, “new gas processing plants and gas pipelines will
be supported through favorable tax holidays under the Corporate Income
Tax.” The Minister noted further that “all the provisions in the Bill seek to
create a coherent and attractive framework for new and additional
investment.
52
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF DATA
4.1 Data Presentation and Analysis
This chapter sets out to analyze the data collected in the course of the
research work. Questionnaire were administered to the respondent to enable
us have their opinion on the subject matter of the study. A total of 390
questionnaires were distributed. However, 350 questionnaires representing
89.7% were returned while 40 questionnaires representing 10.3% were either
not returned or damaged. SECTION A: BACKGROUND
INFORMATION ON THE RESPONDENTS
Table I: Sex Distribution of Respondents
Sex Frequency Percentage
Male 250 71.4
Female 100 28.6
Total 350 100
Source: field data
The above table shows the gender of the respondents. Out of a total
sample size of 350, 250 respondents representing 71.4% are male while 100
respondents representing 28.6% are females.
53
Table II: Age Distribution of Respondents
Age Frequency Percentage
18-35 140 40
36-45 155 44.3
46-55 40 11.4
56 and above 15 4.3
Total 350 100
Source: field data
The table shows the age distribution of respondents. Out of a total sample of 350, 140 respondents representing 40% of the sample population fall within the age range 18-35, 155 respondents representing 44.3% fall within the age range 36-45, 40 respondents making up 11.4% of the sample fall within 46-55 age bracket, while 15 respondents representing 4.3% of the sample fall within 56 and above age bracket.
Table III: Marital Status of the Respondents
Marital Status Frequency Percentage
Single 98 28
Married 247 70.6
Divorced 5 1.4
Total 350 100
Source: field data
The table above shows the marital status of respondents. Out of a total
of 350 respondents, 98 representing 28% are single, 247 respondents
representing 70.6% are married, while 5 representing 1.4% are divorced.
54
Table IV: Educational Profile of Respondents
Qualification Frequency Percentage
OND/NCE 10 2.9
HND/B.Sc 120 34.3
PGD/M.sc 180 51.4
Ph.D. 40 11.4
Total 350 100
Source: field data
The table shows the educational profile of the respondents.10
respondents representing 2.9% are OND/NCE holders, 120 respondents
representing 34.3% have HND/B.Sc, and 180 respondents representing
51.4% have PGD/M.Sc, while 40 respondents representing 11.4% have
Ph.D.
Table V: Religion Profile of Respondents
Religion Frequency Percentage
Christian 200 57.1
Islam 145 41.4
Others 5 1.4
Total 350 100
Source: field data
The table above shows the religion profile of respondents. Out of a
total of 350 respondents, 200 representing 57.1% are Christian, 145
55
respondents representing 41.4% are Islam, while 5 representing 1.4% are
others.
SECTION B
Study objective 1: To identify major challenges facing the NNPC in the
implementation of the deregulation policy
Table 4.1.1: NNPC inability to attain a stable price for its products has been
a major challenge in the implementation of the deregulation policy
Response Frequency Percentage
Strongly Agree 100 28.6
Agree 180 51.4
Disagree 40 11.4
Strongly Disagree 20 5.7
Undecided 10 2.9
Total 350 100
Source: field work
The table above shows that 80% of the respondents agreed to the fact that NNPC inability to attain a stable price for its products has been a major challenge in the implementation of the deregulation. 17.1% of the respondents did not agree with the aforementioned, while 2.9% were undecided. Since 80% is greater than 17.1%, we therefore conclude that NNPC major challenge is the inability to attain a stable price for its products in the implementation of the deregulation policy.
Table 4.1.2: NNPC inability to attain a stable price for its products led to increase in price of petroleum products
Response Frequency Percentage
Strongly Agree 170 48.6
Agree 150 42.9
56
Strongly Disagree 20 5.7
Disagree 10 2.9
Undecided 0 0
Total 350 100
Source: field work
The table above shows that 91.4% of the respondents agreed to the fact that NNPC inability to attain a stable price for its products led to increase in price of petroleum products, while 8.6% of the respondents did not agree with the aforementioned. Since 91.4% is greater than 8.6%, we therefore conclude that NNPC inability to attain a stable price for its products led to increase in price of petroleum products.
Table 4.1.3: NNPC inability to attain a stable price for its products led to product unavailability
Response Frequency Percentage
Strongly Agree 90 25.7
Agree 160 45.7
Strongly Disagree 80 22.9
Disagree 20 5.7
Undecided 0 0
Total 350 100
Source: field work
The table above shows that 71.4% of the respondents agreed to the fact that NNPC inability to attain a stable price for its products led to products unavailability, while 28.6% of the respondents did not agree with the aforementioned. Since 71.4% is greater than 28.6%, we therefore conclude that NNPC inability to attain a stable price for its products led to product unavailability.
57
Study objective 2: To find out the extent the implementation of the deregulation policy addressed gross inefficiency experienced in the downstream sector of the oil industry.
Table 4.1.4: Perennial scarcity of petroleum products has been addressed by the deregulation policy
Response Frequency Percentage
Strongly Agree 38 10.9 Agree 90 25.7 Strongly Disagree 100 28.6
Disagree 120 34.3 Undecided 2 0.6 Total 350 100 Source: field work
The table above shows that 36.6% of the respondents agree to the fact that perennial scarcity of petroleum products has been addressed by the deregulation policy, 62.9% of the respondents disagree with the aforementioned, while 0.5 were undecided. Since 62.9% is greater than 36.6%, we therefore conclude that perennial scarcity of petroleum products has not been addressed by the deregulation policy.
Table 4.1.5: Deregulation of the downstream sector has engendered reduction in price of petroleum products
Response Frequency Percentage
Strongly Agree 30 8.6
Agree 45 12.9
Strongly Disagree 150 42.9
Disagree 120 34.3
58
Undecided 5 1.4
Total 350 100
Source: field work
The table above shows that 21.4% of the respondents agree to the fact that deregulation of the downstream sector has engendered reduction in price of petroleum products, 77.1% of the respondents disagree with the aforementioned, while 1.4 were undecided. Since 77.1% is greater than 21.4%, we therefore conclude that deregulation of the downstream sector has not engendered reduction in price of petroleum products.
Table 4.1.6: Smuggling of petroleum products in the downstream sector have been addressed by the deregulation policy
Response Frequency Percentage
Strongly Agree 30 8.6
Agree 120 34.3
Strongly Disagree 50 14.3
Disagree 150 42.9
Undecided 0 0
Total 350 100
Source: field work
The table above shows that 42.9% of the respondents agree to the fact that smuggling of petroleum products in the downstream sector have been addressed by the deregulation policy, while 57.1% of the respondents disagree with the aforementioned. Since 57.1% is greater than 42.9%, we therefore conclude that smuggling of petroleum products in the downstream sector have not been addressed by the deregulation policy.
Table 4.1.7: The high cost of turn around maintenance of the nation’s refineries have been addressed by the deregulation policy
Response Frequency Percentage
59
Strongly Agree 50 14.3
Agree 90 25.7
Strongly Disagree 70 20
Disagree 140 40
Undecided 0 0
Total 350 100
Source: field work
The table above shows that 40% of the respondents agree to the fact that the high costs of turn around maintenance of the nation’s refineries have been addressed by the deregulation policy, while 60% of the respondents disagree with the aforementioned. Since 60% is greater than 40%, we therefore conclude that the high costs of turn around maintenance of the nation’s refineries have not been addressed by the deregulation policy.
Study objective 3: To determine steps to be taken to improve the outcome of the deregulation policy in the downstream sector of the oil industry
Table 4.1.8: Stable price of petroleum products would be achieved by provision of more refineries.
Response Frequency Percentage
Strongly Agree 170 48.6
Agree 140 40
Strongly Disagree 35 10
Disagree 5 1.4
Undecided 0 0
Total 350 100
Source: field work
The table above shows that 88.6% of the respondents agree to the fact that stable price of petroleum products would be achieved by provision of
60
more refineries, while 11.4% of the respondents disagree with the aforementioned. Since 88.6% is greater than 11.4%, we therefore conclude that stable price of petroleum products would be achieved by provision of more refineries.
Table 4.1.9: Thorough monitoring of independent marketers activities by NNPC in the downstream sector would improve the outcome of the deregulation policy
Response Frequency Percentage
Strongly Agree 180 51.4
Agree 100 28.6
Strongly Disagree 50 14.3
Disagree 20 5.7
Undecided 0 0
Total 350 100
Source: field work
The table above shows that 80% of respondents agree to the fact that thorough monitoring of independent marketers activities by NNPC in the downstream sector would improve the process of the deregulation policy, while 20% of the respondents disagree with the aforementioned. Since 80% is greater than 20%, we therefore conclude that thorough monitoring of independent marketers activities by NNPC in the downstream sector would improve the outcome of the deregulation policy.
61
4.2 Test of Hypothesis
In testing of hypothesis, three (3) distinct hypotheses were postulated
in chapter two. Having analyzed the data collected, it is important to test our
hypothesis in order to determine whether they are verifiable. However, since
hypothesis two (2) is concerned with test of significance of relationship we
used the chi-square here to test our hypothesis.
HYPOTHESIS 1: NNPC’s inability to attain a stable price for
petroleum products led to product unavailability and increase in the
price of petroleum products.
Table 4.1.1, 4.1.2, 4.1.3 confirm this hypothesis. Table 4.1.1 shows that
NNPC major challenges is the inability to attain a stable price for its
products in the implementation of the deregulation policy. Table 4.1.2 also
shows that the NNPC inability to attain a stable price for its products led to
increase in price of petroleum products. While table 4.1.3 opined that NNPC
inability to attain a stable price for its products led to product unavailability.
In order words, there is a consensus among respondents that NNPC’s
inability to attain a stable price for petroleum products led to product
unavailability and increase in the price of petroleum products in the country.
62
HYPOTHESIS 2: Ho: there is no significant relationship between
deregulation, product availability, and reduction in price of petroleum
products. Hi: there is a significant relationship between deregulation,
product availability, and reduction in price of petroleum products.
The data used for this test of hypothesis is drawn from the responses
shown in table 4.1.4 and 4.1.5 above, the result of analysis for this
hypothesis is shown in table 4.2.1 and 4.2.2 below. For table 4.2.1 a chi-
square value of 135 was obtained and a critical/tabulated value of 9.488 and
for table 4.2.2 a chi-square value of 219.3 was obtained and a
critical/tabulated value of 9.488. The critical/ tabulated value was obtained
at 4 degree of freedom at 0.05% level of significance. This leads to the
rejection of the null hypothesis and the acceptance of the alternative
hypothesis. The outcome of the test therefore revealed that there is a
significant relationship between deregulation, product availability and
reduction in price of petroleum products.
TABLE 4.2.1: CHI-SQUARE VALUE FOR TEST OF HYPOTHESIS 2
RESPONSES
OBSERVED
(O)
EXPECTED
(E)
O –E
(O-E)2
(O-E)2
E
63
STRONGLY
AGREE
38 70 -32 1024 14.6
AGREE
90
70
20
400
5.7
STRONGLY
DISAGREE
100
70
30
900
12.9
DISAGREE
120
70
50
2500
35.7
UNDECIDED
2
70
-68
4624
66.1
TOTAL
350
350
X2 =135
Source: field survey
TABLE 4.2.2: CHI-SQUARE VALUE FOR TEST OF HYPOTHESIS 2
RESPONSES
OBSERVED
(O)
EXPECTED
(E)
O –E
(O-E)2
(O-E)2
E
STRONGLY
AGREE
30
70
-40
1600
22.9
AGREE
45
70
-25
625
8.9
STRONGLY
DISAGREE
150
70
80
6400
91.4
DISAGREE
120
70
50
2500
35.7
64
UNDECIDED
5
70
-65
4225
60.4
TOTAL
350
350
X2 =219.3
Source: field survey
HYPOTHESIS 3: Thorough monitoring of independent marketers
activities will improve the outcome of the deregulation policy
Table 4.1.9 confirms this hypothesis. Table 4.1.9 shows that thorough
monitoring of independent marketers activities by NNPC in the downstream
sector would improve the outcome of the deregulation policy. In order
words, there is a consensus among respondents that thorough monitoring of
independent marketers activities by NNPC in the downstream sector would
improve the outcome of the deregulation policy.
4.3 Discussion of Findings:
Deregulation pre-supposes market forces as the determinant of prices
rather than a decision to fix price by administrative fiat. From the findings of
this study, there is a vivid confirmation that NNPC’s major challenges in the
implementation of the deregulation policy has been the inability to attain a
stable price for petroleum products which had led to product unavailability
and increase in the price of petroleum products as official prices of
65
petroleum products rose sharply from 26 to 65 (naira) per liter between 2002
and 2011 and to 95(naira) per liter in 2012.
Deregulation is seen as the process of freeing federal government of its
concurrent control and involvement in the businesses of refining,
importation and distribution of refined petroleum products in the Nigeria
market. The implementation of the deregulation policy in the downstream
sector of the petroleum industry is evident by the federal government
intervention to the dismantling and unbundling of the natural monopoly of
the state owned enterprise (NNPC) by privatizing and deregulating price
controls in order to create competition in the downstream sector.
Government argument on deregulation of the downstream oil sector is
premised on the expectation that it will improve the efficient use of scarce
economic resources by subjecting decisions in the sector to the operations of
the forces of demand and supply. Appropriate pricing of petroleum products
is one of the major factors that will attract private investment into the
Nigerian downstream petroleum sector, thereby increasing competition,
promoting overall higher productivity and, consequently, lowering prices
over time. Independent oil marketers would be free to set their prices. This
would lead to further reduction in prices for refined oil product until an
appropriate market price is attained. Continued subsidization by the
66
government will not help achieve such appropriate pricing. Deregulation
through subsidy removal will lead to adjustments that will push prices
towards its market-determined level. Appropriate pricing achieved through
this policy will make activities in the sector more profitable and attractive to
private domestic and foreign investors.
The intention of the Federal Government since 1991 was that, the
planned deregulation of the downstream petroleum industry in Nigeria was
to be implemented in phases, so as to enable the state-owned monopolies to
regain efficiency before its full privatization. However, petroleum products
are unavailable to most Nigerians and are quite costly, because almost all of
the oil extracted by the multinational oil companies is refined overseas, with
only a limited quantity supplied to Nigerians themselves. The cost of
importing petroleum products has increased so rapidly in recent years that it
is threatening the country’s balance of payment and capital expenditures
(CBN, 2012).
The federal government through the Nigerian National Petroleum
Corporation (NNPC) had been spending lots of money daily subsidizing
imports of petroleum products. The NNPC buys at the prevailing
international price, since its refineries are producing less than 30% of their
installed capacity. Hence, Nigeria exports and uses the proceeds to import
67
refined fuel for local consumption. It is against this backdrop, the complete
removal of fuel subsidy and deregulation of the downstream sector of the oil
industry is advocated by the government.
The downstream sector of the oil and gas is currently partially
deregulated, making it difficult for prices of petroleum products to be market
determined. The sector was regulated, with government maintaining a
monopoly of supply of petroleum products and it’s dominated by few oil
majors. The dominance of these firms in the market has made the Petroleum
Marketing Industry in Nigeria an oligopolistic one. Due to the market
structure, the leading marketers dictate the trends in the market while the
fringe independent marketers struggle to match up with the competition. The
dominance of these few oil majors in the downstream sector is as a result of
the fact that NNPC lacks the capacity to import enough petroleum products
for the country, couple with the perennial malfunctioning of the refineries,
the government introduced the Petroleum Support Fund (PSF), from which
it draws money to pay the excess expenditure incurred by the marketers for
importing and selling petrol at regulated price and distributing it to every
part of the country. The Farouk Lawan led House of Representatives’ Ad-
Hoc committee on fuel subsidy probe of the sector in 2012, however
68
indicted the NNPC and major oil marketers, who took advantage of the
massive corrupt loopholes in the system.
The major oil marketers engaged in falsifying the dates of bills of lading
to reflect particularly high market prices. By so doing, they overcharged the
Nigerian National Petroleum Corporation (NNPC). According to the report,
over $300 million has been overpaid by NNPC for fuel import. Farouk
Lawan raised further posers: “How could the nation be made to pay for 59
million litres daily when we consume only 35million daily? The balance of
24million litres per day might be the area of sharp practices. By making that
provision, you are encouraging smuggling because we know that this
24millon litres balance would simply be smuggled out of the country since it
has been paid for already and we cannot consume it”. It would be recalled
that in KPMG’s “Interim Review of NNPC” dated 22 November 2010, the
auditor said it had found that NNPC’s subsidy claims and PPPRA’s
verification were based on the volume of petroleum products available for
sale (volume of products imported and actual production from refineries) as
against duly verified volume of products lifted out of the depots (volume of
petroleum products sold) as stipulated in the subsidy guideline. This laid
credence to the fact, that major oil marketers made excess profit at the
69
expense of the country and her citizens making the payment on fuel subsidy
unbearable for the government to sustain.
Also, the Petroleum Marketing Industry in Nigeria is dominated by
cartels who manipulate prices, through artificial supply restriction. These
cartels determine volume of importation and the proportion that should be
released to the market. At times, they only allow a few product holders to
supply the market, while others hoard. Peter Akpatasan President of
NUPENG has stated thus: "Deregulation cannot work in a market dominated
by a cartels. This cartel is so strong that it can continue to manipulate prices
out of the reach of common man. You cannot deregulate when you have no
refineries. There will be serious economic crisis" (Democratic Socialist
Movement, 2009). The sector is characterized by supply uncertainty; fueled
by gross inefficiency and mismanagement of the nation’s refineries.
CHAPTER FIVE
70
SUMMARY RECOMMENDATION AND CONCLUSION
5.1 Summary
From the foregoing, one can rightly state that the Nigerian National
Petroleum Corporation (NNPC) concern over the years have centered on
coping with challenges of dealing with developments in the oil industry,
particularly with regards to its products. The concern has been how to make
its products compete favourably in the world market, both in terms of
pricing and quality. Consequently, NNPC major challenges in the
implementation of the deregulation policy have been the inability to attain a
stable price for petroleum products which had led to product unavailability
and increase in the price of petroleum products.
The downstream sector of the oil and gas is currently partially
deregulated, making it difficult for prices of petroleum products to be market
determined and being dominated by few oil majors. The dominance of these
firms in the market has made the Petroleum Marketing Industry in Nigeria
an oligopolistic one. Due to the market structure, the leading marketers
dictate the trends in the market. The downstream sector is characterized by
supply uncertainty; fueled by gross inefficiency, mismanagement of the
nation’s refineries and inability to improve local refining.
71
5.2 Recommendation
Taking into consideration the whole gamut of the research study, the
following recommendations suffices:
1. For Nigeria to realize its potential and reap the benefits of the
deregulation policy there is the need to tailor the formulation and
implementation of reforms in manner that will take cognizance of the
socio economic challenges facing Nigerians. This would prevent the
wide resentment from majority of Nigerians especially has it involves
the removal of fuel subsidy, one of the requirements of the
deregulation policy.
2. Government should create an enabling environment to engender
private investors’ for the purpose of improving the local refining
capacity to meet the ever increasing local demand of petroleum
products and indeed for exportation purpose. The continued
importation of refined petroleum products whilst exporting crude
petroleum is detrimental to the Nigerian economy and importation
must be viewed as a very short-term measure aimed at ameliorating
the cost of living for Nigerians immediately. However, the past efforts
to sale the refineries have not been very successful because of the age
72
and poor state of the refineries. I, therefore, believe that the federal
government must keep an open mind about the feasibility of selling
these refineries and ensure that the options of Green field or
environmental – friendly refineries are actively promoted alongside
efforts to sale the existing refineries. The availability of open general
licenses will also improve competition and should result in a reduction
in the cost of petroleum products, provided there is sincerity and
transparency in the issue of these licenses.
3. Nigeria’s resources need transparent and accountable management.
Related to the above is the need to use the oil windfall proceeds and
the savings realized by the federal government from the withdrawal of
subsidy channeled towards fixing the refineries, build new ones or
upgrading and developing of infrastructure within the polity, in areas
such as waterways, rail and mass transit system, thus providing
cheaper alternative transportation methods.
4. Corrupt practice and elements in the downstream sector should be
quickly identified and punished without fear of favor, so that the huge
leakages currently associated with the subsidy scheme could be
curbed. Government’s commitment to accountability, corporate
governance and responsibility as core values by all the stakeholders in
73
the sector will go a long way in rebuilding the trust of Nigerians in
deregulation of the oil sector and other subsequent reforms. To attain
this, there is a need for a strong pro-competition and anti-trust law to
be put in place to regulate the industry, instead of nurturing an
oligopoly of government cronies.
5. Finally, the full deregulation of the downstream sector should proceed
with the passage of the Petroleum Industry Bill (PIB) which will help
revise, update and consolidate existing petroleum sector related
legislations in Nigeria.
5.3 Conclusion
While the reform process has made quite some gains yet there remain
many challenges. The most notable of these challenges is the inability of the
Nigerian National Petroleum Corporation (NNPC) to attain a stable price for
petroleum products, which had led to products unavailability and increase in
price of petroleum products. The downstream sector is characterized by
supply uncertainty; fueled by gross inefficiency, mismanagement of the
nation’s refineries despite massive injection of funds and most importantly,
poor thorough monitoring of major oil marketers and the lack of political
will to tame the monster of official and unofficial corruption among other
problems.
74
The current state of the downstream sector is judged as inefficient in
service delivery and ineffective at promoting national developmental
objectives. The rationale for restructuring the oil and gas sector in a
petroleum dependent economy like Nigeria must be to enhance the
sustainability of petroleum wealth and its impact on all sectors of the
economy. This notwithstanding, such reforms or restructuring must not only
focus on enhancing industry effectiveness and efficiency, it must be mindful
of equity issues with respect to wealth distribution among all the sectors of
the national economy.
In Nigeria, the focus of the reform should be for the oil and gas
institutional structures and regulatory framework to maximize the economic
benefits of petroleum resources, for the current and future generations. The
policy should facilitate economic prosperity for an average citizen in
Nigeria. However, the caveat issue to keep in mind is that the petroleum
downstream sector deregulation should produce efficiently, effectively and
equitably, which could result in durable infrastructures and human capital
for sustainable development of the national economy.
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77
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C: JOURNALS ARTICLES
Abubakar, A. (2001): How to end fuel shortage by ex-PPMC Boss, edited by Nwora, C; “Guardian” Newspaper, 3/06/01, pp1-2
Adigun, B.A. (1993): Averting oil shortage in Nigeria – The efficiency and adequacy of supply and distribution facilities in Nigeria, Energy policy agenda, pp197 Aigbedion, I.& Iyayi, S. (2007): Diversifying Nigeria’s Petroleum Industry, International Journal of Physical Science, 2, (10), 263-270 Ali, M. S. (2001): Fuel deregulation: a symphony of discord Guardian Features, 20/02/01 Aluko, M.E. (2003): On the fuel price hike and why we are where we are, view point in Lagosforum.com, 2/3/03, pp1-16 Avuru, A. (2004): Ensuring Transparency in Nigerian oil industry, Thisday Perspective, 17/03/04, Pp26 Ayodele, A. S. (1994): Elements of the Structural Adjustment Program: Privatization and Commercialization in The Nigerian Journal Economics and Social Studies, Vol. 36, No. 1. Braide, K.M. (1997) “Guaranteeing Petroleum products self – sufficiency in Nigeria”, Annual Dinner Guest Lecture of the Nigerian Society of Chemical Engineers, held at shell club Port Harcourt held between 17th and 18th November. Braide, K.M. (2004): Modes of Deregulation in the Downstream Sector of the Nigerian Petroleum Industry. University of Port-Harcourt, Rivers State, Nigeria El-Rufai, N.A (2005): Why Nigerian refineries can’t be sold, ed. Othman and Bunter, in Alexander Oil and Gas, vol. 9, no. 6, pp1-9
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Enomoh, G. (2001): Deregulate the entire petroleum sector not just price alone, Guardian Executive brief, 5/3/01, pp46 Ezeagba, C.E. (2005), “Deregulation of Nigerian Economy: Implications for the Downstream Petroleum Industry,” Certified national Accountant, July –September. Dhanji, F. & Milanovic (1991), Privatization in Eastern and Central Europe: Objectives, Constraints and Models of Divestiture, A World Bank Research Working Paper, No. 770 Gaius Obaseki, J.E. (1996), "Potentials for a West African Sub-Regional Gas Market", Napetcor, Fourth Quarter Izibili, M. and Aiya, F. (2007), “Deregulation and Corruption in Nigeria: An Ethical Response”, Kamal – Raj. Journal of Sciences. 14(3): 229 – 234. Kupolukun, F. (2005): NNPC’s silent revolution, Tell Magazine Special Edition, no.8, 21/02/05 Pp1-10 Kupolukun, F. (2007): The Nigerian Oil and Gas Industry: Consolidating the gains. A paper presented at the Nigerian Oil and gas Conference, Abuja, Nigeria. Kupolokun, F. (2006) "Challenges and Future Prospects of Oil and Gas Industry", The Guardian, Lagos, Wednesday, May 31, 2006. Mayoraga Alba, E. (1995) “Deregulation and Reform of Petroleum Markets” Energy Issues Number 6, World Bank Group, Washington D.C (September).NPC, Abuja
Nwosu, G.F. (2004): NDDC and the burden of developing the Niger Delta, the Guardian Forum, Ed. Aderinbibe Y. pp15
Ovaga, O.H. (2010) “Deregulation of Downstream Oil Sector in Nigeria: Its Prospect,” Journal of Social Sciences and Public Policy, Centre for Research and Innovations, December, Vol.2.
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Philips, A.O and Osayinwese, I. (1977): On the 1978 Increases in the Retail Prices of Petroleum Products, The Nigerian Journal of Economics and Social Studies, NES, vol 19(3), Nov. 1997, Pp. 307 –324 Salami, O. and Ayoola, A. K. (2010): The 'War' of Appropriate Pricing of Petroleum Products: The Discourse of Nigeria's Reform Agenda. Linguistik online 42, 2: 4152 Soeze, C. (2005): Deregulation of the downstream sector of the Nigerian economy, Vanguard Newspaper, 15/02/05 Usman, S. (2007): Nigeria: Searching the National Resource Curse, Being a paper presented at the London School of Economics and Political Science, London Oct. 11, 2007. D: NEWSPAPERS
The Sunday Vanguard, (Lagos), June 25, 2006. Tell, (Lagos), May 1, 2000. Tell, (Lagos), August 14, 2000. Tell, (Lagos), April 7, 2003. The Guardian, (Lagos), December 11, 2000. ThisDay, (Lagos), August 4, 2005
E: THESES, DISSERTATIONS AND UNPUBLISHED WORKS
Adubok, A. (2001): An appraisal of deregulation as a strategic policy to end Nigeria’s Fuel Energy Crisis, M.B.A (mgt) project, Imo State University, unpublished, pp 47-55 Osibanjo, O. (1999): Petroleum products distribution and marketing and the scarcity problem M.Sc Thesis in energy and petroleum economics, Delta state university, Unpublished
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F: INTERNET MATERIALS
Aigbedion I. D. Iyayi, S.E. (2007): Diversifying Nigeria’s Petroleum Industry, International Journal of Physical Science, Vol.2(10):263-27 october 2007. www.Academicjournals.orgijps
Akpoghomeh, O.S. and Badejo D. (2005): Petroleum Product Scarcity: A Review of the Supply and Distribution of Petroleum Products in Nigeria. www.onlinelibrary.wiley.com
Braide, K. M. (2008): Modes of Deregulation of the Downstream Sector of the Nigerian Petroleum Industry. www.nigerdeltacongress.com Ibanga, I. (2010): The Economics of Privatizing and Deregulating the Nigerian Downstream Sector, www.florin.com/CSS2/vi/ifiokiibanga Kupolokun, F. (2007): Liberalization: The Experience of the Nigerian Petroleum Sector. http:/www.gasandoil.com/goc/company/cna50438.html Reginal S. (2009): Petroleum Industry Bill (Pib) And The Deregulation Of The DownstreamSector.www.nnpcgroup.com/.../PIBandTheDeregulationOfTheDownstreamS Tosanwunmi O. (2012): Fuel Subsidy Removal or Deregulation: Evolving a Working Policy in Nigeria. http://www.alphaedufoundation.org/ Wunmi. I. (2007): an Appraisal of Oil and Gas Industry Reform and Institutional www.iaee.org/documents/newsletterarticles/408wumi.pdf
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