EVALUATION OF THE DEREGULATION OF THE DOWNSTREAM SUB-SECTOR OF THE NIGERIAN PETROLEUM INDUSTRY ( ) KARIKPO GOGOROBARI ERNEST PG/M.

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1 i EVALUATION OF THE DEREGULATION OF THE DOWNSTREAM SUB-SECTOR OF THE NIGERIAN PETROLEUM INDUSTRY ( ) BY KARIKPO GOGOROBARI ERNEST PG/M.SC/10/57539 BEING A RESEARCH PROJECT PRESENTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF SCIENCE DEGREE IN PUBLIC ADMINISTRATION AND LOCAL GOVERNMENT. DEPARTMENT OF PUBLIC ADMINISTRATION AND LOCAL GOVERNMENT FACULTY OF SOCIAL SCIENCES UNIVERSITY OF NIGERIA, NSUKKA. APRIL 2012.

2 i TITLE PAGE EVALUATION OF THE DEREGULATION OF THE DOWNSTREAM SUB-SECTOR OF THE NIGERIAN PETROLEUM INDUSTRY ( ) A RESEARCH PROJECT BY KARIKPO GOGOROBARI ERNEST PG/M.SC/10/57539 DEPARTMENT OF PUBLIC ADMINISTRATION AND LOCAL GOVERNMENT UNIVERSITY OF NIGERIA, NSUKKA. IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF SCIENCE (M.SC) DEGREE IN PUBLIC ADMINISTRATION WITH SPECIALIZATION IN FINANCIAL MANAGEMENT APRIL 2012.

3 ii APPROVAL PAGE This research project has been approved for the Department of Public Administration and Local Government, University of Nigeria, Nsukka. BY DR M.O IKEANYIBE SUPERVISOR. PROF. FAB. O. ONAH H.O.D DATE.... DATE.... PROF. E. C. EZEANI DATE.. EXTERNAL EXAMINER DATE

4 iii CERTIFICATION This is to certify that Karikpo Gogorobari Ernest PG/M.SC/10/57539 has written this thesis under our guidance and supervision and to the best of our knowledge, his work is original and he did acknowledge all secondary information and materials contained therein.. DR. M.O IKEANYIBE SUPERVISOR. PROF. FAB. O. ONAH H.O.D.. DATE

5 iv DEDICATION This work is dedicated to my unborn child, Aneme Ernest Karikpo and to my late father HRH T.L Karikpo (JP).

6 v ACKNOWLEDGEMENTS My gratitude goes to God Almighty, who made the accomplishment of this thesis a reality. I express my heartfelt gratitude to all my lecturers at the Department of Public Administration and Local Government, their commitment and selflessness is worthy of note and emulation. I really appreciate the contributions of my supervisor Dr Okey Marcellus Ikeanyibe who, without his meticullous rigorous perusal of this thesis work, the present quality of the research work would not have been achieved. My sincere gratitude goes to my family, my in-laws especially Batam Nanee and his family for their support. I also appreciate the moral and financial support of my friends and classmates. Thank you all and God bless you. Karikpo, G.E (JP)

7 vi ABSTRACT This study evaluates the deregulation of the downstream sub-sector of the petroleum industry. This study arose out of the need to find solution to the sorry state of the four refineries, the inefficiency in the distribution, the poor pricing of petroleum products and the negative effects of monopolistic structure of the downstream sub-sector. The study attempt to identify the challenges associated deregulation of the downstream sub-sector and to examine the effects of deregulation of the downstream sub-sector on petroleum product pricing in Nigeria. The study examine the extent to which deregulation has impacted on availability of petroleum product since The study progressed to identify what policy options are there for improved performance in Nigerian downstream subsector. The descriptive survey research design was used and data was collected using questionnaire method. Chi-square and simple statistical methods was used for data analysis. The findings of the study amongst others review deregulation of the downstream is to open the market for new investors and reduce government spending on subsidy payment. It is recommended that government need to create an enabling environment for private individuals and companies to establish refineries and should double the quantity of crude for domestic refining needs, in this way, the country should target supplying the refined needs of these would be investors.

8 vii TABLE OF CONTENTS Title page Approval Page... Certification Dedication... Acknowledgment... Abstract.. Table of Contents... i ii iii iv v vi vii CHAPTER ONE: INTRODUCTION 1.1 Background to the Study Statement of the Problem Objectives of the Study Significance of the Study Scope and Limitations of the Study... 8 CHAPTER TWO 2.1 Literature Review Introduction Concept and Meaning of the Deregulation of the Downstream Sub-sector Evaluation of the Downstream Petroleum Deregulation Policy Benefits of the Deregulation of the Downstream Sub-sector Challenges of the Deregulation of the Downstream Sub-sector... 18

9 viii Best Practices in the Global Oil Industry Hypotheses Operationalization of Key Concepts Methodology Data Gathering Instruments Population of the Study Sample and Sampling Techniques Validity and Reliability of Instrument for Data Collection Method of Data Analysis Theoretical Framework CHAPTER THREE: 3.1 Background Information on Deregulation of the Downstream Sub-sector Background Information on the Nigerian Petroleum Industry Background Information on Petroleum Product Pricing and Regulatory Agency (PPPRA) 56 CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND FINDINGS 4.0 Introduction Data Presentation Questionnaire Distribution Presentation and Analysis of the Substantive Data Findings and Discussion of Findings... 78

10 ix CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1 Summary Recommendations Conclusion BIBLIOGRAPHY APPENDIX. 90

11 1 CHAPTER ONE INTRODUCTION 1.1 Background of the Study Over the last couple of years, the Nigerian oil industry has become known for the phenomenon of petroleum product scarcity resulting in long and unending queues at petrol stations and rising costs of production input and other operations for all other sectors of the economy (Olawale et al, 2005). The government felt that this is as a result of a number of risks associated with the petroleum product exploration and refining activities beside the external influences (Odiase, 2005). This incessant crisis culminated in the decision by the federal government in April 2000, to set up a committee to investigate reforms in the oil and gas sector with a focus on deregulating the downstream sub sector. The first terms of reference for the reforms in the sector was to formulate reform proposals to create condition for sustainable development of the oil and gas sector. However, the Nigerian downstream sub sector is managed by the government through the Nigerian National Petroleum Corporation (NNPC) which was given the powers and operational obligations in refining petrochemicals and products transportation as well as marketing (NNPC, 2010).

12 2 Historically, oil was discovered in Nigeria in 1956 in the Niger Delta after half a century of exploration. The discovery was made by Shell BP at the time the sole concessionaire. Nigeria joined the ranks of oil producers in 1958 when its first oil field came on stream producing 5,100 bpd. After 1960, exploration rights in the upstream and downstream areas adjourning the Niger Delta were extended to other foreign companies. In 1965 the oil field was discovered by Shell in shallow water South East of Warri. In 1970, the end of Biafran war coincided with the rise in the world oil price, and Nigeria was able to reap instant riches from its oil production. Nigeria joined the Organisation of Petroleum Exporting Countries (OPEC) in 1971 and established the Nigerian National Petroleum Company (NNPC) in 1977; a state owned and controlled company which is a major player in both the Upstream and Downstream sub sectors. By the late Sixties and early Seventies, Nigeria had attained a production level of over 2 million barrels of crude oil a day. Although production figures dropped in the eighties due to economic slump, 2004 saw a total rejuvenation of oil production to a record level of 2.5 million barrels per day. Current development strategies are aimed at increasing production to 4 million per barrels per day by the year 2012, (NNPC, 2012). Furthermore, the Nigerian oil industry is separated into two sectors; the Upstream and Downstream sectors. Upstream sector deals with exploration and

13 3 production while the downstream sector deals with refining and distribution of crude oil for domestic consumption. (Hofsar, 2002), as cited in (Adidu and Oghene, 2001). Sees deregulation as consisting of a shift to a competitive economic climate by re-orientating or suppressing regulatory mechanism. (Bankole, 2001), defines deregulation as entailing the following elements; privatization, removal of price control, to a large extent elimination of barrier to participation in all aspects of production, supply and distribution of goods and service by private business. He believes that a regulated market can lead to shortage in supply which will give rise to hoarding and existence of black market in the economy (Umoru, 2001) opined that deregulation is the process of freeing government of its concurrent control and involvement in the business of refining, importation and distribution of refined petroleum products in Nigeria market. In this study, deregulation will be taken to refer to the reduction or removal of government control, rules and regulations that restrain free operational activities in the downstream oil sector. Nevertheless, it is necessary to carry out an evaluation of the deregulation as a necessity to this study.

14 4 In this study evaluation of the downstream sector has become inevitable due to the despicable performance of our refineries. Since 2003, the refineries have been working below capacity when deregulation in the sector was announced. The total capacity of all the refineries put together is 445,000 barrels per day (bpd) and our estimated domestic consumption is 300,000 an excess of 145,000 bpd. But the refineries hardly operate at 50% of installed capacity, (Igbudu, 2002). Consequently, actual capacity is 50% of 445,000 bpd or 225,000 shortfalls of 77, 5000 bpd. Because of the lack of alternative domestic refineries such as private sector production and supply, it means in effect that the government must import the shortfall, but government cannot continue to import shortfall because of its cost implication, neither does it have the technical know- how to run a refinery. To enable government concentrate on its primary responsibilities, which is politics or governance, it becomes imperative to deregulate the downstream sector. Considering the fact that international oil prices were increasing and the real refined production in the country was dropping, the government decided that it could no longer afford the continued subsidies in the pump price of fuels because it was purchasing refined product at huge international prices only, to sell at heavily subsidized rate. According to (NNPC Report, 2011), the federal government pays around N1.6 billion dollars (US$1.1 million) per day on subsidies. The government claims that despite the huge amount spent, the subsidies did not reach the targeted

15 5 population rather few higher income groups. It further claims that continuation of subsidies on petroleum products limit its ability to deliver its statutory functions such as power generation, security, education, health etc. The government found it imperative to deregulate the downstream sub sector and invite independent marketers to apply for licenses to build private refineries. This was not achieved because the independent marketers who are profit motivated decline interest to apply as the government still regulates the pump price. The federal government considers it necessary to deregulate the downstream sector (Adamu, 2011). However, the deregulation process is now facing serious challenges and criticism especially from labour and trade unions, parliamentarians and the public. It is against this backdrop that this study seeks to evaluate the deregulation of the downstream sub sector. 1.2 Statement of the Problem The need to deregulate the downstream sector of the petroleum industry arises from the sorry state of the four refineries, the inefficiency in the distribution, the pricing of petroleum products and the negative effects of monopolistic structure; all this has been contentious issue in the downstream sub-sector and on the economy at large leading to non-availability of petroleum product and poor

16 6 product pricing in the petroleum industry. Therefore what policy options are there for improved performance in the Nigerian downstream sub-sector? It is in view of the above problem that the following questions are posed: 1. What are the challenges associated with the deregulation of the downstream sub sector? 2. How has deregulation of the downstream sub-sector impacted on availability of petroleum product since 2003? 3. To what extent has deregulation of the downstream sub-sector impacted on petroleum product pricing in Nigeria? 4. What policy options are there for improved performance in the Nigerian downstream sub-sector? 1.3 Objective of the Study The general objective of this study is to evaluate the deregulation of the downstream oil sub sector of the petroleum industry during the period of 2003 to On the other hand, the specific objectives are stipulated as follows; 1. Identify the challenges associated with deregulation of the downstream sub sector.

17 7 2. Examine the extent to which deregulation impacted on availability of petroleum product since Examine the effects of the deregulation of the downstream on petroleum product pricing in Nigeria. 4. Identify what policy options are there for improved performance in the Nigerian downstream sub-sector 1.4 Significance of the Study Theoretically, this research shall be a contribution to scholarship, contributing a reference material on the evaluation of the deregulation of the downstream sub sector of the petroleum industry and related subject matter for further research. Empirically, at the end of the study it is hoped that it will create assistance to stakeholders on production capacity in the four state owned refineries in the country. In addition to this, the study will also enhance policy formulation on the part of government in the downstream oil sector with the intention of alleviating the suffering of the masses. Finally, the study will expose us to the inherent challenges associated with the deregulation of the downstream sub sector.

18 8 1.5 Scope and Limitation of the Study This study evaluates the deregulation of the downstream sub sector of the petroleum industry. The empirical analysis is restricted to the period of During the course of the study, the research was confronted with numerous constraints that pose difficulties to proper understanding of the subject matter. The first constraint relate to the dearth of adequate literature on the subject of deregulation of the downstream sector. It was rather difficult and in most cases impossible to get hold of certain document and record that would have been vital to the study, most especially as it concerns problem that tend to displace the objective of the study.

19 9 CHAPTER TWO 2.1 LITERATURE REVIEW Introduction In order to evaluate and clarify the related works of other scholars in our field of study, the related literatures will be reviewed under the following subthemes. Meaning of deregulation of the downstream sub-sector.. Evaluation of the downstream petroleum deregulation policy.. Benefit of deregulation of the downstream sub-sector. Challenges of the deregulation of the downstream sub - sector.. Best practices in Global Oil industry.. Hypotheses. Operationalization of key concept. Theoretical framework Concept and Meaning of the Deregulation of the Downstream Sub Sector The word deregulate from which the term deregulation is taken means to free something such as an organisation or industry from regulation (Obioha, 2009). This is a term the federal government had for many years been using to describe its activities in the downstream sub sector, it stresses government desire to free the

20 10 oil industry from regulation. In that wise, it wants the market forces of demand and supply to determine the prices of domestic petroleum products. Deregulation according to (Oxford Advanced Learner s Dictionary, 2005) means to free a trade, a business or industry so that it is no longer owned by the government. (Ernest and Young, 1988) Posit that deregulation is elements of economic reform programmes charged with the ultimate goal of improving the 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 investor (Izibili and Aiya, 2007). Petroleum Product Pricing and Regulatory Agency (PPPRA) (2004) Defined deregulation as the opening up of the downstream sector of the petroleum industry. It means allowing every player the opportunity to refine or import petroleum products for use in the country as long as the products so refined meet quality specification. Ministry of Petroleum Resources, (2010) in agreement with the above assertion define deregulation as the opening up of an industry or a sector of the economy to operate with the government only creating an enabling environment for businesses to thrive. Put differently, deregulation in economic sense means freedom from government control. According to (Akinwumi et al, 2005), deregulation is the removal of government rules and regulations governing the

21 11 operations of the system are relaxed or held constant in order for the system to decade its own optimum level through the forces of supply and demand. For the purpose of this study, deregulation of the downstream implies removal of restrictions on the establishment and operations including refining, jetties and depots which allowing private sector players to be engaged in importation and exportation of petroleum products and allowing market forces to prevail Evaluation of the Downstream Petroleum Deregulation Policy The Nigerian oil industry is separated into two sectors; the upstream sector and downstream sector. The upstream sector deals with exploration and production, while the downstream sector deals with refining and distribution of crude oil for domestic consumption (Ahmed, 2011). This evaluation focuses on the downstream sector and issues relating to its deregulation. Hence, the term evaluation according to the (Oxford Advanced Learners Dictionary, 2005) means to examine or judge something, to consider something in order to judge its values, quality, importance or condition. Deregulation according to (Bankole, 2001) entails the following elements; privatisation, removal of price control, to a large extent elimination of barriers to participation in all aspects of production, supply and distribution of petroleum product. In this study, evaluation of the downstream deregulation policy becomes inevitably due to the despicable performance of our refineries.

22 12 Nigerian downstream sector is managed by the government through the Nigerian National Petroleum Corporation (NNPC) which was given the obligations in refining, petrochemicals and product transportation as well as marketing. Oil refining in Nigeria dated back to 1965 when the first refinery was built. Presently (2012), the country has four refineries with total capacity of 445,000bpd but operates below its optimal capacities. The supply of petroleum products and management of pipeline outlets is done by the Petroleum Products and Marketing Company, (PPMC). The bulk customers otherwise known as dealers supply the products to millions of customers throughout the country. These products include Petroleum Motor Spirit (PMS), Gasoline Automatic (AGO), Household Kerosene (HHK) Fuel Jet and Liquefied Gas (LPG) (PPMC, 2010). In the 1990s, due to the increase in demand for oil products, which outweighed its supply, it became necessary for Nigerian National Petroleum Corporation (NNPC) to import heavily from abroad to meet the escalating demand, and as a result, the revenue generated from crude oil export had to be used to import refined products into the country, (Ahmed, 2011). As at 2011, Nigeria imports 85% of refined petroleum products. This has exposed the country to difficulties in funding subsidies on refined petroleum products, the country had to borrow from international financial institutions to maintain this subsidy and also spent more to service the debts. Consequently, the country entered a difficult

23 13 situation where meeting the major budget needs of the government became difficult, considering the fact that international oil prices were increasing and the real refined production in the country was dropping, the government decided that it could no longer afford the continued subsidies in the pump price of petrol because it was purchasing refined products at huge international price only to sell at a heavily subsidized rate (Ayankoka, 2012). Presently, (2012) one litre of Petroleum Motor Spirit (Gasoline) is regulated at N97 (US$ Naira, as at 3/9/12) but the actual cost is expected to be N114.32, therefore for every litre of gasoline the government pays the difference of around N However, Nigerian government pays around N1.6 billion (US$1.1million) per day. Therefore Nigerian government pays around N1.6 billion dollars (US$1.1) per day on subsidies. The government claims that despite the huge amount spent the subsidies did not reach the targeted individuals but rather few higher income group, it further claim that continuation of subsidies on petroleum products limits its ability to deliver its statutory functions such as power generation, security, education, health etc. The government found it imperative to deregulate and invite other local marketers to apply for licenses to build private refineries. This was not achieved because the marketers who are profit motivated declined their interest to apply as the government still regulate pump price.

24 14 The Government of Dr Goodluck Jonathan in January 2012 considers it necessary to deregulate and privatized the downstream sub sector in the country. However, the deregulation process faces serious challenges and critism especially from labour and trade unions, parliamentarians and the public. It is against this backdrop that this study seeks to evaluate the downstream deregulation policy Benefits of the Deregulation of the Downstream Sub-sector Since 1999, the Nigeria government decided to emulate developed and developing oil producing nations by deregulating the downstream sector of her petroleum industry which, hitherto, was monopolized by the Nigerian National Petroleum Corporation (NNPC) like every policy measure; deregulation will not be without costs. A cost benefit analysis always forms sound basis for adopting a particular policy, and it is believed in this case, that the benefits of deregulation outweigh the cost (Kwaye, 2005), note that the most obvious cost of deregulation is potential to have a shape price increases from transportation of food, to a lot of other items and services. He maintained that this chain of price increases is inevitable since, in economics everything affect everything else, however remotely and oil of course, a unique commodity and its effect are expected to cause a onetime jump in overall inflation, which needs not become perpetuating if it not accommodating, say through monetization of budget deficits and large wage awards. Inotherwords, once fiscal and monetary discipline and associated exchange

25 15 rates stability remain in place, inflation should return to the original declining path quickly, Kwaye concludes. (Feblowititz, 2000).Feels it is true from the consumer s perspective that the benefits of deregulation may not be intuitively obvious, especially with the hassle factor of making sense of various offers and the confusion of meeting the challenges of price increases on commodities and services in the immediate term. (Ramsey & Heskett, 2002) believe in the long term advantages of deregulation and it is worth the attendant short term disruptions and consumer confusion. The negative perceptions of Nigerian public that arose from the sensitization campaigns to deregulate the downstream sector which were registered through protest and strike by labour unions were resisted by the government. The government on the other hand, defended her position by pointing to the successes of to other countries as USA, Germany, Mexico, etc. who run a deregulated downstream sector as her models an adhering to the policy. In the campaign aired on the television and the print media, (Barkindo, 2010) stress that the benefits of deregulation are enormous, it is meant to eradicate huge revenue spent as subsidy, he opined that between 2006 and 2009 about N2.5 trillion has been spent. He further stated the following benefits among others as being enjoyed from the deregulation policy.

26 16 1. Products are now available all over the country and no one needs to queue for days at filling stations waiting for non existent products. 2. Motorists no longer hoard fuel in their homes or jerry cans of fuel when travelling; this has eliminated the fuel induced accidents and fire that claimed thousands of lives in the regulated economy. 3. Marketers are now investing in new facilities such as storage tanks, retail outlets, trucks, the railway rolling stock, etc. 4. There is now competition among the marketers who now treat the consumer as king. 5. The marketers, who in the past depended on NNPC for all products, now import their own; some are planning to build refineries in Nigeria. 6. Jobs have been created in the sector, for example, NNPC is now confident enough to build its own retail outlets (Mega Stations) and has already built and is operating one each in all states of the federation. 7. Apart from new investment in new facilities, old ones are being expanded because of increase in activities. 8. Investment in the downstream sector is now more attractive to the international and local business communities as evidences by the interests express in the refineries privatization programme.

27 17 However the above benefits appear to be experienced in the short and mid term.(kwaye, 2005) points to the long term advantages as did (Ramsey & Heskett, 2002). He indicated the following benefits as the flip side of the costs of subsidization in regulated downstream. 1. Deregulation free resources for government to spend on productive ventures and social sectors, in education and health. 2. A market price will encourage efficiency in the use of petroleum products, which would reduce traffic congestion, and loss of productive time, this will save the country money in terms of reducing oil import. 3. Removing the subsidy will reduce the incentive to smuggle as the domestic price approaches those in neighbouring countries. This will save the country foreign exchange, which would have been used to replace the smuggled portion, and also allow government to realize the full complement output would have been lost to smugglers. 4. Fundamentally, deregulation will depoliticize petroleum pricing and eliminate the speculation, rent seeking and other practices usually associated with government announced price increases. 5. Automatic pricing would allow the benefits of cost reductions, through world oil price fall passed on to consumers.

28 18 Others commentators acknowledge the benefits of deregulation from different perspectives for example. (Luba, 2000) observes that the deregulation of the energy sector in the United State was forth with hindsight as the policy markers, by their rulers suggest that they lost the fundamental purpose of deregulation. As a result a few big companies that figured out how to gain the rules profited enormously, while everyone else suffers. This view appears to be the case with the Nigerian downstream because the major marketers who have capacity and a good network of marketing outlets are benefiting from the policy far above their counter parts, the independent marketers. (Ihenacho, 2009) holds that deregulation make it possible to recover the full amount of the projected subsidy per annum which would now be spent on life improvement projects for the Nigerian masses. Deregulation would also remove the current incentive which exists for people smuggling our oil elsewhere. Removal of the smuggling incentive would greatly improve local product availability and this would in turn, exerts a downwards pressure on product prices within the economy Challenges of the Deregulation of the Downstream Sub- sector The nation s downstream sub-section of the oil industry comprises activities relating to the distribution and marketing of petroleum products and derivatives throughout the country. The sub-sector is particularly volatile in recent times due

29 19 to government s policy on deregulation of the industry, which has removed price control mechanisms that have undermined the growth of the sub- sector in previous years (Ezigbo, 2003). The sub-sector has also been constrained by the unenviable state of the nation s refineries, which have been producing at minimal capacities in the past few years, despite huge expenses incurred on turnaround-maintenance of the crisis-ridden refineries. This development has led to massive importation of petroleum products to fill demand gaps that exist in domestic consumption. However, the huge cost associated with importation of petroleum products is a major reason for government emergent deregulation and the hike in prices of petroleum products from 26 to 48 % at the end of The government has also signified its intention to relinquish its holding in the nation s refineries and make its percentage holding available to the private investors. This is expected to complement it efforts toward complete deregulation of Nigeria s oil industry. The downstream sector of Nigeria s petroleum industry is at once volatile but laden with economic opportunities. The sector is characterized by supply uncertainty, fueled by the mismanagement of the nation s refineries endemic corruption, lack of transparency, direct government interference and bureaucratic processes (Aigbedion, 2004). 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,

30 20 hallmarked by a dearth of product to supply. Particularly, this problem became noticeable in the late ten years. This has led to massive importation of petroleum products by government and major oil marketers in Nigeria. Until recently, the sector was heavily regulated, with government maintaining a monopoly of supply of petroleum products. However, in line with the nation s economic reform agenda, which was launched in the 1980 and 1990s, policy makers have embarked on a regime of deregulation of the sector, allowing private stakeholders to complement the government efforts in developing the industry. 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 production level to 15 % of the total installed capacity in 2004(Braide, 2005). The sudden closure of the Kaduna and Warri refineries during this period (to allow for the turn - around maintenance (TAM) contributed to the decrease in production (Ibiyemi, 2004). During this period, sharp practices thrived in the industry with independent marketers arbitrarily hiking prices beyond approved rates, also, product adulteration, diversion, bunkering, and other illegal acts was very common. Indeed, official prices rose sharply from 26 to 75 (naira) per liter between 2002 and The incessant instability of the downstream sector inspired a radical policy shift on the part of the federal government. Consequently, in 2003 the Petroleum Products Pricing Regulatory Agency (PPRA) announced a

31 21 programme of deregulation for the sector. This programme 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 investor and stakeholders in the industry to source their products within and outside Nigeria. Despite this, the Government s programme of deregulation of the sector later assumed a controversial dimension. In view of the price increases affected on petroleum products for example, the price of premium motor spirit (PMS) was increased from to (naira) in The major defect of this policy shift allows 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 labour, which saw the policy shift as capitulation of government to the demands of oil marketers against the interest of consumers. Despite robust opposition to government s 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 and erasing government monopoly on the refineries.

32 22 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 Best Practices in the Global Oil Industry The countries here under reviewed possess either the character of Nigeria as: i. A recognized oil producing nation. ii. A member of the organization of Petroleum Exporting Countries (OPEC). iii. A politically democratic nation. Australia - Background The refining sector in Australia is characterized by over capacity. The country has a distillation capacity of 38 metric tons per year. The continuing financial crisis in Asia and low world oil prices have contributed to lowest petrol prices in ten years in Australia which in turn, has begun to flow through to petrol price with significant increases. The federal government has recently withdrawn a draft oil to apply to downstream oil. Political issues prevented its ratification by the federal parliament; this resulted in continuing difficulties being experienced by the downstream sector (Ramsey & Heskett, 2002).

33 23 Control / Structure The downstream industry is controlled by the private sector. There are no state owned refineries or retail marketing companies. There are eight refineries in total, the largest being BP S Kwinana Refinery, followed by the Kurnell refineries, which is owned by Australian Petroleum ( A joint venture between Caltex and Ampol) and Shell owned Geelong Refinery. The proposed recent change policy mentioned above would have allowed more companies as distinct from lesser owned sites. Competition is expected to increase with further downward price pressure. France - Background There are twenty four refineries in France and the country has a total refinery capacity of 98metric tons as at France is a significant net exporter of heavy fuel oil and importer of diesel fuel and heating oil. The entire French downstream industry is characterized by poor profitability due to a combination of high refinery costs and low margins in a very competitive retail sector. The French oil industries face problems of over capacity. The trend is towards rationalization and negotiations concerning possible refinery closures and is still ongoing.

34 24 Control / Structure The downstream oil industry in France is controlled by private sector. The refining sector is dominated by five major international companies, including Total (28.8metric tons capacity) Elf France (20. 2metric tons capacity), Esso (13.3metric tons capacity), BP (10.6metric tons capacity), Mobil (3.2metric tons capacity) and Compagnie Rhenage de Raffinage (4metric tons capacity).the retail petroleum station sector is in a private hand. The sector has seen a significant rise in market share by super market chain, which control 49.5 percent of market and 4.4 percent, is controlled by independent retailers. Germany Background Germany is a net importer and consumer of oil. Oil consumption in 1997 was 136.5metric tons, making Germany the biggest consumer in Europe and the fourth largest in the world. In addition to being a significant consumer and importer, Germany is also a major refiner and is the second largest in Western Europe and the sixth largest in the world. The refining sector is profitable, but is improving slightly. Cost difficulties due to stringent environment requirements and losses are large. In addition, oil is imported from Rotterdam on barges and fluctuates in price, depending on the depth of the sea.

35 25 Control / Structure The German refining industry is controlled by private sector and is relatively fragmented; no individual company has greater than a 15 percent share of total share of total refining capacity. The retail market is also controlled by private sector and most of Western oil majors are represented. Aral, a joint venture between Veba and Mobil, has over 2500 outlets, Shell has 1700 outlets, Dea has 1600, Esso has 1500, BP has 1400 and Conoco has 600. Rationalization of outlets has started. Japan Background Japan has no significant reserve of natural gas or oil, but is a major importer, refiner and consumer of oil and products, in addition to being a major importer from the countries of the middle east and smaller portion of supplies from China, Indonesia and Mexico, Japan is participating in several upstream oil and gas projects abroad, which will lead to diversification of oil supply sources in the long term. The country has a capacity of 247metric tons per year, which represents 6.4 percent of the world s total and is the largest refining capacity in Asia. Japan consumes 266.4metric tons in 1997, making it the second largest consumer in the world after the US oil constituted 53 percent of primary energy consumption in 1997.

36 26 Control / Structure Japan has 44 refineries, which are controlled by the private sector. The retail industry is also controlled by private companies. Until the April 1996, the energy sector in Japan was control by Ministry of Trade and Industry of Japan and was a regulated market, where permits for the import of products were restricted to qualified companies, after this time, the domestic product was expected to be more competitive, due to the unregulated imports of petroleum products. The objective of the new energy policy is to accelerate economic supply of petroleum products through deregulation and products have relatively small but had the beneficial effect of pushing down end user prices. The downstream oil sector is in private hand, with the deregulation of the oil product market, the private retail sector which is independent of oil refiners and suppliers is growing. United State Background The industry is dominated by large and highly efficient refineries which are concentrated in the Gulf Coast, Mid Continent and California. Recent environment concerns have forced refiners into significant capital spending to reduce emissions and upgrade products. The Clear Air Act has imposed additional restrictions on automobile emissions, which have forced refiners into cleaner burning fuel production (Ramsey &Heskett, 2002).

37 27 The US consumed 846.5metric tons of oil in 1997 and imported 489.6mt of crude oil and products. Imports from Canada (72.7metric tons), Mexico (68.0metric tons), South and Central America (132.1metric tons), the Middle East(86.9metric tons). Western Europe (32.9metric tons) and other regions (28.7metric tons). The US also exported 41.3metric tons of products and 5.6metric tons of crude oil in 1997 primarily to Mexico, South and Central America, Western Europe and Canada, among other countries. Control / Structure The downstream industry is controlled by the private sector refineries under a regulatory environment, which monitors output and operations (Chatterjee & Lubatkin, 1990). As the sixth largest oil exporter in the Organization of Petroleum Exporting Countries (OPEC), Nigeria is endowed with abundant quantities of oil; subsequently, the country has generated billions of dollars as revenues from oil since the last four decades when oil was first found in the country. Despite the enormous revenues Nigeria gets, the benefit has not reflected into the lives of ordinary citizens in the country and the Nigerian Economy is continuously confronting challenges, this may have resulted from inefficiencies, corruption, and abuse of Natural Monopoly Powers, mismanagement, smuggling, bureaucratic bottlenecks and excessive subsidy.

38 28 In the 1990 s, due to the increase in demand for Oil Products, which outweighed its supply, it became necessary for NNPC (as a state owned Enterprise) to import heavily from abroad to meet the escalating demand, and as a result, the revenue generated from crude oil export had to be used to import refined products in to the country. Nigeria imports 85% of refined products, this has exposed the country to difficulties in funding subsidies on the refined petroleum products, the country had to borrow from International Financial Institutions to maintain this subsidy and also spent more to service the debts. Consequently, the country entered a difficult situation where meeting the major budget needs of the government became difficult. Considering the fact that international oil prices were increasing and the real refined production in the country was dropping the government decided that it could no longer afford the continued subsidies in the pump price of the fuels because it was purchasing refined products at huge international prices only to sell at a heavily subsidized rate. Presently, one litre of Petroleum Motor Spirit (Gasoline) is regulated at N65 (US$1= Naira, as at 21/4/2010) but the actual cost is expected to be N114.32, therefore for every litre of Gasoline the government pays the difference of around N However, Nigerians consumed around 32 million to 35 million litres of Gasoline per day. Therefore, Nigerian government pays around N1.6 billion (US$1.1 Million) per day on subsidies. The government claims that despite the huge amount spent, the

39 29 subsidies did not reach the targeted individuals but rather few higher income groups, it further claims that continuation of subsidies on Petroleum Products limits its ability to deliver its statutory functions such as power generation, security, education health etc. Consequently, the government found it imperative to resort to selling the refineries and invited other local Marketers to apply for licenses to build private refineries. This was not achieved because the marketers who are profit motivated declined their interest to apply as the government still regulates the pump price. Subsequently, the recent government considers it necessary to deregulate and privatized the downstream sector in the country. However, the deregulation process is now facing serious challenges and criticism especially from Labour and Trade Unions, Parliamentarians and the public. 2.2 Hypotheses The following hypotheses are hereby formulated to determine the veracity of this study. 1. There are no significant challenges associated with the deregulation of the downstream sector. 2. Deregulation of the downstream petroleum sector since 2003 has guaranteed availability of petroleum products in Nigeria.

40 30 3. Deregulation of the downstream has no effect on petroleum product pricing in Nigeria. 4. Deregulation is not a policy option for improved performance in the downstream subsector. 2.3 Operationalization of Key Concepts For the purpose of clarity and common understanding, the researcher has here under defined some of the terms used in this work. 1. Availability of Petroleum Products: This refers to the abundance of petroleum products such as Premier Motor Spirit (PMS), Automatic Gasoline (AGO), Household Kerosene (HHK), Fuel Jet and Liquefied Gas (LPG) which eventually lead to elimination of hoarding of petroleum products and removal of queue at the filling stations. 2. Petroleum Product Pricing: This refers to the market forces of demand and supply to determine the prices of domestic petroleum products. 3. Policy Options: This has to do with government economic agenda, programmes, framework formulated to create conditions for sustainable development in the downstream sub-sector geared towards fostering appropriate pricing mechanism and elimination of sharp practices in the industry.

41 31 4. Improved Performance in the Downstream: This refers to a situation where the downstream sub-sector performance is above installed capacity. That is performing above optimal capacity level. 5. Petroleum Products: These are useful materials derived from crude oil (petroleum) as it in oil refineries. They are materials derived from petroleum natural gas or asphalt deposits which include gasoline, diesel and meating fuels, liquefied petroleum gases (LPG and Bugas), lubricants, waxes, greases, petroleum coke, petrochemicals and sour crude and natural gases Methodology The study adopted the descriptive survey research design with a view to eliciting information from respondents, a self-developed questionnaire was designed using strongly agree, agree, disagree, strongly disagree and undecided method. The instrument has two sections; section A elicits the profile of the respondents. Section B has 15 items which sought the views of respondents on downstream deregulation of the petroleum industry. A total of 95 copies of questionnaires will be distributed to target population using the simple random sampling technique. The questionnaire will be self administered to respondents upon which data analysis will be based.

42 32 With respect to respondents category, respondents to this survey consists of two (2) groups, the top managers and selected senior staffs members of the NNPC downstream drawn from four states of Rivers, Bayelsa, Delta, Akwa-Ibom and Edo Data Gathering Instruments Questionnaire The research instrument used for data collection for the study was a four factor structured questionnaire. The questionnaires were issued to the literate and learned with closed ended questions and opened ended where necessary. Secondary Data There was a general review of relevant literatures such as textbooks, journals and other printed documents, magazines and newspapers, unpublished works were also consulted Population of the Study The population of the study comprise of all staff member in the NNPC downstream sector. According to NNPC Personnel department, Port-Harcourt office, they are One thousand five hundred and seventy in number This method was used for obvious constraints; not every member of the population could be reached.

43 Sample and Sampling Techniques The sample in this study comprises of top managers and selected senior staff of the NNPC downstream drawn from four states in Nigeria; Rivers, Bayelsa, Delta, Akwa Ibom and Edo. The four states were randomly chosen out of the six states of the South-South zone of Nigeria. In determining the size of a sample in a given population, it is most appropriate to use a statistical formula to do it. Generally, there is no universal formula to calculating the size of a given population. However, two basic factors are well known from statistical point of view, first, the larger the size of a sample, the more precise will be the information given about the population. Thus, for a study of this nature, the Yamani s formula is used to determine the sample size since the population is known. The Yamani Yaro s formula is used to determine the sample size since the population is known. N The formula is n = 2 1 Ne Where: n = Desired sample size N= Population of the study e = Limit of tolerance error (using 10%) I = Theoretical constant

44 34 Assigning values to these symbols the sample size would be calculated thus: n= n= x x n = = Validity and Reliability of Instrument for Data Collection The researcher will administer the questionnaires to respondents twice. On the first occasion, the researcher would collect the questionnaire from respondents and record same. After an interval of three weeks, the respondents again and collect their responses. These would be compared with responses obtained during the first visit Method of Data Analysis The data that collated from the study is analyzed with the aid of simple percentages and chi square (X 2 ).

45 35 Percentages would be used for this research because of its ability to transform questionnaires into values and attributes which were quantitative in nature. It would enable the researcher to analyze the variables independently. The formulated hypotheses would be tested using a non parametic statistic called chi square, X 2. The formula for calculating the expected frequency is as follow: Expected frequency = Row Total Column Total Grand Total The formula for calculating the chi square (X 2 ) is as: Where: X 2 = (O E) 2 E O E = Observed frequency = Expected frequency O E = Deviation (O E) 2 = Deviation square summation In our calculation, we would either confirm or reject the null hypothesis. The null hypothesis would be confirmed if the discrepancy between observed and expected frequency is so small that the difference could be attributed to chance. However, the null hypothesis could be rejected if we consider the discrepancy so large that we could not attribute the departure to change.