ABSTRACT

Crude oil is an extractive mineral resource which share with

natural gas jointly and severally in the concept of petroleum in

so far as they remain in their natural state in strata. Crude oil

as part of petroleum is a mixture of hydrocarbons formed beneath

the ground or the sea in liquid or solid forms which are

occasionally found in springs or pools but usually obtained from

beneath the earth’s surface by drilling wells.14 Section 2 of the

Petroleum Profits Tax Act (PPTA) defines crude oil as “any oil

(other than oil extracted by destructive distillation from coal,

bitumous shales, or other stratified deposits) won in Nigeria

either in its natural state or so after the extraction of water,

sand, or other foreign substance therefrom but before any such

oil has been refined or otherwise treated.”

Wide variations of crude oil exist ranging from light volatile

liquids or gases that condense into liquids as the atmospheric

pressure increases to heavy mixtures that have to be warmed

before they can flow. Crude oils differ also in colour, from

green, yellow to brown or black.

Crude oil or petroleum is a naturally occurring mixture,

consisting predominantly of hydrocarbons with other elements such

as sulphur, nitrogen, oxygen etc. appearing in the form of

organic compounds which in some cases form complexes with metals.

The elemental analysis of crude oil shows that it contains mainly

carbon and hydrogen in the approximate ratio of six to one by

weight. Some physical and chemical properties of samples of

light, medium and heavy Nigerian crude oils and petroleum

products including gasoline, kerosene and engine oil have been

measured and are characterized by the fractional distillation and

elution liquid chromatography. This paper is analytically

characterized into five sections. The first deals with the

introduction dealing with the structure of the Nigerian petroleum

industry. The second deals with deregulation and liberalization

of the downstream sector, the third deals with legal and

regulatory framework of the industry and the fourth and final

deals with the conclusion summarizing the expressed views.

PART ONE: INTRODUCTION

HISTOTY AND STRUTURE OF THE NIGERIAN PETROLEUM INDUSTRY

Crude oil has been known and used by man for thousands of

years. The first oil well is said to have been dug in Shush,

Southern Iran in about 500 BC and the Chinese are believed to

have drilled for oil and gas with bamboo tubes and bronze drill

bits as early as the third century BC. However, the first modern

commercial drilling and production of oil began in 1859 in the

United States when Col. Edwin L. Drake sunk a well in

Pennsylvania near some natural oil seepages.The discovery of

crude oil in Nigeria dates back to the early 20th century when in

1906, a businessman John Simon Bergheim convinced the colonial

office and the government of Southern Nigeria based on his

knowledge of the regions geology that petroleum existed in

Nigeria and that his company, the Nigerian Bitumen Corporation

could find it. The company was given the prospecting rights and

for six years, Bergheim’s corporation searched for petroleum in

the Okitupupa area of Southwestern Nigeria.

The advent of the oil industry can be traced back to 1908, when a

German entity, the

Nigerian Bitumen Corporation, commenced exploration activities in

the Araromi area, West of Nigeria. These pioneering efforts ended

abruptly with the outbreak of the First World War in 1914. Oil

prospecting efforts resumed in 1937, when Shell D'Arcy (the

forerunner of Shell

Petroleum Development Company of Nigeria) was awarded the sole

concessionary rights covering the whole territory of Nigeria.

Their activities were also interrupted by the Second World War,

but resumed 1947. Concerted efforts after several years and an

investment of over N30 million, led to the first commercial

discovery in 1956 at Oloibiri in the Niger Delta.

This discovery, opened up the Oil industry in 1961, bringing

in Mobil, Agip, Safrap (now

Elf), Tenneco and Amoseas (Texaco and Chevron respectively) to

join the exploration efforts both in the onshore and areas of

Nigeria. This development was enhanced by the extension of the

concessionary rights previously a monopoly of Shell, to the

newcomers. The objective of the government in doing this was to

the pace of exploration and production of Petroleum. Even now

more companies, both foreign and indigenous have won

concessionary rights and are producing. Actual oil production and

export from the Oloibiri field in present day Bayelsa State

commenced in 1958 with an initial production rate of 5,100

barrels of crude oil per day. Subsequently, the quantity doubled

the following year and progressively as more players came onto

the oil scene, the production rose to 2.0 million barrels per day

in 1972 and a peaking at 2.4 million barrels per day in 1979.

Nigeria thereafter, attained the status of a major oil producer,

ranking 7th in the world in 1972, and has since grown to become

the sixth largest oil producing country in the world. Today,

license has been granted to indigenous companies in the country

to explore, produce and market petroleum products. However,

significant progress has been achieved in the area of marketing

of mainly imported petrol and diesel [fifty years after oil was

first struck in 1957]. Local refining of crude oil is now a

popular business in the Niger Delta. Its owners and operators are

mainly members of the militant groups who because of the huge

money they make from the business do not seem to care about the

enormous health risks that it entails.

The emergence of offshore oil and gas operations and the

granting of deep water acreages to the oil producing companies

have however witnessed a shift from JOA regimes to Production

Sharing Contracts (PSCs), with implications for the operation and

regulation of the oil industry in Nigeria. This shift is

attributable to a number of factors ranging from the complexity

of operations in the offshore terrain, (which makes regulation

under a JOA more difficult), to dwindling resources of the

country, (which makes funding under the JOAs precarious for the

government). At a time when the Nigerian government is intent on

increasing oil and gas reserves and the country’s production

capacity without the necessary funds to back it up, a funding

arrangement which achieves those objectives without having a

negative impact on the scarce resources available for investment

in other sectors of the economy is imperative. A number of oil

and gas projects using the PSC model are due to come on stream

soon and the successes recorded so far in this area have

encouraged the government to consider extending PSC arrangements

to other areas of the industry which had hitherto operated under

JOAs.

The oil and gas industry in Nigeria has continued to evolve

since its inception in the fifties. However, despite the

evolution, reforms and internal restructuring, the public sector

of the industry has yet to fully meet the aspirations of the

Federal Government and key stakeholders. The existing structure

of the industry and enabling legislation were no longer

consistent with global standards. In parallel the private sector

of the upstream sector of the industry, dominated and operated by

the international oil and gas companies (in joint ventures with

NNPC) equally continued to face new challenges mainly with

funding and cash call problems, as well as challenges in the

Niger Delta region. It is for these and many other reasons that

the Federal Government of Nigeria embarked on a journey of a

comprehensive reform aimed at re-positioning Nigeria's oil and

gas industry to foster a long-term sustainability of the sector,

ensuring greater efficiency and effectiveness to meet the

aspirations of Nigerians and all the stakeholders, and also

ensuring global competitiveness.

The oil and gas sector accounts for about 30-40% of GDP, 80%

of government revenues and 95% of foreign exchanges earnings, and

is also the backbone of Nigeria's national development plan.

Efficient management of the industry will therefore have a

significant impact not only on the well being and future

prospects of the Nigerian economy, but also on the security and

stability of global energy supply and the growth of global

economy.

The reform sets out legal and structural framework for the

operation of the Nigeria's oil and gas industry. The Petroleum

Industry Bill (PIB) currently before the National Assembly was

based on the report of the Oil and Gas Reform Implementation

Committee (OGIC) set up by the Federal Government of Nigeria in

year 2000 to carry out a comprehensive reform of the oil

industry. I will therefore go on to outline some of the key

features of the reforms. Over the years, the laws regulating

Nigeria's oil industry have not been comprehensively reviewed.

The main laws are the Petroleum Act 1969 (as amended), the

Petroleum Profits Tax Act 1959 (as amended), and the Nigerian

National Petroleum Corporation Act of 1977 (as amended). There

are also a number of other laws, mostly decrees which have become

obsolete and proven to be impotent in regulating the country's

petroleum industry. The PIB coalesces all the existing 16 laws

into one comprehensive, all encompassing legislation, which

captures all the experience of past more than 50 years in

addressing all institutional matters: policy, structure, legal

and governance. The reform clearly defines three different

sectors of the industry, to facilitate the governance processes

and regulatory functions. These sectors are:

1. Upstream Sector: covering Oil and Gas exploration &

development

2. Midstream Sector: covering Oil transportation & Gas

transmission; Gas processing; LNG/CNG/GTL; Derivative

processing/production; and Oil refining.

3. Downstream Sector: covering Gas distribution and sale;

Petroleum product distribution & storage; and Petroleum product

retail.

The PIB will serve to promote transparency in the operation of

the oil and gas industry in Nigeria. Transparency, good

governance and accountability will be promoted through the

removal of confidentiality, which encourages corruption. With the

passage of the PIB, Petroleum Prospecting Licenses (PPLs) and

Petroleum Mining Leases (PMLs) can only be granted by the

Minister through a truly competitive bid process. Such process

will be open and accessible to all qualified companies. The

details of all licenses, leases and contracts, and any of the

changes to such documents will no longer be confidential.

It is therefore the expectation of Government that the new law

will transform the industry from "the most opaque" to "one of the

most open and transparent in the world". To that extent, PIB has

the prospects of bringing to an end the age-long decadence and

orgy of exploitation and corruption in the industry.

Another key feature of the reforms is separation of policy,

regulatory and commercial roles of the public sector entities.

The separated roles will be assigned to appropriate agencies to

ensure clear delineation of responsibilities. The new structure

will comprise of the following:

• One Policy Body - National Petroleum Directorate, that will be

responsible for detailed policy initiation, formulation and

development for optimum resource utilisation.

• Three Regulatory Bodies:

1. National Petroleum Inspectorate; will be an autonomous stand-

alone technical and cost regulator of the upstream petroleum

industry. The inspectorate will also ensure the efficient, safe,

effective and '"sustainable infrastructural development of

upstream petroleum operations.

2. Petroleum Products Regulatory Authority, will regulate the

downstream sector of the industry, and promote implementation of

national technical and commercial policies for the downstream

operations.

3. National Midstream Regulatory Agency, will regulate the

midstream petroleum operations, and promote the implementation of

national technical and commercial policies of the midstream

sector of petroleum operations in Nigeria.

• One Commercial Centre, Nigerian National Petroleum Company Ltd;

will have strict commercial orientation and focus, vertically

integrated and capable of competing both locally and

internationally in all relevant segments of the oil and gas

industry

• The National Frontier Exploration Agency, will be responsible

for regulating and stimulating petroleum exploration activities

in the unassigned frontier acreages.

• One Research & Development Centre, will be responsible for

research and development, promoting capacity building and

maximising local value addition.

• Two Fund Organisations:

1. Petroleum Equalisation Fund - for management of reimbursement

of losses by companies and the management of surplus revenue of

marketing companies, and

2. Petroleum Technology Development Fund - for capacity building

and training of

Nigerians in oil & gas related activities.

One of the biggest challenges of Nigeria's oil and gas

industry has been that of funding. The

International Oil Companies in the existing Joint Venture

arrangements have consistently complained that Government's

budgetary allocations for cash call purposes have often and

chronically fallen short of requirements over the years. This is

claimed to have negatively impacted capital expenditure

requirements for increasing production levels from the existing

Joint Venture fields.

Joint Venture funding therefore became an immediate challenge

for which a long-term solution had to be sought. A long-term

solution involves conversion of all Joint Ventures to

Incorporated Joint Ventures (IJVs), which can obtain loans and/or

go the capital market for funding. Each IJV will be a corporate

entity to be incorporated under the laws of Federal Republic of

Nigeria.

Apart from immediately eliminating problems of cash call

constraints, the IJV concept will free up funds, which will be

available to the Federal Government to invest in other areas of

social and economic development of the country.

The PIB also introduces a number of changes to the existing

fiscal system governing oil and gas operation in Nigeria. The key

changes include the fact that all companies engaged in upstream

petroleum operation, including the National Oil Company will be

required to pay Company Income Tax, as well as the introduction

of Nigerian Hydrocarbon Tax (NHT), which is a simplified version

of Petroleum Profit Tax.

These changes will give the government a higher government-

take for deep offshore fields and marginally higher government-

take for onshore and shallow waters, but will still leave the

industry with very competitive terms compared to other parts of

the world.

The reform introduces a modern acreage management system with

strict relinquishment guidelines, that will provide a platform

for new investors, both local and foreign, to enter and

contribute to the growth of the industry. Companies currently

operating in Nigeria will be required to give back acreage from

existing oil prospecting licenses and oil mining leases, except

acreages from which there are production, or acreages that will

be developed in the near future. This will prevent companies from

just sitting on acreages that otherwise will be available to new

investors. The Petroleum Industry Bill is currently with the

National Assembly and barring any unforeseen circumstances, will

be passed into law before the end of this year.

The gas sector reform is anchored on the Nigerian Gas Master

Plan which is currently being implemented. The plan aims to

address some of the challenges confronting the Nigeria gas

sector, notably that of inadequate infrastructure and commercial

framework, which have had a strong impact on the ability of the

sector to supply as rapidly as the market opportunity dictates.

The gas master plan provides for an Infrastructure blueprint for

the development of an extensive backbone for the Nigerian gas

grid. The fundamental strategy is the creation of a gas

infrastructure that concurrently supports the supply of gas to

the domestic, regional and export markets. This approach provides

for flexibility and scaleability of supply, and cost

effectiveness.

At the core of the proposed infrastructure are 3 gas gathering

and processing systems each of which will gather gas across a

delineated area, process the gas into a national specification

and export the dry gas into the network of gas transmission

systems. The processing facilities will enhance the LPG capacity

in the country and hopefully address the issue of LPG

availability within Nigeria. Three transmission systems are also

proposed, one of which will ultimately progress to be the Trans-

Saharan pipeline to deliver gas to Europe through North Africa

and the Mediterranean Sea.

With the proposed network of infrastructure, it is expected that

the ability to supply will increase rapidly and flexibly, and

Nigeria will be better positioned to respond to growth in demand

both domestically, regionally and for export.

The Gas Master Plan also addresses the issue of commerciality.

A gas pricing framework has been developed and it introduces a

sector based pricing and the gradual movement towards export

parity in domestic gas pricing. The pricing structure requires

the establishment of the Strategic Aggregator that should

essentially serve as the engine for the implementation of the

domestic gas pricing and the realisation of commercial pricing

and export parity for the suppliers. The framework divides the

domestic market into 3 categories comprising Power, Strategic Gas

Based Industries (i.e. industries that use gas as feedstock e.g.

fertilizer, methanol etc.), and wholesale gas marketers who

purchase wholesale gas for onward distribution to low pressure

commercial buyers such as manufacturing industries who typically

require much smaller volumes for fuelling their plants. A pricing

approach has been developed for each of these categories as

follows: cost-plus for the power sector; netback for gas based

industries; and alternative fuels pricing for the wholesale

buyers. With the pricing approach, it is expected that the

strategic intent of economic growth will be realized.

The most prolific oil producing region in the country is the

Niger Delta. A brief profile of the respective oil producing

states below shows their ranking according to estimated

production figures1. Apart from crude oil and natural gas

resources, these states have vast deposits of solid minerals and

agriculture that could potentially become alternative sources of

income. Out of revenues generated from the sale of crude oil, oil

producing states receive 13% as derivation allocation for oil

produced from the states before Federation Account distributions

to all tiers of government. An additional source of funds for the

Niger Delta states is the NDDC2, which gets three per cent (3%)

of the total annual budget from all oil companies operating in

the region. NDDC funds are solely for developing the region. How

effective this development funding has been is a subject for

further discussion and will be explored in subsequently.

The oil and gas sector is structured as upstream, midstream

and downstream sectors. Upstream operations – exploration,

development, production and to a large extent midstream

(exportation of crude oil) are capital intensive. Players in

these two sectors are the NNPC and IOCs. Collectively, the IOCs

contribute 94% of total production in the industry.

Downstream, local refineries process a limited amount of the

domestic crude oil into various petroleum products for local

consumption with distribution and marketing taking place within

this sector Pre-independence, the few IOCs operated under the

Mineral Ordinances and Petroleum (Production) Act. Five

additional laws were put in place before the end of the 1970s

reflecting government’s interest in the sector. Some of these

laws are highlighted below – Oil Pipelines Act, Petroleum Act,

NNPC Act, Land Use Act. Others are the Offshore Oil Revenue

Decree No.9 of 1971, Petroleum Production and Distribution (Anti

Sabotage) Act 1975 and the Exclusive Economic Zone Act 1978.

Interestingly, early Nigerian laws referenced “All Minerals”

whereas with an increased focus on oil, laws referenced

“Petroleum”.

Presently, the Petroleum Industry Bill 2012 (PIB) aims to

consolidate the affairs of the sector and upgrade redundant parts

of existing Acts if passed into law. However, it comes with

considerable contentious issues that may not necessarily address

the wholesome minerals and mineral oils sector, or existing

problems within the sector.

Participation Regimes in the Oil Sector in Nigeria

Participation in the oil sector in Nigeria is dependent upon

certain measures in the nature of a right. Right means “that

which is proper under the law. It is something that is due to a

person by just claim, legal guarantee or moral principle. It also

means power, privilege or immunity secured to a person by law”.

Right is a correlative to duty and most rights are qualified.

Rights of participation in crude oil business may be owned or

acquired.

OWNERSHIP RIGHTS

Ownership rights connote the totality of or the bundle of the

rights of a person over and above every other person on a thing.

In Chief Joseph Abraham & Anor v. Ishau Amusa Olorunfunmi & Ors, ownership

was held to connote the totality of the bundle of rights of the

owner over and above every other person on a thing. It connotes a

complete and total right over a property. Ownership rights

consist of an innumerable number of claims, liberties, powers and

immunities as regards the thing owned. This includes the power to

enjoyment, to determine the use to which the thing is to be put,

to deal with, produce or to destroy it, as the owner pleases, the

power of possession, the power to alienate, the power to

bequeath, the power to charge as security and the power to grant

to another person any or all of the rights for a stipulated time

period. In NNPC v. Sele, the court held that the owner of land

adjoining, abutting or encompassing waterways are entitled not

only to fish there but also to settle or erect structures and

even extract rent from others seeking to use the land.

Ownership rights over crude oil are determined by a number of

factors. The principal factor is the political system in place at

the time of determination and the instrumentality of law.

Generally, two broad ownership theories exist. They are the

Domanial System and Qualified Ownership. The Domanial system

provides for the vesting of ownership rights in the sovereign.

This is the most prevalent system of ownership of crude oil

practiced in most countries. Under qualified ownership, the

landowner is said not to have title to the oil in situ because of

the fact that he can be divested by drainage without consent and

without any liability on the part of the person causing the

damage. In this theory therefore, minerals belonged exclusively

to the one that captures it. In Ellif v. Texon Drilling Co, the court

held that the owner of a tract of land acquires title to the oil

which he produces from wells on his land, though part of the oil

may have migrated from the adjoining lands.

Theories of ownership are based on the concept of economic

interest and a critical factor in any transaction involving crude

oil is determining who owns the economic interest. This will

determine who receives benefits on the mineral resource. The

origin of economic interest as a concept is generally traced to

the Supreme Court decision in Palmer v. Bender where it was held

that the right to depletion also turns up on the substantive

issue of whether the owner has an economic interest in the

minerals depleted by production.

The question of ownership of crude oil and natural gas resources

has received attention in international instruments. In December

1952, the United Nations General Assembly made a resolution24 to

provide that the right of peoples freely to use and exploit their

natural wealth and resources is inherent in their sovereignty.

This extended in 1962 to the trend that the right of peoples and

nations to permanent sovereignty over their natural wealth and

resources must be exercised in the interests of their national

development and of the well being of the people of the state

concerned.25

In Nigeria, ownership of crude oil is vested in the Federal

Government. In South Atlantic Petroleum Ltd v. Minister of Petroleum

Resources, the court held that petroleum resources in Nigeria are

vested in the Federal Government. Interested persons are granted

licenses or leases to explore, prospect or mine oil and gas. The

exclusive right enjoyed by the Federal Government has been a

subject of controversy in Nigeria. There have been series of

protest over the ownership by the Federal Government. The

protesters have argued that they should be given control as

owners of the land where these resources are located while they

pay a determinable percentage to the Federal Government.28 This

agitation led to the disputes where the Supreme Court was called

upon to determine its jurisdiction as well as the seaward

boundary of a littoral state for the purposes of calculating the

revenue accruable to such state from the resources29 of its area

(which will also accrue tax payment) in accordance with section

162 of the 1999 Constitution.

ACQUIRED RIGHTS

An acquired right is usually in exchange for a contribution of

cash, property or services. In the beginning of crude oil

business in the country, Nigeria was caught in the web whereby

the investment for the exploration and exploitation of its crude

oil were more in the hands of multinational corporations who

enjoyed oil concessions covering land, territorial waters and

continental shelf areas for extended periods of time. However, by

the enactment of the Petroleum Act in 1969, provisions were made

for acquisition of participatory interest for Nigerian

government. This opportunity for participation was enhanced when

OPEC tilted the contractual scale in favour of its members and

also, with the establishment in 1971 of the Nigerian National Oil

Corporation (NNOC) which was later merged with the Ministry of

Petroleum Resources to form the NNPC in 1977.

In Nigeria, acquired rights of participation were granted through

licences and leases such as Oil Exploration Licence (OEL), Oil

Prospecting Licence (OPL),36 and an Oil Mining Lease (OML).These

rights were granted only to applicants who are companies

incorporated in Nigeria for crude oil exploration and

exploitation. The Mineral Oils Ordinance and the Petroleum Act

provided for such grants upon the applicant satisfying certain

requirements. The rights and powers of holders of OEL, OPL and

OML are subject to all the applicable laws and approvals to be

made by the Department of Petroleum Resources and other

appropriate government agencies and to such conditions as they

may impose.

Most of the early grants made under the Mineral Oils Ordinance

were of duration of 30 and 40 years respectively while those made

under the Petroleum Act were of shorter duration. However, by

virtue of the universally accepted doctrine of sanctity of

contract, the grants made under the Mineral Oils Ordinance are

still valid in Nigeria. As such; the Petroleum Act protects the

grants made under the repealed Mineral Oils Ordinance by virtue

of the transitional and saving provision contained in schedule

four to the Act.

Such acquired rights of participation may be revoked. The

circumstances for revocation are contained in paragraph 23 (1) of

schedule one to the Act. Where there is a decision to revoke, the

holder of a licence or lease shall be informed of the grounds for

such revocation and given opportunity to put forward its

explanations. If the explanation is taken and accepted, the right

may be restored. Where however, there is insufficient

explanation, the revocation takes effect and the notice of

revocation is gazetted.

The acquired right of participation for crude oil business in

Nigeria is structured with several features guaranteeing the

Federal Government (through the NNPC) and the other participants’

different rights and interests.

LICENSES

The DPR (Department of the Ministry of Petroleum Resources) is

responsible for processing applications for licenses and

supervision of all operations carried out under licences and

leases – essentially upstream operations related to petroleum

reserves, technical viability of production and exports of crude

oil, gas and condensates, in addition to licences and leases.

Ownership of oil blocks and mining licences allows the holder to

prospect (OPL) or mine oil fields (OML) in Nigeria. Licencing

rounds occur without any regular pattern, the most recent was in

2005/2006.

Discrepancies exist regarding the number of oil fields

allocated between 2011 and 2013. As at April 2013, DPR placed the

total number of oil blocks in Nigeria at 388, out of which 173

have been awarded - 90 to indigenous companies and 83 to IOCs.

The remaining 215 are yet to be awarded. According to Deep

Prospects Concession Maps 20115, 89 oil fields are owned by IOCs

while local and independent operators own 51 fields. 114 are yet

to be allocated. Margin

Indigenous oil companies include Summit Oil International Ltd6

(OPL 205), Sahara Energy Field Limited7 (OPL 274,286,284), and

Peak Petroleum Industries Nigeria Limited8 (OML 122).

AGREEMENTS

Agreements preserve the contractual framework within which the

NNPC on behalf of the Nigerian government and the IOCs conduct of

operations in the industry. These include the Joint Operating

Agreement (JOA), Production Sharing Contract (PSC) and Service

Contract (SC).

The development of these contractual agreements reflects the

readiness of the Nigerian government to respond to trends in the

global oil and gas industry as well as tackle inherent problems

emanating in previous arrangements. For instance, the PSC is

responsible for fears expressed over the JV, particularly as the

nation was opening the frontier areas such as the Inland Basins

and Deep/Ultra Deep Waters.

Joint Operating Agreements (JOA)

The JOA is the basic, standard agreement between the NNPC and

operators. It establishes guidelines for running upstream

operations.

Joint Ventures

In a Nigerian petroleum joint venture, two or more oil

companies enter into an agreement for joint development of oil

prospecting licences or oil mining leases (OMLs) and facilities.

Each partner in the joint venture contributes to the costs and

shares the benefits or losses of the operations in accordance

with its proportionate equity interest in the venture. Each joint

venture (JV) operates under a JOA with the NNPC and a Memorandum

of Understanding (MOU) with the Federal Government. NNPC operates

seven joint venture partnerships with oil companies.

This is a contractual relationship used by host governments in

acquiring participation interests in crude oil concessions.

Nigeria’s participation in the oil sector business is undertaken

either on its own or in a joint venture with other companies.

Joint venture arrangements are defined by the Oil Mining Lease

(OML), the Participation Agreement and the Joint Operating

Agreement. The Joint Operating Agreement spells out the legal

relationships between the parties involved in the respective

leases and lays down rules and procedures for joint development

of the area concerned and of property jointly owned by the

parties. In 1971, the first joint operation agreement (JOA)

detailing each party’s obligations, rights and interests as well

as the nature of the working of the relationship was executed in

Nigeria.

The joint venture concessions are operated through a fixed

system under the Minerals Ordinance and Petroleum Act. The

mechanism involves the use of a clause which requires the oil and

gas companies to accept as binding all legislative and regulatory

provisions as well as the changes, which may be enacted or

promulgated from time to time. The fixed system under the law

appeared to have a standard form and the advantage of giving

assurance of equal treatment to all licensees or lessees and

therefore give the impression that the terms are not negotiable.

The rigidity of the fixed system also gave the oil producing

country a stronger hand when discussing terms with the oil

companies and this created difficulty in attracting oil and gas

companies.

Under the joint venture, Nigerian Government was burdened by

upstream cash call commitments and had difficulty meeting its

cash calls obligations. The Government often resorted to

overdrafts from banking institutions to execute joint venture

projects. This resulted in underfunding leading to cuts or

cancellation of exploration and development projects and

deferment of contractors’ payments.

Challenges of the JOA

Some of the constraints associated with the JOA include poor

funding, due mainly to the imbalance in the financial capacity of

the different joint venture partners, especially the government

which has other pressures on its resources, leading often to

reduction in operations and consequential loss in revenue. JOA is

also constrained by allegations of gold plating of operating

costs by the non‐operators of the venture, which often leads to

mutual suspicion between the parties, and the rather unfair

distribution of revenues, especially in the situation of upsides

from high oil prices. Additionally, the Operator also faces

peculiar challenges in Nigeria such as the need to meet the

incessant demands by oil producing communities for development

programmes in their areas – demands which could lead to

disruptions in operations from time to time.

With the expansion of the Nigerian oil and gas industry, acreages

started being allocated in the shallow and deep offshore areas,

and this introduced the need for a different regime, as it

brought its own unique challenges in terms of funding and

technical complexity. This led to the introduction of PSCs in the

new offshore and inland basin acreages, which is gradually

assuming prominence in the entire industry.

Production Sharing Contract (PSC)

The PSC is an agreement put in place in response to funding

problems faced by the old Joint Venture arrangement and the

desire of the Nigerian government to open up the sector for more

foreign participation.

The PSC arrangement governs the understanding between the NNPC

and all new participants in the new inland deep & ultra-deep-

water acreages. Currently, Statoil, Snepco, Esso, Elf, Nigerian

Agip Exploration Limited, Addax, Conoco and Petrobas, Star Deep

Water, Chevron, Oranto Philips are operating the PSC in the

country.

As a result of the quest for control and increased financial

returns to the Federal Government, new varieties of acquired

participation arrangements such as the production sharing

arrangement for crude oil business were developed.49 All over the

world, new forms of arrangements have been developed to enable a

country assess how effectively its interests could be realized in

its crude oil resources. The production sharing is a form of

contract, which was pioneered in Indonesia in 1967. It was

introduced through Memorandum of Understanding (MOU) to keep pace

with the development of relationships between oil producing

countries and oil producing companies.

Under the production sharing structure, participatory rights

were granted on the basis of individually negotiated agreements

which have the following features:

1. The oil company is appointed as a contractor in a certain area

by the oil producing country to operate at its sole risk and

expense under the control of the oil producing country;

2. The oil company is entitled to a recovery of its operating

costs out of production from the contract area while the

production if any, belongs to the country;

3. The balance of production cost- profit oil is shared on a

predetermined percentage split between the oil producing country

and company;

4. The oil company’s income is liable to taxation and the

equipment and installations are the property of the oil producing

country either at the outset or progressively in accordance with

the amortization schedules.

In Nigeria, deep water and frontier exploration utilize

production sharing contracts. The first PSC in Nigeria was the

one between NNPC and Ashland Oil (Nigeria) Limited in 1973 and

its principal features included the following rights and

obligations: 50

1. The company shall bear the risk of operating costs required in

carrying out petroleum operations in the contract area as well as

provide the technical expertise for the performance of the work

programme;

2. The reimbursement of the company’s operating costs is

dependent on the production of petroleum in commercial quantity,

which will be sufficient to compensate the company’s operating

costs. The company was also entitled to recover interests’ costs

on funds borrowed to conduct petroleum operations. This was fixed

up to a maximum of 40% per annum of available crude oil. Any

unrecovered operating costs from previous years are carried

forward until fully recovered;

3. 55% of the remaining 60% after allocation of cost oil to the

oil company shall be allocated to the oil company and the net

realized price received for such tax oil shall be applied to the

oil company towards payment of petroleum profits tax payable for

the production;51

4. The remaining oil after allocation of cost oil and tax oil

would be profit oil. Of this profit oil, NNPC shall be entitled

to take and receive 65% and the oil company shall be entitled to

take and receive 35% provided that when daily production of

available crude from the contract area exceeds 50,000 barrels per

day, the participating interests, which shall apply, shall be

NNPC, 70% and the oil company, 30%;

5. The oil company is required in the implementation of its work

programme and in accordance with the contract to prepare and

carry out programmes for the training and education of Nigerians

for all job classifications with respect to petroleum operations

in accordance with the Petroleum Act etc.

The PSC arrangement as used reduces Nigerian Government’s burden

of upstream cash call commitments and appears to provide solution

to the difficulty of the Nigerian Government in meeting its cash

calls obligations. The main feature of the PSC in Nigeria is the

sharing between the partners to the contract of the petroleum

produced under the contract. The oil produced under the PSC is

shared as cost, royalty, tax and profit. The cost of oil

production is allocated to the contractor in such quantum as

shall generate an amount of proceeds sufficient for the recovery

of operating costs. Royalties and tax oil are allocated to the

host government and payable at the rate lower than what obtains

under the concessionary arrangements, while the profit oil is

allocated to each party in accordance with the terms of the PSC.

From its nature, the PSC to a host country like Nigeria, with a

developing economy and lacking the necessary expertise and

finances, is very attractive because it totally releases

government from the obligation of providing a substantial share

of up-front funding of the operations. Added also to the bargain,

is the fact that the ownership of the concessions would reside

entirely in the NNPC as a representative of the Government.

However, in 1980, the tribunal set up to probe the allegation of

missing N2.8 billion from NNPC accounts, found that the PSC had

no great benefits whatsoever to NNPC as it stood. The features in

the PSC were clearly inequitable and lopsided in favour of the

oil company Ashland Oil. As a result, the Federal Government

through the NNPC in September 1990 issued a model PSC in respect

of recovery of operating costs and sharing of profit. It provided

30% as cost oil, 40% as tax oil and the remaining 30% of profit

oil to be shared as follows: NNPC 35% and oil companies, 65%

while taxes due on the oil company’s share of 65% is to be paid

by the oil company in accordance with Companies Income Tax Act

(CITA).55 Again in March 1991, another PSC was issued modifying

the existing PSC. It provided among others that tax oil is to be

taken in kind by the Federal Government while cost oil and

operating cost is to be recovered by the contractor (Oil Company)

from the proceeds of the cost oil sold by the oil company. In

1993, the PSC was again modified as the NNPC signed yet another

PSC with oil companies.

Continuous modification of the PSC is very necessary for the

purposes of harnessing the maximum gain anticipated by the

Federal Government for its use. The PSC can be improved by

incorporating into it specific provisions to safeguard different

interests. For example, in Angola, there was an inclusion of

“price gap” clauses, which retain for the state any excess profit

that may arise when an increase in crude oil prices exceeds the

rate of increase in company cost.

The PSCs are attractive to the oil companies because of the

fiscal and legal regimes, which govern them and give the oil

companies’ higher profit share. These incentives are to help the

oil companies sustain their levels of oil production. The

incentives granted under the PSCs are underscored by the unusual

risk the oil companies are exposed to (i.e. the PSCs require them

to provide all upfront funds for the exploration, the high risk

nature of exploration and production activities in the frontier

areas of the deep offshore and inland basins and the high cost of

funding oil and developing productions facilities such as

equipment; structure, manpower in these terrains). However, PSC’s

can be disadvantageous if the operator decides to slow the pace

of production or tries to be wasteful or extravagant in its

exploitation especially when the operator knows his expenses

would be fully met.

Despite the disadvantages, the Nigerian Government has continued

in its use of PSC’s due to the difficulties encountered in the

use of existing joint venture concessions and the realization

that PSC’s are applicable in deep offshore exploration

activities. The PSC terms in Nigeria are attractive enough to

spur deepwater exploration by several major oil companies. It is

also hoped that the oil companies will reciprocate the

government’s gesture by rapid exploration and development of the

deep offshore and inland basin areas as established under the

Law.

Some of the advantages associated with PSCs include the relative

flexibility in the management of the operations, and the fact

that there is no financial burden on the host government, and

even after a commercial find, the payment to the contractor is in

oil, which does not attract any direct financial cost. Leveraging

on the technical know‐how and experience of the companies in such

operations, the government can focus its energies in other areas

of the economy while trusting that the oil and gas industry will

develop at an acceptable pace without the usual trappings of cash

call constraints. However, PSCs have some drawbacks such as the

risky nature of the operation. For instance, in the event of an

unsuccessful operation, millions of dollars could be completely

lost ‐ unless the local laws allow for costs from one acreage to

be transferred to another, which is not always the case, and

would depend on the provisions of the PSC entered into by the

parties. Also, the fact that the contractor is usually allowed a

relatively unfettered hand to draw up and execute its programme

could lead to allegations of gold plaiting of costs.

The long term nature of transactions in the oil industry

however usually mitigates some of these difficulties. The

tendency is usually for both parties to strive to make room for

flexibility in drawing up the terms, and also make provisions for

renegotiation in the event that particular provisions are later

found to be causing undue hardship. In recent times, there has

been a conscious shift in the contractual structure in the oil

and gas industry in Nigeria from JOAs to PSCs.

Service Contract (SC)

Under the SC arrangement, the OPL title is held by the NNPC.

Just like the PSC, the operator is designated as the Service

Contractor, providing all funds required for exploration and

production works. In the event of a commercial find, the

contractor’s costs are recouped in line with procedures spelled

out in the contract.

One major difference between the SC and PSC is that SC covers

only the OPL in question while the PSC may span two or more OPLs

at a time. Also, the SC covers a fixed period of five years and

should efforts not result in commercial discovery, the contract

automatically terminates.

Under the SC, exploration and development costs are paid in

installments over a period of time and the contractor has no

title to the crude oil produced, although he may be allowed the

option to accept reimbursement and remuneration in oil.

As an incentive for the risk taken, the contractor has the first

option to purchase a certain fixed quantity of crude oil produced

from the SC area. Only Agip Energy and Natural Resources (AENR)

operate the SC in Nigeria.

Another method of acquiring participatory rights in crude oil

business in Nigeria is through service contracts. Service

contract, which are very beneficial in terms of the acquisition

of petroleum technology was introduced to gain access to

relatively assured supplies of crude oil and natural gas. This

arrangement, which was first introduced in Brazil, is used with a

view to avoiding the disadvantages of the PSC.

The Service Contract could be Risk-Service, Pure-Service or

Technical Assistance Agreement. In the Risk-Service arrangement,

the host country owns the concession covered by the arrangement

as well as the petroleum discovered while all risks are borne by

the oil company who is employed as a contractor in certain area

and for a specific period. The contractor provides the upfront

money and furnishes the technical expertise for the operations

and only gets fully reimbursed from the sale of the concessions

of oil production. This type of contractual arrangement is

successful where there is commercial discovery or upon other

contractual terms.

The Pure Service contract or Technical Assistance Agreement

is a simple contract of work. All risks are borne by the

government and the contractor performs its stipulated services

and is paid fees for his services. The Pure Service or Technical

Assistance Agreement exists mainly in areas of proven reserves

for example, in the oil-rich Middle East countries such as Saudi

Arabia, Kuwait, Qatar, Bahrain and Venezuela.

Other types of agreement exist amongst independent oil companies.

Famfa Oil for example is an indigenous oil company awarded

leasehold rights to OPL 216. It entered into a Farm-in Agreement

with Star Deep Water Petroleum Limited, a subsidiary of Chevron

Texaco Inc., to facilitate exploration and production.

Contractual Incidents in the Upstream Oil And Gas Industry

The rights and duties available under different upstream

contractual devices may be open ended, as parties are in theory17

free to agree on the terms they choose. In practice, however,

most upstream devices are drawn from standard forms or model

agreements, with the parties simply varying the terms to suit

their specific transactions.

The contracts can be divided into pre-license contracts, examples

of which include the Joint Bidding Agreement, the Non-Disclosure

Agreement and the Areas of Mutual Interest Agreement, and post-

license contracts i.e. the Joint Operating Agreement, the

Production Sharing Contract, the Service Contract and the Farm-

out Agreement.

(i) Joint Bidding Agreement

This type of pre-license agreement is entered into to regulate

the contracting parties’ joint bid for offered licenses. The

Joint Bidding arrangement is particularly useful where the

capacities and experience of one of the parties does not meet the

bid requirements established by the Department of Petroleum

Resources.

(ii) Non-Disclosure Agreement

It is common place that in the process leading to a petroleum

transaction or the application for a petroleum license,

information of a proprietary nature will be divulged. The parties

will therefore enter into this sort of agreement to secure the

confidentiality of such information.

(iii) Areas of Mutual Interest Agreement

This is a binding agreement between the parties to only transact

with one another with regards an identified geographical area,

i.e. regardless of whether or not it has been offered by the

Federal Government.

(iv) Joint Operating Agreement (JOA)

It is important to note as a preliminary point that the NNPC

joint ventures (popularly known as the Traditional Joint

ventures) with the 6 Oil Majors20 were entered into via Heads of

Agreement and Participation Agreements. These agreements were

limited and only dealt with the equity holdings of the venture

partners and general principles for off-take, scheduling and

lifting. These agreements were succeeded by joint operating

agreements in 1991, which have remained in place between the

parties. The common features in a JOA include clauses on the

participating interests of the parties; the relationship of the

parties; the operator; Control of the operator; Funding of joint

operations; Sole risk operations; Disposal of petroleum;

Confidentiality; Change of operator and Assignment of interests.

(v) The Production Sharing Contract (PSC)

The PSC is a contracting device which would appear to be the

predominant global device; especially as exploration and

production activities move deeper offshore. The device conceives

an arrangement between the license holder and an exploration and

production company acting as the contractor. This contracting

company carries all the costs of exploration and production and

is rewarded if a commercial discovery is made and development

follows, by recovering its costs and taking a share in the

profits. The sharing of production is done in the order of

royalty oil, cost oil, tax oil and profit oil. Royalty is charged

on a graduated basis so that the deeper offshore the location the

less of it is charged. Cost oil is a negotiated item. Tax oil is

allocated to NNPC and paid on behalf of the parties, being

charged at a flat rate of 50% of chargeable profits. Profit oil

is only paid on the balance available crude oil and upon a

shifting scale. 20 Oil majors are Total, Shell, Exxon Mobil,

Agip, Chevron and MRS (formerly Texaco).The common features in

the PSCs include Bonus; Contract duration and relinquishment;

Work programme; Management Committee; Recovery of operating costs

and crude oil allocation; Commercial discovery; Natural Gas;

Renegotiation Clause; Stabilization clause and Conciliation and

Arbitration.

(vi) Service Contract Arrangement

The Service Contract is a commercial device that is largely

unused in the

Nigerian oil and gas industry, its features include provision by

the contractor of funds for exploration and development; non-

recovery of costs where no production is achieved, no title but

an option to oil produced; duration for short period.

(vii) Farm-out Arrangements

This is an arrangement whereby third parties acquire interest in

a license by paying i.e. may be in marginal field contained

within the license area. The Petroleum Amendment Act of 1996

marked the commencement of the implementation of the Federal

Government’s programme on marginal fields. The initial programme

was roundly condemned by the license holders because of the

unilateral classification of fields as marginal and what was

perceived as the imposition of farmees. In 2001, the Federal

Government formulated with the ‘Guidelines for Farmout and

Operation of Marginal Fields ’which was meant to deal with the

concerns of the license holders as well as the farmees. The

Guidelines provided for basis for field classification; ownership

and compensation; indemnification.

LEGAL IMPLICATIONS AND REGULATORY RISKS OF INCORPORATED JOINT

VENTURES

Laws and regulations are often designed to isolate or guard

stakeholders against plausible risks apart from outlining the

framework in which State policies and objectives are to be

effected in a given industry. In the petroleum industry, the

stakeholders are often the State or custodians of State interests

on one hand and private (local and multinational) corporations on

the other. The process of changing or reforming the underlying

legal regime within the industry also brings to life certain risk

elements. Regulatory risks entails the threat to earnings,

capital and business reputation associated with a failure or

difficulty in complying with an increasing or dynamic array of

regulatory requirements, including a change in underlying

regulatory and contractual framework for investments.

Furthermore, it is the effect of a change in law(s) or

regulation(s) made by the government or a regulatory body, which

consequently increases the costs of operating a business,

reducing the attractiveness of investment and/or change the

competitive landscape of an economic sector.

A critical policy thrust of the Federal Government of Nigeria as

contained in the National

Oil & Gas Policy 2004, is to convert existing Unincorporated

Joint Ventures (UJVs) to

Incorporated Joint Ventures (IJVs) which raise critical corporate

governance, funding, financing and investment protection issues.

A UJV is a strategic alliance between two or more companies,

individuals or organizations that are otherwise unrelated, which

is formed for the purpose of conducting a new profit-motivated

business. An IJV on the other hand is a joint venture arrangement

in which the companies involved create or incorporate a separate

corporation and divide its shares between themselves generally as

an equitable way to distribute income from the joint business

operations.

Incorporated Joint Venture Arrangement

Under an IJV, the parties are more than just owners of an

undivided share of the joint venture’s capital, risks and

liabilities, but become shareholders in a new company

incorporated at the Corporate Affairs commission (CAC) with the

assets and liabilities belonging to the IJV Company. The issue of

converting ‘participating stakes’ in an OML under a UJV to equity

in an IJV may be difficult to implement, where the law mandates a

conversion from UJVs to IJVs. In the writer’s view such

considerations are best left to inter-party negotiations and

evaluations. It is important that the law does not mandate an

expropriation of the undivided share of each co venturer’s

proprietary interests as section 44(1) of the Nigerian

Constitution provides that-

“…No moveable property or any interest in an immovable property

shall be taken possession of compulsorily and no right over or

interest in any such property shall be acquired compulsorily in

any part of Nigeria except in the manner and for the purposes

prescribed by a law that, among other things - a. requires the

prompt payment of compensation therefore and

b. gives to any person claiming such compensation a right of

access for the determination of his interest in the property and

the amount of compensation to a court of law or tribunal or body

having jurisdiction in that part of Nigeria…”

Another important issue is the transfer of the underlying core

assets of the UJVs i.e. OMLs or other licenses to the IJV. Such

assignments usually require the consent of the Minister of

Petroleum. One may however take it as a given approval, since the

process is at the instance of the State. An example of an

existing IJV company in the Nigerian oil and gas sector is Brass

LNG Limited. The Shareholders are Nigerian National Petroleum

Corporation (NNPC) (49%), Eni International (17%), Phillips

(Brass) Limited (an affiliate of ConocoPhillips) (17%) and Brass

Holdings Company Limited (an affiliate of Total) (17%). The

Company was formed to construct and operate a Liquefied Natural

Gas Plant to be sited on the Island of Brass, Bayelsa State. The

most outstanding IJV in Nigeria remains the Nigerian Liquefied

Natural Gas Limited, comprising of NNPC (49%), Shell (25.6%),

Total (15%) and Eni(10.4%).

Contractual Documentation for an Incorporated Joint Venture

The most important document for the establishment of an IJV

further to a mandatory conversion from a UJV is the JOA. Upon

incorporation, the board of the new IJV company must ratify it as

part of the company’s constitution.23Other required documentation

includes:

Articles of Association

This is a public document registered at the CAC under the

Companies and Allied Matters

Act (CAMA) 2004. It contains among other things agreed rules

about the procedures to be followed at general meetings, board

meetings and composition, company secretaryship, the rights

attached to the various types of shares and other procedural

matters. It also specifies the role of the Chairman if any, vis-

a-vis the Board of Directors.

Shareholders' Agreement

This is a private document, which may therefore contain

commercially sensitive or highly confidential information. For a

UJV being converted to an IJV, the provisions of the

participation agreement should automatically guide the parties in

negotiating the new Shareholders Agreement. Typically, it would

include provisions relating to board representation, voting

rights, confidentiality, the transfer of shares and the procedure

to be followed in instances of deadlock.

Management Agreement

If required by the parties, they may appoint a "managing

shareholder" who enters into a management agreement with the IJV

company. The management agreement typically provides that one of

the shareholders would be responsible for the management of the

business. The agreement sets out the role of the managing

shareholder and any limit on his power to conduct the business,

his remuneration, provisions regarding his accountability, and

the circumstances in which the agreement may be terminated.

Occasionally, other shareholders may also be parties to the

management agreement with specific roles.

Contracts for the purchase of assets or business

Generally, an IJV may be formed by the co-venturers in order to

purchase the existing business or asset of a third party.

Alternatively, the co-venturers may establish a jointly owned

vehicle through which they intend to channel various businesses

in order to carry them on as a combined operation. In either

case, it is necessary to have agreements between the IJV company

and the third party or co-venturers providing for the sale and

transfer of the assets to be used in the joint venture (for

example, geological surveys; oil rigs etc.). This agreement

should be "at arm's length" and provide the IJV with all of the

usual warranties and assurances that a normal business would

require. Depending on the particular scenario and situation

surrounding the formation of the IJV, the other documents that

may be required are:

Loan agreement

Contracts for the supply of goods and services;

Intellectual Property Transfer Agreements ;

Distribution and marketing agreements (Crude Handling

Agreements);

Service and secondment agreements; and Agreements relating to

real property. Risk Allocation under an IJV.

The IJV company is a separate legal entity from the shareholders.

Thus, it is the company that is, therefore, exposed to the

financial and commercial risks involved in the joint venture. A

board of directors will be established to manage and decide on

the activities of the IJV. Theoretically, the parties are

protected from losses arising from the company’s operations and

their liabilities are either limited by the amount of unpaid

shares they subscribed to or unlimited accordingly. In practice,

the concept of limited liability of many joint venture companies

is often undermined by financiers who require the parties or

shareholders to put forward guarantees, if the joint venture

company itself has no track record or has insufficient assets to

cover huge investment risks as security for its proposed

borrowings. This situation may arise where the newly created UJVs

(i.e. those comprising of NPDC and local oil companies who

recently acquired interests held by some MOCs in Nigeria) are

incorporated as they have no sufficient track record as separate

legal personalities.

Furthermore, undue political influence on the IJV may hamper its

smooth functioning with the NNPC being the majority shareholder.

Also, the capacity of the NNPC to function effectively as the

operator remains another issue.

Legal and Business Implications

Whatever legal structure is adopted, IJVs inevitably require a

degree of mutual trust and co-operation that goes beyond the

usual arm's length commercial relationship between contracting

parties.In an IJV, the relationship is contractual as between

shareholders amongst themselves on one hand, and between the

shareholders and the company. Section

41(1) of the CAMA, provides that the memorandum and articles of

an incorporated company has the effect of a contract under seal

between the company, its members and officers and between the

members and officers themselves whereby they agree to observe and

perform the provisions of the memorandum and articles, as altered

from time to time in so far as they relate to the company,

members, or officers as such. Unlike in the UJV where each co-

venturer acts in the course of its own business when it comes to

the disposal of the resulting petroleum, in an IJV, the ‘IJV

company ’as opposed to respective shareholders, owns and disposes

the petroleum.

Corporate Governance

In terms of corporate governance and decision making, without

a uniform agreement on the companies objectives and work

programmes, the IJV company’s business may suffer due to

differences in the business customs and style of operations of

individual corporate shareholder. The corporate governance

arrangements must therefore be pragmatically laid out in the

articles of association and/or shareholders' agreement bearing in

mind the legal and regulatory requirements that the IJV company

will be subjected to inter alia under the CAMA and the Petroleum

Industry Act (when passed). Importantly, the parties must agree

on the extent to which authority should be delegated to the

executive management of the IJV company and the main board of

directors (which according to CAMA is responsible for the overall

management of the Company). The parties may exercise control over

key issues directly through the shareholders' agreement but in

the interest of the IJV. Importantly, the directors of an IJV

appointed by the shareholders may be conflicted in deciding

between the interests of the appointing shareholder and the

interests of the IJV.

This is because; apart from the obligations owed to his

regular employer (i.e. the shareholder) the director is also

under a fiduciary duty to act in the interests of the IJV.

Therefore, the interests of the IJV and the appointing

shareholder may conflict.

Ultimately, the duty of the director to the IJV must supersede

that which he owes to the appointing shareholder as Section 279

(2) of the CAMA provides that a director shall owe a fiduciary

relationship to the company even where such a directors is acting

as an agent of a particular shareholder.

Funding and Financing

Obtaining finance or funding is crucial to the success of

joint operations in the petroleum industry, whether through UJVs

or IJVs. Parties must critically consider initial funding and

future financial requirements. In the wake of new regulatory

requirements, the relevant parties will be required to function

not as co-venturers or partners but as equity holders in a

limited liability company. The general perception is that a fully

privatized IJV,stands a better chance of securing finance for its

operations. However, major transactions in the Nigerian oil and

gas industry, particularly in the upstream sector have been

consummated through reserves based lending and project finance.

It is worthy of note that a key element of these types of

financing is the emphasis by the lender on the cash flow rather

than the credit base of the sponsor. Undoubtedly, these types of

financing will still be the order of the day even for IJVs.

Budget approval

Under the UJV, this is carried out by the operating or steering

committee on behalf of the co-venturers, followed by particular

Authorities for Expenditure (AFEs) established in relation to

specific items. However, in an IJV, the responsibility ordinarily

will be for the board of directors to propose the budget and for

the shareholders to approve.

Cash calls

Cash calls would be made by the operator on all of the co-

venturers to fund items for which

AFEs have been issued under the UJVs. This has been a major

challenge for existing UJVs as NNPC has often been in default in

meeting its cash call obligations. In an IJV, the company will

ordinarily be responsible for its own financial obligations and

obtaining capital for its operations. The shareholders’ agreement

may set out the initial capital contributions of the parties to

the IJV company’s account which doesn’t necessarily have tobe

based on the shareholders shareholdings in the IJV company.

Subsequent funding by the IJV may be by additional equity

contributions, quasi-equity or debt.

As earlier stated, under an IJV, there is a distinction between

the company (IJV) and the owners/shareholders, since the IJV has

a distinct legal personality upon incorporation and any assets of

the IJV are owned by the IJV. Thus, an IJV may be able to raise

finance on the strength of its balance sheet and give security to

lenders accordingly. It can be argued that since the IJV will be

the entity raising finance (and not the individual shareholders),

there will be an alignment of interest between the MOCs and their

fellow shareholders to provide the necessary incentives and co-

operation (for e.g. shareholder guarantees) to make the IJV

attractive for raising the funds. This is unlike under an UJV

where each party would have to source for their funds separately

leading to a situation where one party may be disadvantaged.

Furthermore, being a separate legal entity, the IJV can access

the capital market either by listing its shares on the capital

market 30 or issuing debt instruments. IJV companies may also be,

financed by non-cash consideration contributions (e.g. when a co-

venturer transfers assets to the company or may agree to provide

know-how or other technical assistance in return for the initial

issue of shares by the joint venture company).

Return on Investment

Under an IJV, the shareholders would typically get returns on

their investment by way of dividend payouts declared by the

Company. This is measured based on each shareholder’s

shareholding in the Company. There are certain provisions

governing the distribution of dividends under the Company and

Allied matters Act. Section 379(5) of the CAMA provides that

dividends shall be payable to the shareholders only out of the

distributable profits of the company. Section 380 of the CAMA

further specifies that profits out of which dividends may be paid

as:

(a) Profits arising from the use of the company’s property

although it is a wasting asset;

(b) Revenue reserves; and

(c) Realized profit on a fixed asset sold, but where more than

one asset is sold the net realized profit on the assets sold.

Under a UJV the mechanism affecting the returns on investments is

usually less uniform. This depends on the participatory interests

of parties and as mentioned earlier, each party usually has the

right to its share of production.

Termination

Unlike in a UJV where the JOA provides for the process of

termination and notices, in bringing the IJV to an end, the

winding up process as stipulated under Part XV the CAMA must be

adhered to. Thus, there is a significant difference in the

transaction cost accruable in ending the business relationship in

either case.

PART TWO: DEREGULATION AND LIBERALIZATION OF THE DOWNSTREAM

SECTOR

The oil industry has been a major contributor to Nigeria’s

economy and that is why over 80 percent of the country’s foreign

exchange earnings come from this sector. Since the discovery of

oil in commercial quantity, Nigeria has been experiencing

consistent increase in revenue earning. But this increase

notwithstanding, Nigerians are yet to enjoy certain basic

necessities of life. It has been strikes and protests against

inadequate supplies and incessant increases in the pump price of

refined products. In order to reduce the burden on the citizenry,

the federal government introduced the policy of subsidy, which

was to make the prices of fuel in the country cheaper for

consumers to buy. But, in spite of the whooping amount of money

spent on subsidy, the prices of the refined products continued to

rise astronomically. It is against this background that this

paper seeks to examine the issue of deregulation in the

downstream oil sector and to find out if the crisis being

generated can be resolved. During the course of this paper, it

was discovered that a group of dissidents and saboteurs have been

working against the functionality of the existing refineries and

equally engage in fuel importation for the purpose of satisfying

their selfish interests. In order to ameliorate the ugly

situation, introduction of deregulation in the downstream oil

sector becomes imperative. The paper believes that the policy, if

properly implemented, will go a long way in eliminating market

distortions, promotes free market competition, and encourages

private ownership of refineries in the downstream petroleum

sector.

Nigeria is endowed with vast natural resources including such

minerals as petroleum, limestone, tin, natural gas and others

(Anyanwu et al, 1997:3). All these minerals have remained

untapped, except petroleum which had dominated Nigeria’s economy

since the

1970s.Today, petroleum is by far the most widely used energy

resource world wide. Its production and distribution, according

to Asimi(2005:8), affects the relations among nations and even

the purchasing power of some individual citizens.The first

discovery of oil in commercial quantity in Nigeria was made in

1956. Shell- BP was the principal company undertaking oil

exploration and production activities in the country, although

there were sporadic explorations by other companies, prior to

that date (Gidado,1999:53).

According to him, Nigerian government did not embark on

serious oil policies for the country until 1967. The rapid inflow

of oil revenue to the country in the early 1970s, led to the

complete abandonment of agriculture which was Nigeria’s mainstay

of economy. It was observed that since the beginning of oil

production in commercial quantity, Nigeria has been rated high,

the world over, such that she is declared Africa’s second largest

producer after Libya, eighth largest exporter in the world and

the world’s tenth largest oil reserves (Omotoso, 2010:2). Since

Nigeria’s first export of crude oil in 1959, it has become the

major contributor to the country’s economy, and that is why over

80 percent of the country’s foreign exchange earnings come from

the oil sector. Nigeria has been enjoying consistence increase in

the revenue from oil. For instance, a barrel of oil was sold at

3.00 dollars per barrel in 1971,12.42 dollars and 37.00 dollars a

barrel in 1974 and 1980 respectively. Following steady increases

in the sales, receipts swelled as well from 300 million dollars

in 1970 to 4.2 billion dollars by the end of 1974, when oil

production was 2.3 million barrels per day (Asimi, 2005:8). By

1976, oil revenue had risen to 6.3 billion naira and in 1980, the

peak of 12 billion naira was achieved (Nigerian oil Directory,

1993: 53). Considering the current price of crude oil in the

international market, which stands above 70 dollars a barrel, the

revenue accruing to the country, has equally increased

correspondingly. The huge revenue notwithstanding, one may be

tempted to ask, if this God-given commodity has brought curse

instead of blessing, since Nigerian people are yet to have

smiling faces right from the inception of oil production and

exportation in the country. It has been protests galore against

short supply and steady increases in the pump prices of refined

products. In order to cushion the effects of these increases and

reduce direct burden on the citizenry, the federal government

instituted the policy of subsidy. The essence of this policy

option was to reduce the prices of the products, but at the

expense of the federal government that was paying whooping amount

of money. For instance, the sum of about 2.5 trillion naira was

spent on fuel subsidy by the federal government between 2006 and

2009, and 600 billion naira budgeted for the fiscal year 2010

(Movement for Economic Emancipation,(2010:10). But what really

disturbs the minds of many Nigerians is that despite the huge

expenditure on subsidy, the prices of refined products continue

to rise incessantly, hence consumers buy them at a rate higher

than expected.

Ezeagba (2005:43), asserts that a situation of subsidy exists,

when consumers are assisted by the government to pay less than

the market prices for the product they are consuming. That is why

the essence of the subsidy in the present circumstance in

Nigeria, is to reduce the official pump prices of petroleum

products paid by Nigerian consumers. It is unfortunate to observe

the deteriorating nature of the country’s social amenities,

critical infrastructure and other development indices, when

trillions of naira are believed to have been spent on subsidy. It

is therefore, against this background that this paper seeks to

examine deregulation of the downstream oil sector and to

ascertain whether the policy would solve the problem of scarcity

and incessant increases in the prices of petroleum products,

which to my own mind have caused a lot of instability in the

economy of this country.

The Origin of Economic Deregulation

In its original application, the return to market propelled

economic policies began to gain currency in the mid-1970s in the

United States of America, the United Kingdom, Australia, and to a

lesser extent in Germany, France, Canada, Japan, Denmark and

Austria.In each of these countries, the deregulation option was

chosen for the failures of regulation. These views have been

succinctly expressed inter alia:

With the exception of the dismantling of wartime

controls, the essentially uniform trend throughout the

twentieth century had been toward more detailed and

extensive regulation of business. …Nevertheless the

rise of a broad deregulation movement, affecting a

wide range of programs in several countries, mainly

reflected intellectual and political developments.

Academic economists had concluded by the 1960s

that much regulation was unnecessary or ill conceived

and, in particular, that public utility-type regulation of

pricing and entry in multiform industries was almost

always unwarranted.

The desire for strict regulatory economic regimes in most of

post war Europe and America, with the exception of the communist

bloc, which was incompatible with a capitalist market economy,

was borne out of strong nationalist and protectionist feelings

that were the immediate outcome of World War II. For the purpose

of this research however, deregulation as an economic term, may

be defined as the exact opposite of regulation or control. To

deregulate therefore means the gradual or complete withdrawal by

government of all forms of regulation or rules of control in

particular sectors of economic activities. In other words

deregulation is an economic laissez-faire, which adopts the

liberal philosophical doctrine.

The move from a regime of economic regulation to deregulation is

not without opposition and their attendant dangers. When France

deregulated its broadcast industry in the 1980s, the principal

opposition generally came from regulated industries and their

unions, which sought to preserve protection from competition. In

addition, opposition from consumer groups and business customers,

who believed they received subsidized service under regulation,

was also observed. The French experience is not far removed from

the anxiety and apathy that has welcomed the Nigerian

deregulation efforts. The fundamental question however remains,

whether or not the entire process is premised on a legal

framework capable, not only of assuring its success, but also of

averting some of the negative consequences of deregulation.

According to Hornby (2001:313), deregulation is the freeing of

a trade or a business activity, from rules and controls. In his

own view, Obioma (2000: no date), understood it to mean the

allocation of resources by market forces. He equally saw it as

the determination of price by the interplay of demand and supply.

It means the withdrawal of government control of resource

allocation mechanism, thereby allowing the forces of demand and

supply to determine the prices of goods and services. By way of

expansion, Ezeagba(2005:43),stated that the fundamental economic

objective of deregulation can be summarized as bringing more

competition to the market with its attendant increase in economic

efficiency and welfare. In his own words, Fawibe (2009:1)

believed that deregulation is the removal of government control,

withdrawal of state interference, encouraging free market

operation, and simplification of government’s rules and

regulation for greater market forces. Fawibe’s view seems to be

more comprehensive and incorporating. This is because; government

does not end up in withdrawing its control and interference in

the day-to-day businesses and activities, but has to prepare an

enabling environment for the take-off of a deregulation policy.

For instance, government has to allow the price system to be

determined by the forces of demand and supply. In addition, the

operators should be acquainted with the rules and regulation of

the game, for greater market forces. In his own opinion, Akintola

(2005:8), described deregulation as removal of government subsidy

and the cessation of the price control or regulation by

officialdom. He went further to state certain conditions that may

necessitate deregulation policy in a country. They include the

inability of government to continue to subsidize petroleum

products because of competing national priorities and the need to

curb smuggling of the products overseas, thereby unwittingly

subsidizing other economies. Akintola’s view is in order as the

mentioned conditions are undoubtedly prevailing in Nigeria today

and that is why there are calls from different quarters in the

country, to implement the deregulation policy without much ado.

Deregulation pre-supposes market forces as the determinant of

prices rather than a decision to fix price by administrative

fiat. Deregulation is therefore 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 intention

of the Federal Government since 1991 (President 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. Although the policy of deregulation and

liberalization pre-dates the administration of Chief Obasanjo.

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 most especially fuel. Professor

Jerry Gana in early 2001, at a press briefing, 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 Group Managing Director (then)

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).

In a similar vein, Deregulation is the gradual withdrawal or

removal of regulation in the way of liberating the economy. The

concept is also referred to as the system of removing impediments

to trade; control of the movement of goods and services, thereby

allowing free flow interplay of the forces of demand and supply

in the determination of the price of commodities and wages of

services rendered (Ojo, and Adebusuyi, 1996). From the dictionary

perspective, the Oxford Advanced Learners’ dictionary (2005)

defined deregulation as the act of freeing a trade or business

outside of the rules and controls. Deregulation therefore occurs

when the government seeks to allow more competition in an

industry that allows more competition in an industry that

condoles near monopolies hence, a general word that refers to the

practice of transforming an economy to one that is open to all

interested players and is usually driven by market forces.

Akinwumi et a (2005), sees deregulation as 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 (Ekundayo, and Ajayi, 2008). Deregulation as defined by

‘investorwords.com’ means the removal of government controls from

an industry or sector to allow for a free and efficient

marketplace. Deregulation occurs when the government seeks to

allow more competition in an industry that allows near-

monopolies. “Deregulation enhances competitive service delivery

that will enable consumers to have wide range of choices as

regards their ques for satisfaction. A glaring example can be

seen in the telecommunications sector” (Omodia, 2007). As noted

by the World Bank (1988), experience has shown that competitive

markets (mainly involving private sectors) are the most efficient

ways to supply goods and services. “Government’s role usually can

be limited to policy-making while leaving actual investment,

operation and maintenance to non-governmental entities” (Omodia,

2007). According to Onipede (2003), the continuous abysmal

performances by most of the government parastatals are the

undisputable evidences of inappropriateness of government

involvement in business. Onipede further asserts that those who

continuously argue against NEPA’s (now PHCN) privatization cited

loss of jobs and national security as reasons. Rational minds

would definitely disagree with this reasoning. Thus, deregulation

and privatization are believed to be capable of enhancing

efficiency and effectiveness in service-delivery.

THE BACKGROUND TO PRIVATISATION IN NIGERIA.

The privatisation of public corporations often referred to as

State Owned Enterprises (S.O.Es), is a relatively recent

phenomenon in Nigeria’s political and economic history. Some of

the basic economic advantages expected from the privatisation of

S.O.Es can be compressed into the need to improve their

efficiency and productivity, reduce operating losses and

deficits, prevent further grant of government subventions,

enhance the repatriation of domestic capital flight, attract net

foreign capital inflow and generally eliminate the existence of

bogus state monopolies and the ancillary economic problems of

corruption and exploitation that emanate from them. In order to

capture the legal and socio-economic background to the Nigerian

privatisation project, it is of necessity that the term

“privatisation” be defined both contextually and conceptually. In

the midst of these fundamental changes, the status of the

Nigerian worker remains unchanged politically, economically and

socially. Apart from the intensified pauperisation of the workers

by governmental policies of privatisation and commercialisation

of SOEs as well as the liberalisation and deregulation of select

commercial and economic activities, problems associated with employee

status, job security, and improved conditions of service remain largely

unattended to. The Nigerian worker, it seems, is being short-

changed from all quarters. While wages and salaries have remained

static over long periods of time, government officials continue

to insist on implementing these schemes without first putting in

place an efficient and revised pensions and social security’s

system, modalities for the adequate representation of employees

in the management and boards of the newly privatised and

commercialised SOEs and renewal of social and physical

infrastructures.

The Public or Private Dichotomy.

The philosophical underpinnings that posit the current

privatisation wave in proper context would expose the defects in

structural and legal conceptions defining the concept of

privatisation and questioning the very need for it, especially in

an emerging market economy such as Nigeria. The relativity of the

concept notwithstanding, the term public used adjectivally means,

“pertaining to a state, nation, or whole community; proceeding from, relating to, or

affecting the whole body of people or an entire community…. Belonging to the people

at large; relating to or affecting the whole people of a state, nation or community….”

It is therefore imperative that something is public when it

belongs to the whole rather than the part, open rather than

closed, communal rather than private and the fundamental

relationship between public and private is that they stand in

opposition to each other perpetually, and a philosophical

continuum is maintained at all times.

The term private on the other hand has been defined simply as

“affecting or belonging to private individuals as distinct from the public generally. Not

official; not clothed with office.”In corporate and organisational senses,

these may either be public or private. A public enterprise, in the

sense used here connotes any corporation, board, company or

parastatal established by or under any enactment in which the

Government of the Federation, a Ministry or Extra-Ministerial

Department, or Agency has ownership or equity interest and

includes a partnership, joint venture or any other form of

business arrangement or organisation. This is fundamentally

different from a public company within the meaning of the Companies

and Allied Matters Act, section 24 which refers to public limited

companies and whose shares are traded in the open market.

Privatisation with reference to business units has come primarily

to mean two things:

(a) Any shift of activities or functions from the state to the

private sector; or

(b) Any shift of the production of goods and services from public

to private.

Invariably, privatisation is essentially the act of reducing the

role of government, or increasing the role of the private sector,

in a business activity or in the ownership of assets. In this

respect, privatisation would be ascribed a meaning similar to

those of deregulation and liberalisation.

The policy initiative for the legal framework of the Nigerian

privatisation project appears to have taken some of these

principles into consideration. In doing so however, several of

the legal options adopted for the privatisation process in

Nigeria appear not to accommodate purely market based and

egalitarian approach to privatisation. The legal and socio-

economic implications of this would become clear in the course of

this work. The Nigerian approach has raised some pertinent

questions bordering on market integrity, the integrity of the

personnel in charge of the exercise, public confidence and

accessibility, and the overall efficacy of the methods adopted

for the privatization exercise.

The Concept of Privatisation in Nigeria

The Privatisation and Commercialisation Act defines “privatisation” as:

… the relinquishment of part or all of the equity and other interests held by the Federal

Military Government or its agency in enterprises whether wholly or partly owned by the

Federal Military

Government, and ‘privatise’ shall be construed accordingly.

The foregoing definition appears to be functional only and does

not reveal the context and the concept of privatisation. A

perusal of the Public Enterprises (Privatisation and Commercialisation) Act does

not help the situation much. It rather assumes the meaning of the

term privatisation in its provisions. This approach leaves

substantial ambiguity in the law, which is often reflected in the

problems and crises of implementation and the overall assessment

of the success index of the privatization scheme.

A reliance on the above-mentioned pieces of legislation

therefore provides little or no assistance in understanding the

concept and scope of privatisation in Nigeria. Recourse to

political economy is therefore proposed. To some experts

privatisation is a hazy concept evocative of sharp political

reactions, the term having been used to cover a range of policies

from those of governmental disengagement and deregulation to the

sale of publicly owned assets. At its broadest and most symbolic

level, privatization has been described thus:

… a counter-movement to the growth of government that has characterised much of

the post-World War II period in industrial and developing countries. It may mean

reducing all forms of state control over resource allocation.

To adopt this description is to posit the concept of

privatisation as necessarily encapsulating the peripheral and

sometimes, incidental concepts of economic deregulation and

liberalisation. Nothing can be further from the truth. The three

concepts capture fundamentally distinct principles that must

function within the same economic terrain.

What appears to be a more appropriate definition comes from

another source to the effect that privatisation is “the transfer of

operational control of an enterprise from the government to the private sector.”

Although “operational control” can be placed in private hands

through leases, concessions, or management contracts, control is

most often secured by majority ownership. Consequently,

privatisation refers to any transaction in which government cedes

or transfers its ownership control of a public enterprise by

depressing its equity participation from above 50 percent to less

than 50 percent. The concept of privatisation appears by this

definition to aggregate that of divestiture, which however

legally connotes a process of complete downloading of government

securities in erstwhile State Owned Enterprises (SOEs).

Privatisation and Divestiture Distinguished

A thin line however exists between the concept of

privatisation and that of divestiture. While the term “privatise”

appears to import a process of total withdrawal of government

from business activities, its adaptation in Nigeria and several

parts of the globe suggests the exact opposite. The government’s

desire to privatise is propelled by two conflicting and

compelling economic principles of development and profit. The

privatisation scheme put in place in Nigeria is intended to

insure and insulate government from the losses in companies owned

by it and arising from the inefficiency of the bureaucracy set up

to manage them, while ensuring that it benefits from business

profits magnified by ceding management and control to private

investors.

The Nigerian variant of the privatisation process seems to be

a hybrid between privatisation and divestiture; the latter as it

were amounting to a complete withdrawal of the State from

business ventures. The objective of government however appears

not to have been adequately underscored by the legal regime

available for the implementation of the scheme.

The Context of Nigeria’s Privatisation Scheme

A definitional approach to an understanding of the concept of

privatisation is an endless exercise that would not only create

further confusion but also equally reveal that it is indeed a

term of relative application. Probing the context in which the

Nigerian privatisation project came about appears to be a more

useful legal investigation.

Nigeria’s privatisation effort is essentially a product of

economic and social needs borne out of the dwindling revenues of

government, huge amounts of subventions required for the

sustenance of SOEs, the unexplainable and embarrassing financial

losses suffered by these enterprises and the massive corruption

and inefficiency engendered by their continued operation as

public enterprises. The background to this state of affairs may

be summarised as a product of post-independent legislative action

meant to stimulate and accelerate national economic development

and industrialisation among others.

Thus, the impetus for state participation in business activities

in post-independent

Nigeria, in the first place, is discernible, not only from

questions of national pride and resistance to economic neo-

colonialism, but also from purely developmental needs and the

desire to break foreign monopolies doing business in Nigeria. The

Nigerian Second

National Development Plan spelt out these objectives in very

unambiguous terms to the effect that state owned companies became

increasing tools of public intervention in the development

process. According to the plan: Their primary purpose is to stimulate and

accelerate national economic development under conditions of capital scarcity and

structural defects in private business organisations. There are also basic

considerations arising from the dangers of leaving vital sectors of the economy to the

whims of the private sector often under the direct and remote controls of foreign

large-scale industrial combines.

The Nigerian Government thereafter proceeded to take legislative

action for indigenisation of foreign private corporations, the

proliferation of state owned public enterprises, and the

exclusion of private participation in considered key areas of the

economy. Surprisingly, the Nigerian Investment Promotion Act, sections

17, 18 and 32 still retains vestiges of these exclusive business

interests reserved for government participation. The situation

persisted, in spite of all pretences at the deregulation, and

liberalisation of the Nigerian economy. The emergent economic

chaos and crises created by the failures of public enterprises in

meeting its original objectives of accelerated national

development, and the loss of foreign direct and portfolio

investments in the economy actually propelled state policies

towards the privatisation of these public corporations. A similar

view was thus expressed:

On the whole, public enterprise was designed to meet the standard market failures

associated with developing economies. Unfortunately… this objective was never

accomplished by the parastatals set up to prevent failure instead, they became involved

in too many activities in which they did not enjoy comparative organisational

advantage. The resulting inefficiency led to widespread efforts in the 1980s and 1990s

to privatise state enterprise…

Some of these failings may however be due to poorly conceived

legislation meant to open up the economy. The desire to privatise

public enterprises in Nigeria is therefore borne out of the

original objective of government to profit from business

enterprises without a corresponding liability of losses emanating

from the inefficiency associated with wholly owned government

companies. Consequently, the legal regime for privatisation in

Nigeria appears to be premised within this context. The

subsequent prognosis of the question, whether or not, an adequate

legal regime for privatization exists in Nigeria, would therefore

depend largely on these primary objectives and the developmental

needs of encouraging foreign investments.

Abiodun, the Chairman, Depot and Petroleum Products Marketers

Association of Nigeria (DAPPMA), also called for the deregulation

of the sector as a way of sanitizing the downstream oil sector of

Nigeria. However, calls from various quarters within the masses

have been of disapproval of the fuel subsidy removal let alone

total deregulation hence the observation that twelve months after

partial deregulation, there is nothing to show for it but

hardship and high cost of living; and that the fuel scarcity was

instigated by Goodluck Jonathan led government to have their will

imposed on the people hence they have no feelings for the masses;

they are selfish, squanders, looters and liars hence they have

failed to implement petroleum sector scandal reports of various

committees established just to dupe and pretend to show the world

that they are fighting corruption, instead of fighting the

cabals. Others upheld that the cabals are the same government

officials employed by the government itself; and that the

beneficiaries of the subsidy payment are the PPPRA and the NNPC

top officials who use the marketers as frontiers as well as the

eminent government officials and their cronies; hence the

solution to the perennial oil saga is just to allow the system to

run normally while the existing refineries are fixed with

additional new ones built and not deregulation because

deregulation is secondary (Abiodun , 2012).

Okafor (2012) averred that the sticky issue of oil is no longer a

new phenomenon in the global political lexicon hence deregulation

policy has globally been embraced by several countries in order

to lessen public sector dominance and for developing a

liberalized market while ensuring adequate supply of products.

For this policy to be successful in these countries, they planned

and mapped out an effective policy response which transcended

into full deregulation. Such is the story in Peru, Argentina,

Pakistan, Chile, Philippine, Thailand, Mexico, Canada, Venezuela,

Japan and USA, all of which have systematically dismantled their

State-owned oil companies, for a significant turning point in the

story of their oil industry reform efforts.

Most fundamental, she identified that the economic reforms of the

government (deregulation and privatization) become rather

imperative since they are geared towards reviving the ailing

sectors. The precedence of some sectors that have been fully

deregulated and their achievements are so tremendous that

Nigerians had forgotten the scars of the initial experiences.

Judging from the above mentioned countries, Nigeria is not alone

in this global trend of attempting to revitalize and develop its

downstream sector through liberalization and deregulation in

order to increased private sector participation. Thus,

deregulation of the downstream petroleum sector, as conceived in

2003, involved not just the removal of government control on

petroleum products prices, but also the removal of restrictions

on the establishment and operations refineries, jetties and

depots, while allowing private sector players to be fully engaged

in the importation and exportation of petroleum products and

allowing market forces to prevail hence if Nigeria should borrow

a leaf from these nations and allow the downstream sector to be

fully deregulated, she is sure to have a success story to tell,

otherwise, she becomes an onlooker in the polity of oil producing

nations. As the recent events unfold, deregulation becomes

inevitable. There is no point running away from grasping the

reality, hence effort should instead be made to face the

challenges stoically than postponing the evil day that will

eventually come (Okafor 2012).

The need to deregulate the downstream oil sector of the Nigerian

economy arises from the sorry state of the nation’s existing

refineries with its concomitant inefficiency in distribution,

ineffective and fluctuating price of the petroleum product and

the negative tendency of monopolistic structure which has had

tremendous adverse effects on the economy. This has been a

contentious issue in national discourse hence the non-

availability of petroleum products found beneath our soil in

quantum as well as poor pricing mechanism as the price of

petroleum product in Nigeria has but fluctuated and skewed

against the masses while the government top officials smile to

the bank.

As a way out, it is believed in some quarters, that the

deregulation of these strategic sectors will bring success to

Nigeria and make the product rapidly and readily available as

well as cheap since it will engender competition as witnessed in

the telecommunication sector in Nigeria which gave way for more

competition and eventually lower tariffs.

The thrust of this section therefore is to examine the problem

with the deregulation policy hence a great policy wrongly

implemented, by answering the following questions-will

deregulation of the downstream oil sector sanitize the downstream

oil sector and improves the Nigerian economy? What are the

challenges associated with the deregulation of the downstream oil

sector in Nigeria? What are the implications of the deregulation

of the downstream oil sector in Nigeria?

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 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 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 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 twenty (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.

The low capacity utilisation of Nigeria’s state-owned

refineries and petrochemicals plants in Kaduna, Port

Harcourt, and Warri, the sorry state of disrepair, neglect,

and repeated vandalisation of the state-ran petroleum

product pipelines and oil movement infrastructure

nationwide, the collateral damage of institutionalised

corruption, with the frightening emergence of a local

nouveau riche oil mafia that controls, and coordinates

crude oil, and refined petroleum products pipeline

sabotage, and theft ("illegal bunkering") nationwide, the

insatiably corrupt military Task Force operatives that

assist diversions of both crude oil and petroleum products,

and large-scale cross-border smuggling of petroleum

products, all of which are the root causes of the

protracted, and seemingly intractable severe fuel crises

that have bedevilled the country relentlessly, for close to

a decade now, are all predictable outcomes of government

involvement in the downstream sector of the Nigerian

petroleum industry, over the past quarter of a century.

As expected, public opinion about deregulation in Nigeria

covers a wide spectrum, and cuts across all sides of the

argument. Some Nigerians hold the view that deregulation

cannot be complete, whether in the downstream sector of the

Nigerian petroleum industry, or indeed, in any other sector

of the national economy. However, deregulation is seen as

desirable in freeing government of its concurrent control,

and involvement in the businesses of refining, importation,

and distribution of refined petroleum products in the

Nigerian market. In their opinion, the 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 privatisation.

Another school of thought strongly believes that the

Nigerian petroleum industry must not be liberalised, or

deregulated, or privatised completely, for whatever reason,

and that the status quo should remain, maybe, with some

minor fine-tuning made, "here and there", to improve

efficiency, as appropriate, "in the overall national

interest". Essentially, this is the implied position of the

Nigerian Labour Congress (NLC).

However, some others insist that complete deregulation,

including the total, and final dismantling, unbundling, and

subsequent wholesale privatisation of all state-owned

petroleum businesses, should proceed without further delay,

with maximum despatch, for the continued, and meaningful

survival of the Nigerian petroleum industry in the 21st

century. In short, for such Nigerians, the benchmarks of

globalisation, not nationalisation, dictate the tempo of

the new world order in international petroleum market

transactions.

Since the early days of the on-going transition from

military dictatorship to reasonable democracy, the Federal

Government set up a team, led by a technocrat in the

Presidency, (recently appointed the Group Managing Director

of the state-owned national oil company, NNPC), to explain

certain key issues of liberalisation, and to counter the

arguments of those opposed to the notion and concept of

deregulation of the downstream sector of Nigeria’s

petroleum industry.

Typically, the scope of discussions covered during the

"enlightenment campaign" included such issues as the burden

of subsidies on the national treasury, the strain of

financing Nigeria’s state-owned petroleum businesses,

intra- and trans-ECOWAS smuggling of Nigerian petroleum

products, the relative market prices of petroleum products

in the ECOWAS sub-region, vis-à-vis their prices in

Nigeria, licensing of private refineries, the need to break

the monopoly of NNPC, and the general benefits of

deregulation. Reactions to the government-sponsored

"enlightenment campaign" range from outright objection, to

cynical disinterest, through cautious empathy, to dogmatic

assertion of the ultimate inevitability of the deregulation

of the Nigerian petroleum industry.

Here, we will consider and make realistic assessments of

probable scenarios of deregulation in the downstream sector

of the Nigerian petroleum industry, against the general

background of global trends in deregulation and

restructuring in the petroleum industry, coupled with the

current level of public awareness, and government’s

posturing on the issue of deregulation in Nigeria.

Five (5) likely scenarios, or probable modes of

implementation of the deregulation process in Nigeria, are

summarised as follows: Supply side deregulation.

Demand side deregulation.

Complete deregulation.

Phased deregulation, starting from the upstream sector.

Retention of the status quo.

The time frame of implementation of workable petroleum

industry reforms, the potential effects on both Major and

Independent petroleum products marketers, the role of both

the currently dysfunctional state-owned refineries and

prospective private refineries, salient factors of

acquisition of the existing state-owned facilities, and the

criteria for identifying suitable players in a deregulated

downstream sector of the Nigerian petroleum industry, are

all crucial to the success of the deregulation process, and

are therefore considered here.

Below are highlights of the five (5) likely scenarios of

deregulation in Nigeria:

Scenario #1: Partial Deregulation Of Only The Supply Side.

The inherent assumptions of this scenario are that:

The Federal Government is sensitive to the inadequacies of

the existing state-owned petroleum refining, and refined

products supply and distribution systems in Nigeria, and

desires to maximise supply sources for the refined products

market in the country.

Federal Government monopoly of refining, pipeline

operations, and primary distribution from the state-owned

storage depots would be completely unbundled, and

abolished.

Local and foreign private investors would be willing to

take over the state-owned facilities (refineries, depots,

and pipeline systems) in their current state of

dilapidation, disrepair and poor performance, and operate

them efficiently and profitably thereafter.

Private refineries would procure crude oil at competitive

rates, and sell their refined products profitably, and at

international prices, both in Nigeria and beyond, as

desired by the refiner. Private importers would procure

refined petroleum products and sell such products at

deregulated prices, in line with prevailing market prices.

Barriers to new entrants into private refining, pipelines

and depot operations would be eliminated.

Hypothetically, with anti-monopoly policies (which are not

yet in place in Nigeria), and with competition among

private refiners, the demand for petroleum products could

be met and sustained. However, because of the low buying

power of the consumers in the Nigerian market, the demand

for petroleum products, sold at international market rates,

would be reduced significantly.

Profitability of business at the retail end of the

downstream sector would be dictated mainly by economies of

scale: only the big players in the petroleum products

marketing sub-sector would survive. Consequently, up to 95%

of existing Independent marketers may cease to be in their

present form. Alternatively, there could be mergers among

weaker Independent marketers (with between 1 - 10 outlets)

to compete with the present top Independent players, on the

one hand, and individual Major marketers, on the other. In

short, the market would be segmented into individual

Majors, individual current top Independents, and groups of

merged minor Independent marketers of petroleum products.

The current sorry state of the state-ran refineries,

pipeline networks, and depot operations may not encourage

private investors (local or foreign) to acquire them. And

so, KRPC, WRPC and PHRC may continue to be state-owned

enterprises, which may, or may not continue to operate

under state protectionism. This scenario is very analogous

to what happened in the Nigerian aviation industry

following "liberalisation".

Essentially, the Federal Government holds on tenuously to

"fine-tuning" an evidently inefficient state-owned business

that goes through a long drawn out process of slow and

progressive extinction. In a sense, the medium to long-term

consequences of Scenario #1 on KRPC, WRPC and PHRC is that

they would decay slowly, and finally die under government

protectionist cover.

The first generation of post-deregulation private

refineries in Nigeria would be the stand-alone type: In

this scenario, private refineries would manufacture

petroleum products, and distribute them to targeted

segments of the Nigerian market (most likely, regional)

from their loading facilities within the refinery complex.

In other words, there will be no private pipeline operating

companies to move refined products from such private

refineries to their markets.

The predominant mode of refined products distribution would

be outlet-specific truck loading, mainly to domestic retail

affiliates of the refiner. In short, private Nigerian

refiners would initially secure their market, built around

the retail outlets of groups of Independent marketers,

while potential private foreign refiners, if any, would

preferably target their distribution at both the Nigerian,

and export markets, possibly through the Majors.

Scenario #2: Partial Deregulation OF Only The Demand Side.

The inherent assumptions of this scenario are that:

The Federal Government, though fully aware of the glaring

inadequacies of the existing state-owned supply and

distribution systems in Nigeria, would prefer to

restructure the decrepit refineries, pipelines and depots,

so as to enable them compete in tandem with the proposed

new refineries that would be built, and managed by private

investors.

Federal Government monopoly, control, and/or coordination

of petroleum products importation would stop.

Private investors would have open access to state-owned

facilities like petroleum reception jetties at Okrika,

Effurun, Calabar, Escravos, and Atlas Cove (Lagos),

including the storage tanks at PHRC, WRPC, and KRPC, and at

non-discriminating tariffs, for expediting the logistics of

importing petroleum products into Nigeria.

Private products marketing companies would form strategic

alliances or mergers in order to optimise operating costs.

Price fixing, "uniform pricing", and so-called "bridging"

subsidies by the Federal Government would stop. Barriers to

new entrants into wholesale, or/and retail marketing of

petroleum products would be eliminated by law. Clearly,

because of the lead-time to effective attainment of

improved performance, and adequate supply of refined

products by the existing state-owned refineries, coupled

with the lead-time necessary to build and operate new

private refineries to complement existing supply sources,

the availability of refined products may not be much

different from what obtains currently. Therefore, the

market segments (Majors and Independents) may also alter

very marginally.

However, opportunities exist for private importers to

complement shortfalls in product stocks. With this

scenario, there may be an upsurge in private importation of

petroleum products. Recent acquisition of import reception

facilities by Independent marketers indicates a potentially

competitive market for both marketer groups: Majors and

Independents. This scenario forces mergers on the existing

Independent marketers in order for them to be cost-

effective.

The emergence of post-deregulation private refineries in

Nigeria would be very dependent on the policies of the

Federal government with respect to the price of crude oil

allowed both private refiners, and the state owned refining

companies. With the current disparity between the open

market price of crude oil and that conceded to the state-

owned refineries, it is not likely for private refiners to

invest under such conditions. In this scenario, the state-

owned refineries would remain protected, probably selling

their products at international rates. Though pipeline

operations may still be monopolised by NNPC, very likely,

"bridging" and "uniform pricing" could cease to apply.

Potential private Nigerian and foreign refiners would not

be attracted to invest under such policy regimes.

Consequently, the only possibility for expansion of

refining capacity would be dependent on new state-owned

refineries that may be added to the existing pool.

Scenario #3: Complete Deregulation of the Downstream

Sector.

The inherent assumptions of this scenario are that: The

Federal Government is conscious of the gross inadequacies

of the downstream sector of the Nigerian petroleum

industry. However, government would restructure all state-

owned refineries, pipelines, and storage depots, prior to

their unbundling, and final acquisition by private

investors.

The Federal Government desires to maximise supply sources

for the refined products market in Nigeria, including the

build-up of a so-called "strategic nation reserve" of

refined petroleum products.

A critical mass of qualified private Nigerian investors

exists that can take over the state-owned downstream

petroleum businesses, now ran by NNPC, and manage them

efficiently and profitably.

Two (2) separate and independent downstream policy

formulation and enforcement agencies would be established

by the Federal Government to monitor the sector

effectively, post de-regulation.

Private businesses may import refined petroleum products

and sell such products at competitive prices. Barriers to

new entrants into all segments of the downstream sector

would be eliminated.

Unnecessary (legal and illegal) impediments, including the

existing overbearing procedures for granting licenses to

private refiners, and other potential investors in the

downstream sector, must be abolished by law, with maximum

despatch.

There must be open access to state-owned monopolistic

facilities such as jetties, storage tanks, and pipelines,

through non-discriminatory tariffs to private operators.

Price fixing in any guise, by government, must stop.

As in Scenario #2, because of the lead-time to attainment

of improved performance and adequate supply of refined

products by the existing state-owned refineries, the

availability of refined products may not be much different

from what obtains currently. Therefore, the market segments

(Majors and Independents) may only alter very marginally in

the short to medium terms. However, if and whenever full

price deregulation starts to apply, opportunities could

emerge for private investors to move in and compete

effectively.

With this scenario, there would be an initial inertia in

private sector participation, to be followed by a trickle

of private refiners, and operators of existing state-owned

product pipeline networks (if any). With such private

refineries, effectively competing at global pricing and

other standards, refineries would be retail outlet-

specific. This scenario forces mergers on the existing

Independent marketers in order for them to be cost-

effective. The scenario would also result in Major marketer

refiners preferentially directing their distribution to

their own outlets. In this scenario, the supply and primary

distribution of refined petroleum products in Nigeria would

very likely be under the control of the Major marketers,

ultimately.

Scenario #4: Phased Deregulation Starting From The Upstream

Sector:

The inherent assumptions of this scenario are that:

The Federal Government would ensure the effective

implementation of a planned phased transition to

comprehensive deregulation of the entire petroleum industry

(upstream and downstream) in Nigeria. The Federal

Government would enforce applicable conditions for

stimulating competition in the market, while concurrently

discouraging monopoly behaviour in the domestic retail

market.

Private suppliers of crude oil to Nigerian refineries would

be encouraged. Prices of crude oil and refined products

would be set in line with international benchmarks, and

prevailing foreign exchange rates. All NNPC Joint Venture

contracts with multinational E&P companies operating in

Nigeria would be replaced with Production Sharing

contracts. Crude oil produced by private operators would be

theirs to sell at competitive market prices in Nigeria or

overseas.

NNPC and its subsidiaries would be restructured in phases

and subsequently broken up.

Regulatory role of the DPR must be redefined to enhance its

capacity to effectively monitor and enforce compliance as

an independent agency of the Federal Government.

With a well-articulated plan of phased deregulation of the

entire petroleum industry in Nigeria, starting with the

upstream sector, the availability of crude oil to the local

refineries would be based on competition among private

suppliers. This would encourage private E&P investments,

particularly local marginal field operators. With the

removal of both monopoly advantages, and mandatory JV

contracts with multinational E&P companies from NNPC, the

state-owned company would undertake more PSC contracts with

foreign and Nigerian partners in the short to medium terms,

if ownership of the crude oil were reviewed in favour of

the producer.

At the stage of full deregulation of the entire oil

industry, private crude oil marketers could compete to

supply feedstock to the local refineries, either as

affiliates, or as independent suppliers. Private pipeline

companies could operate the existing petroleum products

primary distribution networks, and storage depots. This

scenario forces mergers on all players in order for them to

be globally competitive.

The scenario would also result in Major refiners

preferentially directing their distribution to their

outlets in Nigeria and overseas. Supply and primary

distribution would ultimately be under the control of the

big players in this scenario. It appears rather strange

that, to date, very little or nothing has been said or done

by the Federal Government about the deregulation of the

upstream sector of the Nigerian oil industry. The

implication of this observation is not trivial, and could

in fact adversely influence the deregulation process in the

downstream sector if not addressed quickly.

Scenario #5: The "Do Nothing Option":

The inherent assumptions of this scenario are that:

Deregulation of the Nigerian oil industry is not in the

"security, and overall national interest" of the country,

and therefore, not desirable. Existing inefficient

government-owned facilities in the downstream sector can be

satisfactorily upgraded.

In a sense, the "Do Nothing Option" represents the worst-

case scenario, and is also the most probable scenario in

Nigeria. In this scenario, the status quo remains: i.e.

"Business unusual, as usual".

Private players are not, (and will not be) motivated to

invest under the prevailing state-protectionist regulatory

framework. The chances of improved performance in the

state-controlled petroleum refining, and refined products

supply and distribution systems, are near-zero, with no

meaningful competition to the existing sick, and severely

dilapidated refineries, and product pipeline

infrastructure.

Predictably, the entire Nigerian petroleum industry becomes

progressively moribund, unattractive to both Nigerian and

foreign investors alike, in both the upstream and

downstream sectors, then comes to a grinding halt, and

finally collapses.

REASONS FOR THE DEREGULATION OF THE NIGERIAN DOWNSTREAM OIL

SECTOR

The most contentious issue in Nigeria in recent times is

unequivocally, the question of deregulation of the oil sector

which has been generating heated debates from several quarters.

The proponents of deregulation of the downstream oil sector of

the Nigerian economy like Okafor (2012) posit that the

liberalization and deregulation of the downstream oil sector

would finally actualize the objective of ending perennial fuel

scarcity and maintaining sustainable fuel supply across the

polity. They also added that liberalization and deregulation of

the sector would open it up for foreign investments; and the

incidents of petroleum products smuggling and inefficiencies in

the sector will fizzle off. They also argued that petroleum

products in Nigeria were the lowest in the world and with

deregulation, the government would be able to channel funds to

other sectors of the economy. They further posit that

deregulation would break the monopoly of fuel supply by the

Nigerian National Petroleum Corporation (NNPC) as the refineries

are reportedly, not working and that the liberalization and

deregulation would enable oil sector stakeholders, including

major and independent marketers, to import and market the

products. This is because as the NNPC lacks the capacity to

import enough petroleum products for the country, couple with the

perennial malfunctioning of the refineries, the government,

through the introduction of the Petroleum Support Fund (PEF),

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 costs the

nation a fortune which should otherwise be channeled into other

sectors for basic amenity and infrastructural development across

board.

The major proponents of this thesis include the Federal

Government, the Presidential Steering Committee on the Global

Financial Crisis, the Nigerian Economic Summit Group (NESG), and

so many individual scholars such as Odidison (2003) who opined

that deregulation of the downstream oil sector would bring sanity

into the oil industry since smuggling of petroleum products,

vandalization of pipeline and all other vices in the sector will

be totally removed. He however agreed that the domestic price of

oil will increase but averred that the rationality is that the

smugglers are likely to reduce their activities. According to

Akinmade (2000), the causal factors responsible for the call for

deregulation include corruption, illegal bunkering and managerial

problems which contributed to the large scarcity of petroleum

products recently experienced. Ogunade (2003), supporting the

corruption claims, documented that the Revenue Mobilization and

Fiscal Commission is still emphatic that NNPC stores the nation’s

oil earnings in illegal dedicated accounts, and Akinmade (2000)

added that about 200,000 barrels of crude oil per day,

representing 1% of Nigeria’s export quota are stolen on a daily

basis by mid-scan thieves and their official collaborators. This

stolen crude valued at N618, 530 daily, has been traced to

Cameroon, Cote d’Ivoire and Brazil; and therefore concludes that

with deregulation, there would be new investment opportunities

for both current and new participants in terms of private

refineries that would meet the demand of the federal government,

and averred that this is the essence of deregulation of the

downstream oil sector.

He further stated that the effectiveness of the deregulation

policy in the oil sector would generate funds, reduce smuggling

of petroleum products and remove economic malaise that emanates

as a result of tax evasion, duties and tariffs evasions as well;

and that the incidence of perennial increase in the price of

petroleum product would face out since price mechanism would be

attained through deregulation policy According to Adagba et al

(2012), the rising demand for petroleum products has made

deregulation in the downstream oil sector compelling for

efficiency in the sector, as it would ensure increased

opportunity to control business flows through integration of

marketers ability to be involved in a broad range of activities

from refinery to the actual sales point. He furthered that the

government controlled downstream oil sector has created

simulative situation that has shot up the price of products far

above government fixed price and efficient supply and

distribution of fuel in the downstream sector is only guaranteed

when deregulation or even privatization is adopted, competition

will definitely determine an actual price for a produce.

However, the pressure on Nigeria and the urgent need to finance a

number of key national projects are the major driving force

behind government urgency to deregulate the downstream oil

sector. This is because Nigeria’s long term energy depend on the

ability to deliver products in the domestic markets at cost

relative prices and this can only be attained in an environment

where clear rules are set and oligopoly are removed.

On the other hand, the opponents such as Izeze (2013) believe

that the Nigeria petroleum industry must not be liberalized,

deregulated, or privatized completely, for whatever reason and

that the status quo should remain, maybe with minor fine tuning

“here and there” to improve efficiency, as appropriate, “in the

overall national interest”. Their main thesis is that the low

capacity utilization of Nigeria’s state-owned refineries and

petrochemical plants in Kaduna, Warri and Port Harcourt, the

sorry state of despair, neglect and repeated vandalization of the

state-run petroleum product pipelines and oil movement

infrastructure nationwide, are no excuse for the collateral

damage of the economy imposed upon by institutionalized

corruption, with the frightening emergence of local nouveau riche

oil mafia that controls and coordinates crude oil, and refined

petroleum product, pipeline sabotage and theft (illegal

bunkering) nationwide, as well as the insatiably corrupt task

force operatives that assist diversions of both crude oil and

petroleum products, large–scale cross–border smuggling of

petroleum products, all of which are the root causes of the

protracted and seemingly intractable fuel crises that have

bedeviled the polity relentlessly for close to a decade now.

Along this line, some scholars and pressure groups in the country

strongly believe and argue that deregulation of the downstream

oil sector will have negative impacts on the Nigerian economy.

One of them is Eson (2002) who sees deregulation of the

downstream oil sector as not following the normal trends

involving systematic removal of regular structure and operational

guidelines, hence deregulation might give marketers the

opportunity to fix their prices out of the government regulation

to the detriment of the masses. According to Agbonyi (2009), the

products were sold to friends of the NNPC officials who have

private depots/pumps where they sell at high cut-throat prices is

the actual cause of the petroleum scarcity cited by the opponents

as the reason for deregulation calls. He further stated that the

petroleum marketers have been noted to divert petroleum products

meant for some state to private hands far away from the states,

for which they are meant for, is part of the causes of the

lingering issues in the downstream oil sector necessitating the

call for deregulation.

Government’s 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 overtime. Independent oil-marketers would be free to set

their prices. This would lead to further reduction in prices for

refined oil-products 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).

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 an 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 30% higher than their original price.

“Deregulation of the downstream oil sector remains 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).

Richard (2012) further asserted that research and analysis shows

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

liters per day. Therefore, importation will remain inevitable

until additional refining capacities are built through the

ongoing Greenfield Refinery Project. Discussions are currently

underway with prospective investors who are willing to provide

Foreign Direct Investment (FDI) to build additional 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 current nature of the Downstream Oil Sector

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 is

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

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 the government’s efforts in developing the industry.

“As a major solution to the economic crises experienced in

Nigeria in the 1980s, the Structural Adjustment Programme

(SAP) was introduced with the central aim of deregulating the

economy; the subsector is particularly volatile in recent times”

(Aigbedion and Iyayi, 2007).

BENEFITS OF THE DEREGULATION OF THE DOWNSTREAM OIL SECTOR OF

NIGERIA

From the countries mentioned earlier in this work that have

duly deregulated, it becomes obvious that Nigeria is not alone in

this global trend of attempting to sanitize and develop its

downstream sector through liberalization and deregulation to

ensure increased private sector participation, hence deregulation

of the downstream petroleum sector, as conceived in 2003,

involved not just the removal of government control on petroleum

products prices, but also the removal of restrictions on the

establishment and operations including refining, jetties and

depots, while allowing private sector players to be engaged in

the importation and exportation of petroleum products and

allowing market forces to prevail. Nigeria, ever before this

reform had weighed her pros and cons and there is no place in the

world where reforms are embraced without agitations. If

statistics of nations who have already adopted deregulation is

taken, it will be shocking to know that its take-off met with

lots of road blocks. Today, it had paid off, and they are reaping

the benefit of their perseverance, hence Kwaye’s observation that

the benefits of deregulation outweighs the cost. Feblowitiz

(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

increase on commodities and services in the immediate term. In

the same vein, Ramsey & Haskett (2002) believe in the long term

advantages of deregulation and it is worth the attendant short-

term disruption and confusion. They continued that the negative

perceptions of Nigerian public that arose from the sensitization

campaigns to deregulate the downstream oil sector which were

registered through protest and strike by labour union were

resisted by the government, who defended her position by pointing

to the successes of other countries such as USA, Germany, Mexico

etc which runs a deregulated downstream oil sector as her models

and adhering to the policy.

Barkido (2010) stresses that the benefits of deregulation are

enormous as it is meant to eradicate huge revenue spent as

subsidy and that between 2006 and 2009, about N25 trillion was

spent which is why its removal have become so imperative.

Therefore, the following are the benefits enjoyed from

deregulation policy:

1. Products are now available all over the country and no one

needs to queue for days at filling stations waiting for non-

existing products.

2. Motorists no longer hoard fuel in their homes or carry jerry

cans of fuel when travelling; and this has eliminated the fuel-

induced accidents and fire outbreak that claimed thousands of

lives in the regulated economy.

3. Marketers are now investing in new facilities such as 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 an operating one each in all states of the

federation. 7. Apart from new investment in new facilities, old

ones are being expanded because of increased activities.

8. Investment in the downstream oil sector is now more attractive

to the international and local business communities as evident in

the interests expressed in the refineries privatization

programme.

While the above cited benefits may appear to be short-term

benefits which could be experienced within the first few months

of deregulation, Kwaye (2005) in agreement with Ramsey & Heskett

(2002) identified the following benefits as the flip side of the

costs of subsidization in regulated economy, such as:

1. Deregulation frees resources for government to spend on

productive ventures and social sectors such as education, road

and health

2. The market price will encourage efficiency in the use of

petroleum products which would in turn reduce traffic congestion

and loss of productive time and 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 or even equals those in the

neighbouring countries where the smuggled oils are sold. This

will also 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 which would have been lost to

smugglers

4. Fundamentally, deregulation will depoliticize petroleum

pricing and eliminate the speculations, 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 the consumers. (Jega,

2000)

Other commentators acknowledged the benefits of deregulation from

different perspectives. For example, Ihenacho holds that

deregulation makes 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. More to it is the

fact that it would remove the current incentive which exists for

people smuggling oil elsewhere. Removal of the smuggling

incentive would greatly improve local product availability and

this would in turn exert a downward pressure on products within

the economy.

Irrespective of how convincing the benefits of deregulation

policy looks, it cannot go unchallenged hence almost every

economic reform policies are usually challenges. Thus, the next

section identifies some of the challenges that deregulation

policy have faced in Nigeria especially in the downstream oil

sector.

CHALLENGES OF DEREGULATION OF THE DOWNSTREAM OIL SECTOR OF

NIGERIA

Every time the issue of oil price increase comes up in

Nigeria, there is bound to be general uprising leading to strike

actions by the Nigerian Labour congress and other pressure

groups; thus, that of deregulation (fuel subsidy removal) of the

oil downstream sector did not come without such uprising (Okafor,

2012). In fact, the uprising that followed the announcement of

subsidy removal in Nigeria on January 1st 2012 has never been

witnessed in the annals of the country’s conflict management. The

reason for such uprising was underlined by the opponents of

deregulation and the following are the challenges that

deregulation faces in this country hence what we have is still

partial deregulation; awaiting full deregulation which the

opponents and some ardent scholars and commentators have affirmed

is the solution to Nigeria’s perennial petroleum product

problems:

A. Lack of trust for Nigerian leaders based on their erstwhile

failed promises as well as misleads, misdeeds and

misrepresentation

B. Corruption in the system especially at the political realm as

the whole governance paraphernalia have been compromised, leading

to outright lack of trust for any policy irrespective of its

prospect and the cited examples.

C. The sorry state of Nigerian refineries which ought to be

revamped for maximum domestic refining of oil as well as the lack

of new one in the system instead of its privatization

D. The role of labour unions in fighting the course of the masses

as against the governments’ whims and caprices which is usually

the highest restraining factor in the Nigerian government/masses

relationship

E. We are oil producing and exporting country and should not be

running comparative analysis with those who are non oil producing

and exporting countries

F. The obvious claim that IMF policies and development cum

economic reformatory strategies are anti-masses hence without

human face; and deregulation of the downstream oil sector in

Nigeria is an offshoot of their deregulation policy bequeathed to

Nigeria during the Babangida era hence Jega noted that adherence

to the structural adjustment programme policy prescription

worsened Nigeria’s economic crisis resulting in a generalized

dearth of social welfare facilities such as healthcare, education

etc. Therefore, the deregulation policy is heavily challenged

(Okafor, 2012).

So far, there are mixed assertions on the importance and essence

of deregulation, as well as its challenges. Therefore a review of

literature on the implication of deregulation of the downstream

oil section on the Nigerian economy suffices.

IMPLICATION OF DOWNSTREAM OIL SECTOR DEREGULATION ON THE NIGERIAN

ECONOMY

The implication of downstream oil sector deregulation on the

Nigerian economy has been classified into domestic and

international by Onyishi, et al (2012) thus: In the domestic

dimensions, the campaign for the removal of the petroleum

products through deregulation of the downstream oil sector of the

industry having been consummated first had fuel stations shut

down and throw the general public into panic. In the interim,

fuel was sold in the black market and prices reached the roof,

hence reports across Nigeria had it that motorists bought fuel

between N138 and N250 per liter on Monday, January 2, 2012. In

Kano State, black market operators sold at N250 per litre. But

the Nigeria National Petroleum Corporation (NNPC) stations had a

uniform price of N138 across the country. They further observed

that that this sharp and huge increase provoked hyper inflation

of prices in the consumer products market and thus compounded the

already impinging poverty situation of the majority of Nigerian

masses. For instance, according to Daily Nation, the fare from

Ilorin to Abuja ranged between N3, 500 and N4,000 for busses and

N5,000 for cars as against the extant price N2,000. Ilorin to

Lagos cost N5, 000 instead of the N1, 600 charged by private

operators. A trip from Kano to Lagos cost N8, 500 as against the

old N5, 500. Kano to Ibadan rose from N4, 500 to N7, 750. Kano to

Bayelsa, which was N8, 500 is now N17, 000.

They additionally, stressed that the removal of fuel subsidy

equally affected the cost of commodities at the various markets

in the metropolis. Commercial motorcyclists instantly adjusted

their fares as soon as the subsidy removal was announced. There

could also be increase in fire incidents nationwide as people are

likely to store Premium Motor Spirit at home. Thus, lives and

properties could be lost.

The government posited that the prices would only rise in the

interim and stabilizes afterwards but not returning to the

former, thus making the comparison with the telecommunications

industry untenable, because the government argues that the only

way to arrest and correct the structural distortions in the

sector is liberalization that would encourage businessmen to

invest in building refineries and importing products to sell at

prices dictated by the market, not sure, if the price will come

below the existing N65 per litre. This argument is not supported

by any empirical evidence as Diesel and engine oil have been

deregulated for years, yet unlike the situation in the

telecommunication industry, the prices have been going up and the

cost of doing business has equally responded to the trend; and as

a result, businesses in the past few years have been relocating

to Neighbouring countries, with Ghana as the major beneficiary

(Salaudeen, 2011). According to Eme (2011), the Manufacturers’

Association of Nigeria (MAN) reported that 834 industries closed

shop in 2010 and relocated. It cited erratic power as the major

reason for these closure and relocation as many industries ran to

neighbouring West African countries because of low production

cost.

Explicatively, the Kano chapter of MAN reported that 86

industries have closed down in the state due to unfriendly

government policies. The branch chairman, Alhaji Sanni Umar

lamented that thousands of workers have lost their jobs, saying

“we consider it necessary to associate the current problems

bedeviling the development of industries in Kano to absence of

clear government’s industrial policy” (Ofikhenua, 2011), such as

deregulation of the downstream oil sector of the economy.

Implicatively, Nigeria has lost many small scale industries

that are supposed to serve as the backbone of her economy as

business enterprises with lofty ideas hardly survives in this

country because they have to source their own energy supply by

spending fortune on diesel to power their machines and struggle

to pay staff salaries. The implication is that Nigeria encourages

small scale industries to grow in other countries at the expense

of our economy and the growing unemployment at home.

Related to the above is the fact that since many companies have

official cars that then have to be fueled for their senior

officers, the operating environment may be more stuffing and

stifling in post-subsidy removal epoch. The middle class that is

just about bouncing back to life is likely to be at the receiving

end from the new policy. While the low income earners can only be

indirectly hit by the policy, the upper class can easily absorb

the effect as their employers will bear the cost. But, for the

middle class that has no access to alternative transport, an

increase of more than 100 percent rise in price can only make

life more difficult. Artisans and technicians who rely on PMS to

power generators to earn their daily meal will be forced to pass

the cost to customers where this is feasible. Otherwise, they

will be forced to close shop, with the consequent implication for

unemployment – one of the evils the government says subsidy

removal will fight (Oladesu et al 2011).

Also considered critical to the economy as the fuel subsidy

issue is the provision of employment for teeming Nigerian

graduates being churned out yearly by tertiary institutions.

Unemployment has resulted in so much brain-drain that there are

so many Nigerians working in, and contributing to the development

of other countries. But since it is not everybody that has the

ability to leave the shores of the country, unemployment has

continued to rise in the country (Okafor, 2012). According to

Salaudeen (2011), the national unemployment rate rose from 4.3

percent in 1970 to 6.4 percent in 1980; 40 percent in 1992 and

41.6 percent in 2011. The high rate of unemployment recorded last

year is attributed largely to depression in the economy. Such are

the domestic implication of deregulation of the downstream oil

sector of the Nigerian economy.

Remedially, President Goodluck Jonathan has repeatedly said

that subsidy withdrawal is necessary to safeguard Nigeria’s

future and that total deregulation of the downstream sector will

open the oil industry for foreign investments, which will lead to

massive jobs creation and development. For instance, the

government’s Subsidy Reinvestment and Employment Programme (SURE-

P), under which it listed among other projects, the construction

or completion of eight major roads and two bridges, provision of

health care for three million pregnant women, six railway

projects, youth employment, mass transit, 19 irrigation projects,

rural and urban water supply (Akanbi, and Agbo, 2012) are still

missing after one whole year of partial deregulation with its

concomitant hardship.

Finally, Oladesin et al (2011), posits that anti-subsidy protests

weaken the already fragile Nigerian economy, hence Employers of

labour had warned of the implication of protests over the removal

of fuel subsidy. According to the Director General of the

Nigerian Employers Consultative Association (NECA), Mr. Olusegun

Osinowo, any crisis worsens the economic situation because

salaries are paid form the daily income of the companies and it

will be difficult for the employer to honour his salary

obligations if businesses are put on hold due to labour protest.

For instance, Nigeria lost about 4.75 million Man-days to strike

in six years. Also the President of National Industrial Court,

Justice Babatunde Adejumo, disclosed that no less than four

million, Seven Hundred and Fifty Thousand, One Hundred and

Ninety-One man-days (4, 750,191) were lost to industrial actions

in six years in Nigeria.

Summatively, the Central Bank Governor, Lamido Sanusi Lamido put

the loss incurred during the period of strike at $617million

daily, translating into about N100 billion (Umeano, 2011).

Deregulation of the downstream oil sector of Nigeria would

contribute to the sanitization and improvement of the Nigerian

economy.

According to the Chairman, Depot and Petroleum Products Marketers

Association of Nigeria (DAPPMA), deregulation of the sector is

the only sure way of sanitizing the downstream oil sector. Hence

as the 6th largest producer of petroleum, it is a paradox that in

the past decade, supply of all products has been erratic and on

sharp decline. Ironically, as supply declined, products’ prices

have been on the increase as successive governments searched for

“appropriate pricing”, but due to the sustained devaluation of

the Naira on account of the implementation of the Structural

Adjustment Programme (SAP) coupled with the non-maintenance of

the refineries, domestic production was undermined making it

imperative for demand to be met through imports. The shortages of

petroleum products escalated in spite of increases in prices of

products since 1990.

The concern by government to overcome this lack of policy and

total dependency on oil companies led to policy shift towards

regulations. Government therefore introduced uniform pricing to

satisfy domestic demand, strengthen self-reliance and avoid a

situation in which the oil companies could hold the country to

ransom.

The Obasanjo administration on coming on board decided to

gradually withdraw the subsidy on petroleum products to allow the

mechanics of market forces to take its full course. The

government of Goodluck Jonathan swore to ensure total subsidy

removal on oil sector and implement total deregulation policy as

majority of Nigerians oppose the continued siphoning of our

collective wealth by just few people in and near the Presidency

(Agboyi, 2009) hence the federal government assertion that

“without deregulation, you will never have a sustainable

downstream sector of the economy; we cannot generate jobs in the

sector; and we cannot have an orderly market,”.

In the words of Maku (2013) “if we insist that government is the

one that will be refining products for the Nigerian market, we

will remain truncated. The potential the oil and gas sector is

supposed to unleash on this country has been completely

truncated. “The government money that should have been used for

development is paid to marketers, who turn around to get more

money from Nigerians; so, in the end, the government and

Nigerians are losing, the sector is also losing.”

According to the pricing template of the (PPPRA) as at august

15 2011 the landing cost of a litre of petrol was N 129.21, the

margin for transporters and marketers was N 15.49 the expected

pump price is N 144.7 while the official pump price today is N 65

per liter this shows that the Federal Government spends N 79.70

as subsidy on each liter of petroleum consumed in Nigeria with

about 32 Million liters consumed daily. It means the country

spends 2.66 billion as subsidy every day.18.2 billion per week

and 72.8 billion monthly. According to the presidential letter, a

major component of the policy of fiscal consolidation is

government’s intent to phase out the fuel subsidy beginning from

2012 fiscal year. The accrual to the sovereign wealth fund

[S.W.F] as a result of subsidy withdrawal will also augment funds

for critical infrastructure as government had said it will save

1.2 trillion naira in 2012 alone which would be used for the

provision of safety nets for the poor to ameliorate the effects

of the subsidy removal Deregulation of the downstream oil sector

of Nigeria will bring an end to the problems of oil and lead to

development of the economy.

The fallout of the efforts at oil sector reform is the

conclusion that deregulation of the sector would serve the best

economic interest of the polity. Corroborating the view of the

senate, the National Economic Council (NEC), the highest economic

policy organ of the government in Nigeria, in its analysis stated

that it costs the country’s treasury one trillion Naira yearly to

subsidize petroleum products in Nigeria. NEC stated therefore

that it would be better if this huge sum of money spent on

subsidy is used in smoothing potholed roads, providing hospitals,

rehabilitating and building health facilities and schools or

supplying portable drinking waters (T-John, 2013).

Already, the deregulation effort had earlier received the support

of the largest oil and gas industry unions, National Union of

Petroleum and Natural Gas Workers (NUPENG), Independent Petroleum

Marketers Association of Nigeria (IPMAN), the multinational

companies as well as oil companies operating in industry.

Largely, their thesis is that deregulating the downstream sector

of the industry will finally end the perennial fuel scarcity as

well as maintain sustainable fuel supply across the nation

(Ovaga, 2012).

The Executive Secretary, Major Oil Marketers Association of

Nigeria (MOMAN)[2], upheld that the full deregulation of the

downstream sector would bring about efficiency in the sector and

signal an end to the perennial fuel crises. On the causes of fuel

scarcity, he explained that most oil marketers stopped the

importation of the product since the beginning of the year due to

what they described as “discrepancies in subsidy payment’’ which

they said was responsible for the current scarcity.

Furthering the argument, the Chairman, Depot and Petroleum

Products Marketers Association of Nigeria (DAPPMA), also called

for the deregulation of the sector as a way of sanitizing it (T-

John, 2013). These point of views may have been instigated by the

Finance Minister and Head of the Economic Team, Ngozi Okonjo-

Iweala’s warning that Nigeria may be plunged into the type of

turmoil currently faced by Greece and other euro-zone countries;

and that of the Central Bank of Nigeria Governor, Lamido Sanusi,

that Nigeria will “never” develop unless the subsidies are

stopped.

In the words of the Information Minister, Laraban Maku “If we

insist that government is the one that will be refining products

for the Nigerian market, we will remain truncated. The potential

the oil and gas sector is supposed to unleash on this country has

been completely truncated. This was due to the statement of the

Federal Government on Wednesday March 20 2013 that the country’s

economy would be truncated if the full deregulation of the

downstream sector of the petroleum industry was not carried out;

the President’s declaration that came barely 24 hours from an

Abuja Federal High Court ruling that declared deregulation

illegal, unconstitutional, null and void.

The Punch Editorial averred that President Goodluck Jonathan and

his officials have opted for the alarmist theory that Nigeria’s

economy will “collapse” unless the subsidy on petroleum products

is removed immediately; a postulation that has generated heated

verbal missiles and cacophony associated with oil subsidy and its

removal which in the words of Umeano (2013) can easily derail a

government that is as weak as GEJ led Federal Government

(www.vanguardngr.com)

.

Deregulation of the downstream oil sector of Nigeria will lead to

more hardship to the people and stagnation to the economy.

The contemporary passion and tension that usually characterize

petroleum discourse is due to inexplicable deprivations and

sufferings of Nigerians amidst plenty and abundance of these

products. As the 6th largest producer of petroleum, it is a

paradox that in the past decade, supply of all products has been

erratic and on sharp decline. Ironically, as supply declined,

products’ prices have been on the increase as successive

governments searched for “appropriate pricing”.

The combined impact of erratic and inadequate supply and

unending price increases have brought untold hardship to the

citizenry and worse too, prevented economic recovery as promised

by the present democratically elected government given that

capacity utilization in the manufacturing sector nose-dives due

to shortages of industrial products. Indeed many industries have

been compelled to close due to non-availability of some of these

products.

In the bid to solve the problem in Nigeria, structural reform of

petroleum markets has become a critical component of

macroeconomic liberalization policies dubbed deregulation and

subsidy removal hence the role of the government in the petroleum

sector is being redefined, and markets are being deregulated (i.e

state interventions such as special treatments of state-owned oil

companies, price controls and monopolies are being broken up).

But unexpectedly, the outcome of the deregulation has not been

encouraging. There has been continuous increase in petroleum

prices with persistent scarcity of petroleum products. It was

expected that deregulation would give room for competition which

would transform into price reduction and excellent supply and

distribution network.

Having evaluated the deregulation exercise; critically

appraising its impact on petroleum pricing, consumption and the

general living standard of the people, Bamidele Aturu, a lawyer

and human right activist took the federal government to court to

ascertain that the deregulation of the sector is unlawful and

unconstitutional. Thus, a Federal High Court sitting in Abuja, on

Tuesday 19th March 2013, gave an order restraining the Federal

Government from continual deregulation of the downstream oil

sector which it had embarked upon. The court, however, declared

that deregulation of the downstream sector of the petroleum

industry was unconstitutional, illegal, null and void. Although

the AGF had raised an objection against the application,

delivering judgment in the suit, the presiding judge, Justice

Adamu Bello, issued an order restraining the Federal Government

from deregulating the downstream sector of the petroleum industry

or from failing to fix the prices of petroleum products as

mandatorily required by the Petroleum Act and the Price Control

Act.

He further held that the policy of government to deregulate the

downstream sector of the petroleum industry by not fixing the

prices at which petroleum products might be sold in Nigeria was

unlawful. Justice Bello also held that the deregulation policy

was in conflict with Section 16(1)(b) of the Constitution of the

Federal Republic of Nigeria, 1999 which provided that the

government should control the national economy in such manner as

to secure the maximum welfare, freedom and happiness of every

citizen on the basis of social justice and equality of status and

opportunity. The court also ruled that the policy of government

to deregulate the downstream sector of the petroleum industry by

not fixing the prices at which petroleum products should be sold

in Nigeria was unlawful, illegal, null, void and of no effect

whatsoever being in vicious violation of the mandatory provision

of Section 6 of the Petroleum Act, Cap P.10, Laws of the

Federation of Nigeria, 2004.

According to him, “That the policy decision of the Defendants to

deregulate the downstream sector of the petroleum industry by not

fixing the prices at which petroleum products may be sold in

Nigeria is unlawful, illegal, null, void and of no effect

whatsoever being in flagrant violation of the mandatory provision

of section 4 of the Price Control Act, cap P28, Laws of the

Federation of Nigeria, 2004”.

Perhaps, the judgment was based on the facts and figures which

Umeano (2011) glaring gave unknowingly when he averred that the

money realized from removal of subsidy may still not be found in

the delivery of infrastructure for the benefit of the citizens

because of the worsening level of corruption in Government at all

levels. Also the citizens who were ‘benefitting’ from the subsidy

were made to suffer unduly because virtually all prices including

food items has hit the roof and the down trodden are badly

affected.

Again, Prof. Tan David west, Buhari’s petrol & Energy minister

argued against deregulation of the downstream oil sector when he

said that removal of subsidy is poverty of idea, since the money

used to import fuel can build many refineries in Nigeria by

Government. He also challenged Jonathan to publish the names of

those importing fuel and how much they are paid. He said that

Nigeria will go ablaze if he did. He did not (Eson, (2002).). The

Nigerian youth is restive because of the level of decay in the

infrastructure, unemployment, hard time and huge gaps in our

social classes. The society has created two wide social groups,

too rich and too poor. No person that is educated and gainfully

employed in an organized society will be planning to blow himself

up in a suicide bomb.

Therefore, deregulation of the downstream oil sector will lead to

more hardship on the people and stagnate the economy.

Government Rationale and Issues Arising

Gas prices affect all Nigerians, both the wealthy and the

poor, and the CIA World factbook estimates that as at 2000, 60%

of Nigerians live on less than a dollar a day. This is a huge

number considering that the World Bank estimates that Nigeria has

a population of 135.6 million as at 2003. “Disruptions in the

Nigerian downstream sector have deeper and more immediate

domestic political implications for the country than those that

may occur in the upstream sector” (Khan, 1994, p. 127).

Nigerians believe that low gas prices are a given right and

have protested vigorously through strikes each time the price of

gas was increased in the last few years and are bitterly against

the privatization and deregulation of the downstream sector. As

noted by Khan above, these disruptions have widespread political

implications, for example there is a constant fear that the

military may use the opportunity to seize power again as it has

done over the decades since independence.

The goal of the Nigerian government in adhering to the principles

of privatization and liberalization is influenced by the

successes of other countries in doing the same. Kupolokun (2004)

the Group Managing Director of NNPC noted that the intended goals

are;

Dismantle the natural monopoly of the stat owned enterprise by

privatizing and deregulating price controls. Creation of

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, and can consequently use

the resources freed up to handle the socio- economic and welfare

needs of the Nigerian people. Boost in Foreign Direct Investment

to the Nigerian economy. Reduction in transportation costs of

products and people.

Possible Unintended Outcomes

The Nigerian government is aware that it cannot face the problems

of the downstream sector in isolation and is well aware of the

potential effects on the labor market. It is possible that in

the short term unemployment may arise due to price increases and

the attendant problem of potential job losses by workers in the

refinery, this will be done by investors who aim to maximize

efficiency, once they acquire control.

Schipke (2001) notes, “Countries in which government was a

dominant player in terms of both ownership and intervention are

also likely to have highly regulated labor markets. Hence, a

reduction in government ownership without the simultaneous

liberalization of the labor market will lead to increases not

only in temporary but also permanent unemployment.”

Using the social process model of analyzing possible effects of a

new government policy, government could be prepared for potential

outcomes. It is in this regard that the Nigerian agency charged

with privatization; the Bureau of Public Enterprises (BPE)

undertook a study of such effects and have come up with possible

solutions such as rather than divest 100% to a core investor, 49%

will be sold on the Nigerian Stock Exchange for ordinary citizens

and part of that amount will be kept for current employees to

acquire. Employees are also given the option of severance

packages if they agree to resign before the actual sale takes

place.

An abrupt removal of subsidy may cause dislocation to price of

gas because with high demand, and not enough supply the price

would sky rocket leading as mentioned earlier to labor strikes

and chaos. This would encourage the military to try and take over

governance using the threat of insecurity to justify their

actions.

Impact of Privatization and Deregulation

The Nigerian government has decided to go ahead with the policy

even against widespread disapproval on the part of ordinary

citizens. The government though is taking note of other countries

that have privatized, particularly those in South America.

It is worth noting that the biggest gain will be in savings

generated from divesting in the sector. As mentioned earlier in

the paper, this will free up government funds for other

activities.

“Potential savings in the downstream sector are defined as the

difference between the actual cost of supplying petroleum

products to consumers (either through imports or by refining

crude) and a benchmark cost corresponding to the procurement of

these products from world markets under competitive conditions;

and are subdivided into three categories: procurement, refining

and distribution” (World Bank, Africa Technical Department,

Industry and Energy, Division Note No. 14, 1992, p. 3-5).

The question that arises is how does government stimulate

competition? Well that is the challenge because since the

refineries to be privatized are natural monopolies. Government

must effectively make sure that collusion does not happen once

the refineries are sold; government also must still be able

influence price mechanism without actually fixing price ceilings

otherwise the exercise of privatization would have been in

futility.

The approach government has chosen to do this is quite

interesting because it is novel in the third world. The

Government has created a policy that affects the upstream sector;

government has sent a bill to the Nigerian senate for approval.

This bill which is receiving accelerated hearing makes it

mandatory for major oil companies operating in Nigeria, i.e.

Shell, ExxonMobil, Chevron and Elf to refine at least 50% of

their crude oil in the country. What this means is that there

will be many suppliers in the Nigerian market, thereby

encouraging competition and attendant lower costs. The oil majors

are not too thrilled about this but it is a price they have to

pay if they want to remain in the Nigerian market.

Petroleum products distribution in Nigeria and the role of oil

marketers

Product is an important element of the marketing mix. According

to Kotler and Armstrong, (1969) a product is anything that can be

offered to a market for attention, acquisition, use or

consumption which might satisfy a want or need. It includes

physical object and intangible

objects.From the above conception petroleum and its bye products

may include the following:

• Premium motor spirit (PMS OR PERTOL)

• Automotive Gas Oil (AGO or Diesel)

• Household Kerosene (HHK)

• Aviation Turbine Kerosene (ATK or jet-Al)

• Industry Fuel:

• High pour Fuel Oil (HPFO)

• Low pour Fuel Oil (LPFO)

• Liquefied petroleum Gas (LPG)

• Bitumen

• Base oil

In any established organization, decision about how to distribute

products and services to ultimate consumers are among the most

the important decisions confronting management because

distribution decisions must be made in terms of various and

sometimes divergent objectives and strategies. Under such

situations, Kotler and Armstrong (1975) suggested that

distribution decisions should be guided by three overall criteria

as follow:

• Market coverage i.e. the size of the potential market that

needs to be served

• Control i.e. control over the product and;

• Costs i.e. fixed and variable

Petroleum products distribution is therefore concerned with the

movement of refined petroleum from the refinery to the final

consumers across various locations of delivery in the country. In

the Nigeria situation, the pipelines and products Marketing

Company (PPMC) is responsible for the wholesale supply,

distribution and marketing of petroleum products in Nigeria.Until

recently, the petroleum products available for distribution were

through an elaborate, network of nearly 4,000 kilometers of

pipelines inter connected to 21 widely dispersed depots across

the country. The products may be obtained from the four local

refineries or in the event of a supply short-fall from off-shore

refineries by way of imports. In addition to pipelines, some

twenty marine tankers are used to ferry from the coastal

refineries of Warri and Port- Harcourt, heavy products and other

products in high demand to Lagos metropolis. As mentioned above,

Nigeria presently has four refineries owned by the federal

Government but being operated by the NNPC with the following

operation capacities shown. Movement of products from the depots

is the responsibility of the six major oil companies and the

numerous independent marketers. Imported refined products are

received at NNPC-PPMC depots at Atlas Cove. From here, products

are pumped to nearby depots at Mosimi in Shagamu, from which

products are pumped into various other depots through the

pipelines; Booster pump stations are provided along the route and

between two adjoining depots. This arrangement is necessary to

boost the flow of products in the pipelines along the routes. The

pipelines are of various diameters which include 12”8 and 6”.

Unfortunately, most of the oil pipelines have been damaged

through vandalization by unscrupulous Nigerians. Consequently,

most of the products are been transported and distributed by

trailers, and tankers, a situation that has led to the

ineffectiveness in the downstream sector of the industry.

From the foregoing analysis, petroleum distribution is a complex

task that involves transporting and storing across the country.

This process is done by a variety of players including the major

marketers that transport products from the refineries to their

branded station, independent distributors that transport products

from the depots to the service stations. According to Nothingham

(2004) the distribution segment of the petroleum value chain

holds the most promise for domestic initiatives. The

effectiveness of the distribution is therefore significant for

the economic development process. This is why a discussion of

distribution of petroleum products is relevant in the Nigerian

situation. Kupolokun (2006) highlighted that in the past years,

the downstream sector of the petroleum products started under a

market structure in which price were determined by the interplay

of the forces of supply and demand.

Then, the product market was dominated by the multinational oil

companies until 1973 when the Government introduced uniform

pricing of petroleum products in order to ensure even

distribution of products nationwide. In 1975, the Petroleum

Equalisation Fund (PEF) was established to deal with the problem

of cost differentials arising from the transportation of

petroleum products to various parts of the country, based on the

uniform pricing policy. As observed by Kupolokun (2006), the

introduction of the Independent marketer’s scheme in

1978 as earlier mentioned broke the dominance of the

multinationals. Adamolekun (1999) observed that over the years,

managing and administering petroleum product prices in

Nigeria has not been easy. These have been marked with series of

protest and crises, irregular supply of products, acute product

shortages, hoarding, smuggling, adulteration and long queues were

the main features of the supply and distribution process. The

situation became worsened by the low performance of the domestic

refineries, which resulted in excessive dependence on imports.

Additionally, there was limited inflow of investments into the

downstream due to low margins, uncompetitive pricing structure

and prior incentive mechanism. It was against this backdrop that

the imperative of opening up the sector became evident in line

with the deregulation programme of the Nigerian economy.

Consequently, in September 2003, the Federal Government

deregulated the supply and distribution of petroleum products.

As highlighted in the NNPC bulletin (2006) the responsibilities

of the oil marketing companies are as follows:

• To contract for petroleum products supply from refineries in

line with prescribed regulations.

• To import, supply and market petroleum products throughout the

country.

• To contract for capacities from logistics companies (jetties

pipelines, depots) in line with regulations and pay prescribed

tariffs

• Ensure that marine tanker parcel size, quantity of products and

conditions of vessel meet prescribed regulations

• Ensure that onward delivery of petroleum products from regional

depots to retail stations

•using road tankers comply with stipulated regulations.

• Ensuring holding of strategic petroleum stocks in regional

depots, refinery tank forms or company owned depots in line with

regulations. In discharging these responsibilities, marketers

will be able to distribute the products effectively, and still

make the normal profit. Emedosibe (2009) observed that in

performing these responsibilities, the marketers are making

abnormal profit of 106% per litre; an allegation which the

marketers have refuted several times. As highlighted in the NNPC

bulletin the Pipelines and Product Marketing Company (PPMC) is

the product distribution arm of NNPC. PPMC is directly

responsible for the comparative ease with which petroleum

products are sourced and distributed to all parts of the country,

at a uniform price. PPMC, a subsidiary of NNPC, ensures, among

other things, the availability of petroleum products to sustain

the nation’s industries, run automobiles and for domestic

cooking.

Petroleum products are either imported or refined locally and

received by the PPMC through import jetties and pipelines and

distributed through pipelines to depots that are strategically

located all over the country called bridging to designated retail

outlets. NNPC operates retail outlets with efficient service

delivery of petroleum and allied products to customers in an

environmentally friendly manner. This situation prevails only in

some states of the federation, but it is not the case in other

parts of the country. On occasions, some states of the country

including Abuja, the federal capital territory, may experience

outages lasting for days, and motorists have to queue up to buy

the products. This situation ought not to be so.

Note: ATK = Aviation Turbane Kerosine ; Bbls = Barrels ; DPK

=Dual Purpose Kerosine; HHK =House Hold Kerosine; HPFO = High

Poor Fuel Oil; LPFO = Low Poor Fuel Oil; LPG = Liquefied

Petroleum Gas; PMS = Premium Motor Spirit.

In 2009, the major and Independent Petroleum Products Marketing

Companies distributed about 8,476,991.86billion litres of

different petroleum products in the six geopolitical regions and

the Federal Capital Territory (FTC) in 2009. Percentage share of

the product distribution accounting for 41.54% of the total

assorted product distribution, while the South East has the least

product distribution of 2.73%. From the NNPC statistical

bulletin, out of the 8.4 billion litres of oil distributed, 61%

was produced locally. The balance was met with importation. The

situation was due to the fact that the Government refineries were

operating below the installed capacities; sometimes resulting in

complete breakdown of some refineries for months. Oladele (1997)

had earlier drawn the attention of Nigeria Government to the

aging refineries and the need to build new ones.

Transportation of products

Movement of products from depots to service stations numbering

several thousand- when they are retailed to the final consumers

involves the use of road as the mode of transportation and the

products are moved by large trucks. Road transportation is

relevant to the bridging activities of - NNPC and its subsidiary

the Pipelines and products Marketing Company (PPMC). Road

transportation is used to make up for shortage in supply across

the nation. In fact a greater percentage of the products are

distributed through road transportation all over the country.

Sea transportation

Movement of products in large quantities sometimes necessitate

the use of sea as the mode of transportation. Marine tankers and

coastal vessels are used for coastal transportation of petroleum

products and to ferry from the coastal refineries of Warri and

Port Harcourt, to Lagos. This involves heavy products in terms of

high demand.

Pipelines

The most suitable means of transportation of liquid substance is

the pipeline. Hence PPMC, uses pipelines frequently to convey

products from refineries to depots which are located in strategic

places across the country.

However, according to Kupolokun (2006), over 75% of the pipelines

have been vandalized, and are not currently in use. The petroleum

products available for distribution through an elaborate 4,000

kilometres of pipelines used to be intercontinental to 21 widely

dispersed depots. The products were obtained either from the four

local refineries or in the event of a supply short-fall from

offshore refineries by way of import of processed Nigerian crude

oil. In some cases, and mostly through vandalization, these

pipelines get burst into flames, causing serious damages to

properties and human lives. By multiplier effect the

environmental, economic and social negative impact of such

damages is usually enormous. In most cases the four refineries

produce about 61% of the total petroleum needs of the country.

The balance is usually met with importation.

The challenge

The distribution of petroleum products is facing a lot of

challenges in the Nigerian environment. In fact the environment

surrounding petroleum products distribution in Nigeria is

challenging and begs for immediate solutions. The low capacity

utilization of government owned refineries and petrochemical

plants in Kaduna, Warri and Port Harcourt poses a lot of

challenge to NNPC. It is the low capacity utilization that often

result into petroleum product shortage and eventual importation

of the products a situation that puts a drain on the scarce

foreign exchange of the nation. As observed by Oladele (1991)

there has been inadequate crude oil allocation to the refineries

for domestic consumption. This situation also leads to under

utilization of the four refineries with the attendant shortage of

refined products for domestic consumption. One need to recount

the despair, neglect and repeated vandalization of the state-run

petroleum products pipelines and oil movement infrastructure

nationwide, coupled with frequent accidents of haulage trucks on

the nations heavily used high ways. All these pose complex

problems to managers, and operators in the oil industry. The

collateral damage of institutionalized corruption with the

frightening emergence of a local nouveau riche oil mafia that

controls and co-ordinate crude-oil, and buying over the

established petroleum companies and changing established names

and logo of these companies should be a major concern to the

future of the Nigerian oil industry. From the NNPC Statistical

bulletin, 67% of the total sale of petroleum products are usually

under taken by the major oil companies, while the independent

marketing companies usually sell the remaining 33%. There has

been contention over the determination of pump price of petroleum

products. Curiously, during a period of almost fifty (50) years

when the petroleumChristopher and Adepoju. 239 marketing

companies sourced for the products themselves transported and

distributed them using their own distribution channels, and

retail outlets, subsidy was not an issue, because the oil

companies fixed the prices of products in consultation with the

government. Kupolokun (2006) pointed out that in 1973; government

introduced uniform pricing of petroleum products across the

country. This was done ostensibly to encourage even development

in the country. Since then, there has been contention over the

determination of pump price of products. In fact, in the last

five years, the Nigerian labour

Congress (NLC has gone on not less than four nationwide strikes

in order to restrict the federal Government from increasing pump

price of petroleum products. In January 2004, the government and

the NLC instituted legal actions in the process of fixing pump

price. Again in

June, 2004, the NLC declared another nationwide strike to press

home the demand for reduction in the pump price of products which

has jumped progressively from N19.00 per litre to N50.00 per

litre over a period of four years. This has led to 263% increase

in the price of petrol over a period of four years. The increase

in petrol price often lead to increases in the prices of

commodities and local transport, a situation that cause hyper

inflation, and above the 10% inflation rate planned for in the

budget.

The man-hour lost per day of each of the nation-widestrikes and

the total grounding of the nation’s economy for days have

calamitous effects on the wheel of progress of the Nigerian

economic development process. Sometimes, the nation- wide strikes

may last seven or eight days when the economic and social

activities in the country are totally grounded. In the nation –

wide strike of January, 2012, it was estimated that the country

lost over 120 billion naira. The illegal bunkering nationwide,

the insatiably Task Force Operatives that collaborated with

petrol station owners to cheat the consumers, and at times assist

in the diversion of petroleum products are all consequences

suffered over the years in the industry. All these have done

untold damages to the Nigerian economy. The unparallel huge

amount of money spent on Turn Around Maintenance (TAM) of the

refineries, which often break down immediately after the

maintenance call for a more effective and long lasting

maintenance policy.

According to Feyide (1994) over $35 million was often Nbudgeted

for Turn Around Maintenance every four years with little or no

improvement in the functioning and operation of the refineries.

Perhaps, it should also be mentioned that the crossborder

smuggling of petroleum products all of which are the root causes

of the protracted and seemingly intractable severe level crises

that usually bedevilled the country relentlessly are all

indications that a more dynamic and effective management of the

downstrea sector of the petroleum industry is necessary. Under

the prevailing situation, a more pragmatic approach is to

completely deregulate the petroleum industry sector as the case

in the communication industry in Nigeria,

Kupolokun (2006) pointed out.

Onakoya (2011) however highlighted that the implications of

deregulation will mean in the first place a complete reform of

the roles of players in the oil and gas industry. Consequently,

deregulation may lead to the following:

• Oil industry infrastructure and investments will be driven by

private capital.

• Refineries, pipelines, depots, jetties, and supplies will be

released from Government ownership.

• NNPC will become either a regulator or competitor, but no

longer both.

• Prices will be driven strictly by plats, local taxes and

operating efficiency.

• Supply and Trading (S and T) risk will be transferred from NNPC

to the market.

• There will be no more guaranteed landing cost and margins for

marketers by PPPRA.

• There will be no more fixed distribution by petroleum

Equalisation FUND

• Additional working capital pressure will be on the players for

inventory financing

• Pricing margins will become free, and may be initially high but

will eventually drop and stabilize in response to competition and

new entrants.

• There will be market rationalization which might make some

players perish, and drop out, while some will prosper. From the

foregoing, complete deregulation and removal of subsidy will no

doubt affect the efficient distribution of products at the

commencement stage. Later, the prices of products will eventually

be determined by the market forces of demand and supply, and

eventual stability in the industry. The consequences enumerated

above will undoubtedly affect the distribution of petroleum

products. The network is that prices of products will eventually

be determined by the forces of demand and supply.

Some policy considerations

The public enterprises in Nigeria have a long chain of problems

making them unable to achieve intended objectives. Such problems

include ill-conceived investments, political interference in

decision making, costly and inefficient use of public resources,

growing budgetary burden, poor management practice and diversion

of credit and other resources from the private sector.

Unfortunately, according to El – Rufai (2000), available evidence

tends to indicate that the NNPC, being a public enterprise is not

immune from the problem listed above. The question is how can the

federal government ensure a more effective distribution of

petroleum products in the country? There is no easy answer to

this question. This may call for a change in policy orientation

and development of new programmes in the oil industry and sector.

Suffice to mention that development in many countries throughout

the world has shown that initiatives and drive of private

investors and entrepreneurs can be important agent of economic

growth. Economic analysis suggests that private enterprises

contribute most to the generation of high economic returns in a

liberal environment characterized by few constraints on access to

inputs and market. Events in the world around us tend to suggest

that governments are seeking solutions to the problems of public

enterprises via privatization and commercialization. Nigeria is

the ninth world producer and world sixth largest exporter of

crude oil. The country’s towering crude oil profile reserve is

estimated at over 36.2 billion barrels and estimated to last till

2056 at the ongoing rate of exploration. This scenario points to

a positive development in Nigeria.

However, the country is importing refined products for her

domestic use. This situation has made the petroleum sector

problematic, riddled with incessant shortages, and price hikes

which make life most unbearable for the over 150 million citizens

of the country.

This paper will like to recommend that government should

completely deregulate the downstream sector of the petroleum

industry. This deregulation will gradually usher in privatization

which will encourage full participation of private sector and

entrepreneurs in the downstream operation of petroleum products.

As Adams (2001) and Akpieyi (2000) have observed, this process is

likely to bread competition which will drive effectiveness in the

sector. The effectiveness will bring down the cost of operation

with the consequence reduction of the pump price of products. The

more effective the sector, all things being equal, the more the

market forces will determine the prices of the products outside

government control. The turn around maintenance of the existing

refineries should be carried out when due. The Depots should be

adequately maintained, and the old pipelines replaced for the

effective flow of products from the refineries to the depots. The

Nigerian rail system should be refurbished and used for the

transportation of products. This will release the heavily

congested Nigerian highways and roads being used by haulage

trucks. Security in the petroleum products is essential to the

nation’s economy and expensive at the same time. Thus the

industry needs adequate safety and security operatives. This is

more urgent in view of the reported cases of vandalization of

pipelines which goes on unabated in some parts of the country.

This paper like Feyide (1994) also advocates for the

establishment of more refineries in the country. A refinery could

be located along Gboko-Jalingo axis in the north-east of the

country, and another one long Ikorodu – Sagamu axis in the South-

West. This step will increase the supply of domestic refined

products, and reduce or eliminate product importation. The excess

refined oil can be exported officially to the neighbouring

countries and thereby eliminate smuggling of the products.

RECOMMENDATIONS

Having established that deregulation of the Nigerian downstream

oil sector, will lead to the sanitization of the sector and

further improves the economy; also bring to an end the problems

of oil and thus lead to development of the economy; and that it

will lead to more hardship to the people and stagnation to the

economy unless more refineries are build and the existing ones

resuscitated to installed capacity, we therefore recommend the

following:

1. That first, the government should commercialize the existing

four refineries to the likes of Dangote, Otedola, Ifeanyi Mba,

Adenuga, who are successful businessmen and have them tender

their terms, such that oil will be refined in Nigeria and

importation of refined oil will become a thing of the past.

2. That if the four existing refineries cannot provide enough

fuel for domestic consumption, the federal government can license

another serious bidder to build one or two to augment the four

existing ones. The essence is to ensure that the refineries are

operating from its generated revenue to serve Nigerians and also

add to her income generation and relief the federal government of

the expenses of subsidization.

3. That as soon as these refineries are ready, Nigeria can

deregulate, in the context of removing subsidy. Countries abound

who are OPEC members whose pump price are far below Nigeria’s

erstwhile N65 per litre. Therefore, I still believe that if Saudi

Arabia is selling at $0.12 (N18), Kuwait sells at $0.21(N32),

United Arab selling at $0.37 (N57), Venezuela selling at $0.05

(N7), Qatar sells $0.22 (34), Iran sells at $0.11 (N17), Algeria

sells at $0.2 (N31)[30], there is no reason on earth for Nigeria

to sell currently at (N97) from the erstwhile N65 following the

pace of the United States of America who is not an OPEC member,

instead of emulating their fellow OPEC members like Venezuela.

A CASE FOR THE PRIVATIZATION OF NIGERIAN REFINERIES

Nigeria,Africa’s leading crude oil exporter and a regional leader

in installed crude oil refining capacity, sadly, remains the

continent’s largest per capita importer of refined petroleum

products. The country’s four crude oil refineries, with a

combined refining capacity of over 445,000 barrels of oil per

day, according to the US Energy Information Administration (EIA),

should easily be able to meet the current domestic demand in

refined products. EIA estimates this is about 270,000 barrels of

oil per day. However, in spite of promises by successive

governments to improve the performance of the refineries and

commit significant resources to their rehabilitation, the four

refineries continue to operate at an average of 22.9% of

installed refining capacity in 2012 (NNPC Annual Statistical

Bulletin).

The simple fact is that Nigeria has to import nearly 80% of its

requirement of refined petroleum products. In 2011 and 2012,

Nigeria spent between 12 and 15 billion dollars annually to meet

the deficit – something that, frankly, deserves sober reflection.

It is also instructive that the cost effectiveness of the crude

for oil SWAP deals has raised more questions in recent times. The

process, designed to mitigate the depletion of Nigeria’s Foreign

exchange reserves, diverts potential foreign exchange reserves

that can potentially be used to bolster infrastructure.

The failure of these government-owned and operated refineries

costs Nigerian citizens colossal sums of money in foreign

exchange and government revenue, to the detriment of education,

healthcare and other badly needed public services. N122 billion

was essentially wasted in 2011 on maintaining refineries that

never produce to their installed capacity. Refinery output fell

between 2011 and 2012 from 24% to 22% (NNPC Annual Statistical

Bulletin). Were these funds invested in the healthcare sector,

for instance, they could have more than doubled the federal

allocation to all 15 teaching hospitals and enhanced indelible

services and training to millions around the country.

Furthermore, poor refinery operation and maintenance, and fuel

importation allegedly engendered massive corruption and fraud,

which in turn, are adversely impacting the country’s image. There

are fears, fuelled by the politicized nature of the dialogue,

that the privatization of the refineries will lead to the

consolidation of wealth in a small subset of the country further

aggravating an already apparent income gap in the population. The

nature of competition is such that private entities are bound by

responsibilities to maximize shareholder value. The need to

develop core competencies and achieve efficiency savings is the

driving force behind the ethos of private sector institutions. A

privatized refinery does not draw maintenance funds from a

seemingly bottomless pit of funds sourced outside its operation.

By its very nature, a privatized refinery must justify such

expenditure in line with its operating profits. With the world’s

current overcapacity for refining petroleum, local refineries

face strong competition in an increasingly open market. A private

sector run refinery can operate uninhibited by the lethargic and

inefficient nature of public sector institutions both in cost,

efficiency and transparency. The facts are that transparent and

robust privatization of these refineries will raise government

revenue, conserve foreign exchange, decrease vulnerability to

imported petroleum products, reduce fuel cost, increase

employment and reduce corruption in the petroleum sector. In

recent weeks, a storm has been raised over the proposed

privatization of these four ailing refineries. At the epicenter

are the National Union of Petroleum and Natural Gas Workers

(NUPENG) and the Petroleum and Natural Gas Senior Staff

Association of Nigeria (PENGASSAN), the two representative bodies

of petroleum workers in Nigeria, who have been very vocal in

their rejection of a refinery privatization programme. PENGASSAN

claims that the government deliberately underfunded the

refineries as a ploy to rob Nigerians of prime national assets

through cheap privatization to its cronies, and that the unions,

through their resistance, only seek to protect job losses in the

refineries – an assertion that is not corroborated by empirical

evidence. Nonetheless, the Federal Government of Nigeria and the

Bureau for Public Enterprise (BPE), the institution appointed to

manage government asset privatisation, seem to have retracted

their earlier announcement on the proposed sale of the

refineries. If this sounds familiar, it is because we been down

this road before: recall Nigeria Airways, NITEL and, more

recently, PHCN, which, contrarily, provides an example of firm

government action that resulted in a positive outcome for all – not

least Industry workers. In each of these cases, the unions and

other stakeholders opposed privatization and successfully

deferred or, in some cases, scuttled the planned sale. Down the

line, however, workers’ were not PROTECTED Nigerian Airways was

eventually liquidated, leaving no jobs for the workers. We are

all familiar with the situation at NITEL/Mtel. Both are

effectively non-functional. PHCN, on the other hand, boasts a

different story, as the Jonathan administration's political will

saved a situation that could easily have gone the way of NITEL

and Nigeria Airways. This government was able to privatize PHCN

in a manner that was globally acclaimed as transparent, even by

unsuccessful bidders! When US President Barack Obama launched

US$7 billion Power Africa initiative to double capacity and

increase access to electricity in Africa, Nigeria was chosen as

one of the eight pilot countries. A key consideration for

Nigeria's selection was transparent power privatization that had

just been concluded. The overwhelming evidence indicates that the

private sector has served the Nigerian public and stakeholders

better than government--‐owned and operated utilities and

parastatals. Let us examine two recent examples: power and

telecommunications sectors before we return to the refineries.

The federal government sold power-generating companies to the

private sector last year. In the case of Transcorp Ughelli Power

Limited (TUPL), a subsidiary of the commercial Transnational

Corporation of Nigeria, the company has doubled the Ughelli power

plant’s electricity output from 164 MW at the handover on

November 1 to 360 MW as of January 31 – just three months! TUPL

has also announced ambitious plans to raise the original capacity

to 700 MW by December 2014, and will soon commence construction

of an additional 1000 MW. Furthermore, a majority of competent

PHCN staff were retained, while the federal government paid

massive disengagement benefits and pensions to former PHCN

employees from proceeds of the sale. The impact of the increased

power generation will likely reach Nigerian homes and offices

later this year, as the bottlenecks in transmission and

distribution are identified and eliminated.

In effect, the general public and stakeholders’ interests have

been well served. In the telecommunications sector, the

government liberalized the industry in 2001 by selling GSM

licences, but retained ownership of the key operator, NITEL/Mtel.

While the rest of the industry grew exponentially, NITEL

faltered, with the result that it was ultimately sold in 2006.

Unfortunately, the sale was subsequently reversed by the

successor administration; today NITEL and Mtel are comatose and

of negligible value, and contrary to the union’s expectations,

workers were left empty-handed. The contrast with the PHCN story

could not be more glaring.

In each of the above examples, continued operation by the public

sector led to billions of naira being lost on poorly managed

entities. These entities deprived Nigerians of important

services, fostered corruption and deprived important budget

items, like education and health, of vital funds; in each case,

privatization or liberalization allowing competition from private

business solved the problem, and ensured the greater common good.

Coming back to the refineries, we have also been down the road of

reversing privatization and retaining public ownership of this

assets.In 2007, attempts by the previous administration to

facilitate the sale of the refineries were reversed due to

pressure by the unions and management renewed its commitment to

revamp the refineries. Yet, in 2011 alone, Nigeria reportedly

spent $760 million on refinery maintenance, and the operational

capacity of the refineries hardly changed. In the five years

since the reversal, we have spent over US$30 billion in oil

subsidies. These sums spent on Turn Around Maintenance (TAM)

could have collectively funded our health and education budget

for three years! This cannot continue. Under the Greenfield

Refinery initiative, the Nigerian National Petroleum Corporation

(NNPC) planned to undertake a public-private partnership project

to expand local refining capacity, eventually settling on

establishing a 350 000 BPD refinery in Lagos. This along with

calls for liberalizing the sector by awarding licences for only

new refineries, saying it worked for the telecommunications

industry and GSM licensees, make up a myriad of policy

suggestions on solutions to the refinery problem. The fact is

that these are not mutually exclusive policies, as excess

capacity can be exported. It is instructive to note that,

although several refinery licences have been awarded in the past,

not a single refinery has been successfully refurbished. As

liberalization has so far failed to work in the refining

subsector as a viable policy option, selling the refineries is a

faster and more efficacious means of building refining capacity.

Moreover, even when new refineries eventually come on board, it

will not negate the need to sell the existing ones just as the

GSM licences did not negate the need to sell NITEL.

While Nigeria continues to squander a fortune on importing

petroleum products, attempts by governments to offload the

existing refineries to competent private investors remain

hampered by misguided policies, corruption and the lack of

political will to confront entrenched, short term interests, such

as the unions, whose fears are proven to be largely unwarranted.

Savings

From the reduced cost of import in the form of tariffs and

demurrage on landed vessels can ease the need for budgetary

allocations to oil subsidy funds. It is in the public interest to

sell the refineries and we have a golden opportunity to do so

now, which will raise much needed revenue, conserve foreign

exchange, reduce corruption and augment national security by

reducing our vulnerability to imported oil products. It will be

for our mutual and collective benefit.

NNPC REFINERY PORT HARCOURT

In 1978, Federal Government acquired the remaining 40% equity of

Shell and BP in NPRC. Name changed to NNPC Refinery Port

Harcourt. New Organizational structure was established by NNPC,

Chief Executive Officer‘s title changed to Managing Director and

reported to GM Refineries, NNPC Corporate Headquarters. Major

policy and operational strategy changes occurred to bring

Refinery Management under NNPC Corporate Supervision.

Bureaucratic style of Management was entrenched – Refinery became

a cost centre for NNPC Operations, supplying all its products to

PPMS for sales, marketing and distribution.

THE REFINERY PROJECTS AT WARRI, KADUNA AND PORTHARCOURT

In 1973 – 1974, first appearance of vehicle queues nationwide,

showing the shortage of petroleum products, especially petrol.

Shortages resulted from sharp increases in demand due to:

a) Increase in economic activities after the end of the Nigeria

Civil war,

b) 1975 Udoji salaries increase and arrears for all workers in

public and private companies, including ministries and

parastatals. Beginning of the “Oil Boom “- Federal

Government began to earn large sums of foreign currency from oil

(a) Result of higher oil prices

(b) Increased production of oil. Government earnings came

through payments of Royalties and Petroleum Profit Tax (PPT)

Federal Government commissioned BEICIP to carry out feasibility

studies

(a) to determine national demand for products

(b) Consumption pattern and

(c) number, size and type of new refineries needed to meet

demand.

THE PROBLEMS OF NIGERIAN REFINERIES

The problems are presented as follows:

Inadequate Funding and Autonomy

1. Managing Directors’ inability to secure adequate working

capital from the NNPC Corporate Headquarters.

2. Managing Directors’ inability to exercise full autonomy to

commit the required funds, as necessary to procure chemicals, and

catalysts, equipment spare parts, other plant consumables and

contract out services from suppliers and experts. This is due to

very low limits of financial authority from the NNPC Corporate

Headquarters.

3. The bureaucratic process of approvals, which in some instances

required as many as 27 signatures to get critical maintenance

spend signed off. These problems originated from the

centralisation of powers at the NNPC Corporate Headquarters in

Lagos and later in Abuja, away from the refineries’ operations.

These problems affect all activities of the refineries directly

or indirectly in varying degree of severity. The approval

processes do not have time limits. They may take a long (up to

6months) or relatively short time (within a few weeks).

Lack of proactive governance

As cost centers instead of profit centers, the driving force to

be efficient and profitable disappeared with the full acquisition

of NPRC. Due to NNPC bureaucratic system, sustaining high level

of staff morale continuously had become a serious and perennial

challenge to management.

Poor Maintenance of the Refineries

Shortage of spare parts as required. Lack of systematic

maintenance activities, ineffective supervision of activities due

to depletion of experienced staff through compulsory mass

retrenchment.

Serious Political Interference by the Federal Government

This could take any form from staff matters (appointments,

recruitments, promotions and compulsory mass retirements),

procurement issues, award of contracts etc. These undue

influences which constitute a heavy burden and distraction to the

business would not exist, if the refineries were privately owned.

Corrupt practices were easily perpetuated under such

circumstances.

Absence of Competition due to Uniform Pricing of PMS

The Federal Government’s mandated uniform pricing of petrol and

the making the refineries a cost centre instead of a profit

centre have effectively eliminated all competition among the

refining companies. These two policies are also responsible for

the overall reduction of efficiency and for eliminating any staff

incentive for innovation in the refineries.

Ineffective Technical services Departments

Depletion of experienced staff through arbitrary transfer or mass

retrenchment without proper and timely replacement, inadequate

training for newly recruited staff. Failure to monitor and timely

correct minor operational deficiencies in equipment and systems ,

to ensure continuous satisfactory performance Inability to make

necessary improvements or innovate as necessary.

Frequent Emergency Shutdowns of Units or entire refineries.

This Caused thermal shocks to equipment, especially those

operated at high temperatures. Metallurgical stress failures were

common causes of equipment failures. Loss of production

Delayed TAM’s

Failure to carry out required Turnaround maintenance on schedule

every 24 - 36 months of continuous operations.

For example, PHRC TAM’s history reads as follows: The first TAM

was carried out in 1991 (on time), the second was in 1994 (1 year

late), the third was in 2000 (3 years late). The next TAM was

planned for 2003/2004, but was again postponed to 2007.

PROPOSED SOLUTIONS TO REFINERY PROBLEMS

First, it is important to note that: The Problems of the

Refineries are well known and documented to the owners, the

Federal Government of Nigeria through the Board of NNPC.

Proposed solutions have also been presented to the Federal

Government by World Bank since 1995. Therefore I am not

inventing new problems or solutions. An Act of the Nation

Assembly,

The Public Enterprise (Privatization and Commercialization) Act

of 1999 mandated the Federal Government to privatize a list of

government owned companies. The Refineries are listed in the

third schedule. The Political Will of the Federal Government to

divest majority of its equity is crucial and was lacking until

2005. The Federal Government in June 2005 hired Purvin and Gertz

Inc. (Engineering Consultants) and Credit Suisse First Boston

(Financial and

Managements Consultants) to assist BPE to design and implement

the processes of the sale of EPCL, PHRC and KPRC. The exercises

were concluded for EPCL and PHRC through public tendering. The

exercise for KRPC was not handled through public tendering. The

negotiated arrangement for the sale of KRPC to a Chinese company

failed. In the case of PHRC an apparent lack of transparency

marred the final choice of the Federal Government on the eve of

its departure in May 2007. The EPCL exercise was completely

successful. This has prompted me to adopt it as a satisfactory

model for the future privatization of the refineries.

Transparency of Process

Crucial for the success of any privatization exercise. This will

ensure that only competent and resourceful Ownership for the long

term (to meet public demand).It will prevent asset stripping and

eventual collapse and abandonment of the facilities

FUEL SUBSIDY IN NIGERIA

Agu (2009:286), saw subsidy as a payment made by government to

producers to enable them produce and sell at a lower price than

they would otherwise. He held the view that it lowers the market

price below the factors cost, so that consumers pay less for the

good than it costs the producer to make the good. In his own

understanding, Ezeagba (2005:45), believed that subsidy exists in

a situation when consumers of a particular commodity are assisted

by the government to pay less than the market price of the very

commodity they are consuming. On the producers’ side, he saw it

as the payment to producers of certain commodities by the

government not to produce at all or to augment their income when

the price of their product is less than break-even point. Subsidy

was defined by Hornby (2005:1476), as money that is paid by a

government or an organization to reduce the costs of producing

goods or services so that their prices can be kept low. He stated

that subsidies can be granted in agricultural area or housing

projects.

From the above definitions, subsidy is seen as a device employed

by government to assist either the consumers or producers to

consume or produce certain commodities at prices below the

prevailing market prices. It is also an incentive given to either

side (consumers or producers) to consume or produce more of the

goods in question.

The issue of long queues experienced by motorists stuggling to

buy petrol, at filling stations, has become a common phenomenon

in a country richly endowed with large crude oil deposit, and a

greater exporter of the God-given commodity. It is pathetic to

observe that no other OPEC country or even countries that do not

produce oil, share similar nasty experience with Nigeria (Badmus,

2009: 25). Prior to this ugly situation, there were moments of

joy in Nigeria, when the four refineries were all working at full

capacities, and there was no need for queuing to buy fuel. But,

according to Badmus, Nigeria could not help relying on fuel

importation because under the regime of President Ibrahim

Babangida and his successors (Generals Sani Abacha and

Abdulsalami Abubakar), the four local refineries could not be

managed properly and they fell below the installed refining

capacities, thereby making it imperative for demand to be met

through imports. The import dependency which constituted over 82

percent of the total supply of petroleum products consumed

locally, invoked protests from different quarters in the country.

This undesirable situation led to the controversial issue of

subsidy, which nearly tore the country into pieces. Subsidy, in

the economic sense, exists when consumers of a given commodity

are assisted by the government to pay less than the market price

of that commodity. In relation to the fuel subsidy, it means that

consumers would pay less than the prevailing pump price per

litre. For instance, the current official pump price of N65 per

liter is still carrying a subsidy of N2.72 per liter of refined

product (Chizea, 2009:8).

According to him, there is equally a subsidy of about N30 per

litre of kerosene, hence, a whooping amount of N640 billion was

spent as a subsidy on all the refined products in 2008 alone. The

amount spent on subsidy alone was almost the whole of the capital

budget estimated for 2009 budget. But the question many Nigerians

ask is to what extent has the subsidy impacted on their lives?

This has generated a lot of crises in the country. Man-hours were

lost, social amenities and infrastructural facilities which were

in short supply were recklessly destroyed, thereby slowing down

the rate of economic development. This was why Ayankola (2010:22)

suggested for its removal, and the introduction of deregulation

in its place. In the same vein, Economists do not like to talk

about subsidy because it is often a misallocation of resources

(Chizea, 2009:8). In the light of the nation’s experience with

subsidy, Chizea believed that it cannot be encouraged anymore in

the country’s present day economic situation. He recalled how the

subsidy on fertilizer was hijacked and later became an instrument

for political patronage and never reached the intended

beneficiaries. He strongly admonished Nigerians to be very

careful in recommending the extension of subsidy in our

environment. Stressing more on the issue of subsidy, Oketola

(2010 :19), contended that it would be difficult to get adequate

financing and investment in refineries in a regulated pricing

regime. He observed that this country spends approximately N600

million per day on subsidy on petrol and kerosene, while

government struggles to fund infrastructure, health, transport

and other competing needs. With deregulation, Oketola stated

further that government will have more resources available for

the provision and financing of education, road construction and

equipping of hospitals and improving the power sector. From the

foregoing, it is observed that the policy of subsidy has rather

done more harm than good to the citizenry of this country.

There was relative stability in the price of petroleum products

between 1988 and 1992. In May 1992, an attempt to hike the prices

was jettisoned. However, in November 1993, the Interim National

Government (ING) adjusted the price of petroleum products upward

by over 600 percent. In protest, the NLC called a general strike.

In the midst of the ensuing ‗dialogue‘ between the state and the

labour, the Interim National Government was replaced by a full-

blown military regime under General Sani Abacha. The regime, in

search of legitimacy, reviewed the prices down, fixing the price

of petrol at N3.25 and kerosene and gasoline at N2.75 per Litre

respectively. A similar scenario was enacted a year later in 1994

when the NNPC purportedly hike the prices of petroleum products

before government ‗intervened‘ to reduce the prices to their

current levels.

The president further announced new increases in petroleum prices

in his 1989 budget and as amplified by the budget and planning

minister, the new price pranged from 60kobo(from 42 kobo) for

fuel and for LPG to 50kobo (from 35 kobo) for kerosene

40kobo( DPK). Hence the purported subsidy remaining ranges from

45% on LPG to 75% on fuel oil. The president told the nation that

following the inevitable information of the pump-head price of

petroleum, it became necessary to streamline the price of all the

fire major petroleum products in the domestic market as well as

to ensure there adequate supplies to the consumers. The budget

and planning Minister Alhaji Abubakar gave the reason of

maintaining ‗price relativity‘.

In 1986, the military administration of Gen. Ibrahim babangida

declared that due to the devaluation of the Naira, the domestic

price level of fuel had become unreasonably cheap and was

therefore burdensome to the federal government purse. The price

of petroleum products was thus raised from 23kobo per liter

through a negotiation process, eventually settling at 70kobo per

liter. Chief Ernest Shoneken, the brief successor to the

babangida regime, cried out in dismay at the physical state of

affairs upon taken over. The price of fuel was identified as one

of the primary budgetary burdens based on the fact that the

currency had further been acutely deva lid. In 1993, the price of

gasoline (petrol) was therefore increased to N5 per liter based

on the NNPC annual statistics; the federal government gave the

level of subsidy in1989 as gas 75%, petrol 69%, kerosene 77%,

diesel 70% and fuel oil 74%.

Unfortunately, the expected of further increase in prices have

been created in the mind of Nigerians and sellers are allowed to

exploit such increases for profiteers. Also as the

controversially rages, comparative figures of petroleum price in

Nigeria and its neighbors were given to buttress arguments for

price hikes. For example, in 1987, we were told that while

gasoline, diesel oil and household kerosene cost 39.5, 27.5 and

10.5 kobo respectively in Nigeria, the same products cost 236,

125 and 115kobo respectively in Niger, 380,380 and 320 kobo

respectively in Benin. A comparative analysis was also made of

prices in some oil producing and exporting countries in Africa.

Unfortunately, such figures do not give a correct picture of the

countries concerned. Most Nigerian neighboring countries hardly

have crude oil in abundance in Nigeria. In fact they all import

to satisfy their petroleum needs.

For Nigerians, most indices and others have even worsened over

the year. For instance, the inflation rate has increased from

16.2%. In 1987 to 38.3% and 47.5% in 1988 and 1989 respectively.

Indeed, there is nowhere in the world where domestic price and

fixed in accordance with international prices. Most especially

when the later are highly volatile. As it is OPEC prices are on

the downward trend and where it hits the rock bottom of about $10

per barrel as expected in 1986. Do we then reduce our domestic

price of petroleum products?

Conversely, as recorded in the guidance business week February

28, 1993, there was overwhelming fear before the presentation of

the year budget on the fact of subsidy on oil. The government

could not keep to itself the much pressure it had from the

western world and its external agencies on the urgent need for

the country to do away with subsidy on oil in spite of assurance

from the presidency that the oil subsidy will stay, peoples still

apprehensive especially as the backdrop of the view expressed by

the British secretary of for states overseas developments.

Baroness Lyda walker, who was in the country few days before the

presentation of this year‘s budget. In the budget, the speech

read by the chairman of the traditional council, the subsidy on

the oil stays but that is for a short while. Then from the tone

of the chairman, there is little doubt that government has taken

a decision on this removal. What seems to be holding a

definite pronouncement on the so-called enlightnment programmes.

The government plans to carryout and more importantly the phase

of these withdrawals.

Shortly after GEN. Abacha grabbed power from the tethering

administration of the Ernest Shoneken, he would reduce of

petroleum products slightly to gain public support. With gasoline

(petrol) now priced at N3.25 kobo/liter, fuel price adjustments

had become a tool in the hands of the government for manipulating

the support and mood of the people. Just over a year later in

1994, the government announced a sharp increase in the price of

petroleum products. PMS (petrol) would now cost a fearsome N11

per liter which is double of what it was in 1993 before Abacha‘s

regime (N5 per liter). Upon the death of abacha and the ascension

of General Abdu salami, the price was once again reviewed and

increased to N25 per liter. An outcry by the public and

resistance from the labour congress forced the administration to

reduce the price to

N20/liter in January of 1999.

Subsidy on oil, government rationalizes not in the best interest

of the nation; besides denying the vital income for development

purpose across our border call for much concern, thus if subsidy

on oil is removed, we stand to gain about N63billion which could

be invested in productive venting . As it stands now we are

giving out petroleum products to our neighboring countries almost

free.

This is looking at it from one perspective, but it does not end

here. A lot of people have wondered around if there is actually

subsidy on oil. If there is how is it? On the activities of

smugglers, many have asked if our borders are meant to be wide

open for all manner of people and transactions regulated. Who is

supposed to be In charge of security at our borders? There are

more questions to be raised on this.

Before we know if there is subsidy on oil and how much is

involved, we need to work out the cost of production, how much

oil men are paid, the royalty oil companies‘ pay, how much they

spend for environmental cleaning and other social services. It is

not enough to use the price of oil in international market to

cost what we produced and consume locally. It is so unfortunate

that we have so bastardize our naira that whatever transaction we

do exception wages any way is computed in dollar, when the

exchange rate was N1 to $1. Nobody talked about subsidy on oil.

Why are we bordered with that now that over naira has been

battered by no fault of ours?

The movement of petroleum products across our borders is the

least convincing reason to give for this one begins to wonder

while the custom and

immigration department should not be reminded to their work,

assuming they have forgotten. We only hear sporadically of the

apprehension of the smugglers, what happens to then afterwards is

nobody‘s business. It is to be noted that appropriate authorities

charged with the responsibilities at our border post have not

failed the nation only in the area (petroleum products), but

there seems to the emphasis on petroleum because the government

is desirous to score cheap point, this is unfortunate.

It is a big irony that the pressure on us to remove subsidy on

oil is more from the countries that they well entrenched welfare

programes citizenry. In Europe, we know that beside subsidy on

education that there are such welfare programes as unemployment

and old age allowance if so significant that most youths prefer

to live on that. In America there are chains of welfare service

on education, health, including subsidy on agricultural products.

Go make the price of grains and wheat‘s competitive in the

international markets, the American‘s have gone even to the

extent of buying large quantity of this over for consignment in

the ocean. One of the wonders why these same countries that so

much love their people‘s welfare want our own government to

suffocate us with an unpopular policy.

The arguments that the amount realizes from the removal will be

used for productive purpose and provision of infrastructural

facilities does not appeal to anyone. These have been such

entropian ideal that have either not seen the light of the day or

crashed at implementation stage. In this live, one will look one

will ask what has happened to the man‘s transit programmes? How

has that solved our erratic transport system problem? What of the

investment wheat production? Has the government not responded to

the public entry on cost of wheat products by lifting barn on

importation through temporality? These are other examples of

purposetedly noble projects that will either still born or half

harzardly implemented. Many of such programmes have become,

avenue to enrich some individuals that have assets to government

with the unenviable records, nobody is carried away by all talk

about investment money realized from removal of fuel subsidy

judiciously. If for any thing, the subsidy (i.e. if there is any)

is the most effective way to ensure that the national net wealth

gross round. Transport system which will be the first victim of

the proposed removal affects everybody either in his social or

economic activities.

The international financial institution should be more patient

with us. In responds their building almost all the vital

government concerns have either been privatized or

commercialized. These means a corresponding increase in the cost

of service they render. These in thus handling anything now that

is at reach of his common man. If subsidy on oil is removed our

lots will be worsened just as it was last year 2012. This

explains why a lot of conation needs to be exercised in this

adventure. If it is due, its social consequences may outweigh

whatever economic return is expected from it. If we must refer to

the international market in fixing the price of one oil for

locally consumption then, we should do the same by fixing the

wages of our workers.

Talking about the argument for the petroleum subsidy removal, one

of the most important arguments (through less emphasized by NNPC)

is that removal of the so-called subsidy on petroleum is the

easiest way to bail out a cash-trapped federal government, it is

estimated that the government would reap about N180billion yearly

starting from 2012 once the removed was withdrawn. The extra

revenue from the international markets, rising public debt,

uncompleted projects and fall in non-oil receipts.

The second reason for the price increase is to check or stop

illegal bunkering. In most case, Nigeria many officials deny the

existence of illegal bartering they know of, there is fear that

Nigeria does not have control over the activities of the mother

vessels which usually fuel fishing travelling and other vessels

in the open sea. The mother vessels get their petroleum products

to a cheaper rate, but Nigeria hardly has any control over them

or how they dispose of the products once they leave the nation‘s

shores and get to the open sea. The logic this is that if

―subsidy‖ is removed prices of the products would become highly

competitive with what is obtained elsewhere in the world.

(Akinrinde). to anyone. These have been such entropian ideal that

have either not seen the light of the day or crashed at

implementation stage. In this live, one will look one will ask

what has happened to the man‘s transit programmes? How has that

solved our erratic transport system problem? What of the

investment wheat production? Has the government not responded to

the public entry on cost of wheat products by lifting barn on

importation through temporality? These are other examples of

purposetedly noble projects that will either still born or half

harzardly implemented. Many of such programmes have become,

avenue to enrich some individuals that have assets to government

with the unenviable records, nobody is carried away by all talk

about investment money realized from removal of fuel subsidy

judiciously. If for any thing, the subsidy (i.e. if there is any)

is the most effective way to ensure that the national net wealth

gross round. Transport system which will be the first victim of

the proposed removal affects everybody either in his social or

economic activities.

The international financial institution should be more patient

with us. In responds their building almost all the vital

government concerns have either been privatized or

commercialized. These means a corresponding increase in the cost

of service they render. These in thus handling anything now that

is at reach of his common man. If subsidy on oil is removed our

lots will be worsened just as it was last year 2012. This

explains why a lot of conation

The third argument for the oil price increase is to check or stop

the smuggling of petroleum products into neighboring countries.

In 1987, the NNPC stated that truck load of petroleum (of 30,000

liters) bought at N9,885 in Nigeria and sold for example, in one

of the countries to the north of Nigeria and sold for example, in

one of the countries to the north of Nigeria would fetch between

N90,000.00 and 114,400.00. The corporation also surmised that the

smuggling activities contributed to locally scarcity of such

products hence if prices increase, it would become less

profitable to smuggle and scarcity would be reduced.

The major argument is that subsidies create distortion in the

consumption of petroleum products, i.e. subsidies discourage

consumers from being cost conscious. In other words, the

government‘s intention is to crab waste and probably increase the

average daily consumption of 290,000 to 300,000 barrels. Some

people, even go to the extent of arguing that subsidy removal

will lead to reduction in domestic consumption of these products

and conserve surplus for export and hence boost Nigerian foreign

exchange earnings. But this is a naïve argument for it is a

reflection of ignorance of the economist of Nigeria‘s membership

of OPEC and quota allocation.

Another plank of the campaign is adulteration of kerosene and

other petroleum products which has become an innovative business

but which is very

dangerous to households and car owners became of explosive that

may result from such mixtures and the consequent enquiries

knocks.

However, both adulteration and smuggling give an indication of

the federal government to police Nigerian borders and NNPC

inspectorate division‘s inability to monitor the oil sector

effectively.

However, on a more general level of argument against petroleum

price like include consequent rise in transportation will be

suffering for the illegal act of a few (through smuggling,

bribery and adulteration) coupled with no too effective law

enforcement agents. Social deterioration, tendency forward,

misdirected public expenditure and consequent structural

distortion in the economy.

What happens in reality followed there general lines of argument.

First, at each period of price increases transportation fare

escalated and in some cases by more than 10%. These had spill-

over effects on other sectors of the economy, inducing

significant increase in the general consumer goods. For example,

the CBN January 1989, reports had if that the consumer price

index of fuel and light rose by 20.6% and 27.7% respectively over

its level of the corresponding period of 1988. Same is true as

the commodities as reflected in the inflation rate of 38.3% in

1988 and 47.5% in 1989. The rising cost of living

has lowered living standard, increased suffering of commuter

while hunger and starvation is the order of the day. Without

adequate food to eat in the period of naira squeeze and non-

rising wage death becomes rampant.

In most cases, long run saving and investment climate becomes

bleak while national income (growth) falls, eventually, the

unemployment problem which we are making serious efforts to

reduce the aggravating and further complicating the tax of

economic management.

Petroleum price increase have also called to question the social

justice stance of the government since such price like has

resulted in huge profits for transporters and distributors at the

expense of committers and consumers whose income rather than

price falls in real terms.

The petroleum price increase also resulted in mass distract of

human capital and property. Indeed, following the April 1988 oil

price increase, students in Nigeria tertiary institution

protested. Consequently open which the police unleashed fire on

them then resulting to a substantial loss of life and property.

The frequent and brutal police killing of students and honest

citizens during such protest constitute loss of human capital in

the form of potentiality high skilled labor. Apart from the loss

and gives the parents, this help to set us backwards

technologically apart from the retarding economic growth and

human development (Anyanwu 1986)

The assumption of most of the petroleum products fell during each

of the price increase. For instance, during the first half of

1989, the consumption of liquefied petroleum gas declined by 4.7%

aviation turbine kerosene by 33.3%, automobile gas oil (diesel)

by 7.8% and low pair fuel oil by 23.3%. The fall in the

assumption of diesel for example reflected in the reflect in the

reduction of transportation services in major towns and cities

despite government intervention through mass root transit

programes (CBN 1989).

Product cost rose in both private and public sector of the

economy. Apart from the inflationary effect, it worsened the

unemployment situation as most small scale firms went down. Rise

in production cost was also reflected in the fall in industrial

capacity utilization from the average of 40.7%. In 1988 to 30% in

1989.

The other is the deleterious impact on fauna and flora due to the

hike in kerosene price in particular, there had been a tremendous

and mass switch from kerosene usage as a source of cooking light

energy to the use of fire wood, lands will undermine the economic

and environmental health of the country. Indeed, the ecological

consequences entail read economic and social cost too.

The lot of rural villagers are been worsened while the national

economy is being undermined. Plant and animal species

extinguished and the earth‘s climate destabilized (Anyanwu 1990).

As democracy was ushered in the then newly ―rebranded‖ Ex-

president-General (rtd) Olusegun Obansanjo, soon found enough

reason to want to remove the subsidy on oil product price.

Obansanjo was the president who increased and inflated the price

of petroleum products three times within a period of 8 years.

Alongside some other economic indices, this action would bring

about a hyperinflationary trend that remains unsolved even today.

Phrases such as ―subsidy removal‖ eliminate waste to free

government funds and encourage foreign and local investment in

upstream sector were thrown around with reckless abandon.

In the space of 8 years, the price of petrol went from N20k to

N30k in 1999 but it was reduced to N22k because of public

resistance in 2000. In 2002 prices went to N26k however, in 2003

it was increased to N40k but reviewed back to N34k because of

another stiff resistance from the public. In 2006 however, the

price was revised up to N40k again and finally as a party gift in

2007, the reprobate president would first a criminal and sudden

increase to N75/ liter on the citizens. For his part, the feeble

and morbid president Yar‘adua who succeeded Obansanjo, showed

some compassion and reduced the official price of petrol to

N65/liter. imported to the nation. The difference in the cost

accrued for importation for comparison to the official domestic

price of N65/liter (PMS), along with an agreed profit out-called

a reimbursement, these essentially is what is being referred

today as subsidy.

According to information derived from the website of petroleum

products pricing regulatory agency (PPPRA), the agency charged

with the control and regulation of domestic fuel consumption,

petroleum pricing templates are been used- a formatted and

standardized formula for calculating the final landed cost of

petroleum products. It is indicated that as of July 2011 the

landed cost of petrol (PMS) was calculated to be N142.40/liter.

This suggest that N77.40 will have to be subsidized by the FGN in

other to sell that fuel for N65/liter. A closer study of the

underlying component of the cost reveal that depot related cost

are separately charged to federal government account, which

amount to almost N50/liter. This fuzzy charge is said to be the

cost of port demurrage alone without adding the landed cost of

the imported fuel. In essence, the actual and total cost of a

liter of PMS fuel to the FGN was a whopping N191.91/liter.

In 2006, Nigeria spent N261.1 billion (us $2.03 billion) on fuel

subsidy. In 2007, the figure rose to N278.9 billion (us $2.3

billion). By 2008 the amount expended nearly tripled to N633.2

billion (us $5.37 billion). The drastic increase in the cost was

partly attributed to the depreciation of currency and the very

high global price of oil products. However, there was also the

incessant issue of massive graft and fraud which was opportune by

the unfortunate and sordid chain of events that led up to the

death of the former president. Once this procedure has been set

in 2008, the stage was primed for inordinate as for annual

increase in the cost to the FGN that would eventually culminate

in the whopping cost estimate for the fiscal year 2011.

POLICY RECOMMENDATION

Recommendation on how to reduce the adverse effect of petroleum

subsidy removal and how to diversify the economy has gained

audience in recent times. Most writers have either concentrated

on elaboration of the corrective measures that are already known

or have suggested some other measures that are recent in origin.

From the above analysis one simply sees that on the average

petroleum price increases are an ill-wind that blows on any one

good. It had been embarked upon to satisfy the whims and caprice

of the western capitalists. It is therefore important that we

should not allow the neocolonialist to push us from frying pan to

fire. Indeed as acknowledge by the NNPC in a recent seminar,

there is nothing bad about subsidy. Ironically in most developed

countries there is one form of subsidy or the other. For example

in the United States, farmers are heavily subsidized and are

often paid to produce, so for European governments. How can it be

different in a country where human suffering has been worsening

and ranked nineteenth from the bottom in the human suffering

level report on 130 countries? Further action therefore calls for

greater improvement and imaginative policy

The so called subsidies to the petroleum sector should attract

strings relating to efficiency in production and consumption

activities so as to achieve the desired effects. Programmes of

actions on the petroleum institution should be closely monitored

regularly. This should be followed with commensurate punishments

where variance exist show as smuggling activities.

There should be well articulated output and performance targets

which are periodically monitored with respect to the NNPC in

order to redress its observed operational inefficiency. Here, the

management of the corporation has to be guaranteed the attainment

of certain stated levels of financial, operational and managerial

performance in return for enhanced operational autonomy. In

addition information relating to production levels, value

profits, average cost, market gaps, and consumption levels are

well as problem envisaged and solution mapped out should be

approved.

There should be also the need to regulate refined petroleum

products markets since this will make the price of petroleum

products markets since this will make the price of petroleum

stabilized other than allowing the forces of demand and supply to

determine it(this is in the long run according to J.M. Keynes, we

are all dead). Government should develop an alternative energy

source since oil is a non-renewable resource. This definitely

calls for co-ordinated investments in research and development in

the direction.

However, there is no gain saying the fact that some men of the

customs and excise department and about smuggling if petroleum

product out of the country. The department needs constant

reorganization with a view to shifting out bad eggs amongst them

and meeting out adequate sanctions as well as reposing almost all

the personnel to various border posts. Adequate and more

sophisticated equipment should be provided for the department

while smugglers should face stiffer penalties. To this end,

existing law and regulation on smuggling need to be constantly

reviewed.

Conversely, if subsidy is to be removed, then the following

recommendations are structured to reflect the complexity of the

challenge and the multifaceted responses needed to address it.

The first set of measures are strategic in the sense that they

aim at addressing what is commonly identified as the kernel of

the subsidy problem, to wit, the historical failure to refine

petroleum products locally. The second set of recommendations

includes measures required to facilitate the removal of

subsidies, which must be approached as a structured process

requiring policy action over the short-, medium- and long-term.

SHORT TERM RECOMMENDATIONS FOR REDUCING THE COST OF PETROLEUM

PRODUCTS

These short-term recommendations are selected to achieve the twin

objectives of reducing the costs of petroleum products and

thereby reducing the subsidy burden on the public treasury. The

measures are recommended as a half-way house towards the

negotiated and orderly removal of subsidies.

NEGOTIATE REFINING CONTRACTS WHICH DO NOT REQUIRE REFINERS TO

BUY CRUDE AT WORLD MARKET RATES

The basic idea here Nigeria supplies the crude at the rate which

NNPC receives for local refining, and/or by paying the foreign

refiners with crude oil rather than cash. None of these options

is satisfactory or guaranteed. They depend on the agreement and

cooperation of the foreign refiners and they both make sense only

where the refining is in a non-oil producing nation. However,

they have the potential to work if the refiners have unutilized

refining capacity that they can deploy specifically for the

purpose of refining for Nigeria. In any case they indicate the

areas of possible exploration that the government can pursue in

order to reduce import costs.

LIBERALIZE THE PETROLEUM PRODUCT SUPPLY MARKET.

The main policy action here is to liberalize product importation

and unbundle the underutilized PPMC pipelines and storage systems

so that all importers (and not just NNPC) can use them to

throughput their imports for onward distribution. This will

create competition and thereby minimize the cartel-like

profiteering built into the current import licensing regime that

guarantees profit margins set by the government. Of course

liberalizing importation requires strengthened monitoring to

ensure the quality of imported products, which may be the only

necessary regulatory function thenceforth.

SECURE THE INTEGRITY OF THE DISTRIBUTION NETWORK.

Related to the preceding recommendation, it will be necessary to

secure the integrity of the pipeline network so that it will

reduce the burden of road haulage of products.

END POLITICAL INTERFERENCE IN FUEL PRICES.

The pricing template currently used by the PPPRA includes

politically determined costs such as distributor margins, which

ideally should be a function of the market. A lesson from

Nigeria‘s telecoms experience is that the market prices can

sometime be lower than margins set by the government. Market

efficiencies and competition should be monitored by a regulatory

body with more autonomy than the PPPRA.

SUBSTANTIVE IMPACT MITIGATION MEASURES TO IMPLEMENT ALONGSIDE

SUBSIDY REMOVAL

As part of the speech announcing subsidy removal, the Finance

Minister, who is probably the most trusted cabinet minister,

should publish a clear and credible schedule for the immediate

implementation of the following (or comparable) impact mitigation

measures. Stakeholder consultation and validation are necessary

before these options can be firmed up into definitive policies.

EXTEND RAILWAY CARGO SERVICE TO NON-OIL TRADERS

Ensure that the aforementioned railway cargo services are

available for non-oil traders as well. This will reduce the cost

of transporting goods and therefore keep prices of foodstuffs and

essential household items within the reach of low income earners.

5.2.2.2. CREDIT GUARANTEES FOR MASS TRANSIT OPERATORS

Provide credit guarantees for lease-operators of subsidized

commercial mass transit vehicles as was done in the 90s. The NLC

has been running a transport service and can be involved in this

initiative.

5.2.2.3. ABOLISH FEES FOR FIRST 12 YEARS OF EDUCATION IN PUBLIC

SCHOOLS

Abolish fees for the first 12 years of education in all

government schools and pay up school certificate examination fees

for first-time candidates of these schools. This will relieve a

significant financial burden for poor families. The measure can

be a concurrent federal and state government responsibility in

which each tier can take care of its own students. However, the

Federal Government can still increase its outlay on the universal

basic education programme in order to supplement that of the

states. Another variation on this measure would be to introduce

school lunches for the first nine years of school which is good

policy in itself and a guaranteed political winner.

PROVIDE FREE HEALTH CARE FOR PREGNANT WOMEN AND U5 CHILDREN

PROVIDE FREE HEALTH CARE FOR PREGNANT WOMEN AND U5 CHILDREN

Provide free treatment for pregnant women and under-5 children in

all public hospitals. This policy is already being implemented to

various degrees of success in various states, but it will need to

be revamped by ensuring drug provision. Availability of drugs in

public health facilities can be a problem, as they somehow find

their way into the private market, so special arrangements will

need to be made to ensure that they are available.

PROTECT LOW INCOME USERS FROM INCREASES IN ELECTRICITY TARIFFS

Maintain or even lower electricity tariffs for poor users. Of

course this is not to transfer subsidy from one utility to

another. Instead, it is to protect poor users while recovering

costs from those who can afford to pay. The basic proposal is to

provide electricity lifeline tariff of specified wattage per day

per registered user. Users who consume more than the lifeline

wattage should pay at full or premium rates as may be required to

help cover the subsidy for the poor users.

PROVIDE FREE HEALTH CARE FOR PREGNANT WOMEN AND U5 CHILDREN

Provide free treatment for pregnant women and under-5 children in

all public hospitals. This policy is already being implemented to

various degrees of success in various states, but it will need to

be revamped by ensuring drug provision. Availability of drugs in

public health facilities can be a problem, as they somehow find

their way into the private market, so special arrangements will

need to be made to ensure that they are available.

PROTECT LOW INCOME USERS FROM INCREASES IN ELECTRICITY TARIFFS

Maintain or even lower electricity tariffs for poor users. Of

course this is not to transfer subsidy from one utility to

another. Instead, it is to protect poor users while recovering

costs from those who can afford to pay. The basic proposal is to

provide electricity lifeline tariff of specified wattage per day

per registered user. Users who consume more than the lifeline

wattage should pay at full or premium rates as may be required to

help cover the subsidy for the poor users.

LONG TERM RECOMMENDATIONS

INVEST IN INFRASTRUCTURE DEVELOPMENT, JOB CREATION AND SERVICE

DELIVERY

The government must diligently follow through on the oft-repeated

rational for subsidy removal is the need to invest in critical

infrastructure, especially power, railways and roads. There

should also be concerted action across the three tiers to improve

services in the areas of health and education, along with

investments aimed at creating a business enabling environment for

job-yielding economic growth.

DEVELOP ALTERNATIVE SOURCES OF ENERGY FOR DOMESTIC AND VEHICULAR

USE

Alternative energy sources such liquefied petroleum gas and

compressed natural gas will relieve the pressure on petrol and

kerosene and thereby reduce the demand and the costs of these

products.

.

PROVIDE A PARTIAL CREDIT RISK GUARANTEE TO HELP LICENSEES BUILD

REFINERIES

The government can adopt the same principle used in the Sovereign

Debt Instrument) to provide a risk guarantee of, say, US$5

billion, to enable licensees to raise credit and build

refineries.

DIVERSIFICATION OF THE ECONOMY

Government should diversify the economy as quickly as possible

and direct its positives to other sectors of the economy that

have been overlooked. For even development Agriculture should

take much of the oil revenue, so that when the oil goes the

country can depend on the agricultural resources for our foreign

exchange earnings.

COMPETITION IN THE DOWNSTREAM GAS SECTOR

Nigeria has had an uphill task trying to stop gas flaring since

the discovery of natural gas. Studies show that without a viable

domestic market this would remain elusive. Over the years,

several policies had been formulated by the government with a

view to creating a domestic market. Notwithstanding that the

greatest need for natural gas is in Nigeria, these policies

failed; the domestic market barely exists. Nigeria remains

acutely short in energy capacity in the face of abundant

resources. Is something wrong somewhere? Obviously, the primary

place to start an inquiry is the legal or regulatory framework.

The policy trust of this paper therefore is to examine the

existing laws to see to what extent they have contributed or

failed to contribute to the growth of competition in the

downstream gas market.

A reading of an avalanche of extant materials on the Nigerian

situation provokes the thought: what is the point of engagement,

since Nigeria has got all the necessary knowledge to build a

thriving downstream market? Surprisingly, some of the materials

were written by top energy experts in Nigeria who have written

master-piece recommendations on the way forward. So then, could

it be that the „letters‟ of the policy were splendid but the

„spirit‟ of its implementation is the issue? Probably! The

Nigerian situation appears to raise some ethical questions, much

of which is beyond the forum of this sub section. Nevertheless,

law has always been an agent of social change. It will be argued

that a further „point of engagement‟ towards achieving the goal

of developing a downstream gas market in Nigeria remains the

right kind of legal framework; if the laws are good, then the

„society‟ would probably be good.

THE STRUCTURE OF THE NIGERIAN GAS SECTOR

Brief History of Gas in Nigeria

The name Nigeria rings a bell which is symptomatic not of its

prosperity but of its position as Africa’s development

challenge‟. Nigeria holds 20% of Africa’s population and 67% of

West Africa’s population. This apparently underscores Nigeria’s

strategic position in Africa’s development agenda as „failure to

deliver economic revival in Nigeria will threaten the overall

Millennium Development Goal agenda for Africa‟.

Aside demography, Nigeria is hugely endowed with abundant natural

resources. Its proven natural gas reserve as at January 1, 2009

was 184tcf.2 Another source estimates it at 232tcf.3 The

government claims a gas reserve as high as 660tcf.4 Apparently,

Nigeria’s gas reserve is huge and of global consequence, the

seventh in the world.

Crude oil was discovered in Nigeria in 1956 by the Shell D’Arcy

at Oloibiri, Bayelsa State. Geologically, since most crude oil is

found in association with natural gas, Nigeria’s natural gas was

discovered at the same time as oil. However, due to the fact that

there was no use for it, until recently, most of it was flared.

In 2007, Nigeria ranked second to Russia as country with the

highest amount of gas flared. Apart from the greenhouse effect of

gas flaring and other environmental pollution, Nigeria loses

enormous amount of foreign exchange through the ugly exercise. In

1998, “there are about 100 gas flaring sites. Some of them have

been burning ceaselessly for 40 years. Each one of the bonfires

has been killing human beings and the natural environment since

it was lit”.5 The National Oceanic and Atmospheric Administration

(NOAA) claimed that Nigeria flared 596Bcf of natural gas in 2007

and consequently lost US$1.46 billion and for IHS Global Insight,

Nigeria loses US$15 million/d.6 However, the Nigerian National

Petroleum Corporation (NNPC) reported that a total volume of

2,282.44Bscf of natural gas was produced in 2008 out of which

631.19Bscf was flared.7 At least, if the report is anything to go

by, it means that the 40 year old bonfires are abating.

Summary of the Risk Profile of Gas in Nigeria

One of the major realities with natural gas is that it does not

have a global market like its counterpart, oil. For gas to be

produced there must be a waiting buyer. Gas production requires

huge upfront investment. The huge investment risks need a viable

market to be mitigated. And since there is scarcely one, the

international oil companies (IOCs) have over the years been

reluctant to develop natural gas, having viewed it as uneconomic.

The cost of gathering associated gas (AG) in 1982 was $0.82/mcf.8

Thus, the IOCs prefer to flare it at the wellhead rather than

expend so much to get it to the city-gate.

Again, Nigeria is unlike most developed gas markets in Europe and

North America where the demand for gas is heightened by climatic

factors. In Europe, apart from gas use for power generation, it

is in high demand for space heating; a non-existent need in

Nigeria. Not realising this obvious climatic differentiation has

led many to expect a market in Nigeria that would be on all fours

with the European or American versions.

The Nigerian Downstream Gas Market

It is the interaction between producers and buyers that founds a

market. The gas chain entails the production, transmission,

distribution, supply and the end-consumer. The level of

interaction amongst the sub-sets determines whether or not there

exists competition. Section 39, Companies Income Tax Act (CITA)

defines it as “the marketing and distribution of natural gas for

commercial purpose and include power plant... gas transmission

and distribution pipelines”.

The downstream gas market in Nigeria is dominated by the upstream

producers, since existing regulatory structures seem to favour

them, and not new entrants. These producers engage in limited

transmission and distribution of gas to serve their needs.

However, Nigeria has managed to develop huge domestic gas demand

centres such as four PHCN’s gas fired plants with peak period gas

demand of 1500mmcfd, cement industries at Benue and Lokoja,

fertilizer companies in Lagos, iron and steel plants at Ajaokuta,

petrochemical, aluminium smelting industries at various locations

in the country.

There is also the need for Gas supply to residential users. The

present import of LPG in Nigeria stands at about 20,000tpy out of

a total estimated market demand of 200,000tpy. Apparently, it

would be wrong to assume that there is no “solid domestic

market”11 demand in Nigeria. Thus, the acute problem is to

incentivize investment in production and marketing of gas in the

domestic market.

Transmission

Transmission is concerned with the transport of natural gas

through a high-pressured pipeline network other than the upstream

pipeline network. The Nigerian Gas Company (NGC), the sole

wholesale supplier, owns and controls the transmission lines. It

operates an un-integrated 1,100km of transmission pipeline

capacity of more than 2Bscf/day, 14 compressor stations, 13

metering stations and 8 supply stations.

There are other transmission pipelines owned by the NLNG and the

NNPC/SPDC/Total joint venture specifically dedicated to their

respective operations.

Distribution

The transport of gas through low-pressured pipelines to the end-

users in Nigeria is done by two companies, Shell Nigeria Gas

(SNG) and Gaslink Nigeria Limited (Gaslink). Gaslink has built

about 100km of pipelines in Lagos State for the supply of natural

gas to industrial and residential users.14 SNG also targets the

supply of gas to power plants and industrial users. Surprisingly

both distributors supply gas only to the western part of the

country i.e. Lagos and the Niger delta. There are no connecting

pipelines to either the south-eastern or the northern part of the

country.

Major Gas Projects in Nigeria

The Nigeria Liquefied Natural Gas Project (NLNG)

This is a joint venture (JV) project involving the NNPC, Shell,

Total and Eni. The project began in response to a law targeted at

enhancing gas utilization and reducing gas flaring, with the

construction of an LNG facility at Bonny Island to process AG to

be loaded as LNG on special trains for export. Presently, a total

of six such trains have been constructed and engaged in LNG

export to the USA and Asia. It produces 22mmtpa and supplies

about 10% of the world’s LNG needs while delivering 4mmtpa of

LPG. The construction of the 7th and 8th trains is likely to be

halted due to recent policy changes of the Nigerian government.

Other LNG projects include the Brass River LNG (still under

construction). It is a fully contracted LNG. Memorandum of

Understanding has been signed with British Gas (BG) Cargo,

British Petroleum and Suez LNG Trading S.A. Its design is for 2

trains of 5mmtpa. Another one is the Olokonla LNG (OK LNG),

another JV with BG and Chevron Nigeria (CNL) having stakes. Its

feedstock is AG from Shell and Chevron operated JVs and designed

for 4 trains to commence by 2012/13.

Escravos Gas-to-Liquid (EGL) and the Oso Condensate

EGL is to process gas from CNL operations for the domestic

market. The plant when completed will have the capacity to

convert about 300mcfd of natural gas into fuel, diesel and GTL

naphtha products. This project shall in conjunction with the

Escravos plant deliver gas to Lagos and also conjoin with the

West African Gas Pipeline project (WAGP). The Oso Condensate

utilizes the condensate from the Oso field and natural gas from

Mobil‟s operations. It began operation since 1992 with

110,000bpd.

Regional Markets

There are colossal regional markets under construction, which

have passed the design stages. The WAGP established by the

governments of Nigeria, Benin, Togo and Ghana with CNL as the

majority shareholder. It focuses on transporting natural gas from

Nigeria to specified delivery points in Benin, Togo and Ghana.

There is also the Sahara Gas Pipeline Project (SGPP) of which the

Russian giant Gazprom has acquired some interests. The SGPP will

transport Nigerian gas to Europe and North America through

Algeria. The plans for these projects are at advanced stages too.

REVIEW OF GAS POLICIES AND LAWS IN NIGERIA SINCE 1956

In dealing with this sub-topic, we need to keep our minds open to

the critical question: To what extent do these laws promote and

preserve competition in the gas sector? Competition has been

shown to be the interplay of efficient allocation of resources in

accordance with customers‟ preferences, continual adjustment to

that preference, continual pressure for purposes of cost

reduction and price lowering and the possibility of the market

process resulting in production efficiency and maximum

utilization of resources in the country.

There is no Gas Act in Nigeria. The standard International

Petroleum Agreements (IPAs) in Nigeria usually provide for the

need to enter into an agreement with the NNPC when gas is

discovered in commercial quantity.

Legislations and Industry Regulations

Nigeria does not have a single body of law for the gas sector.

Numerous legislations apply to natural gas. The Constitution and

the Petroleum Act (PA) vest ownership of petroleum in the Federal

Government. The PA defines petroleum to include ,natural gas‟

and thus applies to the gas sector as well. The Petroleum Profit

Tax Act (PPTA) regulates taxation of the upstream oil and gas

production; the CITA deals with taxation in the downstream

sector. The Oil Pipelines Act and the Oil and Gas Pipelines

Regulation regulate oil and gas transmission pipelines. The

Department of Petroleum Resources (DPR) (and more recently the

Department of Gas) and Ministry of Environment (MOE) oversee the

issuance of permit for pipeline construction. However, there are

other legislations that touch specially on the gas sector that we

shall highlight in details.

The Petroleum (Drilling & Production) Regulation Decree: The decree (now

Act) requires a lessee or licensee to submit a feasibility study

programme or proposal for gas utilization not later than 5 years

after commencement of production. Consequently, natural gas could

be flared for five years before the IOC submits the proposal.

Worse still, the Act did not prescribe any penalty for flaring or

failure to submit such proposal.

The Associated Gas Re-injection Act: The Act requires an IOC to prepare

a detailed programme for gas re-injection or in the alternative,

present a plan showing viable options for gas utilisation before

commencement of operation. It prohibits with penalties any gas

flaring activities beyond January 1, 1985.

This Act was criticized for failing to provide for fiscal

incentives,19 and its paltry penalty created a willingness in the

IOCs to flare AG and pay penalties- which is cheaper20- than

embarking on gas utilization programmes. CNL has been quoted as

saying that “while flaring costs $1million, gas re-injection will

cost $56 million”.

The Associated Gas Re-Injection (Continued Gas Flaring) Regulations: The

Regulation severely altered its predecessor and exempted 86 out

of 155 oil fields from anti-flaring restrictions.22 As a result;

an added impetus was given to the ugly exercise. Probably it was

at this point that the source claimed there were over 100

bonfires that have been lit for decades unending.

The Associated Gas Re-injection (Amendment) Decree: It increased the

penalty for gas flaring. However, the imposition of stiffer

penalties never helped, more so when NNPC shares complicity in it

as a holder of up to 60% interest in most of the JVs24 from where

these bonfires stem.

The Nigerian Liquefied Natural Gas (Fiscal Incentives, Guarantee and Assurances)

Decree: The government took a bold step here. It made provisions

for certain fiscal incentives such as tax holidays, guarantees

and assurances to encourage the utilization of AG as LNG. In

pursuance of this law, the NLNG was created.

The Gas Master Plan

In 2008, Nigeria clearly stipulated a downstream gas policy

framework known as the National Gas Policy. The focus was to

encourage private sector involvement in the commercialization of

the country’s natural gas in order to enhance the development and

diversification of the domestic economy. It proposed a Downstream

Gas Act (which was never passed), fiscal reforms and the popular

Gas Master Plan (GMP). The fiscal reforms include extending tax

holidays to 5 years for companies engaged in gas utilization

investments, tax exemption for dividends in such companies,

deducting interest payable on loan for gas projects and reduction

of taxation from 85% to 35%.

The GMP aims at creating a fully liberalised market within five

years of its implementation through its dual focus approach.

Firstly, it prescribes innovative ways by which Nigeria would

maximise the benefits from its gas from both export and domestic

market. Secondly, it tries to achieve a dynamic balance between

satisfying export demands and the domestic needs.

Furthermore, it indicated a design to establish central gathering

and processing units in three locations of the country; integrate

the pipeline networks; adopt a uniform pricing mechanism and

specify standard gas spec while maintaining reserve growth.

REGULATORY ISSUES IN THE NIGERIAN DOWNSTREAM GAS SECTOR

Issues militating against the realisation of a liberalised and

competitive market in Nigeria have gone past the recent muscle-

flexing between the government and the IOCs.28 Estrada et al

submitted that the main barriers to gas utilization are basically

regulatory, resulting in poor access to local market and

financing constraints for gas infrastructure.29 This inefficient

regulatory framework has played out its ugly scenes leaving the

market with no supplies and undeveloped. We shall therefore

highlight the more acute issues of domestic gas obligation (DGO)

and pricing mechanism in the following subsections.

Domestic Gas Obligations

This is a legal duty imposed on a gas producer to supply a

stipulated quantity of gas to the domestic market at a given

period. This could be imposed either by the basic law, regulation

or contract. It gives rise to the concept of the „domestic‟ and

the „non-domestic‟ (non-DGO) gas obligations. While DGO is for

domestic market, the Non-DGO is for export market. One of the

incentives to delivering the DGO is the marketing of the non-DGO,

hence the vexing issues of pricing and fair export.

Presently, there is no legislation in Nigeria on the point. But

the GMP prescribes a DGO for the IOCs of up to 50% of their gas

production in accordance with a Gas Management Model through

which the demand forecast would be made and quota allocated. It

imposes a penalty of $3.5mcf for non-compliance and an

environmental surcharge of $0.5mcf for any gas flared. To this

end, the Government has indicated a supply obligation for five

years and would only allow export after the DGO is met.

Realistic Pricing Mechanism

The domestic price of natural gas in Nigeria is such that does

not incentivise investments in the sector. It is extremely lower

than the cost of supply. The Chief Executive of BG indicated that

the company’s decision to disinvest from Nigeria was due mainly

to a weak gas price in the domestic market.

Inefficient pricing of gas is central to IOCs‟ inability to meet

their DGO. The current Nigeria’s energy mix has more of thermal

plants. While “[g]as is the logical choice for power generation

in Nigeria both in terms of gas availability and capital

requirements”, its under-supply status remains the hydra-headed

monster in electricity generation and availability.

The price at which gas is sold is set by the Energy Minister.

There are criticisms that he sets this price indiscriminately

without due regard to the project economics. It has been argued

that this power is a major deterrence to the growth of gas

utilisation.33 Price control is said to distort the relationship

between supply and demand leading to eventual shortages.34

Although this might hold true 100% in a perfectly liberalised

market, in a regulated liberalisation (which is what exists

globally) the degree of distortion and consequential shortages

will only mirror the adequacy of the regulatory decisions or the

strength of the independent regulator. However, because Nigeria’s

gas sector lacks both, independent regulator and effective

regulatory decisions, price control has aided shortages.

Power tariff is unreflective of the cost of gas supply. This has

been partly blamed on the existence of subsidy in the sector.

Some writers have suggested that subsidy on gas should be

completely removed.35 However, there is a socio-political

complicity in the issue of government subsidy which need be

considered.36 PHCN, the major single consumer in Nigeria pays as

low as US$0.12/mmbtu while gas for export is at US$0.5/mmbtu. So

why won‟t the producers opt for more of export?

The GMP addresses the impasse by designing a stratified pricing

mechanism, a sector-based pricing. The strategic domestic sector

such as power plants buys gas at a floor price of US$0.40/mmbtu

based on US$0.10/mmbtu at the well-head and a transmission charge

of US$0.30/mmbtu; supply to strategic industrial sector will

adopt a netback of 15% to the producer after cost and the

commercial users will pay a comparative price with the price of

other fuels. Thus the non-power plant users pay a pooled price of

about US$0.80/mmbtu. These sectors‟ price would cross-subsidise

the supply price to the domestic power sector. Gas price for

power generation was estimated to rise to US$1.00/mmbtu by 2013

when the cross-subsidy is expected to be phased out. As a further

assurance to suppliers to the power sector, the government would

securitize the supplies.

Another innovation is the establishment of a Strategic Aggregator

(SA) company whose duty is to co-ordinate purchase-orders from

buyers and the placement of the demand-orders to the producers.

The SA in its duty to interface between producers and suppliers,

would set up an escrow account, conduct due diligence on

prospective buyers in order to get the qualified ones to execute

a Gas Sales Agreement (GSA) with the producers. It shall also

forecast the average domestic aggregate price, ensure that the

buyer pays the sector price and the producer receives an

aggregate price.

There is however some doubts as to whether the new pricing policy

would be the magic wand in incentivising investment in the

sector. A writer has argued that pricing measures alone cannot

yield the desired result unless they are combined with

“complementary governance measures” in order to sustain it.

Since the power sector is the major consumer, then the MYTO price

formula recently adopted by the National Electricity Regulatory

Commission (NERC) should be properly designed to take cue from

countries like Peru and Brazil that have successfully implemented

it. Expert opinion is that a uniform national tariff cannot work

under MYTO. The recommendation is to calculate power tariff “on

an enterprise by enterprise basis to take account of differences

in customer mix, overall load profiles, and the physical

characteristics of different services territories”.

Access to Fair Export

The present configuration of the Nigerian upstream operations

which still control the downstream activities is export oriented.

Most IOCs who embraced the opportunities to invest in gas

utilisation infrastructures did so for purposes of export

primarily. Greater percentage of the gas produced is exported in

the form of LNG. Efforts are being made to realise the WAGP and

the Trans-Saharan Gas Pipelines which would deepen the access to

the international export market, other than for LNG. The

government recently pre-qualified fifteen firms to engage in

US$10 billion gas project, Gazprom inclusive.

However, owing to the government’s intention to implement the

GMP, it has indicated readiness to halt some gas export oriented

projects in preference for the domestic market. But as expected,

some of the IOCs have raised eyebrows.

Third Party Access (TPA) Discrimination

The world over, TPA is crucial to achieving a competitive

downstream gas market. The natural monopoly element of

transmission and distribution networks makes it imperative that

access to the network by other interested market players must be

guaranteed. One of the major prerequisites of competition is the

change of the legal and institutional framework to ensure TPA.

The Oil Pipelines Act and the Oil Pipelines Regulations regulate

the approval, construction and operation of pipelines both in the

upstream and downstream sectors. The permit to build a pipeline

network usually emanates from DPR. The Minister does not have the

right to compel a pipeline owner to enhance his facility to

accommodate third parties. TPA is basically by agreement between

the pipeline owner and the supplier, failing which the minster

may determine terms and conditions of such agreement. However,

the Minister may not direct TPA if it will be injurious to the

pipeline infrastructure or exceed the pipeline capacity, etc.

The upstream pipelines are independently owned by the IOCs. There

are also downstream pipelines that are dedicated to their various

activities. NGC runs two unconnected pipelines both as a gas

transmission operator and as the sole supplier of gas in Nigeria,

and also has the power to grant permit to build distribution

pipelines.

In order to promote gas-to-gas competition in the UK and the USA,

TPA was a major factor. The Gas Regulations 2005 for the EU

underscores the need for non-discriminatory rules of access

conditions to gas transmission systems. The retail price of gas

will be positively impacted with a unified transmission network

and a properly regulated TPA. One of the proposals of the GMP is

to realise the infrastructure blue-print which will see to a

unified transmission network with an un-bundled NGC saddled with

transmission operations only. Different Local Distribution Zones

would be established along geographical lines with each having a

licensed distributor. The much needed regulation would be handled

by a Regulatory Commission who will establish and implement the

tariffs to be charged by the transmission and distribution

operators.

RECENT POLICY SHIFT

With the GMP, there is likely to be a positive policy shift for

the Nigeria’s Gas sector. A source44 submits that the GMP has

given the gas sector the right foundation to thrive. To an

extent, government has demonstrated some level of commitment to

it by completing some of the phases. However, the absence of a

law to bridge the regulatory lacuna seems to be thwarting the

efforts. As part of the GMP, the enactment of a Downstream Gas

Act (DGA) was proposed but never passed.

PART THREE: A CRITICAL ANALYSIS OF THE REGULATORY AND

INSTITUTIONAL FRAMEWORK OF THE NIGERIAN OIL AND GAS SECTOR

A nation or province endowed with petroleum resources such

as Nigeria must endeavor to produce its recoverable petroleum

reserves optimally. Such a nation must choose whether to allow

the current generation to use the entire petroleum wealth derived

from current petroleum production for their benefits or give

future generations a share of the derived wealth from petroleum

resource development. This means that petroleum produced today

must be used to develop durable infrastructure and human capital

that benefit and advance society for generations to come. The

question the oil and gas reformers in Nigeria seek to address is

easy to conceptualize: How can the society’s economic welfare be

maximized over time using the wealth derived from produced and

remaining petroleum reserves in Nigeria? Supposedly, the answer

to this question lies within 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.1

The immediate past federal administration in Nigeria under

President Olusegun Obasanjo had the above pragmatic policy

objectives and instruments in mind when they inaugurated the

first Oil and Gas Sector Reform Implementation Committee (OGIC)

on April 24, 2000. The essence of the National Oil and Gas Policy

(NOGP) that emerged from the OGIC efforts is anchored on the need

to separate the commercial institutions in the oil and gas sector

in Nigeria 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. On

September 7, 2007, the federal government administration under

President Umaru Musa 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 in Nigeria. The mandate basically calls 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

A Synopsis of the OGIC Report

The Lukman committee submitted its OGIC report on August 3,

2008. The report provides a pragmatic regulatory framework and

institutional arrangements that could bring Nigeria oil and gas

industry into global prominence. The report addresses the

ineffectiveness of the oil and gas sector in Nigeria over the

years, which borders on the use of outdated or very archaic

regulatory and institutional arrangements to govern the petroleum

industry. The Lukman OGIC establishes that such regulatory and

institutional structures are incongruous with contemporary global

oil business. The report provides insight into the current

national petroleum policy framework, objectives and goals and the

innovative institutional structures and policy functions to

proffer solutions to the problems affecting the oil and gas

industry in Nigeria. Further, it highlights operational strategy

and action items necessary to drive the national oil company to a

global status and suggests solutions to fiscal policy problems

and community issues affecting all segments of the petroleum

industry in Nigeria. Without mincing words, the Lukman OGIC

advocates the need for consultation with energy experts on

various regulatory frameworks and institutional structures for

clarity and research. The aspects under consideration for further

research include funding sources and sustainability,

capitalization of the commercial institutions, incorporation of

joint venture operations as autonomous commercial entities, and

finding progressive policy instruments and terms for existing and

new contractual and concessionary fiscal arrangements.

The aspect of the OGIC reform efforts that has inundated public

attention is the unbundling of the current National Petroleum

Corporation (NNPC). However, the recommended overall insti-

tutional framework in the OGIC report is intended to facilitate

managing and overseeing all the phases of the oil and gas sector

in Nigeria more effectively than before by assigning functional

responsibilities to separate institutional structures. The

institutional framework is based on the policy mandate to

separate the commercial/operations (private sector culture) of

the oil and gas sector from the policy-making and regulatory

aspects (public sector administration) in Nigeria. Accordingly,

the institutions are revenue generating and some are non-revenue

generating or revenue “enhancing” institutions. In any case, for

many oil industry observers in Nigeria, the main feature for the

entire oil and gas sector reforms is the restructuring of the

Nigerian National Petroleum Corporation and its subsidiaries. The

success of the restructuring, therefore, will depend on the

implementation of these institutions’ policy functions. An

appraisal of the new institutional structures proposed by the

OGIC for effective governance and management of the oil and gas

industry in Nigeria follows.

National Petroleum Directorate (NPD)

The National Petroleum Directorate (NPD) is designated as the

primary institution to initiate, create, and implement the

petroleum policy governing the oil and gas sector in Nigeria. The

predecessor, the Ministry of Petroleum Resources (MPR), has not

been up to these tasks of oil and gas policy initiation,

formulation, and implementation. It is my opinion, that the

ineffectiveness of MPR in its functions as a policy-making

institution, however, has never been because of its location in

the ministry environment or a lack of competent and highly

skilled manpower, but is due to a lack of institutional

empowerment and the putting of a “round peg in a square hole” by

the central government. Thus, the oil and gas industry policy

initiation and implementation functions ended up being assumed by

NNPC to the detriment of its commercial and operational

responsibilities over the years.

Accomplishing the thirteen stated objectives for NPD by OGIC

would depend significantly on institutional empowerment, funding,

and finding and putting highly skilled personnel in the key

management positions as envisioned by the OGIC. Surprisingly

either by error of commission or omission or because we have had

several versions of the final report, the OGIC is silent on the

terms of employment for the Director General (DG) of NPD. Neither

were there any guidelines on whether NPD management positions

shall be political appointees or be hired through open resource

recruitment. The government, as a matter of obligation, must

avoid invoking or applying the spirit of federal character or

“geopolitical zoning” to justify “putting a square peg in a round

hole” during recruitment or selection exercise for the filing top

management positions in NPD. These principles must be used in a

pragmatic manner without sacrificing efficiency and effectiveness

for equity. Regarding funding for NPD, a surcharge or fees on per

fiscal barrel of oil equivalent basis paid to NPD is a

constitutionally taxing. A constitutional amendment may be

required to do this. A line-item budgeting approach should be

evaluated for consideration.

Nigerian Petroleum Inspectorate (NPI)

The National Petroleum Inspectorate (NPI) is the regulatory

institution for the upstream segment of the oil and gas industry

in Nigeria. NPI will assume the functions of the Department of

Petroleum Resources (DPR) and it will be the upstream industry

operation and technical regulator. It will have operational

autonomy from the NPD unlike its predecessor the DPR, which

traditionally derives its operational directives from the

Minister of Petroleum Resources. The extent of NPI’s strategic

autonomy from the NPD, which serves as the secretariat of the

Minister of Petroleum Resources is not clear. The terms of

employment for the management positions in the NPI and the

optimal approach to filling these positions either as political

appointees or professionally recruited management staff are very

important if the ongoing restructuring efforts are to be

successful. Over the years, we have had as many former DPR

Directors and GMDs as the number of Presidents or Heads of State.

The undeveloped nature of the oil and gas industry regulatory

framework in Nigeria is, therefore, not surprising to many

industry observers. Thus, a confirmation process by the National

Assembly for a fixed term appointment for the Director General of

the upstream regulatory institution will enhance its service

deliveries; but I would recommend against making Deputy Director

General’s (DDG) position a political appointee.

Petroleum Products Regulatory Authority (PPRA)

The Petroleum Product Regulatory Authority (PPRA), which has

been designated to regulate the downstream sector of the oil and

gas, is a stand-alone institution with no functional relationship

with NPI. Alternatively, it could have been a division of the

NPI. PPRA should be directed by a technically competent Deputy

Director General (DDG) and not a political appointee. This

arrangement would optimize the distribution of the limited

skilled labor force available at this time both locally and in

the Diaspora. This revised arrangement is also not expected to

affect the already defined functions and funding of PPRA. The

terms of employment for the management positions in the PPRA and

the optimal approach to filling these positions either as

political appointees or professionally recruited management staff

are very important if the ongoing restructuring efforts are to be

successful. Thus, a confirmation process by the National Assembly

for a fixed term appointment for the DG would enhance the

institutional performance of PPRA.

Nigerian National Petroleum Company (NNPC Ltd.)

There is no doubt that restructuring the Nigerian National

Petroleum Corporation (NNPC) is the focal point of the ongoing

oil and gas sector reforms in Nigeria. The general observation by

the public that NNPC has failed woefully to fulfill its charge is

perhaps justifiable. It must be recognized, however, that its

failure to attain the prospect to drive the national economy has

not entirely been the corporation’s error of judgment.4 For

example, there has been as many NNPC CEOs as were Heads of State

or Presidents in Nigeria from 1976 to 2007. Thus, the degree of

operational and strategic autonomy of the old NNPC from the

national government in comparison to successful global NOCs is

appalling. Ironically, most of these successful NOCs companies

are as old as NNPC, which was created in 1976.

Therefore, the new goal is to reposition the new Nigerian

National Petroleum Company, NNPC Ltd., on a level comparable to

the status of successful National Oil Corporations (NOCs)

worldwide, such as the Malaysia NOC (Petronas), Venezuela NOC

(PdVSA), Norway Statoil, Algeria NOC (Sonatraco), Mexico NOC

(PEMEX), Brazilian (NOC) and Saudi Aramco. The desired goal is to

get the new corporation to a level in which the degree of

operational and strategic autonomy from the government is similar

to the Norway Statoil. The separation of commercial and business

operations from regulatory and policy-making functions in the oil

and gas sector in Nigeria will help NNPC Ltd. to be more focused,

more so because the regulatory and operational functions of the

oil and gas sector will henceforth be undertaken by separate and

autonomous institutions, ceteris paribus.

The identity and corporate culture, NNPC Ltd., is expected to

operate along the entire petroleum supply chain. This will make

NNPC Ltd. a fully integrated oil and gas company. The envisioned

ownership structure will enhance its ability to function as a

purely commercial and capitalized business. The exclusion of NNPC

current profitable assets from the take-off assets for the new

National Petroleum Company, NNPC Ltd., however, may perhaps make

the capitalization process of the national company difficult. The

functionality of the board of directors in the governance

structure of NNPC Ltd. is vague. There is also uncertainty as to

the extent of the operational and strategic autonomy of the NNPC

Ltd. from the influence and dictate of the Minister of Petroleum

Resources.

National Petroleum Assets Management Agency (NAPAMA)

The National Petroleum Assets Management Agency (NAPAMA), like

NNPC Ltd., is a commercial and operational institution empowered

to undertake cost/commercial regulation of the oil and gas

industry. It is conceived to manage all national assets and

investments in exploration and production ventures to ensure

maximum government returns and take statistics. It is

paradoxical, however, for NAPAMA to regulate and control costs

within the Incorporated Joint Venture (IJV) framework. The IJV

concepts seek to convert all of the existing JV arrangements into

autonomous commercial entities. Thus, how can NAPAMA regulate and

control costs for the IJV companies who have autonomous boards of

directors? An outright rejection of the IJV idea as currently

proposed seems more likely than not in the national Assembly.

Further, the idea is most likely dead on arrival at the door

steps of the International Oil Companies operating in Nigeria,

not because of its illegality, but the expediency of the concept.

The biggest concern of all, of course, borders on international

business ethics. The IJV concepts will be thwarted if the

international community perceives the process as a form of

petroleum assets nationalization.

National Petroleum Research Center (NPRC)

The National Petroleum Research Center (NPRC) is to be

responsible for research and development in the petroleum

industry in Nigeria. It is expected to pay a great deal of

attention to upstream exploration and development issues and

problems. As with NAPAMA, NPI, and PPRA, the nucleus of NPRC will

be formed by the old NNPC R&D assets. This is going to be another

drain on the NNPC Ltd. human resource capacity. The idea of a

separate national oil and gas research center is redundant. All

the NPRC policy functions could easily be handled by existing

federal institutions. This is the rationale for the establishment

of the existing Petroleum Technology Development Fund (PTDF) and

the many departments of petroleum engineering and geosciences in

Federal Universities and the Center for Petroleum Studies in

Nigeria?

In the eighties, a ministry in charge of petroleum affairs was

re-established to take charge of policy functions and the new

Department of Petroleum Resources (“DPR”) was also created to

carry out the regulatory/inspectorate functions previously

carried out by NNPC. It should be noted that the responsibilities

conveyed upon NNPC, which were now transferred to DPR were not

legally transferred. The legislation which granted those powers

and functions were not amended to reflect this functional

transfer. It can thus be argued that DPR has no legitimate power

to carry out those functions validly granted to NNPC’s

Inspectorate Arm by legislation. This however is a discussion for

another day. Whilst the institutional structure detailed above

suggests clear functional separation in the government’s various

activities in the oil and gas industry, the reality is a bit

removed from this picture. The relationships between these

entities are not at arms-length. Indeed, the relationship between

NNPC & DPR may be characterised as one which suggests regulatory

capture.

Structurally, NNPC and its supposed regulator, share facilities

and the employees of both institutions are often sent on

secondment from one to the other. NNPC has also directly funded

the operations of DPR, including the payment of staff salaries

and the funding of DPR’s monitoring functions. The closeness

between the entities compromises the ability of DPR to

effectively and independently police NNPC activities.

Additionally, the relative institutional strength of NNPC in

terms of human and financial resources, amongst others, as

compared with the other entities, has seen the corporation

extending its scope of powers well beyond what would be

considered valid commercial functions. Through its National

Petroleum Investment Management Services (NAPIMS) arm, NNPC

carries out what would be traditionally classified as regulatory

functions.

Furthermore, as an entity which enjoys a monopoly of a de-facto

nature, whereby exploration and production rights are granted

mainly to it or to private companies, which are associated with

it, NNPC enjoys a special position in the oil and gas industry

allowing it to play a very significant role in influencing

government policy. It has been opined that de-facto monopolies

such as NNPC are incentivised to take decisions which are

primarily in their own interests and not those necessarily in the

interest of the government or the nation. Indeed it may be

suggested, for example, that NNPC’s intransigent opposition to

the privatisation of some of its subsidiaries (despite its

repeated failures in reviving these entities over the years) may

serve as evidence of this theoretical position. In sum the

failure to achieve functional separation has the effect of

weakening the institutional governance of the industry and does

not promote efficiency, effectiveness and transparency. In

recognition of this, the foundation of the proposed institutional

framework has been “the need to ensure the separation and clarity

of roles between policy, regulation and commercial activities”.

It should be noted however, that there are other significant

systemic failures, and in particular the perennial problem of

joint venture funding, which the proposed industry reforms seek

to address. To describe this problem briefly – production from

joint ventures constitute an estimated 90% of Nigeria’s current

production. As the holder of majority interests in these joint

ventures, NNPC is required to contribute significantly to the

joint venture budget and funding. Under the current arrangements,

NNPC’s interests in the joint ventures are funded directly from

the Federal Government’s budget. This has served as a significant

strain on the government as money is diverted away from other

areas of infrastructural investment such as power, roads, schools

and hospitals to fund joint venture activities. Aside from the

opportunity costs associated with this diversion, the arrangement

has proved to be thoroughly inefficient, significantly hampering

investment in joint venture projects, with many being cancelled

or postponed until government funding is arranged. It has also

had the effect of stifling the growth of NNPC, due to its

inability to fully and independently plan its growth and

investment. This has led the government to consider alternative

funding mechanisms for joint venture investment in its reform

initiatives.

OIL AND GAS (EXTRACTIVE) LAWS

Although there are several laws enforce governing the upstream

and downstream activities of the oil and gas sector, about

fourteen of these laws in broad categorization are directly

connected and relevant to extractive operations i.e., upstream

activities. The laws are identified and discussed below:

I. Petroleum Act 1969 (as amended)

Primary intent and objective

The Petroleum Act is an Act to provide for the exploration of

petroleum from the territorial waters and continental shelf of

Nigeria and to vest the ownership of/and all onshore and offshore

revenue from petroleum resources derivable there from/in the

Federal Government.

Strengths

a. The Act provides for regulations to be made for safe working

of petroleum operations; prevention of pollution of water courses

and the conservation of petroleum resources, among others.

Weaknesses

a. The Act grants the complete right to decide to the Minister;

b. It does not create a transparent process for the grant of oil

licenses, leases and permits;

c. The penalty stipulated for contravention of the provisions of

the Act are grossly inadequate;

d. Provisions for accountability are non-existent in the Act.

Application of the law

a. It has been applied in the case of Attorney General of the

Federation (AGF) vs. Attorney General of Abia State (No. 2) (2002)

6 N.W.L.R3. Part 764, page 542 on the legal implication of Federal

Government ownership of petroleum resources in

Nigeria. The court confirmed the vesting of ownership of petroleum resources in the

Federal Government. It further held that the Federal Government alone and not the

littoral states can lawfully exercise legislative, exclusive and judicial powers over the

maritime belt or territorial waters as well as sovereign rights over the exclusive

economic zones subject to universally recognized rights.

b. Reference to paragraph 35: First schedule of the Petroleum Act

was also made in the case of Famfa Oil Ltd. vs. A.G.F. & NNPC

(unreported suit No. C. CA/A/173/06), here, the court held that provisions of paragraph

2 of Deep Water Block Allocation to companies (backing rights) regulations 2003 (a

subsidiary legislation under the Petroleum Act) which gives the Federal Government the

arbitrary right to acquire five-sixth of an OPL4 or OML5 interest is invalid to the extent

that it is inconsistent with paragraph 35. First Schedule to the

Petroleum Act which stipulates that such participation or acquisition must be made on

terms to be negotiated between the Federal Government and the holder of the OPL or

OML.

c. It empowers government agencies to grant operating licenses

and permits to operators in the sector;

d. It forms the basis and derivative source of power for the

enactment of subsidiary regulations.

II. Petroleum (Drilling and Production) Regulation 1969 with

amendments in 1973,

1979, 1995 and 1996

Primary intent and objective

The Petroleum (Drilling and Productions) Regulation sets out the

requirements and documents to accompany an application for oil

prospecting license or oil mining lease.

The regulation also states the rights and powers of licensee and

lessee and limitation to their rights, such as entry into land

held sacred. The regulation also imposes obligation on the

licensee and lessee to take necessary precautions to prevent

pollution, control and end it when it occurs.

The various amendments to the regulation basically set out new

fees, rates for payment of rents and royalties to reflect current

economic realities.

Strengths

The regulation provides for the protection of lands held to be

sacred; protection of the environment and water courses from

pollution; procedure for abandonment and decommissioning of wells

and mandatory provision for licensee and lessee to keep accurate

records of quantity of crude won, saved and removed (Regulations

17, 25, 36 and 53).

Weaknesses

The regulation is honoured more in the breach6 and lacks proper

enforcement mechanisms.

Whereas the regulation is periodically amended to reflect current

economic realities in terms of fees, rents and royalties, there

are no clearly defined provisions on penalties for offences

resulting from breach of the regulations. Another weakness of the

regulation is that information supplied by the licensees or

lessees are to be treated as confidential (Regulation 58), hence

the regulation lacks transparency.

Application of the law

It is relied on by the Department of Petroleum Resources (DPR) as

the basis of granting licenses and performing their inspectoral

responsibilities. The law has been applied in the following

cases:

a. South Atlantic Petroleum Company vs. Minister of Petroleum

Resources (unreported suit No. FHC/L/CS/361/2006) on the legal

requirement for conversion of Oil Prospecting

Licence to Oil Mining Lease. The court outlined the provisions of Paragraph

12 of the First schedule to the Petroleum Act which provides that ten years after the

grant of an Oil Mining

Lease, one-half of the area of the lease shall be relinquished and held that it would thus

be unlawful if before the expiration of a period of ten years after the grant of an OML,

the Government should claim that one-half of the area of the OML has been

relinquished to it. The court however notesthat this was not the issue in this case and

rather that the Government is claiming to have relinquished is the residue of an Oil

Prospecting Licence upon the grant of an Oil Mining Lease.

b. Federal Government of Nigeria vs. Zebra Energy (2002) 18 N.W.L.R.

Part 798 page 162 on the legal mode and procedure for revocation of

an Oil Prospecting Licence.

The supreme court held that the provisions of paragraphs 23-27 of the first schedule to

the

Petroleum Acts regulates the procedure for the revocation of an oil prospecting licence

and

therefore the contractual relationship created by the Federal Government of Nigeria

and the Oil

Prospecting Licensee are statutory and the government is bound to comply with the

statutory

provision which governs the revocation.

III. Minerals Oil (Safety) Regulation 1963

Primary intent and objective

This regulation is intended to ensure safe handling of mineral

oil. Regulation 7 provides that where no specific provision is

made by this regulation in respect of drilling and production

operations, all drilling, production, and other operations

necessary for the production and subsequent handling of crude oil

and natural gas shall conform with good oil practice which shall

be considered to be adequately covered by the current Institute

of Petroleum Safety Codes, the American Institute Code or the

American Society of Mechanical Engineers Codes.

Strengths

The provision for conformity to good oil field practice in the

absence of a clearly defined or specific regulation is a key

strength of this law.

Weaknesses

There is no doubting the fact that conforming to international

best practices is advisable.

However, total reliance on the American standards without

adaptation to local environmental concern is a weakness which

leaves much to be desired in the regulatory activities of the

Department of Petroleum Resources of the Ministry of Petroleum

and the Ministry of Environment.

Application of the law

Provisions of the regulation are relied on by government agencies

in regulating petroleum operations.

IV. Petroleum Profit Tax Act (PPTA) 1959 with amendments in 1967,

1970, 1973 and

1979

Primary intent and objective

The PPTA imposes a tax regime upon profits from the mining of

petroleum in Nigeria and provides for the assessment and

collection of such profit.

Strengths

The taxing regime under the PPTA is a specialized one which is

levied upon the profits of each accounting period of any company

engaged in petroleum operations.

Weaknesses

a. Section 5 of the Act provides that any person performing any

administrative act for the purpose of the Act shall act and deal

with all documents and information as secret and confidential. It

would appear that this provision negates the concept of

transparency;

b. The provisions of the PPTA have also been weakened by the

Memorandum of

Understanding entered into by the government and the oil

companies granting incentives to the latter to invest in

exploration and development activities;

c. Inadequate penalty for offences committed under the Act.

Application of the law

It forms the basis for taxing petroleum operations in the country

and has been applied in the following cases:

a. Shell Petroleum Development Company of Nigeria vs. Federal

Board of Inland

Revenue (1996) 8 N.W.L.R. Part 466 page 256 on the computation of adjusted

profits for purpose of payment of petroleum profit tax and on the

legal authority of F.B.I.R. to sue for and recover petroleum

profits on behalf of the Federal Government of Nigeria. The

Supreme Court held that by section 8 of the Petroleum Profits Tax Act, 1959, any

company engaged in Petroleum Operations is liable to pay profits tax. On the meaning

of Petroleum Operations for the purpose of payment of petroleum profits tax, the court

held that “Petroleum Operations” include not only winning or obtaining and

transportation of petroleum oil by drilling, mining, etc, but also all activities incidental

to such operations excluding refining at a refinery.

b. Gulf Oil Company (Nig.) Ltd vs. F.B.I.R7. (1997) 7 N.W.L.R. Part 514

page 535, considered extensively the provisions of the Petroleum

Profits Tax Act including section 10(1) (h). The issue before the court

was whether or not the following items were deductible for the purpose of computing

chargeable tax under the Act: (i) Exchange losses on payment of Petroleum Profits Tax;

(ii) Central Bank Charges/commission for payment of Petroleum Profits Tax; and (iii)

scholarship expenses. The court held that payment of Central

Bank charges imposed by the Federal Government is an expense incurred in the course

of the appellant’s business which is petroleum operations and therefore qualify for

deduction under section 10(1) of the Petroleum Profits Tax Act.

c. In Shell International Petroleum BV vs. F.B.I.R. (2004) 3 N.W.L.R.

Part 859 page 46 where the meaning of “fixed base” in relation to assessing tax liability

under the Company

Income Tax Act (CITA) came up for determination. The court held that it would be

mistaken to equate “fixed base” to “residence” or “ordinary residence”. Accordingly, the

court concluded that “fixed base” for the purpose of assessing tax liability, connotes a

place where business has been carried on by a company over a long period of time

irrespective of ownership of the place.

Petroleum profit tax and petroleum operations; “fixed base”, “cost sharing” and “cost

recovery as basis of tax liability and assessment in Nigeria.

d. Texaco Oversea Nigeria Petroleum Company vs. F.B.I.R. (1997) 4

N.W.L.R. Part 501 page 566 on how notice of appeal is given against the

decision of the Federal Board of Inland Revenue. The court held that

once a notice is filed with a copy made available for service on the Board that amounts

to giving notice in writing to the board.

V. Oil Pipeline Act 1956 as amended in 1965

Primary intent and objective

The Act is intended to provide for licenses to be granted for the

establishment and maintenance of pipelines incidental and

supplementary to oil fields and oil mining, and for purposes

auxiliary to such pipelines.

Strengths

a. The Act requires the holder of oil pipeline license to seek

previous consent of the owner or occupier before entering the

land;

b. The holder must take reasonable steps to avoid unnecessary

damage to the land, buildings, crops or profitable trees;

c. Where such damage occurs, the holder must pay compensation

(Section 6);

d. The Act allows any person whose land or interest in the land

may be injuriously affected by the grant of a license to lodge

verbal or written notice of objection (Section

9);

e. The Act also lists those to be paid compensation (section

11(5)).

Weaknesses

The proscription of quantum of damage as a material ground for

lodging a notice of objection (Section 9 and 10) is a weakness of

the Act.

Application of the law

The Act has been applied in the following cases: a. Nigerian AGIP

Oil Company vs. Kemmer (2001) 8 N.W.L.R. Part 716 page 506 where the

meaning of oil pipeline was considered. The court held that: An oil

pipeline means a pipeline for the conveyance of oil minerals, natural gas and any of

their derivatives or components, and also any substance (including steam and water)

used or intended to be used in the production or refining or conveying of mineral oils,

natural gas, and any of their derivatives or components.

b. Shell Petroleum Development Company vs. Burutu Local

Government Council

(1998) 9 N.W.L.R. Part 565 page 318 where the issue on whether oil pipelines and other

installations belonging to NNPC can be regarded as hereditaments or tenements9 for

rating and valuation purposes was considered. The court held that oil pipelines and

other installations belonging to the NNPC cannot be regarded as hereditaments or

tenements to be valued for rating purposes.

c. Seleba vs. Mobil Producing (Nigeria) Unlimited (2002) 12 N.W.L.R.

Part 995 page 643 where the interpretation of section 11(2) of the Oil Pipelines Act and

the question of whether oil pipelines or oil terminals qualify as a ship or vessel for

purposes of determining cause of action in oil spillage matters was considered: The

court held “Oil Terminal” to mean an oil loading terminal, pumping or booster station,

or other installation (or structure associated with a terminal, including its storage

facilities) other than a terminal situated within a port or any approaches within the

meaning of this Port Act.

d. Shell Petroleum Development Company vs. H.B.F.M C.S Ltd. (2002)

1 W.R.N. page

37 where the court confirmed the exclusive jurisdiction of the Federal High Court to

entertain claims pertaining to upstream oil operation and in particular, oil spillage.

e. Shell Petroleum Development Company of Nigeria Ltd. vs. Abel

Isaiah and Ors. (2001) 1 N.W.L.R. Part 723 page 169. In this case the

court held that installation of pipelines, producing, treating and transmitting of crude

oil to the storage tanks is part of petroleum mining operations. Therefore, if an

accident happens during the transmission of petroleum to storage tanks, it can be

explained as haven arisen from or connected with or pertaining to mines, and minerals

including oil fields, and oil mining. The court therefore confirmed the exclusive

jurisdiction of the Federal High Court to entertain claims pertaining to upstream oil

operation and in particular, oil spillage.

VI. Associated Gas Re-injection Act 1979 (as amended in 1985)

Primary intent and objective

The purpose of this Act is to phase out gas flaring in the

country.

Strengths

a. The Act provides for oil producing companies in Nigeria to

submit to the Minister a preliminary programme or schemes for the

viable utilization of all associated gas produced not later than

1st April, 1980;

b. Detailed programmes and plans for either the implementation of

programmes relating to the re-injection of all produced

associated gas or schemes for the viable utilization of all

produced associated gas are also to be submitted to the Minister

not later than

1st October, 1980 (Section 1 & 2).

Weaknesses

a. The Act grants discretion to the Minister to permit the

continued flaring of gas to companies engaged in production of

oil and gas by issuing a certificate to that effect based on

terms and conditions to his/her satisfaction;

b. The phase-out date has been shifted severally, showing lack of

political will for effective implementation and enforcement;

c. The monetary penalty for continued flaring of gas by oil

companies under the Act is grossly inadequate and is preferred by

the oil companies as opposed to complying with the phase-out of

gas flaring.

Application of the law

The law has been applied in the case of Jonah Gbemre & Ors. vs.

SPDC & Ors. (unreported suit No. FHC/B/CS/53/05). In that case, gas flaring was held

to be illegal and a violation of communities’ human rights. The case is however on

appeal.

VII. Deep Offshore and Inland Basin Production Sharing Contract

Act 1999

Primary intent and objective

The Deep Offshore and Inland Basin Production Sharing Contract

(PSC) Act10 gives effect to certain fiscal incentives granted to

oil and gas companies operating in the deep offshore and inland

basin areas underproduction sharing contracts with the Nigerian

National

Petroleum Corporation. The Act applies to any agreement or

arrangements made between the Nigeria National Petroleum

Cooperation (NNPC) and any other petroleum exploration and

production company or companies for the purpose of exploration

and production of oil in the Deep Offshore and Inland Basins.

Strengths

a. The Act serves as an investment incentive into the deep

offshore.

b. The Act makes the submission of receipt in respect of each

party’s tax allocation mandatory for payment of petroleum tax

under the provision of the production sharing contract. This

appears to be a move towards transparency.

Weaknesses

As an investment incentive into the deep offshore, the concession

granted in terms of tax credit at a flat rate for the duration of

a production sharing contract, without which there may be no

investment in the deep and ultra deep offshore, and at the moment

may not be considered a weakness per se.

Application of the law

It forms the basis of determining the investment incentives

granted on such fields as the Bonga and Agbami Fields.

VIII. Deep Water Block Allocation to Companies (Backing Rights)

Regulations 2003

Primary intent and objective

This regulation applies to oil prospecting and oil mining leases

issued for deep water blocks except the one issued to NNPC. The

regulation also provides that where an allocation includes a

reservation by the Federal Government of the right to

participating interest in an oil mining lease derived from an oil

prospecting licence, the Federal Government shall exercise its

right by acquiring five-sixth of the allottees’ interest in the

relevant oil prospecting license and oil mining lease rounded up

to the nearest whole percentage point of total interest in the

deep water block, upon such terms as to be determined from time

to time.

Strengths

The regulation grants the Federal Government the unilateral right

to acquire and participating interest in relevant oil prospecting

license (OPL) and oil mining lease (OML) which may be beneficial

to the country.

Weaknesses

By granting the Federal Government unilateral right to acquire

participating interest in

OPL and OML, it does not create a stable regime, assurance and

guarantee for investors in the sector.

Application of the law

The regulation was applied in Famfa Oil Ltd vs. A.G.F. & NNPC

(unreported suit No.

CCA/A/173/06) on whether or not The Federal Government of

Nigeria, can unilaterally acquire participating interest in an

OPL or OML without negotiating with the holder of the OPL and

OML. The court held that the provisions of paragraph 2 Deep Water Block Allocation

to companies (Backing rights) Regulations 2003 (a subsidiary legislation under the

Petroleum Act) which gives the Federal Government the arbitrary right to acquire five-

sixth of an OPL or OML interest is invalid to the extent that it is inconsistent with

paragraph 35, First Schedule to the Petroleum Act which stipulates that such

participation or acquisition must be made on terms to be negotiated between the

Federal Government and the holder of the OPL or OML IX. Nigeria National

Petroleum Corporation (NNPC) Act 1977

Primary intent and objective

The NNPC Act empowers the Corporation to engage in all activities

relating to the petroleum industry and to enforce all regulatory

measures relating to the general control of the petroleum sector

through its Petroleum Inspectorate Department.

Strengths

It provides opportunity for NNPC to be meaningfully engaged and

involved in petroleum activities without limitations.

Weaknesses

a. It makes NNPC both an operator and a regulator at the same

time without a clear distinction of these roles. This makes the

Corporation ineffective in both responsibilities;

b. It inhibits legitimate action against NNPC by stipulating that

before an action can be instituted or commenced against the

Corporation, a one month prior notice of intention to sue is

required to be served on it by the intending plaintiff or his/her

agent.

c. It also provides that no suit against a member of the board or

an employee of the Corporation for an Act done or in respect of

an alleged neglect shall be instituted in any court unless it is

commenced within 12 months after the act or the neglect

complained of (Section 12), thereby imposing a strict statutory

limitation of action and unduly insulating the board or an

employee from legal action that may be brought against them.

Application of the law

The Act has been applied in the following cases:

a. Nigerian National Petroleum Corporation vs. Fawehinmi (1998)

N.W.L.R. Part 559 page 598 on the constitutionality and legality

of the pre-action notice provision contained in section 12(2) of

NNPC Act. The court held that a statute that prescribes the procedures for invoking

the exercise of Judicial Powers cannot ex ipso facto be said to be in conflict with section

12(2) of the NNPC Act. The NNPC Act in this case therefore cannot be said to contain

anything inconsistent with section 6 of the constitution as section 12(2) of the Act

neither removes the adjudicatory powers of the court in respect of matters concerning

the corporation (NNPC) nor does it deny access to the courts to an individual, it merely

regulates, without interposing the discretion of any other person between the will of

the individual and the commencement of proceedings, the manner of invocation of the

jurisdiction of the courts.

b. Idoniboye-Obu vs. NNPC (2006) N.W.L.R. Part 660 considered the

legal status of NNPC. The court held that NNPC is a creation of statute enacted

by the National Assembly. It is therefore a Federal Government Corporation which is

known to perform a central role in the Oil and Gas industry.

c. Opuo vs. NNPC (2002) F.W.L.R. Part 84 page 11 on the nature of

relationship between NNPC and the Nigerian Gas Company. The court in

this case held that by the provisions of sections 5 and 6 of the NNPC Act, the Nigerian

Gas Company is not only a subsidiary of NNPC but an agent of the corporation.

d. Nigerian Gas Company Ltd. vs. Dudusola (2005) 18 N.W.L.R. Part 957

page 292 where the court held that section 4(4) of the NNPC Act empowers the

corporation to appoint such persons as members of staff of the corporation as it

considers necessary and may approve conditions of service including provision for the

payment of pensions.

e. NNPC vs. Tijani (2006) 17 N.W.L.R. Part 1007 page 29 where the court held

that “no suit against NNPC shall be instituted in any court unless it is commenced within

12 months following the ceasing of the act complained of”.

X. Oil Prospecting Licenses (Conversion to Oil Mining Leases

etc.) Regulations 2004

Primary intent and objective

This regulation is to the effect that an oil prospecting license

issued under the Petroleum

Act may be converted to an oil mining lease after satisfying the

conditions specified in the

Petroleum (Drilling and Production) Regulations (Regulation 1).

Strengths

a. The conditions to be satisfied are stated for interested

applicants to know what is expected of them;

b. If considered from the overall goal of benefit to the country,

the conditions regarding terms and conditions not less favourable

to the government and NNPC’s right of participation can be

described as a strong point of the regulation.

Weaknesses

a. Existing operator of Oil Prospecting License (OPL) seeking

conversion to Oil Mining

Lease (OML) may consider the requirement of granting

participating rights to NNPC as unfavourable and unfair.

Application of the law

The regulation now forms the basis of conversion of OPL to OML.

XI. Nigeria Extractive Industries Transparency Initiative (NEITI)

Act 2007

Primary intent and objective

This Act was enacted to ensure due process and transparency in

the payments made by companies operating in the Nigerian

Extractive Industry to the Federal government. The

Act is intended to ensure accountability in the revenue receipts

of the Federation from companies in the extractive industry and

to eliminate all forms of corrupt practices in the determination,

payments, receipts and posting of revenue accruing to the

Federation (Section 2).

Strengths

a. The Act develops a framework for due process and transparency

in the reporting and disclosure by companies in the extractive

sector;

b. By virtue of the Act, any company in the extractive industry

may be requested to disclose the amount of money paid and

received by it as revenue on behalf of the

Federal Government;

c. It seeks to ensure conformity with the principles of

Extractive Industries Transparency

Initiative and to eliminate all forms of corrupt practices in the

determination, payments, receipts and posting of revenue accruing

to the Federal Government from extractive industry companies.

d. The establishment of a National Stakeholders Working Group and

it’s all inclusive composition as the governing body of NEITI

(section 6(2)).

e. The Act empowers NEITI to audit the account of total revenue

accruing to the Federal

Government from all extractive industry companies by an

independent auditor appointed on terms and conditions as the

National Stakeholders Working Group may approve and cause same to

be published for the information of the public (section 14(1)).

Weaknesses

The monetary penalty of #30 million for failure to disclose is

inadequate having regards to the high profit margin and return on

investment from the extractive industry.

Application of the law

The law can be applied to compel a “publish what you earn” by

companies operating in the extractive industry.

XII. Oil in Navigable Waters Act 1968

Primary intent and objective

The Oil in Navigable Waters Act provides for the implementation

of the International

Convention for the Prevention of the Pollution of the sea by oil

and also makes provision for such prevention in the navigable

waters of Nigeria.

Strengths

a. The Act makes the discharge of oil into a prohibited sea area

an offence and the owner or master of the ship responsible for

such discharge is guilty of an offence;

b. The owner or master of a vessel, or place on land or apparatus

from which oil or any mixture containing oil is discharged into

the sea within the territorial waters of Nigeria is guilty of an

offence (section 1 and 3).

Weaknesses

The monetary penalties for the offences under the Act are

inadequate (sections 6 and 7).

Application of the law

The law can be applied to enforce safety and protection of the

marine ecosystem and environment. It can also be used to demand

for cleanup of oil spill in the country’s territorial waters and

to a large extent relied on for compensation for destruction and

damage to marine ecosystem.

XIII. Environmental Impact Assessment Act 1992

Primary intent and objective

The Environmental Impact Assessment (EIA) Act sets out the

general principles, procedure and methods to enable the prior

consideration of environmental impact assessment on certain

categories of public or private projects. Under the Act, the

goals and objectives of the EIA are to ascertain how a project

would significantly affect the environment or the environmental

effect of the projects or activities (Section 1 (a)).

Strengths

a. The Act prohibits both the public and private sector of the

economy from embarking on or authorizing projects without

consideration of their environmental impact at an early stage.

b. The Act provides that before a decision is reached whether in

favour or otherwise, opportunity must be given to government

agencies, members of the public and experts to make comments on

the environmental impact assessment of a proposed activity or

project (sections 6 to 11) Weaknesses

The monetary penalty for failure to comply of #50,000 and not

more than #1 million in the case of a firm or corporation

(section 60) is inadequate.

Application of the law

The law can be applied to ensure that oil and gas and solid

mineral projects to be embarked on will not adversely affect the

environment. It can also be relied on by stakeholders to comment

on the suitability or otherwise of projects in the extractive

industry.

XIV. National Oil Spills Detection and Response Agency (NOSDRA)

Act 2006

Primary intent and objective

The National Oil Spills Detection and Response Agency Act is

charged with the responsibility for preparedness, detection and

response to all oil spills in Nigeria. By section 5 of the Act,

the Agency is mandated among other things to ensure a safe,

timely, effective and appropriate response to oil pollution and

to identify high risk and priority areas for cleanup.

Strengths

a. The Act provides for the establishment of a National Control

and Response Centre charged with the responsibility of acting as

a coordinating centre for all oil spills incident.

b. The Centre is to serve as a command and control centre for

compliance and monitoring of all existing legislation on

environmental control, surveillances for oil spill detection,

monitoring and coordination of responses and to receive reports

of all spills from

zonal offices and control units.

Weaknesses

a. The provisions of section 24 that a member of the Board, an

employee or officer of the

Agency shall treat as confidential any information which has come

to his/her knowledge, and not disclose any information except

where required by a court of law negates the tenets of

transparency and is an inadequacy in the overall conception of

the Act.

b. The subjection to a court order before an information can be

divulged in a justice system such as that of Nigeria may make

impossible the access to vital information.

Application of the law

The Act can be applied to demand immediate response and

remediation of oil spills in oil production environments.

1. National Energy Policy as applicable to Oil and Gas 2003

The overall thrust of the National Energy Policy (the Presidency,

Energy Commission of

Nigeria 2003) of which oil and gas is a subset is the optimal

utilization of the nation’s energy resources for sustainable

development.

Specific policies regarding crude oil are to the effect that:

i. The nation should engage intensively in crude oil exploration

and development with a view to increasing the reserve base to the

highest level possible;

ii. Emphasis should be placed on the internal self sufficiency in

and export of petroleum products;

iii. The nation should encourage indigenous and foreign companies

to fully participate in both upstream and downstream activities

of the oil industry;

iv. The nation should encourage the adoption of environmentally

friendly oil exploration and exploitation methods;

v. The nation should progressively deregulate and privatise the

oil industry.

Specific policies regarding natural gas are to the effect that:

i. The nation’s gas resources should be harnessed and optimally

integrated into the national economy, energy mix and industrial

processes;

ii. The nation should engage intensively in gas exploration and

development with a view to increasing the reserve base to the

highest level possible;

iii. The nation should put in place necessary infrastructure and

incentives to encourage indigenous and foreign companies to

invest in the industry;

iv. The nation should put in place necessary infrastructures and

incentives to ensure adequate geographical coverage of gas

transmission and distribution network.

2. Solid Minerals Law

The Nigerian Minerals and Mining Act 2007

Primary intent and objective

The Act is enacted for the purposes of regulating all aspects of

the exploration and exploitation of solid minerals in Nigeria and

for related purposes. It is therefore the principal legal and

regulatory framework governing the development of the solid

minerals sector of the extractive industry.

Strengths

a. The Act provides for a regime of the basic principles of

priority (i.e. first come, first served); objectivity (i.e. based

on legally defined sets of regulations and procedures); non-

discretionary (i.e. same rules for all) and transparency (i.e.

openness to the public) in the application and grant of licences,

permits and leases;

b. The Act grants certain rights to host communities and mandates

that a Community

Development Agreement be concluded between operators i.e.

licensees/lessees and host communities for social and economic

benefits to the community prior to the commencement of any

development within the lease area;

c. The Act provides for environmental protection and

rehabilitation;

d. It grants incentive for investment in the solid mineral

sector.

Weaknesses

a. The Act does not adequately provide for restoration and

reversibility of mines land;

b. The Act does not adequately provide for health and safety of

miners and employees in mining fields;

c. Provisions of the Act regarding ownership and control deprive

host communities of participation and involvement in the solid

mineral sector.

Application of the law

Since the law essentially regulates all aspects of exploration

and exploitation of the solid minerals sector, it can therefore

be relied on for sundry matters with regards to the sector.

3. National Minerals and Metals Policy 2008

The National Minerals and Metals Policy (2008, Ministry of Mines

and Steel Development

MMSD) was formulated against the background of developing a

policy framework that will ensure an efficient and effective

management of the nation’s mineral resources and the government’s

desire to attract private sector participation through investment

incentives. To this end, the major policy thrust of the solid

mineral sector is to separate the distinctive role of the Federal

Government as regulator/administrator from that of private sector

as operator/manager and to ensure that access to mineral rights

is transparent, flexible and free from undue interference of

government, in addition to addressing issues relating to the

socio-economic wellbeing of the people with both direct and

indirect contact with the mining industry.

AN OVERVIEW OF THE PETROLEUM INDUSTRY BILL

Background of the PIB

In an attempt to restructure the oil and gas industry, the Oil

and Gas Sector Reform Implementation Committee (“OGIC”) was

inaugurated on 24 April 2000 under the chairmanship of Dr.

Rilwanu Lukman (then serving as the Presidential Adviser on

Petroleum and Energy) and charged with the task of making

recommendations for a far reaching restructuring of Nigeria’s oil

and gas industry. The recommendations of OGIC included a proposal

to separate the commercial institutions within the industry from

the regulatory institutions.

In 2007, the Federal Government of Nigeria introduced the

National Oil and Gas Policy and re-constituted OGIC to make

recommendations towards the emergence of a new institutional

framework to govern the operations of the oil and gas industry,

including the emergence of a new National Oil Company, new

regulatory bodies and a new national directorate, for more

effective policy formulation for the industry.

Further deliberations of OGIC produced the Lukman Report of 2008

which recommended regulatory and institutional frameworks that,

when implemented, would guarantee greater transparency and

accountability. This report formed the basis for the first

Petroleum Industry Bill that was submitted in 2008 as an

Executive Bill.

Among the salient features of the original version of the PIB

were the:

a) Unbundling and commercialization of the Nigerian National

Petroleum Corporation (NNPC);

b) Transformation of the existing joint ventures between

multinational oil companies and the NNPC;

c) Deregulation of the downstream sector;

d) Creation of new regulatory bodies; and

e) Introduction of a new fiscal regime that sought to increase

overall government takes.

Expectedly, the prospect of a new fiscal regime which almost

certainly would guarantee increased government take elicited

strong opposition from the international oil companies which

argued that the Bill would create a harsh environment that would

materially change the economics of new and existing investments.

Initial reactions to the Bill prompted intense discussions among

stakeholders in the industry and signaled the commencement of a

process of multiple revisions of the Bill in an attempt to

produce an acceptable draft. This revision process culminated in

a proliferation of diverse and oftentimes irreconcilable versions

of the Bill. This, more than any other singular factor, has

militated against all efforts to pass the Bill since 2008.

The resurgence of the Bill can be traced to a number of factors:

the gradual cessation of investments in the sector as a result of

uncertainty as to the Bill and its potential impact on the

industry, the emergence of alternative petroleum investment

opportunities in other sub- Saharan Africa countries such as

Ghana, Angola, Sao-Tome and Principe, and more recently, the

attempt by the Nigerian Government to deregulate the downstream

industry in January 2012 which led to an increase in fuel prices.

In response to the increase in fuel prices, organized labour

under the umbrella of the Nigerian Labour Congress and the Trade

Union Congress called out its members on a six-day nationwide

strike which paralysed economic activities. The Federal

Government on its part, and as part of efforts to contain the

strike, committed to expedite the reform of the oil and gas

industry by, among other things, fast-tracking the passage of the

PIB. Subsequently, the Federal Government inaugurated a Special

Task Force with responsibility to produce a harmonized version of

the Bill which would be re-presented to the legislature for

passage. The current Bill which has now been submitted to the

legislature is believed to be largely the product of the Special

Task Force and its Technical Committee.

The PIB is a 223 page legislation which seeks to revise, update

and consolidate existing petroleum sector related legislations in

Nigeria. 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.

Award Process for Petroleum Prospecting Licence and Petroleum

Mining Lease

The PIB provides that a licence or lease may be granted only to a

company incorporated in Nigeria under the Companies and Allied

Matters Act or any corresponding law. A licence or lease may be

granted to a winning bidder pursuant to a bid process prescribed

by the PIB or directly to an existing licensee or lessee. It is

also worthy to mention that the PIB on one hand abolishes the

grant of discretionary awards of licences and leases but creates

an exception in the case of the President who is permitted under

the Act to grant licences or leases in special circumstances.

Section 190 provides that the grant a Petroleum Prospecting

Licence or a Petroleum Mining Lease not derived from a Petroleum

Prospecting Licence shall be by open, transparent and competitive

bidding process conducted by the Inspectorate. The parameters for

the winning bidder shall be determined on the basis of single bid

parameter based on signature bonus, royalty percentage in

addition to relevant subsisting royalty percentage, work

commitment in terms of number of wells to be drilled to a

specified minimum depth during the initial exploration period, or

work units. The PIB requires the bid process to be made open to

the general public through publications on the website of the

Inspectorate and at least 2 (two) newspapers with international

coverage and 2 (two) with national coverage. The processing of

all received bids shall be in accordance with the published

guideline and monitored by the Nigeria Extractive Industries

Transparency Initiative.

Assignment, Mergers and Acquisitions

Pursuant to the provisions of the PIB, where a licensee, lessee

or production sharing or service contractor is taken over by

another company or merges, or is acquired by another company

either by acquisition or exchange of shares, including a change

of control of a parent company outside Nigeria, it shall be

deemed to be and treated as an assignment within Nigeria and

shall be subject to the terms and conditions of the PIB.

The assignment of licences, leases or contracts including any

accompanying rights, power or interest without the prior written

consent of the Minister is prohibited. The Minister may consent

to an assignment if the proposed assignee is able to show to the

satisfaction of the Minister that –

a) the proposed assignee is of good reputation;

b) the proposed assignee has sufficient technical knowledge,

experience or financial resources to enable it effectively carry

out the responsibilities under the licence, lease or contract

which is to be assigned; and

c) where the proposed assignee is to serve as operator, such

assignee has proven operating experience or is supported by a

competent operator under a technical service agreement with

respect to operations to be carried out under the licence, lease

or contract which is to be assigned.

Licensing for downstream operations under the PIB

The Downstream Petroleum Regulatory Agency (the “Agency”) is

responsible for granting licenses in the downstream sector and

this includes but is not limited to licence for –

a) construction and operating a process plant, including those

for gas liquefaction;

b) construction and operating a petroleum transportation pipeline

for crude oil or gas or condensate or petroleum products;

c) construction and operating a petroleum transportation network;

d) construction and operating a petroleum distribution network;

e) undertaking the supply of downstream products or natural gas;

or

f) owning and running a downstream products or natural gas

processing or retail facility.

In addition, the Agency is responsible for granting licenses in

respect of the utilization of all chemicals used for downstream

petroleum operations in Nigeria, including, chemicals used in the

processing, distribution and storage of petroleum products in

Nigeria. Conducting any downstream petroleum operations without a

licence issued by the Agency is prohibited under the PIB and the

Agency can modify, amend, revoke or suspend licences. It is also

pertinent to note that the issuance of the licence is subject to

certain conditions stipulated in the PIB and a licensee is

prohibited from assigning or transferring its licence or rights

and obligations arising from such licence without the prior

written consent of the Agency.

Fiscal Regime under the PIB

Under the current fiscal regime, companies and entities engaged

in upstream petroleum operations are subject to petroleum profits

tax pursuant to the Petroleum Profits Tax Act (“PPTA”) while

other companies (including those engaged in downstream petroleum

operations) are subject to corporate income tax pursuant to the

Companies Income Tax Act (“CITA”). The current rate of petroleum

profits tax is 50% for operations in the deep offshore and inland

basin and 85% for operations onshore and in shallow waters.

The PIB introduces the Nigerian Hydrocarbon Tax (“NHT”) which is

proposed to replace the existing petroleum profits tax and

applies to the profits of any company engaged in upstream

petroleum operations. The NHT rates are fixed at 50% for onshore

and shallow areas of not more than 200 metres depth or 25% for

bitumen, frontier acreages or deep water areas. In addition to

NHT, the PIB also proposes companies income tax at the rate of

30% on companies engaging in upstream and downstream petroleum

operations Other significant aspects of the new fiscal regime

proposed by the PIB include:

a) The introduction of a General Production Allowance (“GPA”)

which may be claimed by a company that has executed a Production

Sharing Contract (“PSC”) with NNPC. Under the current regime, an

oil producing company which had executed a PSC with NNPC prior to

July 1998 is entitled to claim an investment tax credit at the

rate of 50% of qualifying capital expenditure incurred by that

company wholly, exclusively and necessarily for the purposes of

its petroleum operations while an oil producing company which

executed a PSC with NNPC after July 1998 is entitled to claim

investment tax allowance also at the rate of 50% of qualifying

capital expenditure.

The difference between investment tax credit and investment tax

allowance is that while the former offers a dollar for dollar

credit which directly reduces the tax payable, the latter

operates to reduce assessable profit before the tax rate is

applied to determine the tax payable. The PIB proposes to replace

both investment tax credit and investment tax allowance with GPA

which, like the current investment tax allowance, is intended to

reduce assessable profit and not to reduce the tax payable.

b) While the investment tax credit and investment tax allowance

are calculated as a percentage of qualifying capital expenditure

and available throughout the period of petroleum operations, GPA

is to be calculated as follows:

i. For onshore operations: the lower of US$30 per barrel or 30%

of the official selling price up to a cumulative maximum of 10

million barrels and the lower of US$10 per barrel or 30% of the

official selling price for volumes exceeding 10 million barrels

up to a cumulative maximum 75 million barrels and then no more.

ii. For operations in the shallow water areas: the lower of US$30

per barrel or 30% of the official selling price up to a

cumulative maximum of 20 million barrels and the lower of US$10

per barrel or 30% of the official selling price for volumes

exceeding 20 million barrels up to a cumulative maximum 150

million barrels and then no more.

iii. For operations in areas with bitumen deposits, frontier

acreages and deep water areas: the lower of US$15 per barrel or

30% of the official selling price up to a cumulative maximum of

250 million barrels per Petroleum Mining Lease and the lower of

US$5 per barrel or 10% of the official selling price for volumes

exceeding 250 million barrels.

iv. For companies currently in a PSC with NNPC but which are not

currently claiming either investment tax credit or investment tax

allowance: US$5 per barrel or 10% of the official selling price

for all production volumes.

c) Oil producing companies in joint venture operations with NNPC

are not entitled to claim GPA notwithstanding that they are

entitled to claim petroleum investment allowance under the

current regime.

d) The PIB further proposes detailed provisions regarding the

entitlement of gas producing companies to GPA.

e) The PIB proposes to reenact the current provisions of the law

which state that expenditure incurred in the acquisition of

rights in or over petroleum deposits will qualify as “qualifying

drilling expenditure” for which capital allowance at the

appropriate rate may be claimed. In making this proposal, the PIB

undermines the contention in certain Government quarters that

signature bonus (which is undoubtedly the consideration paid to

acquire a right in or over petroleum deposits) is not subject to

capital allowance.

f) The PIB proposes provisions which put it beyond doubt that a

PSC contractor who finances the cost of acquisition of a capital

asset is entitled to claim capital allowances on the capital

asset. In this regard, the PIB provides as follows: “Where the

production sharing contract between the National Oil Company and a contractor

provides for the contractor to finance the cost of equipment and for such equipment to

become the property of the National Oil Company, the contractor shall be deemed to be

the owner of the qualifying expenditure thereon, for the purpose of the claim of capital

allowances.” Indeed, the effect of this provision is that unlike

under the current regime where the PSC contractor and NNPC share

in the benefit of capital allowance, only the PSC contractor will

be entitled to capital allowances under the PIB since the

“contractor shall be deemed to be the owner of the qualifying expenditure thereon, for

the purpose of the claim of capital allowances”.

g) With respect to royalties, the PIB does not specify new

royalty rates, but provides that royalties and fees will be

determined by regulations that will be drafted by the Minister

after the PIB is enacted into law. However, pending the issuing

of regulations in that regard by the Minister, the present rates

of royalties which are charged on a sliding scale and depth

related will continue to apply.

h) The PIB addresses matters concerning double taxation

arrangements with other territories and vests the Minister with

the power to make orders and rules in this regard.

Does the PIB create efficient and effective regulatory agencies

for the gas sector?

a. The model of sector oversight proposed by the PIB does not in

fact promise independent regulation of the gas sector. Sections 6

(1) (g) and (h) preserves the old model of sector regulation –

the Minister continues to grant licences upon the advise of the

Downstream Petroleum Regulatory Agency (Agency). To make matters

worse, members of the board of the Agency do not have protection

(security) of tenure that those on the board of the Nigerian

Electricity Regulatory Commission (NERC) have. To all intents and

purposes, the board members have a “grace and favour” appointment

i.e. at the pleasure of the President. This further undermines

their independence. To the extent that the Agency cannot take

decisions independent of the Minister, or operate under a

regulatory structure similar to that which exists in the

electricity sector, where the Minister for Power is in charge of

policy and NERC independently regulates that sector, then we

should expect regular political interference in gas regulation,

which will ultimately result in inconsistent regulation between

the power and electricity sectors.

b. The regulatory model proposed for the gas sector has two

separate commercial and technical regulators for the upstream and

the downstream. This is in an era when the whole polity is

concerned about the size of Nigeria’s bureaucracy. But on a more

technical note, one regulator with 2 divisions (upstream and

downstream gas) or structured along specialized activities

(Technical and Commercial Divisions) would be more “effective and

efficient” for sector regulation a la the efficiency desiratum in S.1

of the Bill.

On another technical note, and this is my experience: it is

always difficult to identify a fine line between the upstream and

the downstream, less so between the respective technical and

commercial teams. The industry should therefore expect a new era

of regulatory conflicts between the upstream and the downstream.

In addition to that, there is a substantial regulatory issue,

which is that one of the hallmarks of effective regulation is for

a regulator to be able to have unfettered access to information

within the regulatory space. That information is extremely useful

for the policy people and will ultimately help in sector

direction. The PIB unfortunately creates two regulators in a

network bound sector. This can only lead to asymmetrical

information being considered by both and acted upon in a dynamic

chain. As such, we should expect gaps in regulation and the

regulatory ball to be regularly dropped between both regulators.

And of course, gaming by operators will occur.

The long and short of this is that the energy chain is one

interrelated chain and the separation of regulatory agencies does

not help create “efficiency and effectiveness”. Hence, expect efficiency

losses and inconsistent regulation from this regulatory split.

To illustrate, a number of incumbent players in the sector

currently operate both in the upstream and the downstream. The

sector is however moving rapidly towards the midstream, and we

will, in short order, witness a fair level of integration of

entities from wellhead through gas utilization, especially in

power generation. The promoters of these entities will leverage

on assets in both segments to achieve efficiency gains for their

affiliates through cross – subsidization, management integration

and other similar commercial efficiency/value optimisation

strategies. One questions the vision of the draughtsmen of the

PIB on this issue – how have they positioned the regulator to

capture these plays or games, moreso in an era of two separate

regulators within the gas chain?

Functionally separate markets for gas sales, transmission and

distribution with each function performed by separate business

entities tends to encourage the acceleration of natural gas

supplies and investment in infrastructure. This is why in most

developed jurisdictions, the licensing regime requires the

separation of monopoly and commercial interests within the same

organisation, at least in management terms, and sometimes in

legal terms. This is to prevent the risk, whether real or

perceived, that the operator of monopoly services, such as

Network Operation or Distribution, will discriminate in favour of

its own commercial interests to the detriment of others and the

market ultimately. Curiously, the PIB does not explicitly provide

for the management of this possibility. This is a significant

omission, and it is an issue which is better handled now rather

than when the regulatory structure is set and the key players

embedded in the system. The only hope, of containing abuse of

powers through cross – interests would be recourse to the general

competition powers of the Agency to handle such issues in future.

It will be interesting to see how these matters will be resolved

at that time.

Fiscal regime under the new Petroleum Industry Bill

From sports to entertainment, tourism to technology,

infrastructural development to industrialisation, and the list

goes on - Nigeria is a country that is often celebrated more for

her potentials than real achievements. Quite so with over 160

million people we struggle for medals to no avail at the ongoing

London 2012 Olympics. The same is our experience in the area of

natural resources; we are one of the largest producers of

petroleum in the world, with one of the largest proven oil

reserves of over 35 billion barrels and over 185 trillion cubic

feet of proven natural gas. No doubt that the country is rich but

unfortunately her people are poor.

The major issues with the all-important petroleum sector have

been corruption, poor institutions, weak regulations, and lack of

transparency. In order to address these issues the Petroleum

Industry Bill (PIB) was initiated during the Obasanjo regime but

the Bill suffered a lot of setbacks and hence the negative impact

on the much needed local and foreign direct investment in the

sector. The inability to pass the previous versions of the PIB

was due to vested interests pulling in opposite directions and

lack of will by the political class.

Following the nationwide outcry particularly arising from the

partial fuel subsidy removal earlier in the year, the federal

government constituted a special task force to harmonise the

various versions of the PIB which has now been re-introduced to

the National Assembly on 18 July 2012.

The key objectives of the PIB include the creation of a conducive

business environment for petroleum operations to enhance

exploration and exploitation of petroleum resources in Nigeria

for the benefit of the Nigerian people, optimise domestic gas

supplies particularly for power generation and industrial

development. The PIB is also to establish a progressive fiscal

framework that encourages further investment in the petroleum

industry while optimising revenues accruing to the Government, to

deregulate and liberalise the downstream petroleum sector,

promote transparency and openness in the administration of the

sector and promote Nigerian content through efficient and

effective regulatory framework.

The midstream operation in the earlier versions of the PIB has

been removed hence the existing upstream and downstream

stratification will be sustained. However, upstream is now

specifically and exclusively to do with crude oil and gas

production. Upstream is defined as “all activities entered into for the

purpose of finding and developing petroleum and includes all activities involved in

exploration and in all stages through, up to the production and transportation of

petroleum from the area of production to the fiscal sales point or transfer to the

downstream sector”.

All other activities in the sector are classified as downstream

including oil transportation and gas transmission, gas

processing, liquefied natural gas, derivative productions and

processing, oil refining, petroleum product distribution and

storage, construction and operation of facilities, product

pipelines and so on.

From the fiscal regime viewpoint, all companies engaged in

upstream petroleum operation to pay Companies Income Tax (CIT) at

30% and the introduction of Nigerian Hydrocarbon Tax (NHT) at

either 50% for onshore and shallow area of not more than 200

metres depth or 25% for bitumen, frontier acreages or deep water

areas. Where petroleum operations fall in geographical areas that

are subject to different tax rates, NHT shall be levied on the

proportionate parts of the profits arising from such operations.

Deductions allowed for tax purposes are expenses wholly,

exclusively, necessarily and reasonably incurred for the purpose

of upstream petroleum operations. The introduction of

“reasonability” as one of the conditions will lead to more

subjectivity in dealings with the tax authorities. Deductions

allowed now include sums set aside in a fund for decommissioning

and abandonment expenditure, interest upon any loans, including

intercompany loans as long as the tax authorities are satisfied

that the interest payable is on capital employed in upstream

petroleum operations except interest incurred under a Production

Sharing Contract. Disallowed deductions include all general,

administrative and overhead expenses incurred outside Nigeria in

excess of 1% of capital expenditure and 20% of any expenses

incurred outside Nigeria except for goods or services not

available domestically in the required quantity or quality. Also

legal and arbitration costs related to cases against the tax

authorities or the Federal Government except awarded to the

company during the legal or arbitration process will not be tax

deductible. Others include costs incurred in organising or

managing any partnership, joint venture or other arrangement

between or among companies, gas flaring charges, insurance costs

payable to an affiliate of the company, any signature or

production bonuses and costs of obtaining and maintenance of a

performance bond under a PSC.

Tax incentives available to upstream gas operations will be

limited to only the tax holiday under the Companies Income Tax

Act provided the gas supply destination is solely to the domestic

market. Dividend distribution by upstream companies will not

suffer any withholding tax in so far as such profits have been

subject to NHT and CIT to be computed and paid on an actual year

basis monthly from the end of February of every year. The final

installment is payable not later than 21 days after filing of the

self-assessment for the accounting period which is due for filing

within 5 months of the end of the accounting period, that is, May

of the subsequent year.

Although capital allowances for petroleum companies will no

longer be restricted, annual allowances will be claimed at 20%

per annum except 5th year and after at 19%. It is unclear whether

the intention is to claim more than 100% given that the tax

written down value will be only 1% after the 5th year. Production

Allowance (PA) will be introduced to replace Investment Tax

Credit (ITC) or Investment Tax Allaownace (ITA) as may be

applicable. The PA is to encourage investment in crude oil and

gas production with specified rates per barrel either as a fixed

amount per barrel or a percentage of Official Selling Price (OSP)

subject to cascading thresholds. This is to reward result in form

of production rather than effort in terms of capital expenditure.

Every company will be responsible for filing its own tax returns

unlike the current arrangement where the NNPC files tax returns

on behalf of PSC partners. Each party will own and be able to

claim capital allowances on cost of equipment. Any appeal against

tax assessments are to be made directly to the Federal High Court

rather than to the Tax Appeal Tribunal as provided under the FIRS

(Establishment) Act. This needs to be resolved also in terms of

potential conflict with CITA given that upstream companies will

be liable to tax under the Act. Each upstream petroleum company

to remit on a monthly basis 10% of the net profit (adjusted

profit less NHT and CIT) to host community fund. Any act of

vandalism or sabotage that occurs in a community will lead to a

forfeiture of the community’s portion of the Fund up to the

amount sufficient to repair and remediate the damage caused.

Contributions made to the Fund will be available as credit

against fiscal rent obligations being royalty, NHT and CIT

although no order of offset is provided for. Downstream companies

are largely unaffected by the provisions of the PIB.

Overall the PIB introduces some positive developments including

moves to address host community concerns, promotion of local

content, removal of minimum tax, removal of restriction on

capital allowances claimable, tax deduction for abandonment

provision. However contentious issues include dispute resolution

and potential conflicts with the existing provisions of CITA,

conflicts with other laws such as NDDC Act and insufficient

distinction regarding the roles of other agencies not mentioned

in the Bill.

Stakeholders must consider all aspects of the PIB including

transfer pricing, regulatory compliance, possible structuring,

tax efficiency, project economics, financial reporting,

contracts/covenants etc. The proposed changes may not really be

revolutionary, but the PIB if passed in its current form will

mean that fiscal issues are no longer business as usual.

POSITION ON VARIOUS ASPECTS OF THE PIB 2012

OWNERSHIP

According to Section 2 of PIB:

“The entire property and control of all petroleum in, under or upon any lands within

Nigeria, its territorial waters, or which forms part of its Continental shelf and Exclusive

Economic Zone, is vested in the Government of the Federation“.

An analysis of the treatment of ownership of mineral and

petroleum resources of a state in other countries is often dealt

with constitutionally, as we have done in Nigeria, where it is

provided for ownership by the people (Indonesia, Iraq), the

sovereign state (UAE), a hybrid (Russia) or even in some

instances, individuals (Canada).

In Nigeria, under Sec.44 of the Constitution:

“The entire property in and control of all minerals, mineral oils and natural gas in

under or upon any land in Nigeria or in, under or upon the territorial waters and the

Exclusive Economic Zone in Nigeria shall vest in the Government of the Federation and

shall be managed in such manner as may be prescribed by the National Assembly.”

Section 2 of the PIB is therefore in total conformity with the

provisions of the Nigerian Constitution. However, events of

recent years have shown that there is the need for the other

stakeholders - the other tiers of government, and the people of

Nigeria to be acknowledged as co-stakeholders.

The first section of the Bill, on ‘Objectives,’ outlines the

stated reasons for the Act, which include the creation of

efficient and effective regulatory agencies, and the promotion of

‘transparency and openness’ in the administration of Nigeria’s

petroleum resources. In section 3, the PIB states that this will

be done in accordance with the principles of good governance,

transparency and sustainable development, by providing for

competition, effective legal and institutional frameworks, and a

balanced fiscal regime. Significantly, section 4 states that

agencies and companies established pursuant to the PIB shall be

bound by the Nigeria Extractive Industries Transparency

Initiative Act.

NEITI is gratified to note that these provisions enshrining NEITI

have not only survived the redrafts over the years, but have been

strengthened, (the provision in the PIB 2008 only provided that

they would be ‘guided’ by the NEITI Act).

Section 4 of the PIB states that:

"In performing their functions and achieving their objectives under this Act, the

agencies and companies established pursuant to this Act, shall be bound by the Nigeria

Extractive Industries Transparency Initiative.”

NEITI however observes that this laudable section might have an

opposite effect from that intended, as it could be interpreted as

one restricting the mandate of the NEITI to only the agencies and

companies ‘established pursuant to this Act.’ NEITI’s mandate is

to ALL entities in the extractive industries, including the

entire petroleum sector. NEITI therefore feels that the clause

should be expanded to cover, not only the agencies and companies

created under the PIB but all companies in the petroleum sector

of the extractive industry as defined by the NEITI Act 2007.

NEITI suggests that section 4 should be redrafted as follows:

"In performing their functions and achieving their objectives under this Act, all

extractive industry companies and agencies in the oil and gas sector as defined in

the NEITI Act 2007 and the agencies and companies established pursuant to this

Act, shall be bound by the Nigeria Extractive Industries Transparency Initiative

Act”

POWERS OF THE MINISTER

The PIB 2012 creates a very powerful Minister, even more than

under the Petroleum Act 1969, where the phrases “the Minister

may,” “as may be decided or imposed by the Minister,” “the

Minister shall have the right” are commonly sighted.

In the PIB, the Minister shall be responsible for the co-

ordination of the activities of the petroleum industry in Nigeria

and exercise general supervisory powers the overall operations

and all institutions in the industry (Section 5). Under the

Petroleum Industry Bill (PIB) 2012 more powers and functions are

assigned to the Minister than under the provisions of either the

PIB 2008 or the Senate PIB 2009. Not only has it restored the

powers of the minister, which were expunged in the PIB 2009 by

the Senate of the sixth National Assembly, it has considerably

enlarged them. The concentration of immense powers in the hands

of a political appointee may affect transparency and

accountability, and compromise the due process that the Bill

seeks to enthrone.

The office of the Minister is central to the structure of the

Nigerian oil and gas industry under the PIB 2012. The Minister

formulates and monitors government policy and advises the

government on all matters pertaining to the petroleum industry.

He or she advises the President on the appointments of the Chief

Executives of the Upstream Petroleum Inspectorate, Downstream

Petroleum Regulatory Agency, the National Oil Company, the

National Asset Management Corporation and any other Government

agency or corporate entity established pursuant to this Act

(Section 6). The Minister is the Chairman of the boards of the

Petroleum Technology Development Fund (PTDF), Petroleum

Equalisation Fund (PEF) Management Board and the Nigerian

Petroleum Assets Management Corporation Board, contrary to

previous drafts, while the Minister’s representative is a member

of the boards of the Upstream Petroleum Inspectorate and

Downstream Petroleum Regulatory Agency.

The powers of the Minister are such that several critical

functions of the agencies are stipulated to be subject to the

Minister’s approval. For instance, the power of the Downstream

Petroleum Regulatory Agency to develop and implement market rules

for trading in wholesale downstream gas is subject to the

approval of the Minister (Section 45). The Minister may, upon the

advice of any of the PIB institutions, make regulations necessary

to give effect to the provisions of the PIB 2012 (Section 8). The

extensive powers of the Minister include the right of pre-emption

of all petroleum and petroleum product obtained, marketed or

otherwise dealt with under any license or lease granted under

this Act (Section 7). There are valid fears that this

centralisation of decision-making powers will create unnecessary

bureaucratic bottlenecks. In addition, the processes involved in

obtaining the approval of the Minister for key activities of the

institutions could hinder the over-all effectiveness of the oil

and gas industry in Nigeria.

NEITI believes that the institutions of the PIB must be empowered

and given sufficient autonomy. It is in line with best

international practice and in the best interests of the country

for the Ministers regulatory and managerial powers in the PIB to

be reduced, leaving the Minister to be primarily concerned with

policy matters, and not with the day-to-day running of the

industry. Please see Table 2 below for a comparison of

international best practice, and what presently pertains in

existing regulatory institutions in Nigeria.

REPEALS AND OTHER ISSUES

1. Section 354 (as presently numbered) is on ‘Repeals.’ Amongst

others, it provides for the repeal of the Deep Offshore and

Inland Basin Production Sharing Contract Act CAP D3, LFN, 2004,

with the exception of Section 16, sub-sections 1 & 2, which are

to be retained. Subsection (1) is essentially a price review

clause, while subsection (2) provides for renegotiation. NEITI

believes that, if found to be necessary for incorporation into

the PIB, these clauses should be specifically drafted for the PIB

and made to apply to all contracts for upstream operations, not

just the PSC.

2. Restriction: (Section 302) The Act introduces restriction in

the access to tax data that will not allow NEITI to obtain the

required data for its audit. The provision should allow NEITI

access to all tax data.

NEITI’S POSITION

THE PIB SHOULD INCLUDE ARTICLES THAT MAKE REVIEW AND

RENEGOTIATION MANDATORY UPON CERTAIN OCCURRENCES, SUCH AS A

SIGNIFICANT CHANGE IN PETROLEUM PRICES, OR IN THE INTERNATIONAL

INVESTMENT REGIME.

Local Content Policy in Nigerian Oil and Gas Industry

The term Local Content (LC) aptly christened ‘Nigerian Content’ has been

defined as ‘The quantum composite value added or created in the

Nigerian economy through the utilization of Nigerian human and

material resources for the provision of goods and services to the

petroleum industry’ (NNPC Website).

This definition seems what can be termed a textbook definition

for LC. However, according to the Chairman Nigerian House of

Representative Committee on Petroleum (Upstream), Tam Brisibe,

“Local content means different things to different people…the

common denominator is value addition in the country” (Ogbodo,

2008). Obuaya (2005), a leading voice in the clamour for higher

participation of local companies in the industry, provided his

definitions in line with this idea of ‘value addition.’ He

defines LC as: ‘a set of deliberate orientation and actions to

build domestic capacity relevant for service and product delivery

comparable within that industry’ and ‘an opportunity to locally

build a sustainable culture of service quality and capabilities

exceeding customers’ expectations and comparable to international

standards through key local personnel and management.’ Though

simple, Obuaya’s definitions reflect on some important indices to

examining the concept of LC such as ‘deliberate orientation’,

capacity building, sustainable capability, product deliverability

systems and comparability.

The concept of local concept is global and not restricted to

Nigerian, as it has previously been undertaken in several other

oil-producing countries. Warner (2007) views LC from an angle of

‘community content’; stating that “Ultimately, community content

is about realising a competitive advantage for an oil and gas

development company in the eyes of both the local population and

the country’s guardians of economic policy.” He further observed

two distinct public policies strategies for achieving higher

local content targets stand out vis-à-vis: the first strategy is

where the state requires oil companies to give greater preference

to those nationals and national suppliers who can compete

internationally on cost, quality and timeliness i.e. what can be

termed local content participation. This policy is implemented

through negotiated conditions and agreements between host

countries and multinationals evidenced by issues such as lower

pre-qualification and tender appraisals criteria and lower

tariffs on imported machinery and semi-finished materials not

available in the country. This model is illustrated in the

Trinidad and Tobago case, where oil production operators “… shall

give preference to national Subcontractors where such are

competitive with foreign bidders in skills, availability and

price and meet technical and financial requirements…”; and the

case in Nigeria where the proposed LC bill requires about 95

percent managerial and supervisory positions, 100 percent risk

insurance and legal services are to be handled by indigenous

professionals. The second policy strategy is where governments

propose a “step change” i.e. gradual change of LC capacity

achieved by consciously building the capability of national and

local skills to access opportunities, considered as ‘local

capability development’ (Warner, 2007). It can also be argued

that while the former strategy can be considered more of a “Push”

model; the latter is more of a “Pull” model. Warner (2007)

considers the latter is a potentially more progressive model that

would involve considerable undertakings from the oil companies

such as providing direct and prolonged assistance to indigenous

firms to improve their quality and reliability; payment of

premiums or subsidies to overcome some of the higher costs

incurred in capacity development; payment of additional insurance

premiums to support local suppliers and contractors; investing in

physical infrastructure such as buildings and utilities; and

providing financial services such venture capital, credit

guarantees and short-term loans to local suppliers and

contractors. He stressed that “we should not be so naïve as to

expect changes in local content and community investment

practices to occur in the absence of the right dedicated

incentives.” However, we argue that although the latter model

sounds laudable; nevertheless, it is important to consider that

multinationals are not charity organisations; but strictly

profits oriented organisations, driven by the goal to maximise

shareholders funds. As such, the model suggested by Warner (2007)

may be difficult to apply. We therefore posit that for a country

like Nigeria, an effective LC policy would need to be driven by

an optimal balance of both incentives on one hand and strict

regulations on the other. This is because, in comparison to other

countries, Nigeria has very low level of local content in the oil

industry operations. According to the Nigerian National Petroleum

Corporation (NNPC), only about 14 percent of the amounts spent

servicing the industry used to be invested in Nigeria; compared

to 25 percent in Indonesia, 50 percent in Norway and 70 percent

in Brazil and Malaysia. Not forgetting that the target of NNPC

was to achieve 45 percent by the end of 2007 and percent by 2010

(Adebola, et al, 2006; Amanze-Nwachukwu, 2007; Nwapa, 2006). the

lack of an Act of Parliament is still a major challenge

inhibiting the efficacy of the LC policy. At the moment, the

National Petroleum Investment Management Company (NAPIMS) and the

Department for Petroleum Resources (DPR) generate guidelines and

regulations from time to time. These sometimes result into

‘shifting of the goal posts’ at will by the regulators and tends

to have detrimental effects on SMEs operating in the industry.

Because once new guidelines are released, and companies start to

make necessary changes in line with the guidelines another abrupt

guideline may impact negatively their operations. It is believed

that an Act would help streamline both the guidelines and the

activities of the regulators; as well as enhance a more efficient

implementation, monitoring, and realisation of the policy

thrusts.

PART FOUR: CONCLUSIVE ANALYSIS

CONCLUSION

The existing oil and gas laws are weak in terms of provisions for

transparency and accountability and most of the laws, including

the policy, are outdated and not in tune with contemporary

realities. Rather they operate to deprive host communities of the

right to fully participate and be involved in the sector. It

should however be noted that there is a proposed National Policy

on Oil and Gas 2004 prepared by the Oil and Gas Implementation

Committee under the National Council on Privatization which seeks

to anchor issues relating to the sector on the principle of

transparency and equal access to opportunity in order to bring

about structural, operational and regulatory changes to the

sector.

The current laws and policies on solid minerals though with some

grey areas such as reversibility of mine lands and safety of

miners, appears to have transparency and accountability as its

fundamental objective. It is however hoped that these will not be

honored more in the breach. Full deregulation of the downstream

oil sector of Nigeria, the sine qua non to the economic

dwindling, had in time past generated unexpected debate but on

the 19 march, 2013, the Supreme Court sitting in Abuja has

declared the policy and its implementation illegal, unconditional

and null and void. This court verdict has rekindled hope on the

path of those who blatantly opposed the deregulation policy. But

the president reiterated his avowed commitment to the

deregulation policy.

The current state of the industry 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. The economic growth in

Nigeria is positively correlated with energy consumption. The

market for petroleum product will thus continue to increase.

However, the sorry state of the state-owned refineries, the

volatility in the price of crude oil on the international market,

the racketeering and gross corruption in the downstream sector

and the persisting restiveness in the Niger Delta Region, all of

which have resulted in dependence on importation of refined oil

and its negative impacts on government revenue from the sale of

crude oil, need to be properly addressed by the government. The

full deregulation policy, if properly implemented, will surely

have tickledown effects such as crowding out the impact of price

volatility, sustain investors' confidence, create employment and

inter-sectoral integration, boost local content, revenue and

external reserves, improve performance and ensure overall

national development.

One of the greatest challenges facing the downstream petroleum

sector in Nigeria is the issue of fuel importation. It is

believed that deregulation would address this problem squarely.

With deregulation, subsidy which has been a conduit pipe and

source of fraud in Nigeria,will be a forgotten issue.

Furthermore, competition which is an important component of

deregulation policy will encourage private sector participation

in building new refineries, thereby increasing refining

capacities in Nigeria. We cannot continue to import petrol, when

we have the capacity to produce what we can consume as well as

for exportation (Okere, 2010:45). In other words, Nigeria has the

entire wherewithal, not only to be self-reliant but even enough

to export refined products.

Nigeria is heading on the right track and is potentially going to

be better off in the long run with the current intended plans on

privatization. Already the benefits of maintaining a good fiscal

policy is coming to bear, government has moved away from over

dependence on oil revenues and is diversifying into other areas.

The international community has seen that and Nigeria is the

first beneficiary of the G8 meeting at Gleneagles, Scotland where

world leaders accepted to write off debt of the least developed

nations. Though it is not considered in that category, the

backing of certain governments including that of the United

States, UK and Germany made it possible for the “Paris Club” to

grant us a 60% debt relief. The condition being that the IMF

approve of the home grown economic policy known as the National

Economic Empowerment and Development Strategy (NEEDS), after it

was scrutinized, the IMF approved the Policy Support Instrument

(PSI), which is first because normally IMF dictates to the debtor

country on what policies to implement.

The “Paris Club” approved an $18 billion debt write off and also

agreed to let Nigeria buy back $6 billion. Though the government

had to pay arrears of $6.4 billion within a specified time frame,

which it has done. It is likely that for the first time since

Independence, Nigeria may be out of debt by June 2006.

At the same time aggressive reforms are being undertaken in the

country by the government in all sectors of the economy. The

combined effects of savings from privatization and debt relief

are going to free up huge resources to the Nigerian government

and people.

The key issues in the impact of privatization when sold are those

of profitability, efficiency, unemployment and capital market

development.

The existing oil and gas laws are weak in terms of provisions for

transparency and accountability and most of the laws, including

the policy, are outdated and not in tune with contemporary

realities. Rather they operate to deprive host communities of the

right to fully participate and be involved in the sector.

It should however be noted that there is a proposed National

Policy on Oil and Gas

2004 prepared by the Oil and Gas Implementation Committee under

the National Council on Privatisation which seeks to anchor

issues relating to the sector on the principle of transparency

and equal access to opportunity in order to bring about

structural, operational and regulatory changes to the sector. The

current laws and policies on solid minerals though with some grey

areas such as reversibility of mine lands and safety of miners,

appears to have transparency and accountability as its

fundamental objective. It is however hoped that these will not be

honoured more in the breach.

CONCLUSIVE RECOMMENDATIONS

The following recommendations are made:

1. The authors recommend that strategic sectors such as oil and

gas as well as the power sector should be deregulated and

privatized for sustainable national development.

2. It is recommended that the regulatory framework and

environment should be such that encourages maximum competition.

Accordingly, government must repeal all laws that inhibit

competition and should pass laws that protect investors.

3. Government should prepare to address the labour problems which

may arise as a result of deregulation and privatization. A

proactive programme of education of labour unions should be

pursued. More so, safeguards against job losses should be

embarked upon.

4. It is recommended that government should leave the management

of a company in the hands of the strategic partner.

5. Government sales option (of 40% to strategic partner, 20%

Nigerian public and

40% government) should be implemented accordingly even at the

reduced equity holding by government. However, it is recommended

that government divests gradually its remaining shares at a

minimum of 5% per year to the Nigerian public.

6. It is recommended that workers should be allowed to have a

stake in the refineries in the form of equity participation. This

will reduce the risk of shortage usually associated with workers’

union activities and ensure greater commitment to the survival of

the refineries.

7. It is recommended that the government should in effect,

provide the broad guidelines for the operation of the refineries

and allow private initiatives in the running of refineries.

REFERENCES

Statutes

Associated Gas Re-injection Act 1979 as amended in 1985.

Deep Offshore and Inland Basin Production Sharing Contract Act

1999.

Deep Water Block Allocation to Companies (Backing Rights)

Regulations 2003.

Environmental Impact Assessment Act 1992.

Minerals Oil (Safety) Regulation 1963.

National Oil Spills Detection and Response Agency (NOSDRA) Act

2006.

Nigeria Extractive Industries Transparency Initiative (NEITI) Act

2007.

Nigerian Minerals and Mining Act 2007 by Ministry of Mines and

Steel Development.

Nigeria National Petroleum Corporation (NNPC) Act 1977.

Oil in Navigable Waters Act 1968.

Oil Pipeline Act 1956 as amended in 1965.

Oil Prospecting Licenses (Conversion to Oil Mining Leases etc)

Regulations 2004.

Petroleum Act 1969 as amended.

Petroleum (Drilling and Production) Regulation 1969 with

amendments in 1973, 1979, 1995 and 1996.

Petroleum Profit Tax Act 1959 with amendments in 1967, 1970,

1973, and 1979.

Policies

National Energy Policy April 2003 by The Presidency, Energy

Commission of Nigeria.

National Minerals and Metals Policy January 2008 by Ministry of

Mines and Steel Development.

The Proposed National Policy on Oil and Gas, 2004 by the

Presidency, Bureau of Public Enterprises, Secretariat of National

Council on Privatisation.

Cases

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