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Subsidy Removal: A Case for the Passage of PIB

By Chibueze Onah

Recently, crude price plunged in the world market as a result of a dispute between Russia and Saudi Arabia (OPEC) over a failed attempt to agree on a proposed oil production. This coincided with a decline in demand caused by externalities of the Covid-19 pandemic; thereby, bringing into focus again the need for urgent reform in the Nigerian oil and gas industry.

Similarly, the Group Managing Director of the Nigerian National Petroleum Cooperation, Mele Kyari, announced on television that the subsidy on petroleum products has been removed. Many industry experts immediately responded, saying that he lacked the powers to make such pronouncement. They argued that the power to make such policy statement resides within the Minister of Petroleum, who in this case is the ‘President’, through the PPPRA.

Subsidies on imported petroleum products were initially considered to be an important instrument for keeping fuel prices and the cost of living low and affordable for the poor. Sadly, the cost of these subsidies however has risen dramatically in recent years due to increased volatility in the global oil market among other factors.

Due to inherent flaws in the policy implementation, government became over-burdened with the payment of monetary claims which obviously could have been used in the provision of infrastructure and the creation of an enabling environment for investors and other developmental projects that will have direct impact on the poor who are in the majority. It is estimated that, prior to the current subsidy removal / deregulation policy announcement, the country spent 15.4 billion naira monthly on subsidy.

Subsidy removal will free up revenue for the various tiers of government to invest in the development of critical infrastructure in education, health, transportation and agriculture for the benefits of the ordinary Nigerian. Subsidy removal will also help to correct the distortions it created in the market, such as smuggling and product arbitrage.

A deregulated market structure where market forces drives demand and supply is what the petroleum industry needs most. But there has to be a proper implementation framework to formalize the arrangement. Recall that the government declared the removal of subsidy in 2015 but reverted to it under the pretext of what it called ”under-recovery”, which made NNPC the sole importer of petrol.

Subsidy removal will attract more investments to the country as corporate organisations and multinational oil firms, who hitherto were reluctant to invest in refineries and other needed critical projects will be drawn to the “will be” friendly business environment it creates.

Some people, however, believe that unless the challenges bedeviling the downstream sector are surmounted, the removal of oil subsidy would most likely compound the problem of the masses. They believe that if the inherent infrastructural challenges of the downstream (insufficient refineries, dysfunctional state of existing refineries, inadequate pipelines and lack of good road network, among others), are not addressed that we are headed for a relapse to fuel scarcity and scarcity of foreign exchange as a result of low oil price at the international market.

Industry experts alongside civil society advocates have made recommendations of discrete strategic economic reform models that they believe will provide guidance to the proposed government reform initiatives in the oil and gas industry. Popular opinion aligns more with the enactment of legislation that will expunge the provisions of section 6 (1) of the Petroleum Act and in its place enshrine a price modulation framework, with the responsibility of its operation vested in the regulator and not the minister.

The oil and gas policy regulation as embodied in the Petroleum Act contains an inherent fault that situates Nigeria into economically disadvantaged position irrespective of the tide of the price of crude in the global market. The current oil and gas policy does not allow Nigeria to benefit optimally from increase in crude price. Both increase and decrease in crude oil price constitutes a revenue loss to the economy.

While other oil producing nations experience a windfall when global crude oil price goes up, Nigeria spends her own profit largely on offsetting the under-recovery deficit because of the subsidy regime.

Over the years, the government has introduced one regulation after another.

These include the Petroleum Products (Uniform Prices) Order of 1973, Petroleum Equalization Fund (Management) Board Decree of 1975 (Amendment 1989), and the Petroleum Amendment Order of 1996-98.

These laws effectively took the downstream sector from an initial deregulated to an over-regulated industry that is characterised by inadequate supply and distribution of petroleum products, monopoly, under- cost recovery, inefficiency, corruption, among others, leading to a near crippling of the sector and the whole economy.

Deregulation only works within a stable legal framework that encourages competition. The announcement by Kyari on the subsidy removal was made without an accompanying price modulation template / implementation framework. He was silent on what would be the new role of Petroleum Equalization Fund (PEF) which provides a kind of subsidy

The current move suggests that the government is heading towards liberalisation which eventually could lead to full deregulation. But it is difficult to make a categorical statement that will define the position of government as there is no confirmation on the policy direction towards the deregulation of the downstream sector.

If the bridging claims stop, as a consequence of the removal of subsidy, how can consumers in the hinterland meet their petroleum product requirements as most of our roads are in a very bad condition and there no arrangement in place for efficient use of the pipelines?

The key objectives of deregulation is essentially to ensure product availability nationally and at reasonable prices, also to provide margins that are fair to all stakeholders in a manner that will allow for maintenance of assets and reinvestment; and make room for competition which will give the consumer option in both pricing and product quality.

It is saddening to note that there is no updated legislation to regulate and monitor the operational activities of the Nigerian oil and gas sector in other to optimally harness its enormous potentials. The institutionalization of the much-desired holistic reform in the petroleum industry is the main objective of the Petroleum Industry Bill (PIB).

The PIB has been debated for years in the National Assembly. Its passage will open up the hydrocarbon industry to domestic consumption, stimulate indigenous participation and spur competitive growth and sustainable development in line with the best practices.

The current global crash in the prices of crude oil represents a perfect opportunity to actualize the necessary reforms in the oil and gas industry. We must not waste it.

[Sir Onah (KSC), Principal Partner at Francona Consulting, wrote from Abuja]

Written by ExpressDay

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