i

DEPARTMENT OF PUBLIC ADMINISTRATION

AND LOCAL GOVERNMENT STUDIES

Ugwoke Oluchi C.

A CRITICAL ASSESSEMENT OF THE NIGERIAN NATIONAL

PETROLEUM CORPORATION (NNPC) IN THE IMPLEMENTATION

OF THE DEREGULATION POLICY IN NIGERIA (2003-2012).

Digitally Signed by: Content manager’s Name

DN : CN = Webmaster’s name

O = University of Nigeria, Nsukka

OU = Innovation Centre

OKARAH ANTHONY CHIDIEBERE (PG/MSC/2012/64598)

FACULTY OF THE SOCIAL SCIENCES

ii

TITLE PAGE

A CRITICAL ASSESSEMENT OF THE NIGERIAN NATIONAL PETROLEUM

CORPORATION (NNPC) IN THE IMPLEMENTATION OF THE DEREGULATION

POLICY IN NIGERIA (2003-2012).

BY

OKARAH ANTHONY CHIDIEBERE

(PG/MSC/2012/64598)

A RESEARCH THESIS SUBMITTED TO THE DEPARTMENT OF

PUBLIC ADMINISTRATION AND LOCAL GOVERNMENT

STUDIES, FACULTY OF THE SOCIAL SCIENCES, UNIVERSITY

OF NIGERIA, NSUKKA IN PARTIAL FULFILMENT FOR THE

AWARD OF MASTERS OF SCIENCE DEGREE IN PUBLIC

ADMINISTRATION (MSc)

SUPERVISOR: DR. IKEANYIBE, M. O.

MARCH, 2014.

iii

APPROVAL PAGE

This research project has been approved for the Department of Public

Administration and Local Government, University of Nigeria, Nsukka.

BY

-------------------- --------------------

DR. IKEANYIBE, M.O. DR. S.U. AGU.

Project Supervisor Head of Department

----------------- ------------------------

External Examiner PROF. C.O.T UGWU

Dean Faculty of the Social Science

iv

CERTIFICATION

This is to certify that Okarah Anthony Chidiebere , a postgraduate student of

the Department of Public Administration and Local government, University

of Nigeria, Nsukka and whose Registration Number is (PG/MSC/12/64598)

has satisfactorily completed the requirement for the Award of Masters of

Science Degree (MSc) in Public Administration (Public Financial

Administration).

The work embodied in this thesis is original and has not been submitted in

part or full for any degree or certificate in any University or institution of

higher education.

--------------------- ---------------------DR. IKEANYIBE, M.O. DR. AGU, S.U

Project Supervisor Head of Department

------------------------

PROF. UGWU C.O.T

Dean Faculty of the Social Science

v

DEDICATION

This work is dedicated to my parents for many reasons

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ACKNOWLEDGEMENT

This work came to reality by the guidance, material, financial and moral

support of many persons. First of all, my thanks go to my supervisor Dr.

Ikeanyibe, M. O. whose painstaking advice, observation and suggestions

contributed greatly to the quality of this work. I am also grateful for his

ability to correct without criticizing.

I would also want to thank my Head of Department, Dr. (Mrs) Agu S.U.

for her motherly interest and love that helped me in the successful

completion of the work. I pledge my indebtedness to the entire lecturer of

the Department of Public Administration & Local Government, especially

Prof. F.C. Okoli, Prof. (Mrs) Oguonu C. N, Prof. (Mrs) Onah R.C., Dr.

Amujiri, B.A, Dr. Onyishi A.O, Dr. (Mrs) Mabel Obi, and many others

whose scholarly lectures and academic advice enriched my knowledge in no

small measure. Similarly, I am grateful to the entire staff of the UNN library

and also the staff of the corporate headquarters of the Nigerian National

Petroleum Corporation (NNPC).

Above all, my special thanks go to God almighty for His immense

inspiration, guidance, protection, provision, and sound health granted me

and my entire family.

OKARAH, ANTHONY C.

vii

TABLE OF CONTENTS

Title Page …............................................................................................ i Approval Page ……………………………………………………………. ii Certification ……………………………………………………………….iii Dedication ………………………………………………………………….iv Acknowledgement …………………………………………………………v Table of Content ……………………………………………………………vi Abstract …………………………………………………………………...viii

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study ………………………………………………1 1.2 Statement of the Problem ………………………………………………8 1.3 Objective of the Study ………………………………………………….9 1.4 Significance of the Study ……………………………………………...10 1.5 Scope and Limitation of the Study ………………………………….....10

CHAPTER TWO: LITERATURE REVIEW AND METHODOLOGY

2.1 Literature Review ……………………………………………………...11 2.1.1 Concept of Deregulation…………………………………………….11 2.1.2 NNPC and the Business Arrangement in the Petroleum Industry….15 2.1.3 State of the Down Stream Sector in the Partial Deregulation Era….22 2.2 Hypotheses …………………………………………………………….26 2.3 Operationalization of Key Concepts…………………………………..27 2.4 Theoretical Framework ……………………………………………….28 2.5 Research Design………………………………………………………30 2.5.1 Population of the Study……………………………………………31 2.5.2 Sample Size and Sampling Procedure………………………………31 2.5.3 Sources and Method of Data Collection……………………………33 2.5.4 Validity of Instrument………………………………………………34 2.5.5 Reliability of Instrument…………………………………………….34 2.5.6 Method of Data Presentation and Analysis………………………..35 CHAPTER THREE: BACKGROUND INFORMATION ON THE

STUDY 3.1Brief Historical Background of the NNPC……………………………37 3.2 NNPC and the Deregulation Policy……………………………………39

viii

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA

4.1 Data Presentation and Analysis………………………………………48 4.2 Test of Hypothesis ……………………………………………………56 4.3 Discussion of Findings ………………………………………………60 CHAPTER FIVE: SUMMARY, RECOMMENDATION, AND

CONCLUSION

5.1 Summary ……………………………………………………………..64 5.2 Recommendation …………………………………………………….66 5.3 Conclusion ……………………………………………………………67 Bibliography…………………………………………………………….69 Appendices

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ABSTRACT

This study critically assesses the Nigerian National Petroleum Corporation (NNPC) in the implementation of the deregulation policy in Nigeria (2003-2012). Because the study was historical in nature and approach, we relied more on data collected from secondary sources. From the data gathered, the study found out that NNPC major challenge in the implementation of the deregulation policy has been the inability to attain a stable price for petroleum products which had led to products unavailability and increase in price of petroleum products. Also, there is a significant relationship between deregulation, product availability and reduction in price of petroleum products. Lastly, it was discovered that thorough monitoring of independent marketers activities in the downstream would help improve the outcome of the deregulation policy in Nigeria. The study recommended among others that:

(1) For Nigeria to realize its potential and reap the benefits of the deregulation policy there is the need to tailor the formulation and implementation of reforms in manner that will take cognizance of the socio economic challenges facing Nigerians.

(2) The Government should create an enabling environment to engender private investors’ for the purpose of improving the local refining capacity to meet the ever increasing local demand of petroleum products and indeed for exportation purpose.

(3) Corrupt elements and practices in the downstream sector should be quickly identified and punished without fear of favor, so that the huge leakages currently associated with the subsidy scheme could be curbed.

(4) Finally, the full deregulation of the downstream sector should proceed with the passage of the Petroleum Industry Bill (PIB) which will help revise, update and consolidate existing petroleum sector related legislations in Nigeria.

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1

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Nigeria is blessed with vast quantities of oil and is the sixth largest oil

exporter among OPEC members. Crude oil has generated billions of dollars

in revenues over the last forty years since it was found in Nigeria, (Ibanga,

2011). According to the figure attributed to the Energy Commission of

Nigeria (2007), Nigeria’s crude oil reserve stands at over 66 billion barrels.

Crude-oil production and export commenced in Nigeria in 1958. According

to the Federal Office of Statistics, oil accounted for 13.5 per cent of the

nation’s export earnings and by 1970, it had become the leading source of

foreign exchange, accounting for 63.9 percent. By 1979, petroleum sales had

completely overshadowed non-oil exports, as it then contributed about 95

per cent of the country's export earnings. As of 2011, oil and gas exports

accounted for more than 98% of export earnings, 76 percent of all

government revenues and about one-third of the country’s GDP (CBN,

2012).

So strategic is the petroleum sector to the Nigerian economy that crucial

aspects of this sector such as exploration, production, gas utilization,

conservation, and petroleum policy and legislation are sensitive economic

2

and management issues. It is estimated that demand and consumption of

petroleum in Nigeria grows at a rate of 12.8% annually (CBN, 2012).

However, petroleum products are unavailable to most Nigerians and are

quite costly, because almost all of the oil extracted by the multinational oil

companies is refined overseas, with only a limited quantity supplied to

Nigerians themselves. The cost of importing petroleum products has

increased so rapidly in recent years that it is threatening the country’s

balance of payment and capital expenditures (CBN, 2012).

The federal government through the Nigerian National Petroleum

Corporation (NNPC) had been spending lots of money daily subsidizing

imports of petroleum products. The NNPC buys at the prevailing

international price, since its refineries are producing less than 30% of their

installed capacity. Hence, Nigeria exports and uses the proceeds to import

refined fuel for local consumption.

The Nigerian National Petroleum Corporation (NNPC) was established in

April 1977 by the Federal Government of Nigeria as a successor

organization to the Nigerian National Oil Company (NNOC). The NNPC

has the mandate to manage the operational aspects of the oil industry in

Nigeria, while the regulatory functions reside with the Federal Government.

In addition to its exploration activities, NNPC developed operational interest

3

in refinery, petrochemicals and product transportation as well as marketing.

Thus, between 1978 and 1989, NNPC constructed petroleum and

petrochemical refineries in Warri, Kaduna, and Port-Harcourt (NNPC,

2007).

In the last two decades, the Nigerian National Petroleum Corporation

(NNPC), one of the largest federally owned corporations in Nigeria, has

emerged from one of the far-reaching organizational changes in its thirty-

year history. In 1978, the corporation was decentralized into twelve strategic

business subsidiaries and units covering the entire spectrum of the

corporation’s operation. This has entailed making the corporation

responsible for the commercial aspects of oil and gas activity. Also, as part

of efforts to put NNPC on a more commercial footing, the Federal

government in March 1988 introduced a new structure for the corporation.

The aim, as stated by the Federal government was to see the NNPC as a

“financially autonomous” and “commercially integrated” company.

Accordingly, in 1978 three new areas of responsibility were initiated for

the Corporation: Corporate Services, Operations and Petroleum Investment

(NNPC 2007). In 1989, two additional Subsidiary Business Units (SBUs)

were established: the Integrated Data Services Company (IDS), and Eleme

Petrochemicals Company which was established and commissioned “to

4

provide the basis for the expansion of a petrochemicals and plastics

industry” (International Directory of Company History, 2005:3 Vol. 172).

Also, between 1978 and 1989, the NNPC constructed refineries in Warri,

Kaduna and Port-Harcourt (NNPC, 2007). The activities and operations of

the refineries fall under what is referred to as Downstream Operations of the

NNPC, which cover oil/gas conversion into refined and petrochemical

products. As an autonomous Federal Government-owned corporation,

NNPC is regulated by the Department of Petroleum Resources (DPR) - a

Department within the Ministry of Petroleum Resources (NNPC, 2007).

Over the years, the operations and activities of the NNPC have centered on

coping with challenges of dealing with developments in the oil industry,

particularly with regards to its products. The concern has been how to make

its products compete favourably in the world market, both in terms of

pricing and quality. As a result, the business units and subsidiaries of the

State Owned Oil firm have been reorganized and unbundled into companies

with NNPC as a holding company.

The campaign for the deregulation of the oil sector got a serious

consideration in 2001 as the likely way to solving the scarcity problem of

petroleum products. The former Minister for Information and

Communication Professor Jerry Gana in early 2001, at a press briefing,

5

disclosed government’s intention to deregulate the oil industry hinging the

stance on distortion, which the smuggling syndicates exploit to cause

scarcity. In same vein, the Former Group Managing Director of NNPC, Mr.

Jackson Gaius Obaseki accused the petroleum marketers of creating artificial

scarcity via diversion, hoarding and smuggling of products to neighboring

countries. Professor Jerry Gana concluded the session by stating that the

government considered all shades of opinion, before deciding that

deregulation is the answer to the problem confronting the oil sector (Ibah

and Oladipo, 2001)

The NNPC have however come under fire by the Farouk Lawan led House

of Representatives’ Ad-Hoc committee on fuel subsidy probe of the sector in

2012. The NNPC was indicted to have promoted corruption and smuggling

that have made major independent marketers of petroleum products make

excess profit at the expense of the country and her citizens making the

payment on fuel subsidy unbearable for the government to sustain.

Full deregulation is viewed as a panacea and this is what has given rise

to the recent town hall meetings between the government and the organized

labour on the complete removal of fuel subsidy and deregulation of the

downstream sector of the oil industry. According to Ayodele (1994),

deregulation is one essential aspect of price and market reforms which entail

6

both unshackling private sector development through removal of

government restrictions on private economic activity and divestiture of the

state assets particularly Public Enterprises (PEs) into private hands. The

main objectives of deregulation include: introducing a market economy,

increasing economic efficiency, establishing democracy and guaranteeing

political freedom as well as increasing government revenue (Dhaji and

Milanovic, 1991). Kupolokun (2004) the former Group Managing Director

of NNPC noted that the intended goals are to:

• Dismantle the natural monopoly of the state owned enterprise by

privatizing and deregulating price controls.

• Create competition in the downstream sector by encouraging more

companies to get involved and eventually supplying the market at

competitive pricing levels.

• Reduce the cost government spends on subsidizing the sector which runs as

high as $1.5 billion annually, which can consequently be used to handle

socio- economic and welfare needs of the Nigerian people.

• Boost Foreign Direct Investment to the Nigerian economy.

• Reduce transportation costs of products and people.

The government made the first move at full deregulation of the down

stream sector in 2003. Partial deregulation has however been in place some

7

years before 2003. In order to speed up the full deregulation policy, the

Federal Government inaugurated a Special Task Force with responsibility to

produce a harmonized version of the Bill, which would be presented to the

legislature for passage. The Petroleum Industry Bill is a 223-page

legislation, which seeks to revise, update and consolidate existing petroleum

sector related legislations in Nigeria. According to Reginald Stanley (2009)

managing director of PPMC, the objectives of the Bill are stated to include:

(a) Creating a conducive business environment for petroleum operations;

(b) Enhancing exploration and exploitation of petroleum resources for the

benefit of Nigerians;

(c) Optimizing domestic gas supplies particularly for power generation and

industrial development;

(d) Establishing a progressive fiscal framework that encourages further

investment in the petroleum industry while optimizing revenues accruing to

the government;

(e) Establishing commercially oriented and profit driven oil and gas entities;

(f) Deregulating and liberalizing the downstream petroleum sector;

(g) Creating efficient and effective regulatory agencies;

(h) Promoting openness and transparency in the industry; and

(I) Encouraging the development of Nigerian content

8

As expected, public opinion about deregulation in Nigeria covers a

wide spectrum, and cuts across all sides of the argument. The Save Nigeria

Group (SNG), a civil society organization during the protest on the removal

of fuel subsidy in Lagos, believes that the Nigerian petroleum industry

should not be liberalized, or deregulated, or privatized completely, and that

the status quo should remain, maybe, with some minor fine-tuning made to

improve efficiency, in the overall national interest. The Nigerian Labour

Congress (NLC) holds the view that deregulation of the petroleum industry

in Nigeria should be implemented in phases, so as to enable the state-owned

monopolies to regain efficiency, before their full privatization. However, the

Government insists that complete deregulation, including the total, and final

dismantling, unbundling, and subsequent wholesale privatization of all state-

owned petroleum businesses, should proceed without further delay, with

maximum dispatch, for the continued, and meaningful survival of the

Nigerian petroleum industry in the 21st century, (Braide, 2003).

1.2 Statement of the Problem

The deregulation policy suffers mostly from the wide resentment from

majority of Nigerians, especially as it bothers on the removal of fuel

subsidy, one of the requirements of the deregulation policy. The removal of

fuel subsidy results in the hike in the price of petroleum products, and with

9

its attendant economic implications on the standard of living of Nigerians.

The legislative probe of the oil sector revealed that over N1.7 trillion subsidy

funds was looted by fuel marketers and government agencies and this has

come as a shock to Nigerians who feel sorely cheated. While the

Government was giving excuses that it could no longer fund subsidies on the

price of petroleum products and that deregulation of the downstream sector

is premised on the expectation that it will improve the efficient use of scarce

economic resources by subjecting decisions in the sector to the operations of

the forces of demand and supply and wanted to use the subsidy money for

other developmental project in the country, insisting on full deregulation of

the downstream sector of the oil industry. The subsidy money has actually

been there all along but was mismanaged by some agencies including the

NNPC. Majority of Nigerians are yet to be fully convinced of the role the

deregulation policy will play for the continued and meaningful survival of

the Nigerian petroleum industry in the 21st century.

It is in view of this, the following research questions are hereby posed as

guide to this study.

(1) What are the major challenges facing the NNPC in the implementation of

the deregulation policy?

10

(2) To what extent has the implementation of the deregulation policy

addressed gross inefficiency experienced in the down stream sector of the oil

industry?

(3) What are the steps to be taken to improve the outcome of the

deregulation policy in the down stream sector of the oil industry?

1.3 Objectives of the Study

The study has both broad and specific objectives. Broadly, this study

critically assesses the NNPC in the implementation of the deregulation

policy in Nigeria. Specifically this study has three objectives deriving

from the research questions:

(1) To identify major challenges facing the NNPC in the implementation of

the deregulation policy

(2) To find out the extent the implementation of the deregulation policy

addressed gross inefficiency experienced in the down stream sector of the oil

industry

(3) To determine steps to be taken to improve the outcome of the

deregulation policy in the down stream sector of the oil industry

1.4 Significance of the Study

This study has both theoretical and practical significance. Theoretically,

the study will be of immense importance, as it will help in testing the

11

validity of the findings of previous study in related area. It will also help in

improving the literature base of the area of study. The work will also serve

as sources of secondary data for further research work.

Practically, this study will help in re-emphasizing and fostering cutting

edge solutions in which the challenges encountered in the implementation of

the deregulation policy can be addressed for improved outcome.

1.5 Scope and Limitation of the Study

This research is designed to critically assess NNPC in the

implementation of the deregulation policy in Nigeria. It takes a look at

the deregulation policy from 2003 to 2012 and narrowed down to

concentrate on the deregulation policy in the down stream sector of the

oil industry to make for a realistic study. Subsequently, the researcher

had limited time and difficulty retrieving some of the research

instrument administered to respondents.

CHAPTER TWO LITERATURE REVIEW AND METHODOLOGY

2.1 Literature Review

12

The two variables that are central focus of this study are the Nigerian

National Petroleum Corporation (NNPC) and the deregulation policy. To

conceptualize this review and make it relevant, the views of scholars on the

subject matter were sought. The literature review will cover opinions of

scholars on the concept of deregulation, NNPC and the business

arrangement in the petroleum industry, and the state of the down stream

sector in the partial deregulation era. We shall take these subheadings one

after the other.

2.1.1 The Concept of Deregulation

In a popular parlance, to deregulate means to do away with the

regulations concerning financial markets and trades. Ernest and Young,

(1988) posit that deregulation and privatization are elements of economic

reform programmes charged with the ultimate goal of improving the overall

economy through properly spelt out ways. For example, freeing government

from the bondage of continuous financing of extensive projects which are

best suited for private investment by the sale of public enterprises;

encouraging efficiency and effectiveness in resources utilization; reducing

government borrowing while raising revenue; promoting healthy market

competition in a free market environment; improving returns from

investment and broadening enterprises share ownership thus engendering

13

capital market development (Izibili and Aiya, 2007:228). Put differently,

deregulation in the economic sense means freedom from government control

(innocent & Charles, 2011). According to Akinwumi et al (2005),

deregulation is the removal of government interference in the running of a

system. This means that government rules and regulations governing the

operations of the system are relaxed or held constant in order for the system

to decide its own optimum level through the forces of supply and demand

(Ajayi and Ekundayo, 2008).

Deregulation allows enterprises and services to be restricted as little as

possible. It includes total withdrawal of government controls in the

allocations and the production on goods and services. Deregulation of a

Country’s economy could be conceptualized as divestiture or market

economy. This refers to private participation in a Country’s economic

activities. It is to ensure competitive economic system devoid of monopoly

and allow price mechanism of demand and supply principle of the economy

to prevail. According to Ahmed (1993), deregulation entails giving greater

space to the private sector as the prime mover of the economy, contrary to

emphasis on the dominance of public sector. To achieve this objective,

greater roles are assigned to market factors as against rigid regulation by the

government. It is aimed at stabilizing and restructuring the economy for a

14

durable growth. To Ayodele (1994), deregulation is one essential aspect of

price and market reforms which entails both unshackling private sector

development through removal of government restrictions on private

economic activity and divestiture of the state assets particularly public

Enterprises (PEs) into private hands. The main objectives of deregulation

include: introducing a market economy, increasing economic efficiency,

establishing democracy and guaranteeing political freedom as well as

increasing government revenue (Dhaji and Milanovic, 1991). The goal of the

Nigerian government in adhering to the principles of deregulation is

influenced by the successes of other countries in doing the same. Kupolokun

(2004) the former Group Managing Director of NNPC noted that the

intended goals of the deregulation policy are to:

• Dismantle the natural monopoly of the state owned enterprise by

privatizing and deregulating price controls.

• Create competition in the downstream sector by encouraging more

companies to get involved and eventually supplying the market at

competitive pricing levels.

• Reduce the cost government spends on subsidizing the sector which runs as

high as $1.5 billion annually, which can consequently be used to handle

socio- economic and welfare needs of the Nigerian people.

15

• Boost Foreign Direct Investment to the Nigerian economy.

• Reduce transportation costs of products and people

The concept of deregulation is based on the neoliberal school of

thought. It is based on the doctrine of competition and profit motive founded

on free market pricing and freedom from the interfering hands of state

regulation (Wikipedia, 2011). Deregulation according to this theory could

reap the advantages of the market system and competition, namely;

effectiveness, productivity, and efficient service. Privatization would thus,

strengthen market forces with some degree of deregulation, economic

liberalization, relaxation of wage and price controls (Ugorji, 1995). It is

derived from the international capitalist imposition, especially the World

Bank / IMF, which stipulated economic liberalization/privatization as pre-

conditions for providing development loans to the less developed countries

(LDCs). According to Ugorji (1995), Privatization and deregulation has

become an acceptable paradigm in the political economy of states. In

Nigeria, this theory has not gone unchallenged as its relevance to many Sub-

Sahara African countries. From the view point expressed by Professor

Aluko, the assumption of the inherent efficiency of the private sector should

be questioned. He argued that in Nigeria, much of private sector profits are

not always the result of efficient operation and increased productivity but

16

rather often represent money that private contractors make through inflated

contracts, patronage and corruption. He argues that most of the richest

people in Nigeria’s private sector make their money, for the most part,

through their public sector connections and influence. (Adeyemo, 2005).

Those who have presided over the state have tended to personalize power

and privatization of collective national resources, while being excessively

reckless in managing the affairs of the nation.

2.1.2 NNPC and the Business Arrangement in the Petroleum Industry

The Nigerian oil and gas sector plays a very dominant role in the

nation’s economy with over 98% of the nation’s foreign exchange earnings

drawn from the sale of crude oil (Atakpu, 2007). Nigeria has about 36 billion

barrels of crude oil reserve and 19.2 billion cubic meters of natural gas. It is

estimated that the country has realized about 600 billion US dollars since

1956 - when it first discovered oil in commercial quantity in Oloibiri,

present day Bayelsa state- from oil and gas (Atakpu, 2007). Besides the

large crude oil and natural gas deposits, there are also deposits of gold, tin,

talc, gemstones, kaolin, bitumen, iron ore and barites that can be harnessed

to earn foreign exchange for the country, yet, oil and gas remains the

country’s major source of foreign exchange earnings and revenue base

(Adebola, 2006).

17

Indeed, over the years, oil has become the main stay of the Nigerian

economy as the earnings from crude oil are used for infrastructural

developments and other improvements on the socio-economic well being of

Nigerians (Augusto, 2002). The Nigerian government earns income from oil

through the sale of crude oil and gas; Petroleum Profit Tax (PPT), royalties

and rent from industry operators.

Three major business arrangements are operated in the industry via;

1. Joint Ventures (JV), also called Joint Operating Agreements (JOA),

between the Federal government and multinational operators, such as Shell,

Agip, Chevron and Elf.

2. Production Sharing Contract (PSC), or arrangements between the

government and operators, where NNPC acts as concessionaire, usually in

the deep offshore operations where the operator funds exploration,

development and production activities and revenues are shared between both

parties.

3. Service Contract (SC) i.e. where Oil Prospecting License (OPL) title is

held by the NNPC while the operator designated as the service contractor

provides all the funds required for exploration and production works. In the

event of a commercial find, the contractor recoups his cost in line with the

procedures stipulated in the contract. The difference with the PSC is that

18

while the SC covers only one OPL, the PSC may span more than two or

more OPLs at a time. The SC covers a fixed period of five years and if the

efforts do not result in commercial discovery, the contract automatically

terminates. (Augusto, 2004). Ariweriokuma (2009), broadly divided the

sector into two, being the upstream and downstream oil and gas activities.

Upstream oil and gas activities involve operations in the areas of Exploration

and Production (E & P) of oil, as well as services that lead to these E & P

activities. (Nwosu, 2007). The Nigerian government is a major investor in

the production activities of the upstream sector. Her activities are

coordinated mainly by the NNPC, which has shares in the major upstream

activities. The downstream oil and gas activities involve refining the

products from crude oil, and distribution until it reaches the final consumer.

There are also three main functional areas within the downstream sector -

refining, distribution and marketing of petroleum products. The downstream

sector is of strategic importance to the nation, as petroleum products

constitute a key source of energy used for various purposes (Obasi, 2003).

However, despite being a major oil producing country for decades, and

accruing huge revenues from oil, Nigeria is ranked as one of the poorest

countries in the world. Also, the lack of equitable distribution of the oil

wealth and environmental degradation resulting from exploration activities

19

have been identified as key factors aggravating actions from environmental

rights groups, inter-ethnic conflicts, and civil disturbances from ethnic

militias such as the Movement for the Emancipation of the Niger Delta

(MEND) and Niger Delta Vigilante Force (NDVF) (NDDC Report). Warner

(2007) noted that the Nigeria case is similar to a number of oil rich countries

where their governments have failed to translate their oil wealth into

economic sustainability and higher standards of living, stressing that

literature abounds on these issues of ‘resource curse’ and ‘Dutch disease.’

Apart from these oil wealth failures, there was also the problem of capital

flight from the county via monies used in servicing the industry, which was

attributed to low local content. Many therefore called for an urgent

deregulation and liberalization of the downstream sector, to enable

indigenous entrepreneurs with experience in the oil and gas sector, to come

in and fill the gap that is evident. Wunmi (2007), reinforced this point when

he called for a pragmatic petroleum development policy framework, with

serious emphasis on managing revenue flows and expectations, creating

linkages with non-petroleum sectors, expanding local capacity and

infrastructure development, human capacity building and development, and

advancing technical progress and entrepreneurship and managerial skills.

President Obasanjo had the above pragmatic policy objectives and

20

instruments in mind when he inaugurated the first Oil and Gas Sector

Reform Implementation Committee (OGIC) in year 2000. The essence of the

National Oil and Gas Policy (NOGP) that emerged from the OGIC efforts

was anchored on the need to separate the commercial institutions in the oil

and gas sector from the regulatory and policy-making institutions.

Unfortunately, Obasanjo’s administration did not completely put into

operation the recommended OGIC policy instruments, to facilitate oil and

gas sector institutional restructuring. In 2007 however, the government of

President Umaru Yar’Adua appointed Dr. Riwlanu Lukman to chair a

reconstituted OGIC, with a mandate to transform the broad provisions in the

NOGP into functional institutional structures that are legal and practical for

the effective management of the oil and gas sector. The mandate basically

called for a restructuring of the petroleum industry in Nigeria that can

facilitate the propelling of the national economy to a GDP level comparable

to the top 20 largest worldwide economies by 2020. This led to the

petroleum industry bill, which is currently before the federal legislature.

(Reginald, 2009) Furthermore, the Goodluck Jonathan administration has

called for the deregulation of the downstream sector, which is being

vehemently opposed by the civil society. Government argument on

deregulation of the downstream oil sector is premised on the expectation that

21

it will improve the efficient use of scarce economic resources by subjecting

decisions in the sector to the operations of the forces of demand and supply.

Appropriate pricing of petroleum products is one of the major factors that

will attract private investment into the Nigerian downstream petroleum

sector, thereby increasing competition, promoting overall higher

productivity and, consequently, lowering prices over time. Independent oil

marketers would be free to set their prices. This would lead to further

reduction in prices for refined oil product until an appropriate market price is

attained. Continued subsidization by the government will not help achieve

such appropriate pricing. Deregulation through subsidy removal will lead to

adjustments that will push prices towards its market-determined level.

Appropriate pricing achieved through this policy will make activities in

the sector more profitable and attractive to private domestic and foreign

investors. The ultimate effect of this chain of activities is increased gains for

the citizens, who would be getting the most out of their natural resources.

For example, following government’s deregulation in the

telecommunication, there has been a reduction in call tariffs. Similar

successes have also been recorded in the banking sector with the emergence

of stronger banks with unprecedented spread to several other African

countries. (Richard, 2012).

22

Furthermore, government expects deregulation to reduce economic

waste and lighten social burdens caused by government control. For several

years, Nigeria experienced scarcity of petroleum products that crippled

national economic activities and increased the cost of doing business, several

times over. The resulting scarcity inevitably led to a flooding of the market

with adulterated products, which caused damages to vehicles and machines.

In many parts of the rural areas, some were forced to buy petroleum

products at 300% higher than their original price (Richard, 2012).

Deregulation of the downstream oil sector, remain the path forward in

expanding opportunities for economic growth and a competitive downstream

sector. If regulation is limited to oversight and supervisory functions, aimed

at guaranteeing quality of products and preventing consumer exploitation,

then the process of deregulation could help achieve greater cost-

effectiveness. Richard (2012) further asserted that research and analysis

show that even if all the country’s refineries were to operate at full capacity,

there would still be a petrol supply gap of 15 million litres per day.

Therefore, importation will remain inevitable until additional refining

capacities are built through the on-going Greenfield Refinery Project.

Discussions are currently under way with prospective investors who are

willing to provide Foreign Direct Investment (FDI) to build additional

23

refineries in the country to ensure domestic self-sufficiency and the export of

refined petroleum products within the next few years. The Petroleum

Industry Bill (PIB) contains special fiscal incentives in place to encourage

the establishment of new refineries around the country. A viable local

refining sector will, in the long term, bring down the pump price of

petroleum products below the current import parity level.

The downstream sector of the oil and gas is currently partially

deregulated, making it difficult for prices of petroleum products to be market

determined. The sector was regulated, with government maintaining a

monopoly of supply of petroleum products and it’s dominated by few oil

majors. The dominance of these firms in the market has made the Petroleum

Marketing Industry in Nigeria an oligopolistic one. It could therefore be

described as the survival of the fittest. Due to the market structure, the

leading marketers dictate the trends in the market while the fringe

independent marketers struggle to match up with the competition (Mars,

2009). However, in line with the nation’s economic reform agenda, that was

launched in the 1980s but effected gradually till date, policy makers have

embarked on a regime of full deregulation of the sector, which was intended

to remove price control mechanisms that have undermined the growth of the

sub- sector in previous years, allowing private stakeholders to complement

24

the government efforts in developing the industry. (Aigbedion and Iyayi,

2007).

2.1.3 State of the Down Stream Sector in the Partial Deregulation Era

(a) State of the Refineries: According to Ibiyemi (2004), the downstream

oil sub-sector has been constrained by the unenviable state of the nation’s

refineries, which have being producing at minimal capacities in the past

years, despite huge expenses incurred on Turnaround-maintenance (TAM).

Poor maintenance of Nigeria three refineries located in Warri, Port Harcourt

and Kaduna with a combined installed capacity of 445,000 bpd, led to a

drastic fall in production level to 15 % of the total installed capacity. The

sudden closure of the Kaduna and Warri refineries, during this period, so as

to allow for TAM, contributed to the decrease in production of refined

products. The development led to massive importation of petroleum

products to fill demand gaps that exist in domestic consumption. According

to Maram (2012), Nigeria, Africa’s top oil producer, relies on imports to

meet about 70 percent of its domestic fuel needs, due to lack of refining

capacity. However, the huge cost associated with importation of petroleum

products was a major reason for government emergent reform and the hike

in prices of petroleum products over the years. In addition, government has

signified its intention to relinquish its holding in the nation’s refineries and

25

make its percentage holding available to the private investors. This is

expected to complement its efforts toward complete deregulation of

Nigeria’s oil industry.

(b) Product Availability: In 2003, the NNPC announced a program of

deregulation for the sector, which was aimed at stimulating adequate supply

of petroleum products, fostering appropriate pricing mechanisms and

eliminating sharp practices in the industry. The policy framework

discontinued government monopoly on the importation of petroleum

products, thereby opening the investment field for private investors and

stakeholders in the industry to source their products. However, this policy

allowed independent marketers to determine prices of petroleum products in

line with their cost of supplies. This development generated a deep concern,

particularly in the ranks of organized labor, which saw the policy shift as

capitulation of government to the demands of oil marketers against the

interest of consumers.

According to Kolawole (2012), despite the nation’s huge endowment of

crude oil and gas and the extensive infrastructures available in the sector for

distribution and marketing of petroleum products, the downstream sector has

been hit by increase instability, hallmarked by a dearth of product to supply.

During this period, sharp practices thrived in the industry with independent

26

marketers arbitrarily hiking prices beyond approved rates. Product

adulteration, diversion/smuggling, bunkering, and other illegal acts were

very common. Indeed, official prices rose sharply from 26 to 65 (naira) per

liter between 2002 and 2011 and to 95(naira) per liter in 2012. The sector is

characterized by supply uncertainty; fueled by the mismanagement of the

nation’s refineries. Furthermore, the House of Assembly probe of the Sub-

sector in 2012 revealed that in 2011, the IPMAN got less than 1% of the fuel

importation contracts, compared to the huge number of its retail outlets and

storage facilities. The association called on the Federal Government to

remove the briefcase contractors from the system and ensure that regulatory

agencies did not provide a platform that encouraged cutting of corners. This

indicated that the fuel distribution system in the nation was defective,

resulting into perennial scarcity of the products.

(c) Fraud and Smuggling: Apart from the Indigenous Ship Owners

Association of Nigeria (ISOAN) accusation that NNPC had engaged in

shady deals with foreign ship owners due to the preferences given to foreign

ship owners in the shipment of crude oil over the indigenous owners which

shortchanged Nigeria as she lost as much as N3.7trillion monthly in freight

or shipping costs. A civil society activist, Barrister Femi Falana also opined

that, while the petroleum ministry estimated national fuel consumption of 35

27

million litres a day, the government paid subsidies on 59 million litres daily

in year 2011. NNPC promoted smuggling by importing 59 million litres of

PMS when the local consumption is not more than 35 million litres per day.

He noted that some of the Marketers were overpaid for jobs done.

(d) Revenue Maximization

According to Kolawole (2012), The Nigerian Ports Authority (NPA)

claimed at the legislative probe of the sector in 2012, that it had granted

waivers to the Nigeria National Petroleum Company (NNPC) to the tune of

N1.77 billion and $135.39 million between July 2009 till date on the orders

of the Federal Government, while the corporation was owing NPA about N6

billion. The Nigerian Custom Service also stated it was sidelined in the

subsidy regime, thus, the importers were not charged for imports. These

indicated a gross lost of the needed revenue for developmental purposes.

Conclusively, according to Tosanwumi (2012), despite robust opposition

to government’s full deregulation of the Nigeria downstream sector, the

reform agenda has continued unabated. As a result, the nation’s refineries

are being offered to investor, while a number of private refineries are being

approved to commence business in Nigeria. Moreover, industry analysts

have arrived at a consensus that allowing private investors to own and

operate refineries in Nigeria’s oil industry would revolutionize the sector

28

and erase government monopoly on the refineries. There is also a

widespread agreement that deregulation of the industry, in the long run will

foster price stability and generate a regular supply of petroleum products.

This trend should usher in a new dawn in the downstream sector and

generate growth, prosperity and sustainable development in the nation’s

most strategic industry. However, there is need for the NNPC to become

more transparent and accountable to win the trust of the citizens, on its quest

for full deregulation of the downstream sector. This explanation should

come with enough integrity to win over the 160 million Nigerians. The

citizens should not be seen as bearing the brunt of government’s inability to

curb profiteering by a few bunkering cabals. The deregulation policy must

come with palliative packages, measures and interventions to reduce the

incidence of poverty, resulting from hyper inflation and widespread

sufferings among the vulnerable group in society. The issue of power supply

and other critical infrastructural facilities need to be addressed before any

meaningful deregulation can be effected to engender foreign direct

investment. The government needs to push for greater accountability and

good governance to ensure a more transparent deregulation process that will

respond to market enterprise and tickle down effect. This will evidently

reassure would-be foreign and domestic investors. Hasty deregulation

29

therefore, in a weak environment as that of Nigeria should be avoided, for

more sustainable results.

2.2 Hypotheses

The following hypotheses have been developed to guide this study

(1) NNPC’s inability to attain a stable price for petroleum products led to

product unavailability and increase in the price of petroleum

products.

(2) Ho: there is no significant relationship between deregulation, product

availability, and reduction in price of petroleum products.

Hi: there is a significant relationship between deregulation, product

availability, and reduction in price of petroleum products.

(3) Thorough monitoring of independent marketers activities will

improve the outcome of the deregulation policy.

2.3 Operationalization of Key Concepts

The assignment of empirical, observable, verifiable and measurable

values to a variable transforms that variable into an operational definition.

Hence, according to Kerlinger (1997), an operational definition is a

specification of the activities of a researcher in measuring a variable or

manipulating it. It assigns meaning to a variable by specifying the activities

or operations necessary to measure that variable. An operational definition

30

gives meaning to a variable by spelling out what the investigator must do to

measure it. Moreover, terms, if not properly defined or classified tends to

imply different connotations and misunderstanding to others apart from the

researchers. Hence, conceptual ambiguity is one of the problems researchers

strive to avoid. Therefore, certain key terms that have been used in this work

are herein defined. However, since the exercise is not exhaustive, other

relevant terms used in the work would be clarified in the course of the work

as the need arises.

Monitoring: To constantly watch over for a particular period of time.

Independent Marketers: These are firms in the downstream sector whose

business is to distribute refined petroleum products to reach the final

consumers.

Stable: To maintain a given level or quantity.

2.4 Theoretical Framework

The theoretical framework for this study is the general equilibrium

theory. A French economist, Leon Walras propounded the theory in the

1870s, while the modern concept of general equilibrium was developed

jointly by Arrow, Debreu and Mckenzie in the 1950s. The main tenets of this

theory indicates the relevance of efficient pricing in ensuring optimal

allocation of society’s limited resources for efficient production of the

31

various needs of society and efficient distribution of the commodities and

services among various consumers. Thus, the concept of perfect competition

and free market imply that the general equilibrium theory will tend to yield

an optimal allocation of resources since competitive equilibrium prices

ensures that supply and demand are equal and in the long-run, all firms

which can produce profitably will enter the industry to ensure long-run

stable and sustainable growth (CBN, 1993). It is obvious that such

optimality results cannot be achieved under centralized planning or

command economies, which depend on elaborate control. This is because

such system is hardly able to arrive at a set of efficient prices, which will

ensure that all firms maximize their profits by covering their costs and

earning reasonable margins, while consumers maximize their unity.

In recent times, there has been some ferment in economics about the role

of the state in economic life (Killick, 1989). Traditionally, the state’s

economic role has been defined in terms of a reasonability to correct or

eliminate various market failures which place serious limitations on the

allocative efficiency of the free market and justify the need for government

intervention. Foremost among these are failures of competition, existence of

externalities, incomplete markets, information failures, public/merit goods,

macro economic instability, creative failures, and poverty/inequality.

32

Although development economists no longer assume that, the existence of

market failures constitutes adequate cause for state interventions. This is

because experience, especially in the peculiar circumstances of developing

country, has taught that government has a duty to rectify these failures

through the use of taxation and subsidies to moderate if not remove the

observed distortions arising from the market failures. Even among the

Socialist Economist (Social Democrat), the case of market deregulation is

widely accepted.

At this juncture, applying the theory of general equilibrium to the

deregulation policy, it is axiomatic to posit that the implementation of the

deregulation policy in the downstream sector of the petroleum industry is

driven by the federal government intervention to the dismantling and

unbundling of the natural monopoly of the state owned enterprise (NNPC)

by privatizing and deregulating price controls in order to create competition

in the downstream sector, by encouraging more private companies to get

fully involved and eventually supplying the market at a competitive pricing

levels, as the market will self regulate itself and prices of refined petroleum

products will be sold at the natural market level as competition forces prices

down.

2.5 Research Design

33

Design implies outlining the name of the equipment, sample size and

sampling technique, study design, scope and other materials the researcher

intends using and applying same to successfully execute the practical aspect

of the research.

Odo (1992:43) opined that design serves as a plan showing what the

researcher will carry out in a step by step procedure of carrying out the

entire study. Based on this premise, the methodology adopted by the

researcher was designed in such a way as to collect data that will enable us

critically assess NNPC in the implementation of the deregulation policy.

In the course of collecting data, the questionnaire was designed to meet

the requirement of the research questions. Therefore, the Likert scale point

and other related option peculiar to the items will also be used. The data

collected for the study will be organized into frequency distribution table

and percentages and will be explained concisely. In the test of significance

of relationship we used the chi-square here to test our hypothesis.

2.5.1 Population of Study

The population of the study is basically employees of the NNPC. They

were selected to form members of the population because they constitute the

34

subject matter of the study. NNPC corporate headquarters is made up of the

Group Public Affairs Division and the Group Medical Division, located at

the NNPC Tower, central business districts, Herbert Macaulay way, PMB,

190 Garki, Abuja. It has Zonal offices in Lagos, Kaduna, Warri and Port

Harcourt with subsidiaries across the country. In view of the study, the

NNPC corporate headquarters in Abuja, with a total employee of 15,000

constitutes the population of the study.

2.5.2 Sample Size and Sampling Procedure

Sampling is a process of selecting a number of any portions of a

population for obtaining information for generalization about the whole

population. The researcher adopted a statistical formula initiated by Yamani.

The formula according to Yamani (1964:80) was stated thus;

N

n = 1 +N(e)2

where n = sample size

N = population size

E = Error margin allowed

1 = constant

35

The researcher chooses 5% (0.05) as the error margin, in substituting the

formula, the researcher noted the population size to 15000, and therefore

they translated the formulae thus;

n = 2)05.0(150001

15000

+

n = )0025.0(150001

15000

+

n = 5.371

15000

+

n = 5.38

15000

n = 389.6= 390 Approximately

The simple random sampling technique was used to administer

questionnaires. Similarly, In the course of this study, the researcher

conducted the research in the NNPC corporate headquarters in Abuja, with a

total employee of 15,000 which constitute the population of study; however

390 employees were selected as the sample size. Given the sample size, the

breakdown is as follows:

36

Category of

Employees

No Represented Percentage%

GL(15- 17) 160 41.0

GL(12- 14) 130 33.3

GL(08- 11) 100 25.6

Total 390 100

Source: Field work

A total number of 15,000 NNPC employees at the corporate headquarters

in Abuja make up the population of study, however, a sample size of 390

make up the total number of respondents. The total number of NNPC

employees GL (15-17) who made their contributions is 160 (41.0%)

respondents, which is the highest. While GL (12-14) constituted 130

(33.3%) respondents and GL (08-11) constituted 100 (25.6%) respondents.

2.5.3 Sources and Method of Data Collection

Method constitutes an aspect of methodology, which deals with

principles and details of procedures used in a given science. The data used in

this study were collected from primary and secondary sources. Under the

primary sources we administered questionnaires to our sample. The

questionnaire was structured to aid the researcher in quantitative analysis of

data. The questionnaire was delivered by hand to enhance its return rate. The

secondary sources of data we used in this study include government

37

document, newspaper, magazines, unpublished research materials, internet

articles, seminar papers, workshop papers and periodicals dealing with the

subject matter.

2.5.4 Validity of Instrument

Any measuring instrument can only possess validity when it actually

measures what it sets out to measure. Validity in this context also seeks to

uncover whether a measuring instrument conforms to the hypothesis or the

research question which guilds the work in other to achieve the objective of

the research. Validity could also refer to the degree to which a research

instrument serves the purpose for which it is constructed.

Based on the above fact, the instrument for data collection used in this

study is the questionnaire which was carefully constructed by the researcher

and was later validated by the project supervisor.

2.5.5 Reliability of Instrument

According to Odo (1992:62), the reliability of an instrument is a

process of obtaining information in the degree to which a measure will yield

similar result for the same subject at different times or under different

conditions on a consistent, dependent, stable, predictable, and accurate way.

38

The reliability of the questionnaire was determined by a test- retest

technique with a random sample piloted on 100 M.sc students in the Faculty

of the social sciences, University of Nigeria, Nsukka not included in the

study. A one month interval was given between the first and second tests to

ensure its reliability overtime.

2.5.6 Method of Data Presentation and Analysis

Taking into cognizance that data for this study were collected from both

quantitative and qualitative methods, we analyzed the data using both

quantitative and qualitative methods of data analysis. In order to ease the

explanation of the linkages between the variables of this study, we sorted

and presented data in frequency tables and simple percentages was also used

to determine each category of response. Qualitative descriptive method was

also used to analyze the data generated from secondary sources. Since the

second question of this study is concerned with test of significance of

relationship we used the chi-square here to test our hypothesis. Hence (Obasi

(1999:33) noted that “hypothesis that has to do with association and

significance of relationship are most suitable to be tested using the Chi-

square”. This can be mathematically represented as follows:

X2 = ∑(Of-Ef)

2

Εf

Where: ∑= Summation

39

Of= Observed Frequency

Ef= Expected Frequency

We stated the hypothesis 2 in null and alternative form; we choose level of

significance at 0.05%; we use the level of significance and degree of

freedom to obtain the critical value; to obtain the degree of freedom, the

formula is (n-1) where n is the number of categories; we also compared the

critical/tabulated value and obtained/ calculated value

Decision rule: If the obtained/ calculated value is less than the critical/

tabulated value, we shall accept the null hypothesis but if the obtained/

calculated valve is greater than the critical/tabulated value we shall reject the

null hypothesis and accept the alternative hypotheses.

40

CHAPTER THREE BACKGROUND INFORMATION TO THE STUDY AREA

3.1 Brief Historical Background of the NNPC

The NNOC was established under the terms of the Government

Decree No 18 of 1971. Its brief was to “participate in all aspects of

petroleum including exploration, production, refining, marketing,

transportation and distribution” (International Directory of Company

Histories, 2005:3Vol. 72). In carrying out this mandate, NNOC acquired a

“33.33 percent stake in the Nigerian Agip Oil Company, and 35 percent in

Satrap-the Nigerian arm of the French company, Elf” (International

Directory of Company Histories, 2005:3 Vol. 72). Further, and as part of

efforts to protect Nigeria interest within the context of this regulatory

framework, NNOC acquired “35 percent stakes in Shell-BP, Gulf and Mobil

on April 1 1973” (International Directory of Company Histories,

2005:3Vol.72). Also, in 1973, NNOC entered into production-sharing

agreement with Ashland Oil. On April 1 1974, “stakes in Elf, Agip/Philips,

Shell-BP, Gulf and Mobil were increased to 55 percent, and on May 1 1975,

the NNOC acquired 55 percent of Texaco’s operations” (International

41

Directory of Company Histories, 2005:3 Vol.72). From the above analysis, it

became clear that the decision to increase the equity holding of the Federal

Government consistently had to do with the intention, not just to reposition

its own oil company within the regulatory framework and the oil industry,

but also to deal with some of the observed lapses in the operations of the oil

multinationals.

This was further expressed by the Federal Government in response to the

1977 Indigenization Decree. The States oil company holdings in the oil

industry increased significantly in July 1979, when its stakes in the

exploration and production activities in the multinational oil companies were

raised by 60 per cent. By 1979, NNPC’s stake in the Shell ventures was also

raised to 80 percent. This was when “BP lost its 20 percent stake, following

disagreement with the Nigerian Government over South Africa”

(International Directory of Company Histories, 2005:3 Vol.72).

Clearly, attempts by the Government of Nigeria to reform its own oil

company rests largely on the desirability to put it on strong par with the

multinationals. Consequently, on April 1 1977, the NNOC was reconstituted

as the Nigerian National Petroleum Company (NNPC). Like the NNOC, the

“NNPC operates and functions as a holding company for the Federal

government. Decree No 33 that created it vested the assets and liabilities of

42

the NNOC in the NNPC,” (International Directory of Company Histories,

2005:4 Vol.72). Thus, by 1979, the NNPC had acquired the majority

interests in the operations of the corporations that engaged in oil business in

Nigeria. A significant development that arose from this has been the creation

and existence of what is referred to as Joint Operating Agreements (JOA),

which regulates the partnership between the NNPC and the major oil

companies (NNPC 2008). In addition, the multinationals have been

operating under what is referred to as Concession System, with NNPC being

the Concessionaire, while the companies are the Operators (NNPC 2008).

The multinational companies also operate in partnership with NNPC under

what is referred to as Production Sharing Contracts (PSCs). The prevailing

government “policy objectives in this regard are to permit the involvement

of private and public interests in the exploration and development of

petroleum resources”(Gas and Industry Regulation in Nigeria, 2000). It also

aimed at “expanding the scope of participation in Nigeria’s oil industry and

diversify the sources of investment and the inflow of funds” (Gas and

Industry Regulations in Nigeria, 2000).

3.2 NNPC and the Deregulation Policy

Deregulation of a Country’s economy could be conceptualized as

privatization, divestiture, and marketization of the economy. In essence no

43

government but private participation in the Country’s economic activities.

This is kin order to ensure competitive economic system devoid of

monopoly and allow price mechanism of demand and supply’s principle of

economy to prevail.

According to Ahmed (1993), Deregulation of an economy entrails

according greater weight to the private sector as the prime mover of the

economy’s opposed to the emphasis on the dominance of public sector. To

achieve this objective, greater role are assigned to market factors as against

the use of pervasive administrative controls. This is aimed at stabilizing and

fundamentally restructuring the economy and places it on a durable and

suitable growth path. As a major solution to the economic crisis experienced

in Nigeria, in 1986 the Structural Adjustment Programme (SAP) was

introduced with the central aim of deregulating the economy. The

government made the first move at full deregulation of the downstream

sector in 2003. Partial deregulation has however been in place some years

before 2003. In order to speed up the full deregulation policy, the Federal

Government inaugurated a Special Task Force with responsibility to produce

a harmonized version of the Bill, which would be presented to the legislature

for passage. The Petroleum Industry Bill when enacted seeks to revise,

update and consolidate existing petroleum sector related legislations in

44

Nigeria. According to Reginald Stanley (2009) managing director of PPMC,

the objectives of the Bill are stated to include:

(a) Creating a conducive business environment for petroleum operations;

(b) Enhancing exploration and exploitation of petroleum resources for the

benefit of Nigerians;

(c) Optimizing domestic gas supplies particularly for power generation and

industrial development;

(d) Establishing a progressive fiscal framework that encourages further

investment in the petroleum industry while optimizing revenues accruing to

the government;

(e) Establishing commercially oriented and profit driven oil and gas entities;

(f) Deregulating and liberalizing the downstream petroleum sector;

(g) Creating efficient and effective regulatory agencies;

(h) Promoting openness and transparency in the industry; and

(I) Encouraging the development of Nigerian content

To Ayodele (1994), Privatization in other words deregulation is one

essential aspect of price and market reforms which entrails both unshackling

private sector development through removal of government restrictions on

private economic activity and divestiture of the state assets particularly State

Owned Enterprises (SOEs) into private hands. The main objectives of

45

deregulation include: introducing a market economy; increasing economic

efficiency; establishing democracy and guaranteeing political freedom and

increasing government revenue (Dhaji and Milanovic, 1991). Kupolokun

(2004) the former Group Managing Director of NNPC noted that the

intended goals of the deregulation policy are to:

• Dismantle the natural monopoly of the state owned enterprise by

privatizing and deregulating price controls.

• Create competition in the downstream sector by encouraging more

companies to get involved and eventually supplying the market at

competitive pricing levels.

• Reduce the cost government spends on subsidizing the sector which runs as

high as $1.5 billion annually, which can consequently be used to handle

socio- economic and welfare needs of the Nigerian people.

• Boost Foreign Direct Investment to the Nigerian economy.

• Reduce transportation costs of products and people.

The deregulation policy is premised on assumption that economics

based on private prosperity are better institutions for preserving individual

freedoms than economies where the productive apparatus is socially owned

(Ijhaiya, 1999). Moreover, for government to be effective, it has to restrict

itself surely to the areas of governance and within that duty provide

46

guidelines for the operation of economic activities which can be performed

better by private individuals. These are the basis under which the

deregulation policy of the downstream sector of the economy is presented in

Nigeria.

As part of the reorganization of the State oil sector, the NNPC had in

succeeding the NNOC subsumed the functions of the petroleum inspectorate

of the Ministry of Petroleum Resources. However, by 1986 when SAP was

introduced, the petroleum inspectorate responsible for the regulation and

policy formulation for the oil industry was detached from the NNPC, and

reorganized as the Department of Petroleum Resources (DPR) (NNPC

2008). Consequently, the NNPC remains solely concerned with commercial

aspects of oil and gas activity through the National Petroleum Investment

Management Services (NAPIMS) (NNPC 2008). The NNPC, through the

NAPIMS supervises and manages government investment in the oil

industry. Thus, as noted by Akinrele (2005:763), “the prevailing policy of

direct state participation has been exemplified by the regulatory instruments

to ensure a measure of control over the operations” in the industry. The

regulatory instrument also aimed at “ensuring physical control of vast

quantities of oil, the acquisition and management of information and know-

how about the industry” (Akinrele 2005, cited in Encyclopaedia of

47

Hydrocarbons 2005:763), through the Integrated Data Services (IDS). To

date, the emergence and operational growth of the NNPC has been to

oversee and implement such policy instruments and mandate from the

Federal Government.

As part of efforts to put the NNPC on a more viable commercial footing,

the Federal Government introduced a new structure for the corporation in

March 1988. The aim, as stated by the Federal Government was to see the

NNPC as “a financially autonomous” and “commercially integrated”

company. Accordingly, three new areas of responsibility were initiated for

the corporation; Corporate Services, Operations and Petroleum Investment

Management. In 1989, two additional Subsidiary Business Unit (SBUs)

were established; Eleme Petro chemicals Company was established and

commissioned in 1989, “to provide the basis for the expansion of a

petrochemicals and plastics industry” in the country (International Directory

of Company Histories, 2005:3Vol.72). Integrated Data Services Company

was also established. Since its inception, the NNPC and its subsidiaries have

undergone “strategic restructuring”, which have kept it abreast of

opportunities in local and international operating environments. Thus,

between 1978 and 1989, the NNPC constructed refineries in Warri, Kaduna

and Port-Harcourt (NNPC 2008). The activities and operations of the

48

refineries fall under what is referred to as Downstream Operations of the

NNPC, which cover crude oil/gas conversion into refined and petrochemical

products. Under the Upstream Operations of NNPC, there is the crude oil

production which is currently managed under the Exploration and

Production Directorate.

However, President Obasanjo had the above pragmatic policy objectives

and instruments in mind when he inaugurated the first Oil and Gas Sector

Reform Implementation Committee (OGIC) in year 2000. The essence of the

National Oil and Gas Policy (NOGP) that emerged from the OGIC efforts

was anchored on the need to separate the commercial institutions in the oil

and gas sector from the regulatory and policy-making institutions.

Unfortunately, Obasanjo’s administration did not completely put into

operation the recommended OGIC policy instruments, to facilitate oil and

gas sector institutional restructuring. In 2007 however, the government of

President Umaru Yar’Adua appointed Dr. Riwlanu Lukman to chair a

reconstituted OGIC, with a mandate to transform the broad provisions in the

NOGP into functional institutional structures that are legal and practical for

the effective management of the oil and gas sector. The mandate basically

called for a restructuring of the petroleum industry in Nigeria that can

facilitate the propelling of the national economy to a GDP level comparable

49

to the top 20 largest worldwide economies by 2020. This led to the

petroleum industry bill, which is currently before the federal legislature. The

Petroleum Industry Bill is a 223-page legislation, which seeks to revise,

update and consolidate existing petroleum sector related legislations in

Nigeria (Reginald, 2009) The Petroleum Industry Bill (PIB) is currently

before the National Assembly. When passed it seeks to provide a “new legal

framework for the organization and operation of the entire oil industry in

Nigeria” (Minister of Petroleum Resources, July 2009). In this regard, there

will be “clear rules, procedures and institutions for the administration of the

petroleum industry in Nigeria” (Minister of Petroleum Resources, July

2009).

In the new regime, there will be a redefined role and character for the

NNPC. While it will still be owned solely by the government, it is expected

to be more self-financing. Under the new framework, NNPC will be

renamed National Oil Company (NOC). By this arrangement, the NOC will

pay to the Federal government the same royalties and taxes, as any other

company (Minister of Petroleum Resources, July 2009). The Bill also seeks

to create a new joint venture structure called Incorporated Joint Venture

(IJV). By this arrangement, the NOC and the foreign oil companies will join

into a single company of which they will be shareholders for the

50

development of the upstream sector. According to the Minister, this is to

remove the bottlenecks currently being experienced by NNPC in securing

funds for joint ventures operations. The new incorporated joint ventures will

pay for new projects from their cash flow and through borrowing (Minister

of Petroleum Resources, July 2009). As noted in the Minister’s speech, for

sound petroleum industry to exist in Nigeria, the administration must be

streamlined and strengthened. Under the new regulatory regime the oil

companies, including the NOC that will be involved in the upstream

petroleum industry, will be subject to the same system of rents, royalties and

taxes, depending on whether they operate onshore, shallow or deep offshore

or inland (Minister of Petroleum Resources, 2009). This also implies that all

oil companies will be treated equally regarding the payment of the taxes and

royalties. In this regard, the “PIB will represent the largest overhaul of the

government petroleum revenue system in the last four decades” (Minister of

Petroleum Resources, 2009).

The framework also seeks to make natural gas production an important

resource for Nigeria. In this regard, the Bill will create what is referred to as

“Gas Master Plan, whereby maximum support is hoped to be given to

domestic gas production under the arrangement of what is to be referred to

as “Midstream Agency” (Minister of Petroleum Resources, 2009). As noted

51

in the Minister’s Speech, “new gas processing plants and gas pipelines will

be supported through favorable tax holidays under the Corporate Income

Tax.” The Minister noted further that “all the provisions in the Bill seek to

create a coherent and attractive framework for new and additional

investment.

52

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF DATA

4.1 Data Presentation and Analysis

This chapter sets out to analyze the data collected in the course of the

research work. Questionnaire were administered to the respondent to enable

us have their opinion on the subject matter of the study. A total of 390

questionnaires were distributed. However, 350 questionnaires representing

89.7% were returned while 40 questionnaires representing 10.3% were either

not returned or damaged. SECTION A: BACKGROUND

INFORMATION ON THE RESPONDENTS

Table I: Sex Distribution of Respondents

Sex Frequency Percentage

Male 250 71.4

Female 100 28.6

Total 350 100

Source: field data

The above table shows the gender of the respondents. Out of a total

sample size of 350, 250 respondents representing 71.4% are male while 100

respondents representing 28.6% are females.

53

Table II: Age Distribution of Respondents

Age Frequency Percentage

18-35 140 40

36-45 155 44.3

46-55 40 11.4

56 and above 15 4.3

Total 350 100

Source: field data

The table shows the age distribution of respondents. Out of a total sample of 350, 140 respondents representing 40% of the sample population fall within the age range 18-35, 155 respondents representing 44.3% fall within the age range 36-45, 40 respondents making up 11.4% of the sample fall within 46-55 age bracket, while 15 respondents representing 4.3% of the sample fall within 56 and above age bracket.

Table III: Marital Status of the Respondents

Marital Status Frequency Percentage

Single 98 28

Married 247 70.6

Divorced 5 1.4

Total 350 100

Source: field data

The table above shows the marital status of respondents. Out of a total

of 350 respondents, 98 representing 28% are single, 247 respondents

representing 70.6% are married, while 5 representing 1.4% are divorced.

54

Table IV: Educational Profile of Respondents

Qualification Frequency Percentage

OND/NCE 10 2.9

HND/B.Sc 120 34.3

PGD/M.sc 180 51.4

Ph.D. 40 11.4

Total 350 100

Source: field data

The table shows the educational profile of the respondents.10

respondents representing 2.9% are OND/NCE holders, 120 respondents

representing 34.3% have HND/B.Sc, and 180 respondents representing

51.4% have PGD/M.Sc, while 40 respondents representing 11.4% have

Ph.D.

Table V: Religion Profile of Respondents

Religion Frequency Percentage

Christian 200 57.1

Islam 145 41.4

Others 5 1.4

Total 350 100

Source: field data

The table above shows the religion profile of respondents. Out of a

total of 350 respondents, 200 representing 57.1% are Christian, 145

55

respondents representing 41.4% are Islam, while 5 representing 1.4% are

others.

SECTION B

Study objective 1: To identify major challenges facing the NNPC in the

implementation of the deregulation policy

Table 4.1.1: NNPC inability to attain a stable price for its products has been

a major challenge in the implementation of the deregulation policy

Response Frequency Percentage

Strongly Agree 100 28.6

Agree 180 51.4

Disagree 40 11.4

Strongly Disagree 20 5.7

Undecided 10 2.9

Total 350 100

Source: field work

The table above shows that 80% of the respondents agreed to the fact that NNPC inability to attain a stable price for its products has been a major challenge in the implementation of the deregulation. 17.1% of the respondents did not agree with the aforementioned, while 2.9% were undecided. Since 80% is greater than 17.1%, we therefore conclude that NNPC major challenge is the inability to attain a stable price for its products in the implementation of the deregulation policy.

Table 4.1.2: NNPC inability to attain a stable price for its products led to increase in price of petroleum products

Response Frequency Percentage

Strongly Agree 170 48.6

Agree 150 42.9

56

Strongly Disagree 20 5.7

Disagree 10 2.9

Undecided 0 0

Total 350 100

Source: field work

The table above shows that 91.4% of the respondents agreed to the fact that NNPC inability to attain a stable price for its products led to increase in price of petroleum products, while 8.6% of the respondents did not agree with the aforementioned. Since 91.4% is greater than 8.6%, we therefore conclude that NNPC inability to attain a stable price for its products led to increase in price of petroleum products.

Table 4.1.3: NNPC inability to attain a stable price for its products led to product unavailability

Response Frequency Percentage

Strongly Agree 90 25.7

Agree 160 45.7

Strongly Disagree 80 22.9

Disagree 20 5.7

Undecided 0 0

Total 350 100

Source: field work

The table above shows that 71.4% of the respondents agreed to the fact that NNPC inability to attain a stable price for its products led to products unavailability, while 28.6% of the respondents did not agree with the aforementioned. Since 71.4% is greater than 28.6%, we therefore conclude that NNPC inability to attain a stable price for its products led to product unavailability.

57

Study objective 2: To find out the extent the implementation of the deregulation policy addressed gross inefficiency experienced in the downstream sector of the oil industry.

Table 4.1.4: Perennial scarcity of petroleum products has been addressed by the deregulation policy

Response Frequency Percentage

Strongly Agree 38 10.9 Agree 90 25.7 Strongly Disagree 100 28.6

Disagree 120 34.3 Undecided 2 0.6 Total 350 100 Source: field work

The table above shows that 36.6% of the respondents agree to the fact that perennial scarcity of petroleum products has been addressed by the deregulation policy, 62.9% of the respondents disagree with the aforementioned, while 0.5 were undecided. Since 62.9% is greater than 36.6%, we therefore conclude that perennial scarcity of petroleum products has not been addressed by the deregulation policy.

Table 4.1.5: Deregulation of the downstream sector has engendered reduction in price of petroleum products

Response Frequency Percentage

Strongly Agree 30 8.6

Agree 45 12.9

Strongly Disagree 150 42.9

Disagree 120 34.3

58

Undecided 5 1.4

Total 350 100

Source: field work

The table above shows that 21.4% of the respondents agree to the fact that deregulation of the downstream sector has engendered reduction in price of petroleum products, 77.1% of the respondents disagree with the aforementioned, while 1.4 were undecided. Since 77.1% is greater than 21.4%, we therefore conclude that deregulation of the downstream sector has not engendered reduction in price of petroleum products.

Table 4.1.6: Smuggling of petroleum products in the downstream sector have been addressed by the deregulation policy

Response Frequency Percentage

Strongly Agree 30 8.6

Agree 120 34.3

Strongly Disagree 50 14.3

Disagree 150 42.9

Undecided 0 0

Total 350 100

Source: field work

The table above shows that 42.9% of the respondents agree to the fact that smuggling of petroleum products in the downstream sector have been addressed by the deregulation policy, while 57.1% of the respondents disagree with the aforementioned. Since 57.1% is greater than 42.9%, we therefore conclude that smuggling of petroleum products in the downstream sector have not been addressed by the deregulation policy.

Table 4.1.7: The high cost of turn around maintenance of the nation’s refineries have been addressed by the deregulation policy

Response Frequency Percentage

59

Strongly Agree 50 14.3

Agree 90 25.7

Strongly Disagree 70 20

Disagree 140 40

Undecided 0 0

Total 350 100

Source: field work

The table above shows that 40% of the respondents agree to the fact that the high costs of turn around maintenance of the nation’s refineries have been addressed by the deregulation policy, while 60% of the respondents disagree with the aforementioned. Since 60% is greater than 40%, we therefore conclude that the high costs of turn around maintenance of the nation’s refineries have not been addressed by the deregulation policy.

Study objective 3: To determine steps to be taken to improve the outcome of the deregulation policy in the downstream sector of the oil industry

Table 4.1.8: Stable price of petroleum products would be achieved by provision of more refineries.

Response Frequency Percentage

Strongly Agree 170 48.6

Agree 140 40

Strongly Disagree 35 10

Disagree 5 1.4

Undecided 0 0

Total 350 100

Source: field work

The table above shows that 88.6% of the respondents agree to the fact that stable price of petroleum products would be achieved by provision of

60

more refineries, while 11.4% of the respondents disagree with the aforementioned. Since 88.6% is greater than 11.4%, we therefore conclude that stable price of petroleum products would be achieved by provision of more refineries.

Table 4.1.9: Thorough monitoring of independent marketers activities by NNPC in the downstream sector would improve the outcome of the deregulation policy

Response Frequency Percentage

Strongly Agree 180 51.4

Agree 100 28.6

Strongly Disagree 50 14.3

Disagree 20 5.7

Undecided 0 0

Total 350 100

Source: field work

The table above shows that 80% of respondents agree to the fact that thorough monitoring of independent marketers activities by NNPC in the downstream sector would improve the process of the deregulation policy, while 20% of the respondents disagree with the aforementioned. Since 80% is greater than 20%, we therefore conclude that thorough monitoring of independent marketers activities by NNPC in the downstream sector would improve the outcome of the deregulation policy.

61

4.2 Test of Hypothesis

In testing of hypothesis, three (3) distinct hypotheses were postulated

in chapter two. Having analyzed the data collected, it is important to test our

hypothesis in order to determine whether they are verifiable. However, since

hypothesis two (2) is concerned with test of significance of relationship we

used the chi-square here to test our hypothesis.

HYPOTHESIS 1: NNPC’s inability to attain a stable price for

petroleum products led to product unavailability and increase in the

price of petroleum products.

Table 4.1.1, 4.1.2, 4.1.3 confirm this hypothesis. Table 4.1.1 shows that

NNPC major challenges is the inability to attain a stable price for its

products in the implementation of the deregulation policy. Table 4.1.2 also

shows that the NNPC inability to attain a stable price for its products led to

increase in price of petroleum products. While table 4.1.3 opined that NNPC

inability to attain a stable price for its products led to product unavailability.

In order words, there is a consensus among respondents that NNPC’s

inability to attain a stable price for petroleum products led to product

unavailability and increase in the price of petroleum products in the country.

62

HYPOTHESIS 2: Ho: there is no significant relationship between

deregulation, product availability, and reduction in price of petroleum

products. Hi: there is a significant relationship between deregulation,

product availability, and reduction in price of petroleum products.

The data used for this test of hypothesis is drawn from the responses

shown in table 4.1.4 and 4.1.5 above, the result of analysis for this

hypothesis is shown in table 4.2.1 and 4.2.2 below. For table 4.2.1 a chi-

square value of 135 was obtained and a critical/tabulated value of 9.488 and

for table 4.2.2 a chi-square value of 219.3 was obtained and a

critical/tabulated value of 9.488. The critical/ tabulated value was obtained

at 4 degree of freedom at 0.05% level of significance. This leads to the

rejection of the null hypothesis and the acceptance of the alternative

hypothesis. The outcome of the test therefore revealed that there is a

significant relationship between deregulation, product availability and

reduction in price of petroleum products.

TABLE 4.2.1: CHI-SQUARE VALUE FOR TEST OF HYPOTHESIS 2

RESPONSES

OBSERVED

(O)

EXPECTED

(E)

O –E

(O-E)2

(O-E)2

E

63

STRONGLY

AGREE

38 70 -32 1024 14.6

AGREE

90

70

20

400

5.7

STRONGLY

DISAGREE

100

70

30

900

12.9

DISAGREE

120

70

50

2500

35.7

UNDECIDED

2

70

-68

4624

66.1

TOTAL

350

350

X2 =135

Source: field survey

TABLE 4.2.2: CHI-SQUARE VALUE FOR TEST OF HYPOTHESIS 2

RESPONSES

OBSERVED

(O)

EXPECTED

(E)

O –E

(O-E)2

(O-E)2

E

STRONGLY

AGREE

30

70

-40

1600

22.9

AGREE

45

70

-25

625

8.9

STRONGLY

DISAGREE

150

70

80

6400

91.4

DISAGREE

120

70

50

2500

35.7

64

UNDECIDED

5

70

-65

4225

60.4

TOTAL

350

350

X2 =219.3

Source: field survey

HYPOTHESIS 3: Thorough monitoring of independent marketers

activities will improve the outcome of the deregulation policy

Table 4.1.9 confirms this hypothesis. Table 4.1.9 shows that thorough

monitoring of independent marketers activities by NNPC in the downstream

sector would improve the outcome of the deregulation policy. In order

words, there is a consensus among respondents that thorough monitoring of

independent marketers activities by NNPC in the downstream sector would

improve the outcome of the deregulation policy.

4.3 Discussion of Findings:

Deregulation pre-supposes market forces as the determinant of prices

rather than a decision to fix price by administrative fiat. From the findings of

this study, there is a vivid confirmation that NNPC’s major challenges in the

implementation of the deregulation policy has been the inability to attain a

stable price for petroleum products which had led to product unavailability

and increase in the price of petroleum products as official prices of

65

petroleum products rose sharply from 26 to 65 (naira) per liter between 2002

and 2011 and to 95(naira) per liter in 2012.

Deregulation is seen as the process of freeing federal government of its

concurrent control and involvement in the businesses of refining,

importation and distribution of refined petroleum products in the Nigeria

market. The implementation of the deregulation policy in the downstream

sector of the petroleum industry is evident by the federal government

intervention to the dismantling and unbundling of the natural monopoly of

the state owned enterprise (NNPC) by privatizing and deregulating price

controls in order to create competition in the downstream sector.

Government argument on deregulation of the downstream oil sector is

premised on the expectation that it will improve the efficient use of scarce

economic resources by subjecting decisions in the sector to the operations of

the forces of demand and supply. Appropriate pricing of petroleum products

is one of the major factors that will attract private investment into the

Nigerian downstream petroleum sector, thereby increasing competition,

promoting overall higher productivity and, consequently, lowering prices

over time. Independent oil marketers would be free to set their prices. This

would lead to further reduction in prices for refined oil product until an

appropriate market price is attained. Continued subsidization by the

66

government will not help achieve such appropriate pricing. Deregulation

through subsidy removal will lead to adjustments that will push prices

towards its market-determined level. Appropriate pricing achieved through

this policy will make activities in the sector more profitable and attractive to

private domestic and foreign investors.

The intention of the Federal Government since 1991 was that, the

planned deregulation of the downstream petroleum industry in Nigeria was

to be implemented in phases, so as to enable the state-owned monopolies to

regain efficiency before its full privatization. However, petroleum products

are unavailable to most Nigerians and are quite costly, because almost all of

the oil extracted by the multinational oil companies is refined overseas, with

only a limited quantity supplied to Nigerians themselves. The cost of

importing petroleum products has increased so rapidly in recent years that it

is threatening the country’s balance of payment and capital expenditures

(CBN, 2012).

The federal government through the Nigerian National Petroleum

Corporation (NNPC) had been spending lots of money daily subsidizing

imports of petroleum products. The NNPC buys at the prevailing

international price, since its refineries are producing less than 30% of their

installed capacity. Hence, Nigeria exports and uses the proceeds to import

67

refined fuel for local consumption. It is against this backdrop, the complete

removal of fuel subsidy and deregulation of the downstream sector of the oil

industry is advocated by the government.

The downstream sector of the oil and gas is currently partially

deregulated, making it difficult for prices of petroleum products to be market

determined. The sector was regulated, with government maintaining a

monopoly of supply of petroleum products and it’s dominated by few oil

majors. The dominance of these firms in the market has made the Petroleum

Marketing Industry in Nigeria an oligopolistic one. Due to the market

structure, the leading marketers dictate the trends in the market while the

fringe independent marketers struggle to match up with the competition. The

dominance of these few oil majors in the downstream sector is as a result of

the fact that NNPC lacks the capacity to import enough petroleum products

for the country, couple with the perennial malfunctioning of the refineries,

the government introduced the Petroleum Support Fund (PSF), from which

it draws money to pay the excess expenditure incurred by the marketers for

importing and selling petrol at regulated price and distributing it to every

part of the country. The Farouk Lawan led House of Representatives’ Ad-

Hoc committee on fuel subsidy probe of the sector in 2012, however

68

indicted the NNPC and major oil marketers, who took advantage of the

massive corrupt loopholes in the system.

The major oil marketers engaged in falsifying the dates of bills of lading

to reflect particularly high market prices. By so doing, they overcharged the

Nigerian National Petroleum Corporation (NNPC). According to the report,

over $300 million has been overpaid by NNPC for fuel import. Farouk

Lawan raised further posers: “How could the nation be made to pay for 59

million litres daily when we consume only 35million daily? The balance of

24million litres per day might be the area of sharp practices. By making that

provision, you are encouraging smuggling because we know that this

24millon litres balance would simply be smuggled out of the country since it

has been paid for already and we cannot consume it”. It would be recalled

that in KPMG’s “Interim Review of NNPC” dated 22 November 2010, the

auditor said it had found that NNPC’s subsidy claims and PPPRA’s

verification were based on the volume of petroleum products available for

sale (volume of products imported and actual production from refineries) as

against duly verified volume of products lifted out of the depots (volume of

petroleum products sold) as stipulated in the subsidy guideline. This laid

credence to the fact, that major oil marketers made excess profit at the

69

expense of the country and her citizens making the payment on fuel subsidy

unbearable for the government to sustain.

Also, the Petroleum Marketing Industry in Nigeria is dominated by

cartels who manipulate prices, through artificial supply restriction. These

cartels determine volume of importation and the proportion that should be

released to the market. At times, they only allow a few product holders to

supply the market, while others hoard. Peter Akpatasan President of

NUPENG has stated thus: "Deregulation cannot work in a market dominated

by a cartels. This cartel is so strong that it can continue to manipulate prices

out of the reach of common man. You cannot deregulate when you have no

refineries. There will be serious economic crisis" (Democratic Socialist

Movement, 2009). The sector is characterized by supply uncertainty; fueled

by gross inefficiency and mismanagement of the nation’s refineries.

CHAPTER FIVE

70

SUMMARY RECOMMENDATION AND CONCLUSION

5.1 Summary

From the foregoing, one can rightly state that the Nigerian National

Petroleum Corporation (NNPC) concern over the years have centered on

coping with challenges of dealing with developments in the oil industry,

particularly with regards to its products. The concern has been how to make

its products compete favourably in the world market, both in terms of

pricing and quality. Consequently, NNPC major challenges in the

implementation of the deregulation policy have been the inability to attain a

stable price for petroleum products which had led to product unavailability

and increase in the price of petroleum products.

The downstream sector of the oil and gas is currently partially

deregulated, making it difficult for prices of petroleum products to be market

determined and being dominated by few oil majors. The dominance of these

firms in the market has made the Petroleum Marketing Industry in Nigeria

an oligopolistic one. Due to the market structure, the leading marketers

dictate the trends in the market. The downstream sector is characterized by

supply uncertainty; fueled by gross inefficiency, mismanagement of the

nation’s refineries and inability to improve local refining.

71

5.2 Recommendation

Taking into consideration the whole gamut of the research study, the

following recommendations suffices:

1. For Nigeria to realize its potential and reap the benefits of the

deregulation policy there is the need to tailor the formulation and

implementation of reforms in manner that will take cognizance of the

socio economic challenges facing Nigerians. This would prevent the

wide resentment from majority of Nigerians especially has it involves

the removal of fuel subsidy, one of the requirements of the

deregulation policy.

2. Government should create an enabling environment to engender

private investors’ for the purpose of improving the local refining

capacity to meet the ever increasing local demand of petroleum

products and indeed for exportation purpose. The continued

importation of refined petroleum products whilst exporting crude

petroleum is detrimental to the Nigerian economy and importation

must be viewed as a very short-term measure aimed at ameliorating

the cost of living for Nigerians immediately. However, the past efforts

to sale the refineries have not been very successful because of the age

72

and poor state of the refineries. I, therefore, believe that the federal

government must keep an open mind about the feasibility of selling

these refineries and ensure that the options of Green field or

environmental – friendly refineries are actively promoted alongside

efforts to sale the existing refineries. The availability of open general

licenses will also improve competition and should result in a reduction

in the cost of petroleum products, provided there is sincerity and

transparency in the issue of these licenses.

3. Nigeria’s resources need transparent and accountable management.

Related to the above is the need to use the oil windfall proceeds and

the savings realized by the federal government from the withdrawal of

subsidy channeled towards fixing the refineries, build new ones or

upgrading and developing of infrastructure within the polity, in areas

such as waterways, rail and mass transit system, thus providing

cheaper alternative transportation methods.

4. Corrupt practice and elements in the downstream sector should be

quickly identified and punished without fear of favor, so that the huge

leakages currently associated with the subsidy scheme could be

curbed. Government’s commitment to accountability, corporate

governance and responsibility as core values by all the stakeholders in

73

the sector will go a long way in rebuilding the trust of Nigerians in

deregulation of the oil sector and other subsequent reforms. To attain

this, there is a need for a strong pro-competition and anti-trust law to

be put in place to regulate the industry, instead of nurturing an

oligopoly of government cronies.

5. Finally, the full deregulation of the downstream sector should proceed

with the passage of the Petroleum Industry Bill (PIB) which will help

revise, update and consolidate existing petroleum sector related

legislations in Nigeria.

5.3 Conclusion

While the reform process has made quite some gains yet there remain

many challenges. The most notable of these challenges is the inability of the

Nigerian National Petroleum Corporation (NNPC) to attain a stable price for

petroleum products, which had led to products unavailability and increase in

price of petroleum products. The downstream sector is characterized by

supply uncertainty; fueled by gross inefficiency, mismanagement of the

nation’s refineries despite massive injection of funds and most importantly,

poor thorough monitoring of major oil marketers and the lack of political

will to tame the monster of official and unofficial corruption among other

problems.

74

The current state of the downstream sector is judged as inefficient in

service delivery and ineffective at promoting national developmental

objectives. The rationale for restructuring the oil and gas sector in a

petroleum dependent economy like Nigeria must be to enhance the

sustainability of petroleum wealth and its impact on all sectors of the

economy. This notwithstanding, such reforms or restructuring must not only

focus on enhancing industry effectiveness and efficiency, it must be mindful

of equity issues with respect to wealth distribution among all the sectors of

the national economy.

In Nigeria, the focus of the reform should be for the oil and gas

institutional structures and regulatory framework to maximize the economic

benefits of petroleum resources, for the current and future generations. The

policy should facilitate economic prosperity for an average citizen in

Nigeria. However, the caveat issue to keep in mind is that the petroleum

downstream sector deregulation should produce efficiently, effectively and

equitably, which could result in durable infrastructures and human capital

for sustainable development of the national economy.

75

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C: JOURNALS ARTICLES

Abubakar, A. (2001): How to end fuel shortage by ex-PPMC Boss, edited by Nwora, C; “Guardian” Newspaper, 3/06/01, pp1-2

Adigun, B.A. (1993): Averting oil shortage in Nigeria – The efficiency and adequacy of supply and distribution facilities in Nigeria, Energy policy agenda, pp197 Aigbedion, I.& Iyayi, S. (2007): Diversifying Nigeria’s Petroleum Industry, International Journal of Physical Science, 2, (10), 263-270 Ali, M. S. (2001): Fuel deregulation: a symphony of discord Guardian Features, 20/02/01 Aluko, M.E. (2003): On the fuel price hike and why we are where we are, view point in Lagosforum.com, 2/3/03, pp1-16 Avuru, A. (2004): Ensuring Transparency in Nigerian oil industry, Thisday Perspective, 17/03/04, Pp26 Ayodele, A. S. (1994): Elements of the Structural Adjustment Program: Privatization and Commercialization in The Nigerian Journal Economics and Social Studies, Vol. 36, No. 1. Braide, K.M. (1997) “Guaranteeing Petroleum products self – sufficiency in Nigeria”, Annual Dinner Guest Lecture of the Nigerian Society of Chemical Engineers, held at shell club Port Harcourt held between 17th and 18th November. Braide, K.M. (2004): Modes of Deregulation in the Downstream Sector of the Nigerian Petroleum Industry. University of Port-Harcourt, Rivers State, Nigeria El-Rufai, N.A (2005): Why Nigerian refineries can’t be sold, ed. Othman and Bunter, in Alexander Oil and Gas, vol. 9, no. 6, pp1-9

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Enomoh, G. (2001): Deregulate the entire petroleum sector not just price alone, Guardian Executive brief, 5/3/01, pp46 Ezeagba, C.E. (2005), “Deregulation of Nigerian Economy: Implications for the Downstream Petroleum Industry,” Certified national Accountant, July –September. Dhanji, F. & Milanovic (1991), Privatization in Eastern and Central Europe: Objectives, Constraints and Models of Divestiture, A World Bank Research Working Paper, No. 770 Gaius Obaseki, J.E. (1996), "Potentials for a West African Sub-Regional Gas Market", Napetcor, Fourth Quarter Izibili, M. and Aiya, F. (2007), “Deregulation and Corruption in Nigeria: An Ethical Response”, Kamal – Raj. Journal of Sciences. 14(3): 229 – 234. Kupolukun, F. (2005): NNPC’s silent revolution, Tell Magazine Special Edition, no.8, 21/02/05 Pp1-10 Kupolukun, F. (2007): The Nigerian Oil and Gas Industry: Consolidating the gains. A paper presented at the Nigerian Oil and gas Conference, Abuja, Nigeria. Kupolokun, F. (2006) "Challenges and Future Prospects of Oil and Gas Industry", The Guardian, Lagos, Wednesday, May 31, 2006. Mayoraga Alba, E. (1995) “Deregulation and Reform of Petroleum Markets” Energy Issues Number 6, World Bank Group, Washington D.C (September).NPC, Abuja

Nwosu, G.F. (2004): NDDC and the burden of developing the Niger Delta, the Guardian Forum, Ed. Aderinbibe Y. pp15

Ovaga, O.H. (2010) “Deregulation of Downstream Oil Sector in Nigeria: Its Prospect,” Journal of Social Sciences and Public Policy, Centre for Research and Innovations, December, Vol.2.

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Philips, A.O and Osayinwese, I. (1977): On the 1978 Increases in the Retail Prices of Petroleum Products, The Nigerian Journal of Economics and Social Studies, NES, vol 19(3), Nov. 1997, Pp. 307 –324 Salami, O. and Ayoola, A. K. (2010): The 'War' of Appropriate Pricing of Petroleum Products: The Discourse of Nigeria's Reform Agenda. Linguistik online 42, 2: 4152 Soeze, C. (2005): Deregulation of the downstream sector of the Nigerian economy, Vanguard Newspaper, 15/02/05 Usman, S. (2007): Nigeria: Searching the National Resource Curse, Being a paper presented at the London School of Economics and Political Science, London Oct. 11, 2007. D: NEWSPAPERS

The Sunday Vanguard, (Lagos), June 25, 2006. Tell, (Lagos), May 1, 2000. Tell, (Lagos), August 14, 2000. Tell, (Lagos), April 7, 2003. The Guardian, (Lagos), December 11, 2000. ThisDay, (Lagos), August 4, 2005

E: THESES, DISSERTATIONS AND UNPUBLISHED WORKS

Adubok, A. (2001): An appraisal of deregulation as a strategic policy to end Nigeria’s Fuel Energy Crisis, M.B.A (mgt) project, Imo State University, unpublished, pp 47-55 Osibanjo, O. (1999): Petroleum products distribution and marketing and the scarcity problem M.Sc Thesis in energy and petroleum economics, Delta state university, Unpublished

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F: INTERNET MATERIALS

Aigbedion I. D. Iyayi, S.E. (2007): Diversifying Nigeria’s Petroleum Industry, International Journal of Physical Science, Vol.2(10):263-27 october 2007. www.Academicjournals.orgijps

Akpoghomeh, O.S. and Badejo D. (2005): Petroleum Product Scarcity: A Review of the Supply and Distribution of Petroleum Products in Nigeria. www.onlinelibrary.wiley.com

Braide, K. M. (2008): Modes of Deregulation of the Downstream Sector of the Nigerian Petroleum Industry. www.nigerdeltacongress.com Ibanga, I. (2010): The Economics of Privatizing and Deregulating the Nigerian Downstream Sector, www.florin.com/CSS2/vi/ifiokiibanga Kupolokun, F. (2007): Liberalization: The Experience of the Nigerian Petroleum Sector. http:/www.gasandoil.com/goc/company/cna50438.html Reginal S. (2009): Petroleum Industry Bill (Pib) And The Deregulation Of The DownstreamSector.www.nnpcgroup.com/.../PIBandTheDeregulationOfTheDownstreamS Tosanwunmi O. (2012): Fuel Subsidy Removal or Deregulation: Evolving a Working Policy in Nigeria. http://www.alphaedufoundation.org/ Wunmi. I. (2007): an Appraisal of Oil and Gas Industry Reform and Institutional www.iaee.org/documents/newsletterarticles/408wumi.pdf

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