New Page 1

______________________________________________________________________________________________

FROM THE ARCHIVES: CBN Report on Fuel Shortage & Prices in Nigeria (1998)

Central Bank of Nigeria

Special Economic Review Series

Vol. 1. No. 1: May 1998

_____________________________________________________________________________________________

THE PERSISTENT SHORTAGES OF PETROLEUM

PRODUCTS IN NIGERIA: A RE-APPRAISAL 0F

CAUSES AND POSSIBLE REMEDIES

Government, in an attempt to satisfy the ever expanding demand for petroleum

products in the country, established four refineries, with a combined refining capacity

of 445,000 million barrels of crude oil per day. At full capacity, the refineries will

produce sufficient fuels for the domestic economy and a substantial surplus for export.

However, provisions were made for importation of petroleum products to complement

local production during emergencies. In spite of these efforts, the phenomenon of

petroleum products shortages which began in 1975 has persisted over the years. Owing

mainly to its telling effect on the economy, the issue of recurrent shortages has been of

great concern among various interest groups, including private sector investors,

manufacturers, households and policy-makers. For example, in 1990, it necessitated the

setting up of investigative studies and a judicial commission to unravel the underlining

factors in fuel shortages in the country. Also in 1995, a committee was constituted to

review the activities of the NNPC and its subsidiaries so as to find lasting solutions to

the problem.

2. Summary of Fuel Shortages Study

by the Research Department. 1997

Against the backdrop of protracted petroleum product shortages lasting for about

five consecutive months in the first half of 1997, the Research Department undertook

a diagnostic study on the causes of shortages of refined petroleum products in Nigeria

during the year. The study covered the period 1994 - 1997 and the major findings included

the following:

(a) Shortages in the Midst of Excess Supply:

With the exception of 1994, when prolonged oil workers’ industrial unrest

induced a substantial reduction in the level of production, the total volume of refined petroleum

products consumed during 1995 - 1997 period was, on an annual basis, below local production.

This, thus, raised the issue as to what could have happened to the excess aggregate supply,

including imports. This also raised the puzzle about the rationale for importation when domestic

production was considered adequate for local consumption.

(b) Fundamental Causes of Petroleum Products Shortages:

These were identified to include declining output at the refineries, capacity underutilization

and decreasing returns on investments, arising from:

(i) the ageing conditions and inadequate maintenance of the nation’s

refineries, resulting into recurring equipment failures and

breakdowns;

(ii) high turnover rate of the management of the refineries;

(iii) gross under-funding of NNPC operations; and

(iv) the impact of over-riding public ownership of the existing refineries

which until recently precluded private investors.

(i) rampant pipelines bursting and the frequent incidence of fire

outbreak which tended to obstruct the supply system;

(ii) vandalization of the pipelines and illegal tapping of huge quantities

of refined petroleum products, between the refineries and the

depots, which resulted in substantial losses to the nation;

(iii) large scale smuggling and increasing diversion of petroleum

products from the depots, by the dealers/tanker drivers, which

accounted for a significant proportion of officially recorded

domestic consumption. The incentive to smuggle out petroleum

products to neighbouring countries was attributed to the substantial

product price disparity between Nigeria and her neighbours;

(iv) bottlenecks in the distribution of refined petroleum products

attributable to burst pipelines and bad management, as well as other

negative factors in the distribution network, including the

unionization and collusive activities of tanker drivers; and

(v) speculative activities among dealers and consumers which tended

to build-up reserves in private premises while artificial shortages

were created at the fuel stations.

To ensure a lasting solution to the perennial problem of shortages of petroleum

products in Nigeria, the paper recommended the following policy measures:

(i) Increased border patrols to curb illegal siphoning of petroleum products

to neighbouring countries and stern punishment for apprehended

smugglers and vandals of the pipelines network.

(ii) In order to tackle the problem of under-funding of NNNPC operations,

adjustments should be made to the share margin of the e revenue from

products’ sale to the Corporation while increase in the pump-head price

of petrol should be effected to attract adequate returns and leverage for

the operators in the refining industry.

(iii) The down-stream oil sector operators, in particular the refineries, should

be adequately funded so as to enable them perform optimally.

(iv) Evolvement of a 90-day strategic reserve system by the NNPC whereby

refined petroleum products could be stockpiled to meet demand during

emergencies, including periods for mandatory or routine repairs and

maintenance of the refineries and during other national emergencies.

(v) The reliance on locally refined crude oil and less dependence on imported

petroleum products for domestic consumption was cost effective, and

should be sustained.

(vi) Appropriate incentives should be offered to boost efficiency in the refining

industry. These should include motivation for staff and their training and

re-training so as to acquaint them, from time to time, with innovations and

technological changes in the sub-sector.

(vii) A special privatization programme that would focus on the participation

of indigenous investors, in the management of the refineries, should be

evolved. This, among others, would enable funds to be channelled to the

refineries through the capital market, and reduce dependence on

government subventions.

3. Policy Measures Taken by the Government in 1997

To address the problem, the government took a number of measures which included the following:

(a) accelerated maintenance, enhanced technical backup facility and

increased allocation of crude oil to the second Port Harcourt refinery,

which enabled it to increase its output by 30.0 and 17.0 per cent in the

second and third quarters of 1997, in relation to the first quarter. Also, an

enhanced crude oil allocation to the Warri refinery resulted in increased

production by 25.3, 26.4 and 34.4 per cent during the second, third and last

quarters of the year, respectively, compared to the first quarter;

(b) resumption of petroleum products importation which had been banned in

October, 1996;

Authority which enabled vessels carrying fuels to berth and discharge at

the ports, thus enhancing distribution of petroleum products; and

(d) restoration of the 30 days sales credit to marketers which was earlier

cancelled on account of mounting debts owed the NNPC.

These efforts yielded positive results as the supply of petroleum products increased and

their distribution improved considerably. From June 1997, therefore, normalcy

appeared to have returned as queues disappeared from the fuel stations for the remaining

part of the year.

4. Causes of Current Fuel Shortages

The problem of fuel shortages re-emerged in January 1998 and has persisted since then.

Shortages have been reported all over the country. The attendant phenomenal economic disruptions

and consumer welfare losses have become noticeable in most parts of the country in recent times.

Firstly, most businesses that have depended on private electric generators for power, given

NEPA’ s epileptic performance, can no longer operate them as a result of shortage of diesel and

petrol. Secondly, their vehicles cannot move freely to bring in raw materials and transport finished

goods to far away markets. Thirdly, workers cannot report for duty on time or in some cases may

not report at all as a result of commuting problems associated with the fuel crisis. Fourthly, many

commercial activities that normally depend on generators, such as restaurants, food storage,

bakeries, cold stores, photocopying and photography have suspended operations owing to

lack of fuels to power their generators. The story is the same for high income families that can

no longer operate their sets for lack of fuels.

The current shortages may be traced to the inability of the authorities to address

the more fundamental problems of the industry which were identified in the study

mentioned earlier. The problems include the following:

(i) poor maintenance of refining infrastructure which results into frequent

breakdown of machinery and equipment and eventual closure of the

refineries. All the refineries, except the second Port Harcourt, are ageing

and characterized by malfunctioning plants and equipment failure, and

therefore require constant maintenance to ensure efficient operations. The

Kaduna refinery which was shut down in July 1997, as a result of system

breakdown, has not re-opened as the needed turn around maintenance

(TAM) has not been done. In addition, the second Port Harcourt refinery

which currently accounts for over 50 per cent of total domestic production

was shut down for over two weeks in February, following the failure of

one of its three functioning boilers and damages to other equipment

caused by the boiler failure. The refinery has been overdue for a turn

around maintenance. The implication of these closures is that domestic

production has reduced substantially;

(ii) poor funding has been a major constraint to regular maintenance and

repairs at the refineries. Recently, approved funding for the NNPC was

estimated to be about 30 per cent of the resources needed for effective

running of the plants. Besides inadequate funding, the problem of delays

in release of funds has persisted and this has tended to delay the repair and

maintenance of machinery and equipment. The funding of the refineries

has not been helped by the formulae used in sharing the revenue from

sales of petroleum products. With a pump price of N11 per litre of fuel,

the PTF takes N5.30, Government N2.40, NNPC N2.00 and marketers,

including transporters and dealers N1.30. The share of NNPC which is

estimated to cover only about 34 per cent of refining cost, excluding other

costs, such as distribution, transportation and overhead, is considered to

be very inadequate. The NNPC is therefore demanding at least N5 which

will cover its refining cost and reduce its dependence for funds on the

government. On their part, the private operators have argued that N1.30

take per litre sold is grossly inadequate to given them a reasonable return

on their investments. They have therefore requested for an increase of 100

per cent to bring their share to N2.60. These arguments by both NNPC

and the private operators merit consideration as enormous resources are

required to maintain existing infrastructure and make new investments;

(iii) large scale smuggling of petroleum products to neighbouring countries has

continued in spite of the deployment of security operatives along the

borders. It has been estimated that about 2.63 million tonnes of fuel or 27

per cent of total domestic production is smuggled out of the country

annually. This massive outflow reduces the volume of fuels available for

local consumption and induces shortages of the products in the country.

The existence of wide price disparity between Nigeria and her neighbours,

arising from the downward slide of the naira exchange rate has offered

large incentives for illegal export of fuels. However, there has been a

counter view that smuggling will continue irrespective of the pump price

of petroleum products; and

(iv) vandalization of distribution pipelines and illegal tapping of petroleum

products, pipeline bursting and the incidence of fire outbreak within

refining and distribution infrastructure has continued, thus constraining

fuels distribution operations.

5. Recommendations

(a) Short Term Measures

(i) As a short term measure, there is need for massive and continuous

importation of petroleum products until the Kaduna and Port

Harcourt refineries are rehabilitated.

(ii) The sanctions for vandalization of pipelines and tapping of

petroleum products as well as smuggling and diversion of fuels

should be vigorously applied. Deployment of more security

operatives to guard refining and distribution infrastructure and

increased border patrols have become very necessary.

(iii) To improve the financial base of the sector, there is

need increase the pump-head price of petroleum products which

have remained unchanged since October, 1994, in spite of the

substantial price increases recorded in other sectors of the

economy.

(iv) There is need to have, at any point in time, a 90-day strategic

reserves of petroleum products to meet demand during

emergencies.

(b) Medium to Long Term Measures

(i) Timely repairs and maintenance of refining and distribution

infrastructure hold the key to adequate supply of petroleum

products to the Nigerian economy. Government should effect an

accelerated turn around maintenance at the Kaduna and Port

Harcourt refineries. For all the refineries, there is need to keep to

maintenance schedules as a means of ensuring efficient operation

of refining facilities.

(ii) The funding of refining and distribution activities can be improved

partly by increasing the share of NNPC in product sales revenue to

N5 per litre as requested by the Corporation. The request by the

marketers to increase their share in every litre of fuel sold by 100

per cent to N2.60 per litre also deserves support as this could

enable them generate substantial surpluses that can be ploughed

back to repair existing facilities and make new investments.

(iii) Another source of revenue to the NNPC is the privatization of the

refineries which, additionally, will bring in private sector expertise

to bear on the management of the companies.

_____________________________________________________________________________________

ALUKO NOTE: