Isong: Against Killer Subsidies and Risky Pricing

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With over 30 years’ experience in the oil and gas industry, Clement Isong, Executive Secretary, Major Oil Marketers Association of Nigeria (MOMAN) is a thoroughbred downstream petroleum operator with footprints in last mile operations across several African countries and beyond. The Lawyer-turned-petroleum expert cut his teeth in the industry with French oil major, TOTAL, where he rose to spearhead several developmental initiatives in the company’s downstream petroleum division.In this chat with Marine & Petroleum Nigeria, Clement Isong shared insights on issues in the downstream petroleum sector such as deregulation, asset renewal, investments and fuel subsidy debt among others.Assessment of Nigeria’s Downstream Petroleum Sector

Clement Isong feels very strongly that over the last 20 years, government policies regulating fuel prices have led to the decline of downstream operations in Nigeria. By extension, he is convinced that government policies have stymied the development of Nigeria’s refineries and notes that pipelines, depots and the entire distribution chain have also suffered significantly. He postulates that the right policies have the potential of making Nigeria the refining and trading hub of not just West Africa but the continent as a whole with substantial contributions to the Nigerian economy as well as the livelihood of its citizens.  “Our marine depots, transportation facilities and filling stations have not improved in tandem with other parts of the world. Elsewhere, the quality of petroleum products continues to improve and refineries are upgraded; but in Nigeria, we have not only stagnated but we have also regressed as a result of poor maintenance and outdated technology,” he said. In the area of petroleum products transportation, Isong advocates total renewal of fleets to achieve global standards in view of the fact that modern tank trucks for petroleum product transportation now have standard features such as anti-skid, anti-roll over, anti-speed, anti-spill, anti-theft, satellite tracking, internal and external cameras and other innovations to prevent road traffic accidents. These innovations in safety are necessary given the nature of our business and the products we commercialise. A Nigerian life is not cheaper than a life in any other country and we must do what we must to keep our people safe. For the filling stations, he notes that so much has been done to upgrade operating conditions and improve the customer experience which we have not adopted in Nigeria. For example, Isong alluded to a meeting the downstream industry had with the Director General of the Nigerian Oil Spill Detection and Response Agency (NOSDRA), where the agency had proposed a five-year period for filling station operators to transit to double-wall underground tanks in compliance with existing international standards to prevent underground water and soil pollution.  He noted that in other African countries, these standards are non-negotiable because they are being funded from the pump price of the product. In Nigeria however, with the pump price of PMS capped at NGN145 per litre, it has been practically impossible.

In terms of productivity, Isong states that “We have one of the highest costs of operation whether in upstream, midstream or downstream and this is as a result of government policies and their mode of implementation leading to inefficiencies and losses. So from the point of view of an investor, his returns are the lowest when you compare with competing investment opportunities. If he does business legitimately as he should and must, he cannot survive and he would need to do other businesses in order to fund this particular one. Simply put, operating cost in Nigeria is higher than most operating environments in Africa and this is because the business does not generate enough margins to drive the investment that is necessary for optimization.”Regulating the Downstream Petroleum IndustryIsong’s brow creased with worry as he noted that the downstream sector is over-regulated and suggested that there are too many regulators seeking to make money from the operators or seeing the operators as a way to increase revenue to meet their budgets. According to him, “There are two categories of regulators; there are those who exist because they care and those who are focused on Internally Generated Revenue (IGR) targets so they just look for some reason to give you a bill.” He is mindful though, that Nigeria’s downstream petroleum regulators are constrained as he states that “For example, the law says that the Petroleum Products Pricing Regulatory Agency (PPPRA) is supposed to track the landing cost and cost of distributing petroleum products and set the pump price; but does PPPRA do that? It cannot. They simply get the numbers together and pass them onwards.” He adds that “There are limitations to what a regulator can achieve when it does not generate enough money or have the authority to do what is expected of it.” He noted that operators have to shoulder some of the blame as indicators reveal that many stations in Nigeria were built without meeting the minimum HSEQ standards. “Now that NOSDRA is going to implement its regulations on double wall tanks, many operators will have to answer hard questions about their existence and whether they can afford to upgrade to meet the minimum international requirements or close shop. On this note, Isong called on regulators to focus on improving standards, and pleaded that the downstream sector demonstrates some level of self-regulation. Competitiveness in Comparison to other African CountriesIsong submits that the poor competitive index for investment in Nigeria’s downstream petroleum sector is intricately sustained by the price regulation of Premium Motor Spirit (PMS) and non-compliance with international HSEQ standards which has led to the divestment of interests by International Oil Companies.  While he identified the price cap on PMS as a major disincentive for competition in the industry, Isong also noted that the major reason IOCs have exited Nigeria’s downstream industry is based on the Risk versus Reward model.

He acknowledged that certain risk factors pertaining to the downstream sector have evolved over the last 20 to 30 years but most operators have not evolved along with the international standards and have therefore become uncompetitive. “For example, the international standard for PMS storage is the ‘floating roof tank’, however, how many depots have floating roofs for PMS storage? There is an HSEQ reason why it is supposed to be floating roof and if most operators are not in compliance and you are, then you are incurring extra cost,” M&P gathered. Isong adds that another reason for the state of Nigeria’s downstream sector is rent-seeking at multiple levels making it extremely challenging to do business. “Many IOCs have left because they had difficulties complying with emerging global corporate governance rules, HSEQ standards and controlling or managing business partner relationships in their operating environments; it is only logical that if you cannot control external activities which threaten to jeopardize your investment, you simply do not continue your business in such an environment,” he warned. Furthermore, Isong submits that the returns in the downstream are just not enough to keep operators afloat and the risks are simply too high. The investment in upgrades we should make are not being done simply because the price cap does not allow the players make enough margins. If you go to Ghana next door, you will be embarrassed when you compare the conditions there to Nigeria. In a way, it is a good thing that some of the IOCs left, because as indigenous investors enter the space, they will face the same challenges as the IOCs but perhaps they will be better placed or better equipped to manage relationships with fellow Nigerian service providers and improve the sector. 

Contribution to GDPThe good news is that filling stations are Small and Medium scale Enterprises (SMEs) with each employing about 12 individuals. Therefore, with a minimum of 25,000 filling stations across Nigeria, there is hardly any other sector of the economy that has such a number of SMEs with such significant impact on human development and capacity across the geographical spread of the country.  Imagine the impact of each filling station in its local economy and then add to that the numerous businesses dependent on each station for diesel to generate electricity; petrol for transportation for teachers and children to go to school; traders to carry produce to the market and catalyse other efforts at production. It is obvious that the downstream petroleum sector is a significant player in the Nigerian economy, so chances are that if the downstream sector of Nigeria is healthy then the economy of Nigeria will be healthy. Does Guesswork Rule Nigeria’s Daily Petrol Consumption Figures?Having been assailed with various figures proposing estimates for the country’s daily national demand and consumption of PMS, Nigerians are unanimous in their irritation that the relevant authorities have been unable to consistently and pragmatically collate, process and warehouse data to enable proper national planning in this regard. For the MOMAN Scribe, his sadness does not come from the concept of not knowing the numbers because he is convinced that PPMC provides accurate figures of what they import. However, what irks him is the fact that because we sell the product at less than half the price at which it is sold in the countries surrounding us, the product will find its way through our borders. It is like simple osmosis. According to him, “The only way to stop the external consumption is to stop subsidizing. Even the governments of countries around us do not like our subsidy policy as they are unable to get enough taxes from the sales of petroleum products in their own countries. The price has to be the same in-country and across the border. Until the prices equalize, we cannot determine our internal consumption rate.” Quasi-Deregulation and its Impact on the IndustryIsong’s response to this subject reveals just how unpopular the price cap policy is among core stakeholders in Nigeria’s petroleum industry. “I think the harm done to our industry as well as to the country is incredible already. As a people we do not quite understand how much harm has been done yet. I know they say in 2018 the figure expended on subsidy ranged between NGN700 billion and NGN1.2 trillion. Do you know what we can do as a country with NGN700 billion?” “The reason I do not like the way subsidy is implemented in Nigeria is because it has killed my industry. For the last four years in the downstream we have been chasing subsidy debts. How is one expected to run a business like that? We no longer had access to credit because we owed the banks a great sum and sectorial borrowing limits had been reached which meant alternative credit terms were extremely high. Many businesses have closed down as a result, while for some of us, it has severely affected our ability to renew our assets. The low-price cap prevents industry players from receiving adequate returns to invest in renewal or upgrade of industry assets and the wholesale implementation of technological innovation. 

Port Harcurt Refinery, Rivers State, Nigeria

Isong feels there is need to engage the Nigerian masses who view the subsidized fuel as the only dividend they benefit from government. “The reason Nigerians do not accept the proposed fuel price increase, we understand, is because they believe corruption is rife. This indeed may be true, but these same Nigerians ask for security, better health care, better education and these investments cost money. Basically, government needs to dialogue with Nigerians and barter what is priority; to burn fuel or seek human development investments such as agriculture, good schools, good quality country infrastructure and access to quality healthcare. In that case, government should negotiate with Nigerians,” he advises. With the knowledge that government cannot afford this level of subsidy, Isong notes that Industry Associations and other stakeholders in the industry have consistently engaged government to review costs templates and margins. He suggests the need to emulate other countries where fuel price determinants are reviewed regularly to reflect competitive rates for operators and consumers alike. “We need Nigerians to understand that prices go up and down depending on other parameters. Petroleum has a price; there is a cost for exploration, production, crude oil open market price which is what you will sell to your refinery and then the refinery will add its own margin before selling to final consumers. Even if we have local refineries, products should still be priced from an economic standpoint as it should be the same across your borders” he stated. As a result, Isong praised Dangote’s acuity for citing his refinery in an export free zone. This, he said, would allow him export the product for the survival and sustainability of his refinery if he is unable to sell at a sustainable price in Nigeria. “We must not expect to buy the product cheaper than the international price,” he added. A sustainable refinery business model can only be good for Nigeria especially as we have been unable to achieve this to date. Repayment of Fuel Subsidy DebtThe protracted issue of subsidy debts was finally put to rest with government’s decision to pay with the issuance of promissory notes to beneficiaries. However, operators are still smarting from the experience as many businesses shutdown, livelihoods were lost and the bogeyman that is AMCON went on an asset seizing spree. 

 Remember that the Government had convinced marketers to go ahead and import fuel with a pledge to pay the difference; so people, ordinary businessmen and traders went ahead and imported. However, government failed to pay within 45 days and couldn’t do so for over 4 years until recently when businesses started receiving promissory notes; some of which will be due at the end of this year and others sometime next year. For Clement Isong, Marketers and the banks, they are a bit relieved because even though they do not have access to the cash, at least the banks see light at the end of the tunnel and can now give access to cash. “For me, it is extremely useful and brings to a close, a very painful chapter in which we lost many downstream players and hope we will never have to go through this again. However, this does not mean we can start importing. If policies are changed to enable us import, those who still have the heart can import and stay in the business” he concluded with a sigh. “Still, as Nigerians, we must be optimistic that we will get it right this time around. Our opportunities to dominate our geographical region in Oil and Gas and exponentially grow our economy is within grasping distance if we get the policies right. This window of opportunity will not stay open forever as many other African countries have discovered oil and are now exploiting their oil reserves. Our oil will also not last forever! If we can indeed become the refining and trading hub in Africa, beneficiating our crude and thereby creating jobs, developing our human resources and earning much more foreign exchange, we could yet become that Giant of Africa our population, entrepreneurship and energy as a people have placed us in the prime position to be. “Source: Marine&Petroleum Nigeria

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