The complex interplay between the demand for petroleum products, and their timely availability to the Nigerian consumer, is constrained by the inadequacy of the quantum of crude oil allowed by the Federal Government of Nigeria for domestic refining, the deficit of available petroleum products needed to satisfy the national demand at any given time, the recurrent low capacity utilisation of Nigerian refineries, the epileptic performance of the pipeline distribution network, and the adverse impact of price regulation in the country. Consequently, a clearer appreciation, and better quantification of the factors that affect the supply-demand dynamic for petroleum products in Nigeria are crucial, and indeed unavoidable, in order to reverse the trend, once and for all.

For a start, the estimated daily crisis-free demand for petroleum products in Nigeria today, are 30 million litres of petrol (PMS), 12 million litres of kerosene (DPK), 18 million litres of diesel oil (AGO), and 780 metric tons (1.4 million litres) of cooking gas (LPG). And so, based on the yield profile of the benchmark Nigerian crude oil (i.e. Bonny Light, the feedstock of the least crisis-prone refinery in Nigeria, PHRC), the estimated amount of crude oil required daily for domestic refining, that would satisfy the pent-up demand for petroleum products in Nigeria adequately, should be about 530,000 barrels per day (bbl/d), which are some 85,000 bbl/d more than the combined refining capacities of all the state-owned, state-ran, poorly maintained, and chronically dysfunctional refineries at Warri (WRPC), Port Harcourt (PHRC), and Kaduna, (KRPC),or about 230,000 bbl/d more than the quantity of crude oil (300,000 bbl/d) allowed by the Federal Government of Nigeria for domestic refining, and consumption, or/and about 440, 000 bbl/d more than the current ultra-low efficiency domestic refining operations in Nigeria.

Right now, Nigeria can only locally refine about 17% of what General Obasanjo needs to "really conquer scarcity" in the country, even though Nigerian refineries have the potential of meeting up to 80% of domestic demand for petroleum products in Nigeria. Evidently, Nigerian refineries have undergone significant depreciation due to old age, neglect, and idleness:

They all have very poor maintenance histories. Therefore, Nigeria’s state-owned refineries, like any state-ran enterprise, are technically inefficient, and are unreliable for uninterrupted domestic production of petroleum products, even at the very best of times.

At any rate, in order to meet the domestic demand for refined petroleum products in Nigeria in 2003, at least 530,000 bbl/d, (i.e. 27% of daily crude oil production, as constrained by Nigeria’s 2,000,000 bbl/d OPEC quota), must be efficiently refined, so as to meet, and if need be, exceed the expectations of the understandably traumatised, and frazzled out Nigerian consumers. The figures would be higher when considering the optimal refining capacity for meeting the national demand for petroleum products in the next decade.

Indeed, daily, about 210,000 barrels (i.e. 10% of the crude oil produced daily in Nigeria, or 70% of the current arbitrary refining limit of 300,000 bbl/d imposed on NNPC), are exported, instead of being consumed cheaply as petroleum products, as intended, in Nigeria! Furthermore, there are regional price differentials which have never been reflected in any official pricing considerations in Nigeria since General Yakubu Gowon promulgated the Petroleum Equalisation Decree, some thirty (30) years ago, in 1973.

Incidentally, the Honourable Federal Minister of Petroleum Resources, who normally should be directly accountable to Nigerians, particularly in an election year, for the success or failure of the Nigerian petroleum industry, is indeed, the current Commander-in-Chief of the Armed Forces, and President of the Federal Republic of Nigeria, His Excellency General (Chief) Olusegun Aremu Okikiola Mathew Obasanjo.

Surely, there can be no better way of haemorrhaging the Nigerian treasury to death, and mismanaging Nigeria’s petroleum resources than this rather macabre merry-go-round of state-assisted executive brigandage, sustained over a period of about 30 years, including the on-going seemingly democratically condoned lack of creativity, transparency, or accountability, in addressing the resultant mess, satisfactorily.

Why is it that in Iraq, for example, even with over 12 years of sever economic blockade, including weeks of full-blown war, there have not been fuel queues like Nigerians have become accustomed to over the past decade? Clearly, the Nigerian paradox of "scarcity in abundance" is a betrayal of the scandalous paucity of the capacity to manage Nigeria’s human, material and natural resources effectively.

It may not be self-evident yet to many Nigerians that a nation does not need to have any petroleum resources (like Austria, Burkina Faso, Cuba, Japan, Switzerland, Niger, or Zambia), or refineries (like (Chad, Uganda, Benin Republic, or Zimbabwe), or petroleum products distribution pipeline networks (like most African countries), in order to be free of the trauma induced by the crisis of fuel availability ("scarcity") that Nigerians have been made to take as normal.

Indeed, for most countries of the world, the importation of crude oil, or/and refined petroleum products for meeting their national energy requirements, is among the topmost priorities and responsibilities of any responsible government. And so, importation of petroleum products is not necessarily bad, as perceived in the Nigerian stereotype.

However, in Nigeria, massive fuel importation has become unavoidable, given the potentially dire social, economic, and political repercussions of the significant deficits in the available inventories of petroleum products nationwide, occasioned by monumental blunders and failures in both political and indigenous technocratic leadership, over a period spanning more than 30 years, to date.

Based on the lowest official foreign exchange (inter-bank) rate, an assumed international open market price of crude oil at US$34.00 per barrel, translates to N26.32 per litre, which, paradoxically, is costlier than one litre of refined petrol, or kerosene, or diesel oil, in the Federal Republic of Nigeria. Of course, using a more realistic (black market) foreign exchange rate, the price of crude oil translates to N29.72 per litre, while petrol, one of the by-products of refined crude oil, costs N26.00 per litre in Nigeria.

At best, the cost of imported petrol (PMS), would amount to N32.76 per litre, based on the lowest official exchange rate, or more realistically, N35.30 per litre, based on the (official) black market exchange rate. Uncertainties about vessel round-trip logistics and delays in the bureaucracy, inefficiencies or/and supply disruptions, occasioned by equipment obsolescence, frequent unplanned shut-downs due to vandalisation, and/or internal corrosion of pipeline network, create anxieties that further exacerbate the crisis of availability of, and accessibility to imported or locally refined petroleum products in the Nigerian market.

The nominal cost of imported petroleum products into Nigeria amounted to N57.44 billion in the first quarter of 2001 alone. Approximately 79% of the total cost of fuel importation - i.e. the cost, insurance & freight (CI&F) of the imported petroleum products - is outside of the control of the Federal Government of Nigeria, yet the Federal Government contributes about 11.5% of the burden of importation of petrol into Nigeria through (self-imposed) taxes and port charges payable to the Federal Government of Nigeria. (Weird!)

In the United States of America, for example, the approximate proportions of the cost components of the pump price of petrol are as follows: (1) Cost of crude oil for refining: 46%; (2) Federal & State taxes: 28%; (3) Refining costs & profit: 14%; (4) Distribution & Marketing costs and profit: 12%.

Based on the (arbitrary) price of crude oil of US$18 per barrel, as allowed by the Federal Government for refining at the state-owned Nigerian refineries, the pump price of a litre of petrol in Nigeria should be between about N58 and N63, depending on the exchange rate applied. However, based on a more realistic international spot market price of crude oil at US$34 per barrel, the pump price of a litre of petrol in Nigeria should be between about N109 an N119, which is, coincidentally, about the same as the prevailing location-dependent open (black) market price of petrol within Nigeria (i.e. N2,000 per 20 litre jerry can at Abonnema wharf, or N100/litre of petrol, even in a refinery-endowed location like Port Harcourt!)

Leaving out refining, and distribution costs, also excluding profits, and Federal Government taxes, translates to about N49 for just the crude oil alone (at the special price of US$18/bbl) needed to produce a litre of petrol in Nigeria. Consequently, the US$18 per barrel cost of crude oil to NNPC refineries suggests a pump price of petrol of about N85 per litre, depending on the prevailing exchange rate, Federal Government taxes, refining, and distribution costs, and allowable profit.

Depending on the applied exchange rate, the landed cost of one (1) litre of imported petrol (PMS) in Nigeria, that is to say, at Apapa Jetty, Atlas Cove Jetty, Calabar Jetty, Effurun Jetty, or Okrika Jetty, (not, for example, at Abeokuta, Burutu, Dutse, Enugu, Ibadan, Gusau, Ilorin, Jalingo, Kafanchan, Lokoja, Minna, Nnewi, Oloibiri, Pankshin, Suleja, Uyo, Wuse, Yenagoa, or Zungeru), is N29.00 (black market), or N26.71 (CBN), or N24.20 (Inter-bank foreign exchange).

However, with a Federal Government tax of N3.10 per litre, dealer’s margin of 60 kobo per litre, and a marketer’s margin of N2.60 per litre, the ex-Lagos (or Warri, or Calabar, or Port Harcourt) pump price of petrol would come to approximately N33.00 per litre. The pump price could have been lower if only the Federal Government reduces its taxes, and limits itself to recovering the full cost of pipeline distribution, while road haulage costs should be market-driven (i.e. built into marketer’s margin), taking into consideration, relative distances from supply sources. Taking into consideration, road haulage, and pipeline distribution costs, the probable price of imported petrol, would be about N40 per litre, even at the most distant nooks of the country.

Recently, some Nigeria petroleum products marketers accused the Federal Government of awarding a rather strange contract for the importation of petroleum products to a Swiss-based businessman called, Marc Rich, whose quotation, we are made to believe, was 30% below those of nine (9) other prospective importers of petroleum products. (Surprise! Surprise!)

Apparently, after securing the contract, (foreign investor) Marc Rich, a long-time acquaintance of the Nigerian petroleum industry, suddenly developed severe hyper-acute business amnesia (SHABA), and discovered to his chagrin that his bid was actually below the prevailing international market price of petrol, and as such could not deliver, since that would be like operating at a loss, deliberately. And so, his failure to bring in imported petroleum products, as agreed, into Nigeria, resulted in the current seemingly intractable fuel scarcity nationwide, (just like that!). Foreign investor indeed!

Of course, worldwide, the prices of gasoline, diesel, and kerosene, along with those of other petroleum products, have gone up, mainly because, refiners are paying considerably more for crude oil (the principal cost component of a litre of refined gasoline), especially since the Venezuelan oil industry crisis began late last year, compounded by the commencement of the war in Iraq, and further aggravated by the sudden shut-down of exploration and production activities in the Western Niger Delta region of Nigeria, following local hostilities in Warri .

In the United States of America, for example, with the price of crude oil at US$30/bbl (19 cents per litre), the cost component of crude oil in a litre of petrol is about 17 cents, and the pump price of a litre of petrol is 37 cents per litre. However, in Nigeria, while crude oil costs NNPC about 12 cents per litre (US$18/bbl, instead of US$30/bbl), the pump price of petrol is about 20 cents (N26) per litre. In short, petrol is cheaper in Nigeria than in the United States of America. Furthermore, crude oil is cheaper in Nigeria than it is in the United States of America.

Consequently, the market values of the end outcomes of both upstream and downstream operations of the petroleum industry in Nigeria (i.e. the prices of crude oil, and petroleum products, respectively) are anomalously cheaper in Nigeria, than in the international open market, and are therefore prone to cross-border smuggling, diversion, or/and hoarding, in conformity with the basic laws of economics.

The second biggest cost component of petroleum products is the prevailing government tax. In the United States of America, for example, federal, state, local, and other taxes add an average of 9 cents to the price of a 37 cents litre of gasoline. In Nigeria, federal taxes add about N3.10 (2 cents) to the price of a N26 (20 cents) litre of petrol. In other words, in Nigeria, the costs of crude oil, refining, and distribution of petroleum products are borne by the national treasury, managed by the current Honourable Federal Minister of Petroleum Resources, General Obasanjo, on behalf of Nigerians, but to their uttermost dissatisfaction.

In other words, stupid as it might sound to most Nigerians, it is actually cheaper, and more effective to import a litre of petrol into Nigeria than to produce the same litre of petrol in a Nigerian refinery, despite the seeming advantage of the unrealistically low crude oil feedstock, and cheap local labour costs to Nigerian refineries, today. (Weird!)

Today, Nigeria needs about 30 million litres of gasoline daily, up from about 22 million litres per day in 1996, through 25 million litres per day in 2001. Thus, the annual petrol consumption growth rate between 2001 and 2003 is about 10% per annum. Meanwhile, Nigerian refineries (KRPC, PHRC, and WRPC) all of them operating at very low efficiencies, are defective, or are frequently shutdown, and can hardly produce 60% of the fuels needed to keep Nigeria going strong, even if they were all brand new and optimally operational, given the imposed feedstock constraint of 300,000 bbl/d .

While Nigerian refineries need about 530,000 bbl/d of crude oil in order to satisfy a pent up daily demand for about 30 million litres of petrol in the country, their combined design refining capacity amounts to 445,0000 bbl/d. However, for one strange reason or the other, the Federal Government of Nigeria allows only 300,000 bbl/d for domestic refining and consumption, and (a hypothetical) 145,000 bbl/d of crude oil for the export of excess refined petroleum products, even when local demand has not been met. Clearly, the conceptual design of the downstream sector of Nigeria’s oil industry is, to put it very politely, stupid: arranging to export what you do not have, only to end up importing what you should have, is silly!

Of the 300,000 bbl/d of crude oil designated for domestic refining, only about 90,000 bbl/d of crude oil are currently actually being refined at PHRC. Thus, daily, about 210,000 bbl/d of cheap Nigerian crude oil (nominally valued at about US$18 per barrel), which, even if completely refined for domestic consumption, would still leave a daily deficit of about 15 million litres in the supply of petrol, are prone to being recycled into the export crude oil pool (valued at about US$30 per barrel), and therefore vulnerable to complete loss of transparency, accountability, and probity, and by extension, open to all manner of abuse or mismanagement, which translate to a possible net loss of about US$12/bbl per day, equivalent to US$2.52 million daily, close to US$3.7 billion over the past four years.

For quite some time now, about 1,910,000 barrels (95%) of crude oil extracted from Nigeria are exported everyday. Even under ideal operating conditions, about 79% of Nigerian crude oil production still has to be exported, because of the self-inflicted low technical limit of refining capacity available in the country. The top receiver of Nigeria’s exported crude oil is the United States of America (averaging 900,000 barrels per day), followed by the EU. The USA refines 100% of its crude oil, primarily for domestic consumption, strategic crude oil reserves build-up, and export of excess refined petroleum products (if need be), as a matter of national policy and statutory obligation of the government to its citizens.

Today, a barrel of crude oil is selling at about US$30. At this time in 2002, the price of a barrel of crude was about US$19. Since November 2002, international crude oil prices have increased about 6 cents a litre, while petrol prices have increased by about 6 cents a litre in the United States, but remained static in Nigeria. In 1999, Nigerians paid N20 (24 cents) per litre of petrol, compared to N26 (20 cents) per litre, in 2003. In other words, Nigerian petrol prices, adjusted for inflation, are still lower in 2003 than in 1999. (Strange!)

Generally, deregulation, particularly the concept of dismantling state-owned enterprises, is still at an early stage in Nigeria. Previous attempts at reforms in the telecommunications and aviation industries suggest that it could be a bit hasty to provide quantitative projections and definitive appraisals of the impact of deregulation on the oil industry in Nigeria at this moment. However, we will provide empirical insights into the unfolding deregulation process in Nigeria’s petroleum industry:

Firstly, uneconomic and inefficient state-protected monopolies like KRPC, PHRC and WRPC, all perennially operating at near-zero capacity utilisation, must adapt quickly or die in a deregulated business environment. These three state-owned refineries, like similar inefficient refineries in the Caribbean, sub-Saharan Africa, and Latin America, have been, and are inflicting severe damage to the Nigerian economy.

They have continuously operated at unacceptably low capacity utilisation, with attendant massive costs and escalating waste. Protectionism, even if for reasons of national security, is no longer justified in the global market. If improving these refineries makes economic sense, then they may be granted explicit temporary tax protection, as was recently done in Kenya and Cameroon. Most of the domestic refineries in Nigeria need to be radically upgraded, or be shutdown (permanently) if they cannot be operated efficiently, and profitably. The longer it takes to make these decisions, the wider the technical, environmental and safety gaps between PHRC, KRPC and WRPC, on the one hand, and the rest of refining world, on the other hand.

Secondly, the condition of the existing pipeline network necessitates extensive replacements in various segments, particularly along the terrain of repeatedly vandalised pipelines. This also applies to most of the over 23-years-old first-generation pipelines (approximately 3,000 km long), because of wear and corrosion, occasioned by poor maintenance or/and negligence over the years.

Thirdly, complete deregulation, followed by privatisation, reduces the incentives for government and state-owned monopolies with half-baked ideas to care-freely indulge in large-scale capital projects, as was the case in the oil industry in Nigeria between the mid-1970s and the 1980s, and recently, in the establishment of ineffective retail outlets by NNPC, supposedly to counter the effect of "scarcity".

Fourthly, restructuring involves significant costs. However, these may be offset by other external benefits. For example, the deregulation of the natural gas sub-sector could affect the deregulation/privatisation of the electricity industry positively.

Fifthly, since the deregulation of the downstream sector of the Nigerian petroleum industry will most certainly have negative environmental impacts, the establishment of appropriate agencies for monitoring and enforcing standards is crucial. The preparedness, effectiveness and appropriateness of the DPR, as presently constituted, as the sole monitor for compliance, and enforcer of oil industry rules in Nigeria, are questionable.

Sixthly, natural gas utilisation might increase with deregulation because of its price competitiveness and minimal adverse environmental impacts relative to other liquid fuels used by industries in particular, and for transportation. Enhanced natural gas utilisation could significantly reduce the demand for AGO (diesel), and at the same time, ensure improved and sustainable industrial capacity utilisation nationwide. The initial impact of increased natural gas utilisation in Nigeria, including its associated benefits, would be felt mainly in Delta, Edo, Lagos, Ondo, Osun and Ogun States, since the Escravos~Lagos pipeline actually traverses (or is very close to) those states. It is hoped that natural gas pipeline networks would emerge subsequently to meet similar industrial fuel requirements of other parts of the Federation.

There are opportunities for the increased use of compressed natural gas (CNG) as vehicular fuel in Nigeria. With increased use of CNG, the pressure on PMS (gasoline) and AGO (diesel) in the retail market would reduce.

Only recently, the Federal Government of Nigeria began preliminary inter-governmental arrangements on a proposed trans-Saharan natural gas pipeline between Nigeria and Algeria. The project, if actualised, would bring Nigeria’s natural gas closer to the Mediterranean and North Western European markets faster and cheaper than LNG, with a commensurate increase in commercial natural gas operations and utilisation in the country.

At the same time, the trans-Saharan natural gas pipeline could provide an opportunity for the extension of the national natural gas supply network to both the Eastern and Northern regions of the Federation, for their industrial development. However, it is not clear yet who would own such a pipeline network in a deregulated business environment.

Should the Federal Government place the currently idle LPG storage and loading depots dispersed across the country for outright privatisation, the obvious preference would be for the LPG depots at Lagos and Calabar, because of their capacity and their advantage of having marine supply access. Next to these, in terms of commercial viability, are the LPG depots at Enugu, Ibadan and Makurdi. Most likely, the investor attractiveness of the LPG depots at Ilorin, Kano, Gusau and Gombe would remain dependent on sustainable supplies from KRPC. Conversely, the LPG depots could be converted or retrofitted to a national compressed natural gas (CNG) distribution grid. These are all justifications for the Nigerian market to maintain a wide mix of fuels as possible, as a matter of effective national energy policy, so as not to over-stretch the demand for any particular source of energy.

Finally, deregulation and privatisation involve significant wealth redistribution effects. This is partly due to government’s lure to win political advantage, essentially buying votes, by dishing out patronage, through the sales of state-owned assets at a discount, under the guise of such worn-out slogans as "dividends of continuity and consolidation of nascent democracy". This tendency is particularly more likely with state governments that have also announced their intention to run refineries.

Paradoxically, the move by various state governments to partake in private refining is also tantamount to state participation in business, which incidentally, completely contradicts and negates the deregulation posture of the Federal Government of Nigeria. Furthermore, the local and international credibility problems that Nigerian governments typically have, could cause genuine initial uncertainties about the long-term prospects of deregulation in Nigeria.

All of the above suggest that NNPC would continue to operate and control the supply and primary distribution systems in the downstream sector of the Nigerian oil industry for at least the next four (4) years. Market share and saturation in the downstream sector would therefore continue to be mainly controlled by the major marketers, since there are indications that products allocations favour this group of marketers. However, nothing prevents the independent marketers from forming mergers in order to be more competitive.

There appear to be no clear indications yet that the Federal Government would effect the mandatory establishment of at least two (2) virile and independent oil industry monitoring and enforcement agencies in Nigeria in the medium term. With the 2003 general elections only days away, moves at price deregulation may be determined more by political expediency, rather than economic rationalisation. The continued ambivalence and general silence of the Federal Government over meaningful deregulation could send wrong signals to potential investors in the Nigerian oil industry.

The traditionally politically sensitive issue of ownership of the crude oil and natural gas produced in Nigeria, an issue as sensitive and similar to the core issues and arguments of "resource control", and "onshore-offshore dichotomy" may force the Federal Government to avoid any meaningful deregulation in the upstream sector for as long as 2007, at best. Ultimately, this could retard the success of deregulation in downstream sector, since such a policy could affect cost-competitive supply of crude oil feedstock, especially to private Nigerian refineries, if any. The due processes of legislation, executive approval, and the subsequent implementation of appropriate enabling laws for deregulation, could therefore become protracted.

We envisage an initial period of inertia in the articulation and implementation of deregulation policies. This could be followed by a period of piecemeal commissioning of probably one (1) or two (2) private refineries in Nigeria by about 2005. In other words, the expected impact of deregulation in Nigeria will be a function of (1) the political climate in the country, vis-à-vis the commitment of the winner of the 2003 presidential elections to meaningful deregulation, (2) the sustainability of implementation of deregulation as currently implemented by General Obasanjo, and (3) the attractiveness of both the upstream and the downstream sectors of the Nigerian petroleum industry to potential investors.

Given that Nigeria is the fifth (5^th) largest exporter of crude oil in OPEC, the largest producer of crude oil in Africa, has a potentially utilisable refining capacity of 445,000 bbl/d, and has a nationwide network for petroleum products distribution, the perennial supply fuel crisis in Nigeria graphically reflects the low sense of obligation that the various governments in Nigeria, past and present, had or continue to have for the basic welfare of Nigerians.

Finally, it must be stated that Nigeria is not that totally hopeless, helpless, and defenceless when it comes to ensuring and assuring that Nigerians have the petrol, kerosene, cooking gas, and diesel oil they need, even in a state of national emergency. However, until the root causes of the recurrent excruciating and nightmarish episodes of sporadic acute "scarcity", experienced in the past decade in Nigeria, are painstakingly and systematically diagnosed, analysed, evaluated, and effectively addressed, Nigeria’s agony, and tragedy of fuel scarcity( in abundance) will continue. That is why it is so painful.

Cost Insurance & Freight (CIF) ex-Lagos = US$275.00 per metric tonne of unleaded premium motor spirit.

Nigeria Ports Authority (NPA) charges @ Lagos, Port Harcourt, Warri or Calabar US$7.00/metric tonne.

The major approximate cost components of petrol imported into Nigeria are (1) CI&F of petroleum product at Lagos (or Port Harcourt, or Warri, or Calabar): 78.8%; (2) Federal Government taxes: 9.5%; (3) Marketer's margin: 7.9%; (4) NPA charges: 2.0%; (5) Dealer's margin: 1.8%. Other hidden, but non-trivial variables of the cost of imported petroleum products include demurrage charges, caused by bureaucracy, and other avoidable delays on arrival at Nigeria, vessels hire costs, pipeline distribution, and equipment maintenance costs.

US$1.00 = N139.00 (Black market); N129.00 (CBN); N126.80 (Inter-bank foreign exchange (cross) rate).