POLITICAL ECONOMY OF FUEL IMPORTATION AND DEVELOPMENT OF REFINERIES IN NIGERIA

POLITICAL ECONOMY OF FUEL IMPORTATION AND DEVELOPMENT OF REFINERIES IN NIGERIA, 1999-2013

ABSTRACT

The contradictions of importing over US $10 billion fuel annually for domestic consumption, in the midst of abundant oil endowment, has attracted attention and concern from researchers and investigators. This study, therefore, set out to evaluate the effects of the political economy of fuel importation on the development of refineries in Nigeria between 1999 and 2013. It set as its objectives the task of interrogating the nexus between allocation of fuel import licenses to independent marketers and investors in the development of new refineries in Nigeria; the connections between fuel importation
probes and the challenges hindering the development of new refineries in Nigeria; and the relationship between expatriates’ dominance of fuel importation and distribution, and the integration of Research and Development (R&D) in Nigeria’s petroleum technology development. The study adopted the political economy theoretical framework of analysis. Data were generated through the qualitative descriptive methodology and the ex-postfacto research design. The study highlighted the interplay of class interest and power relations on fuel importation to the neglect of building new refineries, in ways that enriched the dominant class coalitions and their political loyalists in the fuel-import dependent economy. This manifested specifically in the allocation of fuel import licenses to independent marketers through favouritism, prebendalism and clientelism that discouraged investors in the development of new refineries in Nigeria; fuel importation probes that failed to adequately expose the challenges hindering the development of new refineries in Nigeria; and expatriates’ dominance of fuel importation and distribution that undermined the integration of R&D in Nigeria’s Petroleum Technology Development.
The study recommended, among others, that the government should increase R&D funding from the current 0.2% to at least, up to the required UNESCO approved 1% of the Federal Government Gross Domestic Product (GDP). Also, that the Nigerian government, should as a matter of urgency, advance policies that will lead to private sector-led development of the refineries in Nigeria’s downstream oil sector (as in Canada) where the  functional refineries are privately owned.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Nigeria is Africa’s largest oil producer and fifth supplier to the United States. She is rated among the 12 biggest oil producers in the Organization of Petroleum Exporting Countries, (OPEC), contributing about 2.5 million barrels per day (bpd) to the OPEC basket. She is the sixth largest oil exporter, “wit h a total of 173 oil blocks in operation, according to the Department of Petroleum Resources (DPR)” (Eboh, 2013:1). The OPEC’s Annual Statistical Bulletin 2012 shows that Nigeria has proven crude oil reserves of 37.2 billion barrels, while proven natural gas reserves stands at 5.154 million cubic metres, making it the eighth in the world gas reserves and first in Africa. Yet the country depends on fuel importation to meet local demands of petroleum products.

Crude oil production and export commenced in Nigeria in 1958. It accounted for 7.1 per cent of total exports in 1961, which was dominated at that time by cocoa, groundnut, rubber and palm oil, in that order. In 1965, oil constituted 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 per cent. By 1979, petroleum sales had completely overshadowed non-oil exports, as it then contributed about 95 per cent of the country’s export earnings. In 2012, oil and gas export accounted for almost 96 per cent of export earnings. Also, in 2013, “Nigeria budget is framed on a reference oil price of $79 per barrel, providing a wide safety margin in case of price volatility” (U.S Energy Information Administration (EIA), 2013:1). No wonder, Central Bank of Nigeria (CBN) reported in 2010 “that petroleum accounted for approximately 96 per cent of the country’s foreign exchange and 76 per cent of the total government revenue” (CBN, 2010:3). It is no surprise then that it was observed that “total oil revenue generated into the federation account amounted to N34.2 trillion while non-oil revenue was N7.3 trillion, representing 82.36 per cent and 17.64 per cent respectively between 2000 and 2009” (Ogbonna and Ebimobowei, 2012:34).

However, despite the above abundant oil resources and unprecedented wealth, “Nigeria depends eighty five (85) per cent and abov e on importation of petroleum products” (Nwachuku, 2012:2), with massive infusion of subsidies, introduced in 1973 to stabilize the price of fuel and insulate Nigerians from the wild fluctuation of global market price. Ploch (2013:9) observed that “Nigeria import s an estimated $10 billion of fuel annually for domestic consumption”. In 2012, “Niger ia consumed 270,000 bbl/d and in 2013, she imported slightly more than 84,000 bbl/d of petroleum products” (U.S. Energy Information Administration (EIA), 2013:13). She imports fuel from far away countries like United States, United Kingdom, Venezuela, Canada, Brazil, Netherlands and the Persian Gulf countries. The more worrisome is the fact that “Nigeria imports fuel from non-oil producing countries like Niger Republic, Cote d’Ivoire, Amsterdam, India, Korea, Finland, Singapore, France, Israel, Portugal, Italy, Sweden, Tunisia, and many more” (Chimezie, 2009:7).

Efforts to increase the refining capacity of the four refineries at Port-Harcourt, Warri and Kaduna in Nigeria for the past 40 years have proved abortive as subsidy on imported products became an avenue for patronage by successive Nigerian governments to their relatives and cronies. For instance:

From 2006-2011, about N3.7 trillion was spent on subsidy…In 2011, N1.348 trillion was spent between January and October and it is expected to reach N1.436 trillion by the end of the year. This represents 30 per cent of total Federal Government Expenditure; 118 per cent of the capital budget; and 4.18 per cent of GDP (Okonjo-Iwuala, 2011:2).

Successive civilian and military administrations in Nigeria depend mostly on the importation of fuel. At independence in 1960, oil industry remained entirely in the hands of International Oil Companies (IOCs), who controlled production, importation and shipment of fuel and pay taxes and royalties to Nigerian government. As such, Nigeria depended 100 per cent on these IOCs till 1973 for her fuel importation which is taken from Nigeria, processed, imported, and supplied to various places in Nigeria by these IOCs. Onimode (1983:87-90) attested to the above fact by stating that, “in road haulage, virtually all oil tankers for petrol haulage through the country were foreign owned until 1973”. By 1971, the Nigerian government was able to import fuel through the Joint Venture (JV) participation agreement between the IOCs and Nigerian National Petroleum Corporation (NNPC) which represents the Nigerian government. NNPC sold its own share of oil allocation in the international market and uses the proceeds to import petroleum products. Nwokeji (2007:33) noted that “with the fr ee allocation, NNPC is able to subsidize the products”.

Currently, NNPC is allocated 445,000 barrels per day (bpd) of crude oil known as “domestic crude allocation” and is intended to be p rocessed by the 4 refineries to supply about 53 per cent to the domestic market and the SWAP/offshore processing arrangement of the balance of 47%. The above 53 per cent allocation to the NNPC is sufficient to provide the nation with the following products: “40 Million Litres Per Day (MLPD) of Premium Motor Spirit (PMS); 10 MLPD of kerosene House Hold Kerosene (HHK); 8.97 MLPD of Diesel Automotive Gas Oil (AGO); 0.62 MLPD of Liquefied Petroleum Gas (LPG) and 2.31 MLPD of Fuel Oil (FO)” (House of Rep resentatives Ad-hoc Committee Reports (HRACR), 2012:9). In practice, the refineries meet at best “about 15 per cent of domestic demand” (EIA, 2010). This implies that ove r 80 per cent of petroleum products are imported. With this method, these civilian/military administration are able to sustain Nigeria’s political economy.

However, joining the Organization of Petroleum Exporting Countries (OPEC), has two noticeable effects on the country’s political economy. First, OPEC required member states to nationalize the oil industry. More far-reaching than that, Nigeria, in fact, came up with a sweeping, economy-wide nationalization program, “requiring all investment in the economy to have a minimum of 60 per cent Nigeria equity participation” (Nwokeji, 2007:33).

Second, it gave rise to the establishment of the Nigeria National Oil Company (NNOC) which effectively ensured direct marketing of its share of crude oil in 1971 and also direct importation of fuel from any country of her choice. Suspicion of corruption in importing and selling of crude oil led to the dissolution and replacement of NNOC by the General Olusegun Obasanjo military regime (1976-79), with Nigeria National Petroleum Corporation (NNPC) in 1977, following the recommendations of the panel set up by him to probe the company. With the establishment of NNPC by Decree 33, the Corporation has since then been saddled with full control of the activities covering the upstream, midstream and downstream sectors of the petroleum industry in Nigeria.

The civilian government of Shehu Shagari (1979-1983), imported an average of 71.5 per cent (NNPC Annual Statistical Bulletin 2005 and 2006) of fuel into Nigeria. The regime of General Buhari imported an average of 69.2 per cent (NNPC Annual Statistical Bulletin 2005 and 2006) of fuel in Nigeria. General Babangida’s regime (1985-1993), imported an average of 89.4 per cent   (NNPC Annual Statistical Bulletin 2005 and 2006) of fuel in Nigeria. He was the first President to popularize the word “subsidy” in 1987.

He announced the removal of 80 per cent of subsidy. When General Sani Abacha (1993-

• took over in another coup in 1993, fuel importation increased in magnitude and intensity with massive infusion of subsidies. For instance, he imported an average of 71.5 per cent (NNPC Annual Statistical Bulletin 2005 and 2006) of fuel in Nigeria. Like his predecessors, he removed subsidy and used it to establish Petroleum Trust Fund (PTF) to manage the extra money from the subsidy.

Nigeria returned to democracy in 1999 with Olusegun Obasanjo elected as President ending almost 16 years of military rule. Obasanjo abolished the monopoly of importation of fuel by NPPC and announced the take off of liberalization and deregulation of the oil industry by September 30^th 2003, followed by the setting up of Petroleum Stabilization Fund later tagged Petroleum Support Fund (PSF) to finance subsidies. The incessant crises in the Niger Delta region, militant attacks, blowing up of oil facilities and hostage-taking of oil workers paralyzed the oil sector, making Nigeria to depend solely on importation of fuel. Thus:

NNPC Group Managing Director (GMD), Mr. Funso Kupolokun, importing all of its fuel because its oil refineries are not working, even though $1 billion (about 129 billion) has been spent on Turn Around Maintenance (TAM) of the plants in the last eight years…they were closed after militants fighting for local control of the Niger Delta’s oil wealth blew up the main feeder pipeline (Izere, 2006:1).

The Yar’Adua administration’s amnesty deal in the Niger Delta resulted in minimal oil refining production in 2009. For example, “the Port-Harcourt refineries