THE IMPACT OF DEREGULATION ON THE STRATEGIC MANAGEMENT OF THE PETROLEUM MARKETING FIRMS IN THE NIGERIAN DOWNSTREAM SECTOR

18

THE IMPACT OF DEREGULATION ON THE STRATEGIC MANAGEMENT OF THE PETROLEUM MARKETING FIRMS IN THE NIGERIAN DOWNSTREAM SECTOR

ABSTRACT

In the past decade or so, Nigerians have been traumatized by the impact of fuel crises. Lives have been lost and some productive enterprises have either gone under or operating far below optimal level as a consequence of fuel supply shortage and unpredicted high pricing associated to the mismanagement of the downstream sector of the petroleum industry. The federal government is aware of this problem and decided to appoint a committee of technocrats to chart a new mode of operating the downstream sector. The committee recommended a paradigm shift from regulation to deregulation of the downstream sector. The sector was deregulated. Until then however, very little was known about deregulation in the Nigerian economy particularly in the running of public utilities in which the petroleum industry is a foremost concern. The study examined amongst others, the nature of benefits that come from the deregulation of the sector, the process of strategic change in a new business environment by firms in the downstream sector of the petroleum industry with a view to determining the impact of deregulation on the strategic management of these firms and to ascertain the risks associated with strategic change in terms of impact on the growth of the firms. Also examined are the best practices in the global petroleum industry, an analysis of the strategies for deregulating the Nigerian downstream sector in petroleum marketing firms. The survey method was used in line with the objective of the study data were obtained form both primary and secondary sources and chi-square statistic was applied to test the hypothesis. The study reveals that collective performance hangs on the fact that their management system lacked the capacity to adjust strategically to the deregulation of the sector. Based on the findings of the study a number of recommendation believed would eliminate the hurdle on the way to successful operation of the sector were made. Conclusively, the study maintained that the deregulation downstream sector requires a change in business modes of operation and that the gains accruing to the policy are worth the effort

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study Area

All over’ the world, reasons for reforms in the public sector vary from country to country depending on the objective, peculiarity and the circumstance that the country finds itself. The issue of reform of the Nigerian downstream sector refining and distribution of petroleum products has been on for quite some time. It has however, become more compelling in the last few years given the trauma of scarify of petroleum products that the nation has continuously witnessed.

Prior to 1965, petroleum products domestic requirements were met entirely through importation under a deregulated environment. By 1965, it had become apparent that the nation, haven gained independence five years earlier, could no longer rely on important for its entire requirement.

Consequently, the first refinery in Nigeria – the old Port Harcourt refinery was built in 1965 as a commercial venture to provide petroleum product at market related prices. It was a 35,000 bard per day refinery jointly owned by shell (25%), British Petroleum (BP) 25%, the Federal Government (20%), and the three regional governments (10% each), (Kopolokun, 2004).

However, by mid 1 970s, with the advent of the oil boom government became directly involved in the downstream sector by building two new refineries and lacking over the first. The Warn refinery was commissioned in 1978 while the Kaduna refinery came on stream in 1980. Government’s main objective was to make petroleum products available throughout the country (www.nnpcNigeria.com)

With the change in ownership structure, the pricing, policy was modified and controlled to encouraged national distribution at uniform prices. This incidentally introduced the issue of bridging and price equalization at government’s expense. This was later inherited by the Nigerian National Petroleum Corporation (NNPC).

However, these controlled prices did not respond to the continuously changing business and economic environment. Thus, the control, of petroleum products prices by government mark at difficult to earn enough resources to maintain the refining and distribution assets.

Since the commencement of government’s direct involvement therefore, prices of major petroleum products such as premium motor spirit (PMS), Automotive Gas oil (AGO) and dual purpose kerosene were set by government. This, of course, has been disincentive to the private sector investment in refining (Kopolodun, 2004).

Also, the impression is created that since Nigeria is an oil producing nation, petroleum product must be cheap regardless of the cost of productive. This has resulted in economic dislocation with its dire consequences. Such consequences include.

  • Loss of revenue to government
  • Petroleum products scarcity.
  • Funding problem for NNPC, leaching to lack of regular maintenance of

     refining and distribution facilities.

  • Capacity under utilization.
  • Smuggling of petroleum products
  • Divestment by marketers
  • Wastages
  • Adulteration of products
  • Social and political unrest
  • Poor economic growth
  • Rampant pipetine ruptures and vandalisation
  • Inadequate and ageing conastal vessels

(NNPC News, January, 2005).

The question in how can the NNPC, the refineries and the distribution sector in particular be repositioned to respond effectively to the dynamics of the oil industry for the maximum benefits of the national economy? It is in this light, that the deregulation of petroleum products prices becomes a sine-qua-non to ensure full cost recovery and reasonable rate of return for any operator.

For many year, NNPC was not able to meet the objective for which it was set-up as a result of the underlying factors briefly mentioned above and this must have be responsible for government’s decision to deregulation the downstream sector (NNPC News January, 2005).

Government as far back a. 1988 commenced a privatization and commercialization programme through decree No 25 of 1988 which focused on partial and full commercialization of some 145 selected public enterprises it was aimed at rationalizing government expenditure and programme in response to the declining economic fortunes of the early 80’s. Furthermore, through Decree No 28 of 1999 emphasized its inability to continuously subsidize inefficient and loss making parastatals and stated that privatizing such investment had become the cornerstone of its policy (Kopolodun, 2004).

The immediate past administration of Chief Olusengun Obasanjo, on the assumption of office in 1999 said that it would turn the situation around through:

•        Maintaining self sufficiency in refining.

•        Ensuring regular and uninterrupted domestic supply of petroleum products.

•        Establishing facilities and infrastructure (Refineries, storage depots, etc) for the production of refined produced targeted at the export market and support to domestic petrochemicals.

•        Providing gainful employment and enabling Nigerians to acquire technical know-how in refining and distribution business.

The downstream reform is therefore expected to ensured

•        Petroleum product price determination by market force.

•        Absence of government control in the pricing process except for tax purpose.

•        Freedom for marketers to source petroleum products locally and internationally.

•        Freedom of marketers to purchase crude oil local and international source for processing in the refineries.

•        Freedom of refineries to enter into processing agreement with marketing companies on the basis of charging fees.

•        Right of access to distribution facilities subject to transportation agreement based on tariff (NNPC News, January, 2005).

Deregulation of the market implies that a regime of trade liberalization will be in place whereby petroleum product can be imported or exported. This will ensure abundant petroleum products in the economy and elimination of long queues at fuel stations (NNPC News, February, 2005).

Deregulation is very critical to private sector participation in refining because it ensures commercial viability of product supplies thereby enhancing profitability, which is the major business attraction. The number of marketers and retail stations is likely to increase, with their positive impacts on business expansion as well as employment generation. According to Kopokolun (2004) about 25,000 jobs will be created for Nigerians. Instead of divesting from the industry, marketers are most likely to invest more (NNPC, News, May 2004)

1.2     Statement of Problem

Population and industrial growth in Nigeria and the attendant increase in economic activities in the country led to increased demand for petroleum product. Demand became much higher than supply and in consequence, acute full scarcity and adulteration was experienced. In response to this problem, the federal government inaugurated a committee to review all aspects of petroleum products supply and distribution in Nigeria. The term of reference covered by the committee, are:

•        the burden of subsidies on the national treasury;

•        the strain of financing state owned; petroleum business;

•        to check the intra and trans-ECOWAS smuggling of Nigerian petroleum products;

•        the relative market prices of petroleum product in the ECOWAS sub-region, vis-a-vis their prices in Nigeria;

•        licensing of private refineries;

•        the need to break the monopoly of NNPC; and

•        the general benefit of deregulation

These points of reference outline above excluded perhaps, inadvertently, the multiplier affect the reform will have on the domestic petroleum marketing firms.

The committee recommended complete deregulation of the downstream sector of the petroleum industry. In September of the same year, the federal government announced the deregulation of the downstream sector. This announcement tended to exert enormous influence of the management of petroleum marketing firms in the downstream sector of the industry.

Although, the federal government of Nigeria, formally announced deregulation of the downstream sector of the petroleum industry in September 2003, real deregulation may be traced back to 1999, when in November of same year, President Obasanjo, announced that the market for petroleum prices, would be deregulated which would offer the country debt relief. He noted that all petroleum prices would be fully deregulated and domestic crude allocation to the NNPC would be paid for at export parity with immediate effect. This would have an immediate effect of pump prices.

This action implies therefore, that all the firms in this sector shall either shift from a regulated environment to a deregulated one or move out of the industry This transition brought about ‘strategic implication (of deregulation) in the management of petroleum marketing firms in the downstream sector of the petroleum industry’. Already most of the petroleum marketing firms, particularly the petrol stations have been observed to be idling or closed down and the few active ones were operating at less than 50% of installed capacity. Therefore, one would like to find out the impact the deregulation has on the strategic management of these firms as they transit or diversify from a regulated environment to a deregulated one.

1.3     Objective of the Study

The  objectives of study are as follows:

(1)     To examine the strategic management system of firms in the downstream sector in order to assess their capacity to adjust strategically to the deregulation of the sector;

(2)     To identify the nature of the benefits that comes from the deregulation of the sector;

(3)     To examine the process of strategic change in a new business environment by firms in the downstream sector of the petroleum industry with a view to determining the impact of deregulation on the on the strategic management of these firm;

(4)     To ascertain the risks associated with strategic change in terms of impact on the growth of the firm;

(5)     To establish the best practice in the global petroleum industry with a view to analyzing the strategies of deregulating the Nigerian downstream sector in relation to best practice in the industry;

(6)     To assess the effectiveness of leadership styles of managers/entrepreneurs of the petroleum marketing firms with a view to determining their adaptiveness to the new business environment

1.4     Research Questions

The research questions .for the study are as follows:

1.       To what extent do the strategic management systems of firms in the downstream sector have the capacity to lend them selves to deregulation?

2.       What benefit accrue from the deregulation policy of the downstream sector of the petroleum industry and which of the stakeholders benefit more?

3.       What is the impact of deregulation on the strategic management of firms in the downstream sector?

4.       To what extent do the obvious risks associated with strategic change impede the overall growth of firms in the downstream sector of the petroleum industry?

5.       To what extent do the strategies employed in the deregulation of the downstream sector compare favourably with the global best practice of petroleum industry?

6.       How much does the leadership style of manager/entrepreneurs of petroleum marketing firms support performance?