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Subsidy Removal Does Not Equate Downstream Deregulation, Expert Says

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Contrary to pronouncement by the Federal Government that it has fully deregulated the petroleum downstream sector and hands off price fixing, oil industry expert, Mr. Isreal Aye, has said that Nigeria is still far from full deregulation.

Aye explained that what government has done was to simply replace the subsidy regime with the price modulation mechanism. Price modulation is a system where the pump price of petrol is determined by market fundamentals such as international crude prices, forex and landing cost.

The implication of this mechanism is such that the price per litre of petrol increase when crude oil prices are high at the international oil market, and drop when oil prices fall as well.

Nigeria’s susceptibility to these price fluctuations owes to the fact that despite being a major crude producer, the country’s refineries are obsolete and operating at near zero level capacity. Consequently, crude is exported and refined products imported. In 2019, the federal government spent about N1.1 trillion subsidizing fuel, under a system tagged ‘under recovery’.

According to Aye, a policy pronouncement is not enough to declare the sector as fully deregulated, insisting that the extant laws providing for price fixing in the Petroleum Act has to be repealed or amended before the sector can be said to be fully deregulated.

Until the laws are amended to reflect the new direction government is headed, Aye, who was speaking at a webinar on downstream deregulation organized by the Nigeria Natural Resource Charter (NNRC), said, investors would still be skeptical and the country would not be able to attract the right investments needed to develop and unlock potentials in the petroleum downstream.

“The subsidy removal policy didn’t expunge price control from the law, so any government can decide to reinstate the policy, hence it is necessary to amend the law. As long as the legal basis for regulation and price control is still in place, investors won’t have confidence in the market,” Aye said.

To buttress his point, Aye noted that Schedule 1 of the Price Control Act lists “Petroleum Products” as a “controlled product”, while section 6 (1) of the Petroleum Act reads: “The Minister may by order published in the federal gazette fix the prices at which petroleum products or any particular class or classes thereof may be sold in Nigeria or any particular part or parts thereof.”

Aye pointed out that these laws are at variance with the Federal Executive Council (FEC) approved oil and gas policies passed in 2017, which prescribes that petroleum subsidy be discontinued within one year of the Nigerian Oil and Gas Policies coming into effect… “The law precedes the Policies both in time and hierarchy, so the Law prevails until it is changed,” the expert stated.

Speaking further Aye emphasized that, “The bedrock of the regulation of the downstream and petroleum product price control is S.6(1) of the Petroleum Act and Schedule 1 Price Control Act.

“In order to deregulate the downstream sector, we need to amend or expunge S.6(1) as it is currently written and amend the Price Control Act to remove Petroleum Products from Schedule 1.” Aye added.

Making a strong case for full deregulation, he said it would save the country from the massive amounts spent annually on subsidy, open up a market that will ultimately serve Nigerians, create a local destination for our crude, create employment for the citizens and increased tax revenue for the government.

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