Deregulation Of Downstream Oil And Gas

It is largely assumed by Nigerians that the government involvement in the management and ownership structure of the refineries and logistics infrastructures is the cause of the numerous problems associated with the downstream oil and gas industry. Thus, the government economic reforms by way of deregulation policy was established in 2003 to revive the ailing industry. This dissertation seeks to examine the deregulation of the downstream oil and gas industry in Nigeria, a strategic management perspective of the effects, challenges and prospects. The objective of this study is to have both theoretical and practical knowledge contribution on deregulation.

This study theoretical framework is embedded in three literatures: deregulation, strategic management and competitive forces. These three perspective are used in order to assess the emerging effects, challenges and prospects that the industry has on the changing strategic landscape of the deregulation exercise. The literature for this perspective, competitive forces and innovation management were reviewed: The reason for this perspective is that the competitive forces provides the understanding of the industry structure and the interactions between competitors, while innovative management is to understand the industry processes and capabilities. By summarizing and integrating these viewpoints formed a hypothesized understanding that reflected the effects, challenges and prospects of deregulation.

In order to obtain an empirical analysis of the study a social constructed research methodology that is based on quantitative and qualitative method were argued for. A non-probability sample approach with a dichotomous questionnaire of (YES/NO) was self-administered in three states Abuja, Lagos and Port Harcourt to represent the three geographical areas in Nigeria, the target population of fifty persons from each state was chosen using purposive sampling method. Furthermore, an open-ended questionnaire were self-administered on two managers from Forth Oil, One Manager from Oando Plc and One Manger from Total Plc. The managers views were sort in order have industry professionals opinion on the deregulation of the downstream oil and gas industry.

The data collected were analysed with the use of SPSS to determine the effects, challenges and prospects of the deregulation of the downstream industry. A Porters five model was also utilised to analyse the competitiveness in the industry. The result of the analysis shows how firms within the downstream oil and gas industry have changed and responded towards deregulation. It further shows how the previous regulated regime of the downstream oil and gas industry has been transformed to become more competitive and market driven. The analysed result shows a slim margin between the (yes/no) responses on the effects and challenges of deregulation, while there was a significant margin on the response in favour of the prospects and opportunities of downstream oil and gas deregulation. Overall, the result shows that many Nigerians are in support that deregulation will deliver positive effects, reduce the challenges in in the industry and also create better prospects and opportunities.

The study findings indicates that the downstream oil and gas industry is not fully deregulated to enable market forces of demand and supply to determine product price, rather government have been fixing petroleum product prices. Most of the industry challenges are still persistent, like fuel scarcity, corruption, smuggling, and ineffective refinery. Thus, the expected benefit as promised by the government is yet to be achieved. However, based on the overall response of the respondent, this study can infer that many Nigerians support the government deregulation of the downstream oil and gas industry.

CHAPTER ONE

1 INTRODUCTION

1.1 BACKGROUND

The advent of deregulation reform dates back to 1973 after the first oil shock experience, which led to a decline in the economic growth of most developed economies Nordhaus, Houthakker and Sachs (1980); Sachs (1982) and labour productivity growth Baily, Gordon, & Solow (1981). Further to the mid-1970s productivity decline, a wide range of policy responses, including economic deregulation were introduced. The inception of deregulation reform was initiated in the US Winston (1998); Morgan (2004), while the UK and other developed economies followed in the early 1980s Pera, (1988); Healey (1990); Matthews, Minford, Nickell and Helpman (1987). The reform was also copied by the new democracies and many developing countries in the 1990s leading to wide range of labour, capital and product market reforms. This was the scenario that prevailed throughout the early 21st century Wolfl, Wanner, Kozluk and Nicoletti (2009) until the global economic and financial crisis determined the credibility of relaxing economic growth.

Like many other developing countries that copied the market reform, Nigeria being a growing economy with an increase in demand for commodities such as petroleum products Nwokeji (2007) meeting the supply needs remains a big challenge due to frequent breakdown of the refineries and over-reliance on importation. Although prior to 1960’s the downstream oil and gas sector was initially market driven with the mechanism of demand and supply determining product price Funsho (2004). The distribution and marketing of petroleum product was virtually controlled by the multinational oil and gas companies Jean (2012). This was the situation before the government decided to harmonise petroleum products by way of uniform pricing in 1973 to encourage even distribution of products nationwide Christopher and Adepoju (2012). In furtherance to the uniform price policy and also tackle the cost differential problem associated with the delivery of products to every part of the country, the government established the Petroleum Equalization Fund (PEF) Oluwole (2004).

The participation of government in the management and ownership structure of the downstream sector culminated to a regulated regime Olumide (2011). The consequence of the policy shift by the government on the economy was characterized by acute product scarcity, hoarding, smuggling, adulteration; long queues, inappropriate pricing, under funding and monopolistic practices. This were the main features of the supply and distribution process of the downstream oil and gas industry Funsho (2004). The unhealthy development degenerated to poor performance of the nation refineries, which resulted in excessive dependence on imports Christopher and Adepoju (2012). Thus, the economic reforms of the government became imperative towards reviving the ailing downstream sector by way of deregulation Okafor(2004).

The deregulation of the sector as implemented in 2003 implies removal of restrictions on the establishment of refineries, jetties and depots. It also involves granting free access to private sector participation in the importation of petroleum products and also allowing the demand and supply mechanism to determine price including also the government total removal of control on product prices Oluwole (2004). Furthermore, the objective is meant to achieve regular supply of petroleum products at reasonable price, maintaining self-sufficiency in refining, employment generation for Nigerians, growth in foreign investment and general economic growth. Onyishi, Emeh, and Ikechukwu (2012). Other major benefits are as indicated in figure 1 below:

Figure : BENEFITS OF DEREGULATION OF DOWNSTREAM OIL AND GAS SECTOR

Removal of subsidy burden

Government refocus to segment regulator

Competition on and a level play field to attract new entrant

DEREGULATION

Increased efficiency by service providers

Eliminate sharp practices that exploit subsidy regime

From the foregoing many years have passed after deregulation, yet the aforementioned problems still persist, refineries continue to operate below installed capacity Oladele (1997). Efficient transport system for product distribution is lacking while pipeline are still vandalized. The expected government responses by private sector investment in establishing new refineries after many years of issuance of licence is yet to be realized. This scenario is in contrast to the objective of deregulation as commenced in the USA in the 1970’s which was to create competition, enhance industry efficiency and guarantee competitive prices DME (2007) ; Hicks (2004).

Improving efficiency in the industry implies product availability, proper functioning of the distribution networks, availability of storage facilities and depots to avoid scarcity of products and to ensure regular supply of products to force down price. However with the lack of these facilities the intending benefit from deregulation of the downstream oil and gas sector by the Nigerian populace becomes defeated. The question now is why should government proceed with deregulation policy? Thus, this dissertation seeks to examine “a strategic management perspective of the effects, challenges and prospects of the deregulation of the downstream oil and gas industry in Nigeria. The theoretical framework of this study dwells on three literature reviews: deregulation, strategic management and competitive forces. This three perspectives are utilized to assess the emerging effects, challenges and prospects of the deregulation exercise in the oil and gas industry. The study analyses the literature for this perspectives, competitive forces and innovation management in the context of deregulation.

1.2 PURPOSE OF THE STUDY

The purpose of this study is to appraise the deregulation exercise that was carried out in the Nigerian downstream oil and gas industry. The specific aim of this study are as follows: To examine the implementation of deregulation policy in the downstream oil and gas industry in order to determine the effects, challenges and prospects. This study is also aimed to explore if deregulation has actually yielded the desired result in terms of the forces of demand and supply determining prices of product. This study further uses the Porters five model to establish if effective strategic management (innovative management and competitive forces) can achieve a sustained competitive advantage among industry competitors in the deregulated regime.

1.2 RELEVANCE OF THE STUDY

This study is relevant in many ways; apart from the downstream sector importance in Nigeria economic stability other relevance includes the following: As already stated, this study would use a Porter’s five competitive forces to analyse the attractiveness of the industry. This will inform us of the impact of deregulation on new entrants, competitive rivalry, buyers bargaining powers, suppliers power, products prices, product supply and distribution. The study would conduct a survey to know the feelings of Nigerians on the effects, challenges and prospects of the deregulation of the downstream industry. The study would also contribute to existing literature on deregulation thereby providing insight of current developments in the downstream oil and gas industry in Nigeria. Furthermore, the study would also serve as an important tool for students, academia, institutions and individuals to consult for knowledge on deregulation of the downstream sector of the Nigerian oil and gas industry.

1.3 RESEARCH QUESTIONS

In finding out the effects, challenges and prospects of the deregulation of downstream oil and gas industry in Nigeria, this study answers three questions: How can government improve the implementation of the deregulation of the downstream oil and gas industry to achieve the actual policy objective? In what way can government encourage the private sector to fully participate in the downstream oil and gas deregulation exercise? What informed the government deregulation of the downstream oil and gas industry and if it is the only solution in an economic environment such as Nigeria?

1.4 ORGANISATION OF THE STUDY

This study contains six chapters. The first chapter is the introduction and background of the study, the purpose of the research, significance of the study, the objectives of the study, the research questions, this would guide the study. Chapter two would present the literature review on the subject matter. Chapter three gives the theoretical framework of the study. The methodology to be adopted in the study would be stated in chapter four. Chapter five focuses on the presentation of data, analysis of collected data, findings and discussion of results. The last chapter which is chapter six, would present the conclusion and appropriate recommendations.

CHAPTER TWO

2.0 LITERATURE REVIEW

Many existing literature have argued on different perspectives and motives for the government deregulation of the oil and gas sector in Nigeria yielding different opinions from two school of thought. The opposing and the supporting group respectively. Those supporting deregulation argue that deregulation of the downstream oil and gas industry would actualize government move to eradicate fuel scarcity and ensure constant fuel supply across the country Funsho (2004). Similarly, deregulation of the industry would create inflow of foreign investment while persistent smuggling of petroleum products and inefficiencies in the sector will be eliminated Oluwole (2004). They also posit that Nigeria has the lowest price of petroleum products in the world and with deregulation the international market equilibrium would allow government to channel funds to other sectors of the economy. Furthermore, they argued that it would break the monopoly enjoyed by the Nigerian National Petroleum Corporation (NNPC) Okafor (2004).

Essentially, deregulation would lead to uninterrupted operation of the refineries, it would also guarantee steady supply by enabling stakeholders and independent marketers to participate in product importation and marketing Enemoh (2004). Their view is also that the regulated regime by way of subsidy is a way of government enriching few Nigerian petroleum products marketers Oluwole (2004). Findings from Abu (2012) indicates that Nigerians believes deregulation and privatization will usher in sustainable development and would be a blessing rather than a course. Odey (2011) recommends the complete deregulation of the downstream sector to reduce corruption, inaccurate record keeping, inefficiency, smuggling and insufficient product supply. Jean (2012) suggested that making deregulation work involves providing an enabling environment and framework for efficient production, supply and distribution. Braide (2003) recommends that the usual business as usual in the NNPC by way of product importation and distribution is inexpedient because it represents a wrong step for government to continue with instead government should fully deregulate the downstream oil and gas sector.

From the opposing group came the argument that the Nigeria petroleum industry must not be deregulated completely, instead government should maintain the status quo and restructure the sector to improve efficiency for the overall national interest. They opined that the root cause and clamour for deregulation is because of the massive corruption in the sector and therefore should be tackled rather than embarking on deregulation. They further argued that deregulation helps increase profit margin for the importers, interestingly this is the position of the labour union and the organized civil society. Furthermore, Amana and Amana (2011) asserts that the fair distribution of economic benefits derived from petroleum has proven elusive and therefore predicts same for deregulation. Ibanga (2011) argued that removal of subsidy may cause dislocation to the gas price because of high demand and inadequate supply. Bafor (2001) doubted government sustaining the gain of deregulation due to the undue interference in NNPC affair resulting to near collapse and dismal performance which encouraged the clamour for the privatisation and deregulation.

According to Kikeri and Nellis (2004) they argued that deregulation processes and institutions must be combined with appropriate competition policies and regulatory frameworks without which the gains of deregulation can be eroded by harsh impact on consumers and the overall economy affected due to inadequate product supply. Matthew and Fidelis (2003) opined that the merit of deregulation can only be enjoyed by Nigerians if only they could be genuine attention to eliminating corruption in the sector. Adagba, Ugwu and Eme (2012) posits that government is merely taxing the poor to subsidise the life of the rich.

Similarly, Akpanuko and Ayandele (2012) argues that government is not transparent in its drive to transform the economy and suggested reduction in the cost of governance, rehabilitating the refineries as a measure to drive the economy.

In global perspective, the theoretical argument behind the large scale deregulation reforms initiated in the late 1970s is two-fold. On one hand, deregulation reduces the rents that regulation creates for workers, incumbent producers, and service providers. This view has gained a widespread popularity among academics and policy makers ever since the works by Stigler (1971); Posner (1975) and Peltzman (1976) contributed to the understanding of the political economy of regulation. On the other hand, deregulation allows the newly created competition on product, labour and capital markets to determine the winner of rent transfers. Thus, by spurring productivity and efficiency gains Winston, (1993), economic deregulation ultimately contributes to the overall increase in economic growth.

The additional growth is brought primarily through increased employment and real wages Blanchard & Giavazzi (2003), which impacts both production and consumption and through increased investment Alesina, Ardagna, Nicoletti, & Schiantarelli (2005), this affects the capital stock in the economy. However, a need for caution is required on the recent take on the efficiency gains from deregulation in the developing world. The key argument in this new area of literature is that deregulation reforms influence diverse economies differently, depending on their position on the technology level and on their quality of institutions. For example, Acemoglu, Aghion and Zilibotti (2006) claim that certain restrictions on competition may benefit the technologically backward countries, while Estache and Wren-Lewis (2009) finds that ideal regulatory policies in developed and in developing countries are different because of differences in the overall institutional quality in those countries.

In addition, Aghion, Alesina and Trebbi (2007) use industry level data to demonstrate that within each economy, institutional reforms influence different industries differently, and more specifically, industries closer to the technology frontier would be affected more by deregulation and would innovate more than the backward industries in order to prevent entry. As a result, countries closer to the technology frontier would benefit more from deregulation. The alleged benefits of economic deregulation in many industries prompted a debate on the growth effects from specific types of reforms on petroleum product downstream deregulation.

2.1 THEORIES OF DEREGULATION

Deregulation can be looked from the angle of different theories, we have the public interest theory which presume that deregulation would occur if the market deficiency which compelled regulation in the first place were to disappear. An illustration is a change in technology which could eliminate a natural monopoly. The public interest theory also predicts that deregulation would occur if discovered that a regulatory regime which had been perceived to be in the public interest was defective. It may turn out that, in the light of experience, the cost of the regulatory apparatus is or has become greater than the loss resulting from the market imperfection it was designed to correct Posner (1974). Thus, it may become obvious only with experience that entry restrictions is a relatively costly way to enforce standards. From Stigler Peltzman came the version of the special interest theory which suggests that a number of factors which may give rise to deregulation.

First, a reduction in the cost consumers must incur in order to inform themselves regarding the effect of regulation on them. For example, price comparisons between regulated and non-regulated controls can assist consumers in estimating the effect of regulation on the prices they pay. Secondly, as product substitutes increases between regulated and non-regulated products, this would reduce profits and hence the urge to lobby for regulation induced price increases. Substitution may also occur between regulated and unregulated industries or between regulated and unregulated controls. Thirdly, a change in industry structure can reduce either the incentive or the ability to lobby for regulation.

Also, an increase in the number of firms in an industry or a merging of their respective interests may increase the incentive to free ride and make it more costly to organize support for politicians promising regulatory benefits Stigler (1974). Noll and Owen (1983) argue that, over time, the beneficiaries of regulation will grow while groups that lose will contract. In view of the interest group structure, alternative for substitutes and information, McCormick et al. (1984) offer two reasons why the incentive to regulate is greater than the incentive to deregulate. The first is that the cost of seeking regulation may be as much as the present value of the anticipated wealth transfer involved, and if this cost is sunk it is not recoverable in the event of deregulation.

The question is does Nigeria have a theory of deregulation? although the public and special interest theories of deregulation had slightly been criticized for the vagueness regarding transactions in policy frameworks and political markets. In the case of Nigeria the evidence on deregulation supports both the public and special interest theories. The two of them are in the same range, deregulation is used by government to effect wealth transfers through privatization. These transfers may benefit the highly concentrated special interest groups, such as petroleum product marketers and politicians. They may also benefit larger groups, like the deregulation of telecom industry. For the public interest group, government most times come up with reforms and policy frame work aimed at benefiting the masses, but often hijacked by the cabals who may want to exploit government programme to their own benefit. An example is the issue of oil subsidy which the original government intention was for public interest, but was later hijacked by special interest groups or cabals.

2.2 COUNTRY EXPERIENCES ON DEREGULATION

2.2.1 ARGENTINA

The Menem administration introduced deregulation in Argentina. The country underwent heavy economic deregulation, privatization and had a fixed exchange rate between (1989-1999). The resulting effects of Argentina deregulation exercise lead to the comparing of Enron with Argentina by Krugman (2001), asserting that they were both experiencing economic collapse due to excessive deregulation. However the claim by Krugman was termed as confusing correlation with causation, as neither the collapse was due to excessive deregulation Herbert (2002). He argued that if deregulation of the Argentine economy produced prosperity for years, how could it generate collapse within a few months? The answer is not deregulation but excessive loans.

2.2.2 AUSTRALIA

Deregulation in Australia commenced with the Minimum Effective Regulation in 1986 following the announcement by the Labour Prime Minister Bob Hawke of a wide range of deregulatory policies. The introduction of the policy, which is now a familiar requirements for regulatory impact statements, took many years for governmental agencies to comply with. Although wider competition policy reforms had commenced, during the 1980s trade policy reform which substantially increased competition in the domestic economy Smith (2001). In this regard the level of assistance to manufacturing sector was reduced from 25 percent to 15 percent of the value of manufacturing output between 1981-82 and 1991-92. They was reductions in import barriers, which off course exposed many industries to the rigours of international competition, providing increased incentives to improve product quality, costs and innovation.

2.2.3 CANADA

The deregulation of natural gas in Canada took place in the mid 1980’s, with exception of Atlantic provinces, Vancouver Island and Medicine Hat, the whole of the country natural gas was deregulated. A price comparison service is operating in some of these jurisdictions, particularly Ontario, Alberta and BC. The other provinces are small markets and have not attracted suppliers. Customers have the choice of purchasing from a local distribution company (LDC) or a deregulated supplier. In most provinces the LDC is not allowed to offer a term contract, just a variable price based on the spot market. LDC prices are changed either monthly or quarterly.

2.2.4 UNITED KINGDOM

The conservative government of Margaret Thatcher started a program of deregulation and privatization in 1979, where the conservative government criticised many public enterprises, including CEGB, for being too inflexible, bureaucratic and out of political control. As a remedy the government suggested deregulation and privatisation Foster (1993) ; Newbery and Green (1996). In response, the policy framework was enacted which included the express coach Transport Act 1980, British Telecom 1984, privatization of London Bus services 1984, local bus services Transport Acts 1985 and the railways 1993. The common feature of all the privatisations was the offering of the shares to the general public. In support of the policy since 1997 the Labour governments of Tony Blair and Gordon Brown developed a programme of better deregulation. This included a general programme for government departments to review, simplify or abolish their existing regulations, and introduced approach to new regulations.

2.2.5 NEW ZEALAND

The New Zealand governments adopted policies of extensive deregulation from 1984 to 1995. Originally initiated by the Fourth Labour Government of New Zealand Dalziel (2010). The goal of the policy was liberalising the economy and had a comprehensive coverage and innovations. The major specific polices included: establishing an independent reserve bank; floating the exchange rate; public sector finance reform based on accrual accounting; performance contracts for senior civil servants; tax neutrality; subsidy-free agriculture; and industry neutral competition regulation. The introduction led to Economic growth in 1991. New Zealand was changed from a somewhat closed and centrally controlled economy to one of the most open economies in the OECD Evans, Grimes, Wilkinson (1996).

2.2.6 UNITED STATES

Many industries in the United States became regulated by the federal government in the late 19th and early 20th century. Entry to some markets was restricted to stimulate and protect the initial investment of private companies into infrastructure to provide public services, such as water, electric and communications utilities. However in the 1970’s among the problems that encouraged deregulation was the way in which the regulated industries often controlled the government regulatory agencies, using them to serve the industries’ interests. In the energy industry the Emergency Petroleum Act was a regulating law, consisting of a mix of regulations and deregulation, which passed in response to OPEC price hikes and domestic price controls which effected the 1973 oil crisis in the United States. After adoption of this federal legislation, numerous state legislation known as Natural Gas Choice programs have sprung up in several states which allow residential and small volume natural gas users to comparison purchase from natural gas suppliers, aside with traditional utility companies.

2.3 CONCEPT OF DEREGULATION

Deregulation refers to a situation whereby they is a restrictive use of the state’s legal power to direct the conduct of private actors Stigler (1971). Deregulation programme is focused primarily on the withdrawal of economic interest of government apparatus. It is also the reduction of government regulation of business, consumers and market activity Economic glossary (2013). Similarly deregulation according to Webster dictionary is the act or process of removing state deregulations, it is the opposite of regulation which implies the process of government regulating certain activities. In the perspective of Kimberly (2013) deregulation is when the government seeks to allow more competition in an industry that allows near-monopolies. From the view of Ernest and Young (1988) deregulation and privatization are elements of economic reform programmes charge with the goal of improving the overall economy in a structured process.

Essentially in an economic perspective deregulation implies freedom from government control Innocent and Charles (2011), while Akinwumi et al (2005) asserts that deregulation is the removal of government interference in running a system. By implication, the normal regulatory rules and enforcement in managing the operation of a system is replaced with market force of demand and supply to be a determinant of price Ajayi and Ekundayo (2008). In the opinion of Wolak (2005) he sees deregulation as the removal of control by government on natural monopolies in order to exercise market power. Where for example in US regulation generally held natural monopolies to a specified rate of return basis for pricing products Rothwell and Gomez (2003). Deregulation introduced free market principles and competition into these natural monopolies Hirsch (1999); Kahn (2004); Novarro and Shames (2003); Rassenti, Smith and Wilson (2002) and created the frame breaking changes.

The deregulation of downstream oil and gas industry is the loosening of government control over the industry. It is a way of breaking the monopoly in NNPC in order to pave way for healthy competition. This implies the introduction of free market system, where the forces of demand and supply are allowed to determine the market price of products PPPRA (2004). This formula is in contrast to the regulated regime, where government acting on existing laws controls and determine retail and wholesale prices of petroleum products. A regulated regime is characterised by low level of competition and investment leading to distortions in product supply and distribution, scarcity resulting to long queues, hording, smuggling and other bottlenecks such as monopolistic practices, existence of subsidy and poor maintenance of infrastructural facilities Funsho (2004). The structural framework of deregulation involves the following phases: (1) Liberalisation (2) Privatization and commercialization.

2.3.1 LIBERALIZATION

Liberalization refers to a relaxation of the government previous restrictions, usually in areas of social or economic policy, in most context the process or concept is often, but not always referred to as deregulation Sullivan, Arthur, Sheffrin and Steven (2002). It is also the involvement of many participants in the downstream petroleum industry PPPRA (2004). Liberalization involves removing monopoly, promoting high competitive culture in the industry, product availability, ensuring fair pricing for consumer, reviving and ensuring the efficiency of the refineries Oluwole (2004). Liberalization also ensures the removal of oil subsidy, which robs the poor to pay the rich PPPRA (2004). Liberalization is aimed to generate additional revenue, which if properly utilized would address the needs of every one than subsidy would provide Funsho (2004).

2.3.2 PRIVATISATION AND COMMERCIALIZATION

Privatization involves the transfer of ownership of the government owned facilities, enterprises to individuals on shareholding basis, it implies state owned companies would be sold to private investors PPPRA (2004). In the context of deregulation government facilities, like storage tanks would be opened to private investors on a user fee basis. It is also defined as the act of selling a company or activity controlled by government to private sectors Longman Business English Dictionary (2000). According to Beim and Calomiris (2001), it is the sale by government, of a state owned enterprise. Ramanadham (1993) posit that it involves the marketing of enterprise operations which can be carried out through the options of ownership changes, organisational changes and operational changes. On the hand commercialization is the process of introducing new product or production method into the market Wikipedia (2008). Government intention is to open up the sector for products discovery and innovations PPPRA (2004).

2.4 GOVERNMENT POLICY ON DEREGULATION

The policy framework for the deregulation of downstream oil and gas industry evolved with the inauguration of a 34 member Special Committee by the government on the 14 th of August, 2000. The committee members from various stakeholders and other interest group where charged to review the Petroleum Products Supply and Distribution (SCRPPSD) and also the problems of the downstream petroleum sector. On October 2000, the Committee submitted its reports and the Government studied the recommendation and published its views in the Government white paper Oluwole (2004). Some of the decisions were: government should deregulate and liberalize the importation of petroleum products by oil marketers and that prices of products should be based on import parity to encourage the

participation of other players other than the NNPC. The privatization of all four government refineries and encouraging private sector participation in the establishment of private refineries. The establishment of a pipeline management authority for the pipelines, jetties and depots, which will charge private and public users a tariff per through put litre of products.

The i mmediate setting up of a Petroleum Products Pricing Regulatory Agency (PPPRA) with sufficient autonomy to superintend the various phases of the proposal embodied in the report (SCRPPSD) especially the deregulation and liberalization of the downstream sector of the petroleum industry. By this decision PPPRA was established by an Act of the National Assembly in May, 2003 as an agency to monitor deregulation implementation.

CONCLUSION

This chapter has highlighted related literatures on deregulation, which reveals the opinion of two school of thoughts the supporting and the opposing group respectively. While the literature supporting deregulation believe it will solve the problem in the industry, the opposing literature hitch its argument that deregulation of the sector would destroy the nation’s economy. The chapter also presented the public interest and special interest theory, which is always the bases for government introduction of deregulation. The concept and government policy framework on deregulation were also revealed, as well as countries where deregulation is already practiced. Generally, this chapter has clearly defined and given an overview of this study.

CHAPTER THREE

3 THEORITICAL FRAMEWORK

This study advances its focus on the perspective of strategic management. This is because of the essential role strategic management plays in policy implementation, planning, evaluation, monitoring and strategic control. It is believed that the effective impact of this roles would drive the success of the oil and gas industry deregulation reform. The perspective that underlines this concept is innovative management and competitive forces, the broad nature of strategic management and the peculiarity of the industry establishes this perspective as a vantage point to use as lenses to answer the study questions.

3.1 STRATEGIC MANAGEMENT

With the deregulation of the downstream oil and gas industry, the regulatory body needs strategic approaches to implement and ensure the success of the program. Since deregulation will increase the participation of oil marketers, which automatically will increase competition among the firms, therefore the application of strategic management tools becomes very important. However, before proceeding it’s important to understand the meaning of strategic management. According to Ansoff (1965) strategy is a rule for making decisions determined by product/market scope, growth vector, competitive advantage and synergy. Chandler (1962) defined strategy as planning and executing company growth, which consisted of deciding the basic long-term objectives of an enterprise and the resulting adoption of courses of action. It involves a clear awareness of the environmental forces and the way which they are changing. It is also an appreciation of potential threats, opportunities and the deployment of strategic resources to create new markets Thompson and Strickland(2001).

According to Mintzberg (1979) Strategy is a mediating force between the organisation and environment, stable patterns in the stream of organisational decisions to deal with the environment. Strategic management is the process by which organisation determine their purpose, objectives and desired levels of attainment, decide on actions for achieving these objectives in an appropriate time scale and frequently in a changing environment Thompson (2001). Strategic management consists of managerial decisions and actions that help to ensure that organisations formulates and maintains a beneficial fit within its environment Wright, Pringle and Kroll (1994). Consistent with this believe is that strategic management is a process of setting a goal in which the organisations capability is matched to the requirement of its environment Ralph (1996).

For competent strategic making/ strategy implementing efforts to show good results, it is the responsibility of the policy regulatory team or company’s management team to adjust unexpectedly to tough conditions by undertaking strategic defences and business approaches that can overcome adversity Thompson and Strickland (2001, p.4-7). The essence of good strategic making and management is to build a market position strong enough and capable to produce successful performance despite unforeseen events, potent competition and policy changes. The rationale for using good strategy making and good strategy execution is to ensure that a policy, task, industry or company is well managed. Strategy making / implementing process comprises of the following managerial tasks as shown in figure 3:

FIGURE 3: THE FIVE TASK OF STRATEGIC MANAGEMENT

Task 5: Evaluating performance, Monitoring new developments, and initiating corrective adjustments

Revised as needed

Revised as needed

Improve/ change as needed

Improved /change as needed

Recycle to tasks 1,2,3, or 4 as needed

Task 1: Developing a strategic vision and business mission.

Task 2: Setting Objectives

Task3: Crafting strategy to achieve the objectives

Task 4: Implementing and executing strategy

Source: Adapted from Thompson and Strickland (2001, p.7). Strategic management concept and cases.

Forming in a strategic vision of where the organisation is heading to in order to provide long time direction, indicating what kind of policy goal the government want to achieve and infuse the regulatory team with a sense of purposeful action.

Setting objectives and converting the strategic vision into specific performance outcome for the industry to achieve.

Crafting a strategy to achieve the desired outcomes.

Implementing and executing the chosen strategy efficiently and effectively.

Evaluating performance and initiating control and corrective adjustment in vision, long term direction, objectives, strategy and execution in terms of actual experience, changing conditions, new ideas and new opportunities.

The task as shown in figure 3 defines what the term strategic management means.

3.3 INNOVATION MANAGEMENT

Innovation involves the conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual use Trott (2005). According to Low and MacMillan (1988) it is the process of planning, organising, operating, and assuming the risk of business venture. Innovation is also the ability of firms to recognise opportunities in the market place Slatter and Narver (1994) ; Porter (1980; 1985). Cohen and Levinthal (1990) ; Trott (1998) argued that few firms have the ability to scan and search their environment effectively. The focus of innovation management is to allow the organization to respond to an external or internal opportunity, and use its creative efforts to introduce new ideas, processes or product Kelly and Kranzburg (1978).

Innovation management does not only refer to research R&D, it also involves workers at every level contributing creatively to a company’s development. The application of appropriate innovation management tools by management can trigger creativity to the entire workforce towards continuous improvement of a company Clark (1980). Innovation management process can be viewed as an evolutionary integration, technology and market by repeating series of activities such as: search, select, implement and capture Tidd and Bessant (2009). Van de Ven (2005) he suggested that first movers of technology innovation move faster in order to get optimal benefit. Although this does not mean that innovation has to be technological, it could be marketing innovation as a means to increase barriers of entry Porter (1979).

3.4 COMPETITIVE FORCES

According to Porter (1980) effective strategic management is the position of an organisation or industry, relative to its competitors, in such a way it gains competitive advantage. A Porter’s five forces framework which deals with how to perceive an industry structure, the attractiveness and profitability of the industry Porter (1979), the bargaining power from suppliers and buyers, the threats of new entrants, the threat of substitutable products/services, and rivalry amongst existing competitors. The five forces model views the industry as a whole and it also considers the firms product level. Therefore to successful apply strategic management is to understand the industry structure in terms of economic and other technical drivers, and in doing so requires to take a position that is more profitable and competitive. In view of the deregulation reform, competition in the industry will increase. Teece et al., (1997) suggested that investment decisions based on this model should consist of the following steps:

(1) consider an industry based on its attractiveness; (2) choose an entry strategy based on inferences about competitors rational strategies; (3) if not already possessed, acquire or otherwise obtain the requisite assets to compete in the market.

Figure 4: The porter five forces: Technique for analysing industries and competitors

Source: Adapted from Porter (1980).

Porter (1980) had argued that the five forces can be used as an approach to determine the profitability of an industry or where an organizational strength is most suitable; however, its assumed that the forces can be manipulated by marketing innovation with the purpose to increase the barriers for entry, such as brand identification, or to increase the perception of switching costs to embrace loyalty Porter (1980). Porter identifies six major sources of barriers to entry: capital requirement, economic of scale, product differentiation, access to distribution channels, cost disadvantages and government policy. To defend a position within the industry, Porter (1980) identifies three generic strategies that a firm could use and these are: differentiation, cost leadership and focus. Essentially, Porter (1980) argues that some firms within industries will be more profitable if they are either big with cost leadership strategies or small with differentiation or focus strategies, compared to medium sized firms which are less profitable and regarded as fixed in the middle. This study utilizes the porters five forces model to analyse the competitive forces that can sustain the firms in a deregulated regime.

3.5 OVERVIEW OF NIGERIA DOWNSTREAM OIL AND GAS INDUSTRY

The downstream oil and gas industry include all the activities from the delivery of crude oil to the processing plants for refining, conversion and value addition into gasoline, diesel, kerosene and petrochemicals, including transportation, storage, marketing of the finished products and associated services El-Rufia (2011). The value chain as shown in figure 4, entails the supply of the crude oil to the refineries, primary distribution from refineries to terminals, secondary distribution to depots and distribution to retail outlets for marketing. Petroleum products constitutes major part of living cost of Nigeria family like; transportation costs, cost the prices of cooking gas: kerosene and gasoline constitute a major part of their cost of living El-Rufia (2011).

Marketing

Distributing and selling refined products

Converting crude oil into finished products

Moving oil to the refinery and consumers with pipeline, trucks and tankers

Bring oil to the surface using technology

Using technology to find resources

Exploration

Production

Transportation

Refining Figure 5: The upstream, mid-stream and downstream value chain

According to EIA (2011), Nigeria domestic consumption of petroleum was about 286,000 bbl./d in 2011 of which about 180,000 bbl. /d was gasoline. Report from OGJ shows that the combined capacity of four major refineries in the country: Port Harcourt I and II, Warri, and Kaduna is around 445,000 bbl. /d. As a result of poor maintenance, theft, and fire, none of these refineries have been fully operational Funsho (2004). In 2009 and part of 2010 low performance of the refinery operation led to the importation of about 85 percent of Nigeria fuel needs EIA (2012). In 2011, the operational capacity at refineries averaged 24 percent, slightly higher than the 22 percent in the previous year.

3.5.1 INFRASTRUCTURE

Nigeria has oil infrastructure across the nation, Port Harcourt refinery was built in 1966 and has total installed capacity of 35,000 barrels per day (bpd). The Warri refinery with a total refining capacity of 125,000 barrels per day was built in 1978. In 1980 Kaduna refinery with a total refining capacity of 110,000 barrels per day was built. The nation’s fourth and last refinery was built in 1989, at port-Harcourt. In order to reduce the cost of transportation, the government constructed pipelines, linking all the depots in the country. By 1979, a total of 3,001 km of pipelines linking 16 storage depots to the refineries where constructed all over the country. According to EIA (2012), over 5,000km of pipelines have currently been constructed linking refineries and 21 storage depots nationwide as indicated in figure 5.

Figure 6: Downstream Infrastructure

Source: Download powerpoint presentation 1-New World Nigeria www.newworldnigeria.com

3.5.2 STRUCTURAL CHANGES

The introduction of independent market scheme by the government in 1978, led to the establishment of Independent Petroleum Marketers Association of Nigeria (IPMAN). In 1988, the Petroleum Inspectorate Department of the NNPC was renamed, the Department of Petroleum Resources (DPR) EIA (2012).The same period the department was separated from the NNPC and merged with the Ministry of Petroleum and Mineral Resources. To ensure the effective management of the pipeline network and overall distribution of petroleum products throughout the country, the government in 1988, established the Pipelines and Products Marketing Company (PPMC). The PPMC do not only manage the petroleum products pipelines and associated depots, but also oversees the overall processes involved in the marketing and distribution of products. The major role of the oil markets in Nigeria is the distribution of petroleum products around the country, while the major petroleum products they distributed includes the following:

Premium motor spirit (PMP or Petrol)

Automotive Gas Oil (AGO or Diesel)

Household Kerosene (HHK)

Aviation Turbine Kerosene (ATK or Jet-AI)

Industry Fuel

High Pour Fuel Oil (HPFO)

Low Pour Fuel Oil (LPFO)

Liquefied Petroleum Gas (LPG)

Bitumen

Base Oil

3.5.3 OPERATIONS

According to PPPRA (2004), the current major oil marketers are namely: Oando, Mobil, Conoil, Total, AP and Texaco. They control substantial share of the country’s oil market in terms of products supply and distribution. The major marketer’s presence is felt more in the major cities. Similarly, the Depot and Petroleum Products Marketers Association of Nigeria (DAPPMA) play significant role in products procurement and distribution in the country. Currently, about 5,000 Independent Petroleum Marketers Association (IPMAN) control a fairly large share of the oil market. IPMAN operations are felt more in the hinterland compared to the majors who dominate the cities.

3.5.4 RECENT DEVELOPMENT

Following the government removal of fuel subsidy on January 1, 2012 on the grounds that it caused market distortions, encumbered investment in the downstream sector, supported economic inequalities as rich oil marketers were the main beneficiaries, and created unclear channel for fraud. Contrary to government contention many Nigerians consider the fuel subsidy a key benefit of being an oil rich nation. Prior to the subsidy removal, the pump price of fuel was 65 naira ($0.40) per litre compared to the actual cost of around 139 naira per litre. According to the United Nations, the fuel subsidy costs the Nigerian government annually 1,200 billion naira ($7.6 billion), or 2.6 percent of the country’s GDP. Subsequent to the removal, the government restored a partial subsidy, requiring consumers at the pump to pay 97 naira per litre ($0.60), as opposed to the new price of 141 naira per litre. Fuel subsidy is a major challenge and debate have continue among government officials, oil marketing associations, unions, and concerned citizens, especially after the review of the sector by government, which culminated in the full deregulation of the downstream oil sector on 29th September, 2003 Oluwole (2004).

CONCLUSION

CHAPTER FOUR

4 RESEARCH MEATHODOLOGY

4.1 RESEARCH PHYLOSOPHY

This study seeks to examine the effects, challenges and prospects of deregulation of the downstream oil and gas industry in Nigeria: a management perspective. The study findings would help us to confirm or reject the assumption that deregulation is the panacea to the problem in the downstream oil and gas industry in Nigeria Fusho (2004). In other to clearly present the methodology used to achieve the research objectives, the diagram in figure 6 presents the research plan:

Table 1: Research Plan

Quantitative Research Paradigm

Epistemology: Interpretivism Approach

Ontological: Constructionism

Research Instrument Questionnaire

Research design: Case Study

The above diagram outlines the research methodology adopted in this study. In addition the research techniques and methods used for data collection are also inclusive. Duffy (1986) asserts that the nature of data and the problem for research dictates the research method. Based on the study objective the nature of data required for this research problem prescribed quantitative and qualitative research paradigm. In a quantitative research, measurement is central because it provides connection between empirical observation and mathematical expression of quantitative relationships Given (2008). Collis and Hussey (2003) argues that the decision and reliability based on quantitative data proves to be more accurate. The research also adopts qualitative search method because of its instruments which are concerned with understanding and classifying unit of content McQuail (1994).

This study employ the quantitative research method embedded in interpretive approach (ontology) and also interpretive/neutralism. Ontology refers to a process of determining the way things are and often discover the cause effect relations behind social reality, it helps to find out meaningful indicators of what is really happening Seale (2004). For a better understanding of deregulation implementation this prompted the adoption of ontological approach described as constructionism. Crotty (1998) had defined constructionism in social perspective in the purview that all knowledge and reality is dependent upon human practices being constructed through the interaction between human beings and their world.

4.2 RESEARCH DESIGN

Research design is the strategy, plan and the structure of conducting a research study Leedy (1985) which provides the overall framework for data collection. The adoption of a research for this study was driven by the requirement for the study problem: assessing the effects, challenges and prospects of the deregulation of the downstream oil and gas industry a management perspective. The collection of relevant data relating to this study requires quantitative and qualitative research design. In order to have a holistic and comprehensive response to the research question while reflecting the research paradigm the study adopted both the case study and non-probability sample design. The use of case study is appropriate for this study because it is concerned with uniqueness of a particular industry, contributing to the underlying pursuit of contextual depth Myers (2002); Leedy and Ormroid (2001); Babbie (2005). A non-probability sample design refers to specific selection of a group of individuals to represent the generality of a larger group from which there were selected. This implies that the individual that are selected comprises of the sample while the larger group is referred to as the population Wiley (1999).

4.3 SAMPLING PROCEDURES

A sample refers to as a segment of the population that is selected for research purpose. Essentially it is a subset of the actual population. This study utilized non-probability sampling method, where the degree to which the sampling differs remain unknown Lesser (2007). The study selected three states in the non-probability sample namely: Abuja, Lagos and Port Harcourt as sample states in line with the major geopolitical areas comprising of the North, West and East to represent the entire population of Nigeria. The choice of states is based on its cosmopolitan nature. Furthermore, in order to have an industry professionals opinion on the deregulation of the downstream oil and gas industry, an open-ended questionnaire were administered on two managers from Forth Oil, One manager from Oando Plc and One manager from Total Plc. A total of 186 questionnaire were distributed to target population of individuals using purposive sampling methods. According to Trochim (2006) he argued that in applied social research there are circumstances where it is practically not feasible to conduct random sampling. Purposive sampling refers to a technique where respondents are selected based on their knowledge of the research topic Seale (2004). From the 186 copies of the questionnaires that was given out, 150 copies representing 80.65 % responses were received for analysis using a statistical package for social statistics to obtain the adequate type of results. For the industry professional views, the four managers that respondent to the questionnaire were selected using purposive sampling method.

4.4 DATA COLLECTION METHODS

Data collection involves applying the measuring instrument to the sample or case study selected for the investigation Duffy (1986). It could be by auditory, visual and tactile observations and perceptions, the responses from people, their actions and events are classified (Duffy, 1986). This study employ questionnaire as its method of data collection. A self-administered dichotomous questionnaire of (YES/NO) was distributed to respondents in order to gather information on their views of the effects, challenges and prospects of the deregulation of downstream oil and gas industry. A slightly different questionnaire (Open ended) which are more courteous and provides background for interpreting results was administered to the managers of the three case study companies to obtain professional opinion on the strategic management aspect of the study. In view of the choice of questionnaire used in this study they were chosen because It saves time and minimizes bias associated with other instruments. It also allows respondents to freely express their feelings in their own ways by answering the questionnaire alone without fear of being further probed by the interviewer Best and Khan (1993).

5.5 DATA ANALYSIS AND PRESENTATION PROCEDURES

The process of data analysis involves discovering patterns among the collected data, in order to identify trends that point to theoretical understanding Babbie (2004). The data from questionnaire was recorded, coded, analysed and presented using statistical package for social statistics (SPSS), word and excel. The coding process involves categorizing the data by relating concepts after which data is analysed and interpreted descriptively Seale (2004). The answers to open ended questions in the questionnaire were categorised and summarised by identifying similar phrases, relations and common consequences, isolating patterns and processes, commonalities and differences Miles and Huberman (1994); Bryman (2004).

4.6 RESEARCH HYPOTHESES

The general data gathered for this research study will be used to test the validity of the following three hypothesis namely:

Hypothesis 1: Deregulation of the downstream oil and gas industry will deliver positive effects on the lives of Nigerians.

It is generally assumed that deregulation of the downstream oil and gas industry will usher in dramatic changes and positive effects on the lives of Nigerians. According to Izibili and Aiya (2007) deregulation will promote market competition, improve returns from investment and broadening enterprises ownership, thus improving capital market development. Similarly, Bankole (2001) argue that it will eliminate the barriers of participation by private marketers in all aspects of production, supply and distribution of products. Deregulation will yield in more fund for government by removing subsidy and saving #1.3 trillion yearly from the budget on fuel subsidy Chiejina (2012). Wunmi (2007) asserts that it will improve infrastructure development, human capacity building and entrepreneurship. Oduah (2006) extends his argument further by stating that smuggling of petroleum products to neighbouring countries thereby causing product scarcity will reduce. Furthermore Adebayo (1999) observed that deregulation will eliminate corruption in the petroleum sector which was motivated by the regulated regime. The validity of this assumption is tested in this study.

Hypothesis 2: Challenges to deregulation reform will not hinder the success of the deregulation of the downstream oil and gas industry.

In view of the general notion that government will encounter lots of challenges in the deregulation of downstream oil and gas industry in Nigeria. The assumption is that tackling the challenges will enhance the success of downstream oil and gas deregulation. Among the challenges is the government inability to display strong political will and commitment in resolving Niger Delta crisis, where the investments that will support deregulation exercise are located Adelabu (2012). Adedipe (2012) noted that corruption is a challenge that will mitigate against the deregulation policy because of selfish interest by government political groups. The regulatory role of government still constitute serious impediment to the use of market forces of demand and supply as determinant of price Christopher and Adepoju (2012). Insufficient and inefficient refineries, despite the 18 licences given to private investors to new build refineries none of them has commence, while the four refineries own by government are not functioning to maximum capacity Onyekwere (2009).The frequent destruction and breaking of petroleum pipeline including excessive smuggling as observed by Oluwole (2004) is a major challenge to deregulation. Funsho (2004) cited the oil price fluctuation in international market imposes import and financial burden on NNPC, discourages fuel importers to fully participate because of price variations. Furthermore he mentioned upsurge in foreign exchange demand which resulted in rapid depreciation of Naira. The challenges will be explored in this study to determine how it impede on the deregulation reform.

Hypothesis 3: Deregulation will facilitate prospects and opportunities in the oil and gas industry in Nigeria.

The downstream oil and gas industry is an important sector that drives the economy of Nigeria. It’s vital role in keeping the economy moving is an indication of government interest in the sector. According to Ajose (2010) he argue that deregulation regime will attract both foreign and local investors into building refineries and storage tanks.

Okereke (2010) noted that investment in building private refineries will lead to self-sufficiency and therefore would discourage fuel importation. Funsho (2004) observed that deregulation will create employment opportunity. The growth of the industry through deregulation according to Olayinka et al, (2009) will yield lower price of product and better quality of service. Okiti (2009) stated that it will lead to greater generation of wealth by government with the competitive incentives that serve as a platform for private sector participation. Enemoh (2004) argued that business activity in the industry subsector will increase like transportation, building jetties new depots and other services. The hypothesis of the study in this regard is to know the benefit of deregulation to the nation economy and the life of Nigerians. The above assertion will be confirmed by this analysis.

CONCLUSION

This chapter have discussed and provided the overall research plan in details. Conversely, the nature of the research have also been established and the study population has also been spelt out. The research instruments that were employed for this study were also identified and their justifications were assessed. The subjects involved in this research study were clearly specified. Finally the data presentation, processing procedures and research hypothesis were also described.

CHAPTER FIVE

5 ANALYSIS, FINDINGS AND DISCUSSION

In this chapter we will analyse and discuss the findings of the empirical study conducted to seek the views of oil and gas industry professionals as well as other Nigerians. This study sought to establish the effects, challenges and prospects of the deregulation of the downstream oil and gas industry in Nigeria. A review of the findings based on the quantitative and qualitative primary data sources will be examined and from the data collected an analysis on the respondents response on open ended questions would be evaluated on the perspective of deregulation implementation, strategies and mechanism of control, industry competitive forces and innovative management. The dichotomous questions reviewed the response of Nigerians on the effect, challenges and prospects of deregu