Report of the Presidential Administrative Panel ofInquiry into the February 2003 Fuel Shortage

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Report of the Presidential Administrative Panel of
Inquiry into the February 2003 Fuel Shortage
Executive Summary
Introduction:
This Administrative Panel of Inquiry was inaugurated on 4th March 2003
by the Secretary to the Government of the Federation to inquire into the
fuel shortage that had manifested in the country since mid-February.
Other than the last three years or so during which the nation enjoyed a
reasonably steady supply of petroleum products, fuel shortage has been a
recurring issue through several administrations. Thus, the members of the
Panel accepted the assignment with every sense of modesty regarding
what positive contribution we could make towards a permanent resolution
of a long- standing issue.
The assignment at the same time seemed difficult and easy – difficult in
that previous distinguished panels of inquiry on the same and related
themes were comprehensive in their coverage and recommendations; and
easy in that some of those panels provided a take-off point for this
exercise.
Indeed, the most recent exercise, The Special Committee on the Review
of Petroleum Products Supply and Distribution of October 2000, was
a comprehensive review of the downstream sector of the petroleum
industry and most of its recommendations were accepted or noted in a
government White Paper of December 2000.
This Panel therefore came to two early conclusions as follows:
• Had the most critical recommendations of the Special Committee
(October 2000) been systematically and painstakingly implemented
over the two years since its report, this current fuel shortage would
probably not have occurred and our exercise would not have been
necessary; and
• Part of our exercise would be to carry out a review of the report of
the Special Committee (2000) and re-emphasise what must be done
urgently to salvage the system for petroleum product supply and
distribution in the country.
Methodology:
In addition to the above report of the Special Committee (October 2000),
the Panel studied the Minority Report of the Nigeria Labour Congress
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(NLC) participants on the Special Committee (October 2000) as well as
the Government White Paper on its report. Important stakeholders,
including State Governments, the Petroleum Products Prices Regulatory
Committee (PPPRC), NNPC and its relevant business units, the
Department of Petroleum Resources (DPR), the Petroleum Equalisation
Fund, Organised Labour and major and independent Product Marketers
were invited to submit memoranda and present oral evidence to the Panel.
Notwithstanding that the duration of the exercise was limited to only
three weeks (later extended to four weeks) the Panel considered it
necessary to visit a few major cities – Kaduna, Maiduguri, Lagos and Port
Harcourt – to meet with refinery and depot staff and with the State
Governments and other stakeholders.
In all, twenty-seven memoranda were received and oral evidence was
taken in Abuja and the four cities named above.
Deregulation:
One key theme that was dwelt upon by the Special Committee (October
2000) and was equally central in our investigation is the need to
deregulate the downstream petroleum sector to enable competitive market
forces to apply. That would enable the full participation of the product
marketers in the supply and distribution chain and make products more
regularly available to the consumer.
Most of the stakeholders that made presentations to this Panel, including
State Governments, consumer groups, industry practitioners, the industry
trade unions (NUPENG and PENGASSAN) and individuals broadly
agree that deregulation in one form or another was inevitable if the sector
must be revamped and rescued. Opinions vary to some extent on details
as well as how far the process should go, for example, with regard to the
complete privatisation of the existing refineries.
One key stakeholder, the NLC, however remains adamantly opposed to
deregulation because of the additional burden they perceive would be
placed on the ordinary citizen. The Panel has some sympathy with the
concerns of the NLC to the extent that the report of the Special
Committee (October 2000) stopped short of addressing that concern.
On the other hand, it can be argued that the great majority of Nigerians,
outside the Lagos-Ibadan axis and Abuja, have for a long time not bought
Petroleum Motor Spirit (PMS) at the regulated price of 26 naira per litre.
This includes the vast majority of the Northern states, where consumers
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rely heavily on irregular sources through jerry cans and surface tank
sellers, and a large part of the South-Eastern states, where the market has
effectively been “deregulated” as a result of the tacit acceptance of
higher prices by the consumer. In addition, industrial users are
increasingly reliant on specialist imports of fuel at international prices.
Two points thus emerge, namely:
• The economy is already reflecting much of the effects of
deregulation since majority are paying up to Naira 50 to 100 per
litre in various parts of the country; and
• A large part of the subsidy being spent by the government is not
reaching the consumer but is rather being creamed off by the
marketers and middlemen.
This Panel has attempted to address the concerns of the NLC by
proposing that the savings from the withdrawal of the product import
subsidy should be invested partly for the upkeep of the downstream
facilities and partly on social infrastructure, such as effective mass
transit, roads, low cost housing, etc. This subsidy amounted to some 52.4
billion naira in the first nine months of 2002. A transparent process
involving a broad section of stakeholder representatives should be set up
to oversee the application of the savings through the relevant ministries
and government agencies.
The Panel also feels that the impasse between the government and
organised labour can be resolved through dialogue based on trust and
transparency. Well meaning senior citizens and statesmen and women
should be invited to facilitate such a process of dialogue, which should be
on a continuing basis.
In considering the ramifications of deregulation, the Panel likened the
process to that of taking a course of antibiotics, whereby failure to
complete the course would leave the patient actually worse off than
before the application of the medication. A phased deregulation as
proposed by the Special Committee (October 2000) is most appropriate in
our circumstance but it should be carried out within a given time frame
and with defined milestones rather than being left open ended. An openended
process could lead to some reversal of the earlier gains of the
exercise, including the dilution of the necessary psychological mindsets
for applying the measures.
The Petroleum Products Prices Regulatory Committee
(PPPRC):
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The creation of this body was probably the most notable recommendation
of the Special Committee (October 2000). The government should be
complimented for accepting the recommendation and taking immediate
steps to establish the body and proposing that it acquires legal status
through an act of the National Assembly. The PPPRC is still gearing up
for full business and its impact on the sector has so far been limited.
Indeed, some of the early interventions by the committee, such as the
waiver of import tax and the reduction of NPA charges, may tend to
entrench the status quo rather than pursue deregulation. The committee as
currently set up may not be able to rigorously drive the process of
deregulation to a logical conclusion as envisaged above. In seeking to be
broadly representative of important stakeholders groups it may have
become unwieldy for the tough decisions it has to make, relying more on
consensus. It currently faces a handicap that the NLC is declining to
participate in the committee’s proceedings.
The Nigerian National Petroleum Corporation (NNPC)
Much of the recommendations of the Special Committee (October 2000)
were for the action of NNPC. Unfortunately, it would appear that no
specific machinery was put in place by NNPC or concerted effort made to
implement those recommendations, such as the urgent repair and
refurbishment of the country’s refineries. The remedial actions taken
since the committee’s report, such as the repair of the Atlas Cove
facilities and the ongoing work at the refineries, appear to have been done
in the normal course of business.
The Panel feels that a high level task force should have been created, and
should still be created, at the executive director level to manage the
implementation of all the recommendations of the Special Committee
(October 2000). Such a task force should carry out a comprehensive
technical audit of the facilities, prepare the requisite budget proposals,
and draw up and manage a work programme based on priority ranking.
Appropriate milestones should be built in for measuring progress. It is
rather distressing to observe that despite the monies spent over the last
three to four years on our refineries, none can actually boast of a clean
bill of health. The country may therefore continue for a considerable time
to rely on importation for the greater part of its PMS consumption.
The Department of Petroleum Resources (DPR)
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The DPR has the responsibility to ensure the compliance of all activities
in the petroleum industry with the laws and regulations of the country.
Notwithstanding that the bulk of the regulatory requirements are in the
upstream sector, the attention of the department has increasingly been
channelled to the downstream because of the growing inadequacies and
profiteering activities in that sector. At the same time, the department’s
ability to fulfil its ever growing statutory roles has been hampered by the
general lack of funds, inadequate staffing particularly at the professional
cadres, and the disproportionate attention it is expected to devote to the
downstream around the country.
With deregulation, it is expected that many of the sharp practices by
marketers and middlemen, which currently take up much of DPR’s
attention, will be eliminated as the market becomes more open and
competitive.
The issue of the autonomy of the department is complex and long
standing and was the root cause of the latest strike by the PENGASSAN
staff of the department. The Panel hopes that the government will accord
the issue the attention it deserves, notwithstanding its intricacies.
The Product Marketers:
The product marketers fall into two groups, namely, the major marketers
that now number six (Exxon-Mobil, Chevron-Texaco, Consolidated Oil,
Total-Fina-Elf, Unipetrol-Agip, and African Petroleum), and the
independent marketers of which over 8000 are members of the
Independent Petroleum Marketers Association of Nigeria (IPMAN).
Except for a trickle of specialist imports at international prices, NNPC
literally sources and supplies the entire product requirement of the
country and makes them available to the marketers. The marketers
compete fiercely for the allocation of volumes and overall terms of trade
with NNPC. Notwithstanding the government’s gesture, they have not
participated actively in recent times in the importation of products
because the regulated pump price does not warrant an acceptable return.
On the other hand, they are accused of designing ways and methods to
maximise their profit to the detriment of stable product supply.
The major marketers, who receive the majority of the supplies from
NNPC, tend to adopt the attitude of not rocking the boat, being content
with leaving NNPC to carry the burden of product supply with all its
financial implications. For instance in the present crisis, NNPC has
claimed that it is not receiving their active support in bringing back order
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to the market. This is an untenable situation that can only be broken by
deregulating the market and engendering competition to the benefit of the
economy.
Unipetrol-Agip was the only major marketer that submitted a
memorandum and met with the panel after failing to organise a sectorwide
representation to the Panel. That is a measure of the extent of the
reticence that pervades the sub-sector.
IPMAN needs to be more effectively organised, self-regulating, and able
to rid itself of doubtful members, who are unable to abide by the rules of
transparent marketing. By so doing, and with their current investment on
depot facilities in Apapa, they can become more assertive in the sector
and be treated similar to the major marketers.
The Terms of Reference for the Panel:
i) The remote causes of the current fuel shortage are the neglect
over the years of our refineries and product distribution system,
including the receiving, storage and bulk transport facilities
such that the nation now relies on imported PMS to the tune of
some 60% of consumption. Necessary investments were not
promptly made over the years and much of the fund earmarked
for the sector was not effectively applied.
ii) The immediate causes are:
1. The non-implementation of the critical recommendations of
the Special Committee (October 2000); and
2. The combined effect of the non-delivery of a large part of
the first quarter import orders for PMS and the significant
reduction in February in PMS output from the refineries.
The four-day strike by the PENGASSAN staff of the
Department of Petroleum Resources (DPR) commenced after
the fuel shortage became manifest and thus was not a direct
cause of it. However, it admittedly contributed to panic buying
and profiteering due to the sensational media headlines it
received.
iii) The extent of the shortage was deduced from the data
provided by NNPC. The average consumption of PMS for the
fourth quarter of 2002 was about 23.7 million litres per day, of
which local refineries provided an average of 9.6 million litres
per day. In January 2003, average consumption was 27 million
litres per day of which local refineries contributed 10.5 million
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litres per day. However, the refinery output dropped to some 8.6
million litres per day in February or a fall of some 18% from the
January output. On the other hand import of PMS, which was
some 1.14 million metric tons (17.1 million litres per day)
during the fourth quarter of 2002, dropped sharply to some 0.26
million metric tons (3.9 million litres per day) for the first
quarter of 2003 reflecting a drop of 77%. Overall, the shortfall
in product availability between December 2002 and January
2003 was some 13.2 million litres per day (i.e. almost 50% of
the consumption) due mainly to the shortfall in imports. There
was an additional drop of some 1.9 million litres per day
between January and February due to the drop in refinery
output. Thus, the nation’s operational stock of some 20 days
consumption was effectively used to meet the January
shortfall leading to the shortage manifesting in February. The
cumulative impact has led to the long time it is taking to restore
normalcy to the market despite the drastic measures that NNPC
has since embarked on. The shortage varies regionally with the
northern states and rural areas generally worse off than the
southern states and urban centres.
iv) The responsibility for the remote causes would seem to lie on
previous government policies and actions. The Panel feels that
much of the responsibility for the immediate causes lies with
NNPC:
1. For failure to implement the many critical recommendations
of the Special Committee (October 2000);
2. For failure to read the warning signals in the international
product market thus suffering major delivery defaults in the
first quarter of 2003; and
3. For not applying due sanctions against defaulters to ensure
that only large and reputable product traders would qualify
to hold contracts.
v) Recommendations to prevent a re-occurrence:
1. NNPC and other relevant bodies should set up task forces to
address the critical recommendations of the Special
Committee (October 2000) as well as those of this Panel as
may be accepted by the government. The first priority must
be the refurbishment of the refineries and the storage and
distribution facilities. It should also consider the
establishment of additional depots and mega-stations in
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states with perennial fuel shortages and which are currently
not well served.
2. PPPRC should be given all necessary backing to carry out its
arduous task of managing the phased deregulation of the
downstream sector. If the consensual approach becomes a
hindrance, the government should consider restructuring the
body and giving it a quasi-judicial status. A deregulation
programme and time-table should be evolved with
appropriate milestones tied to the repair of facilities and
greater output from the refineries.
3. Demand has outstripped the combined output of our existing
refineries, the last of which was commissioned in 1988. The
government has approved the establishment of private
refineries but these cannot seriously take off until the market
has been deregulated. It is not recommended that the
government should build another refinery but rather it should
actively pursue the phased privatisation of the existing ones
within the milestones of a deregulation programme. The
government should provide appropriate incentives for the
rapid take-off of private refineries.
4. Concerted effort should be made to ensure normal product
availability during the rest of the year. NNPC is responding
to the current shortage by purchasing spot cargoes at higher
prices. It has also awarded second and third quarter contracts
and brought forward some delivery dates. These short-term
measures may deplete the product price subsidy budget
before the end of the year and leaving the nation exposed to
further shortages especially if the refinery outputs remain
unsteady.
5. Meanwhile, the refining capacity of the country can be
enhanced through offshore refining arrangements, which the
Panel understands is already under consideration by NNPC.
6. NNPC should monitor the international product market more
effectively, be more flexible in its contract terms as well as
more stringent in the application of sanctions against
defaulters. Whilst doing its best to encourage Nigerian
traders and increase local content in this sub-sector, this
should not be at the risk of poor performance particularly at
this period of critical reliance on imports.
7. There is need for the government to establish effective
dialogue on an ongoing basis with the key stakeholders in
the society. In particular, there is need to be seen to be acting
to improve relations with the NLC particularly on the subject
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of deregulation in general. The NLC should in turn be seen
to reciprocate the gestures of the government.
vi) Other recommendations incidental to the terms of reference
are as follows:
1. NNPC is a very large organisation by any standard and the
petroleum industry is global, complex and rapidly changing.
For survival and success, any serious player needs to
constantly re-engineer and re-invent itself particularly with
regards to its structure, processes and policies. Areas for
particular attention would include manpower development
and deployment, decentralisation of management processes,
and according appropriate authority levels to the business
units. It is recognised that NNPC straddles the public and
private sectors and is thus constrained on how fast it can rid
itself of public sector rules and protocols in its strive to
improve overall organisational effectiveness.
2. There is need to evolve a comprehensive transport policy
that on one hand can optimise the movement of people and
goods and on the other be energy efficient. The panel sensed
the feeling among some stakeholders that the nation could
afford to be profligate in the domestic use of petroleum since
we are a producing country. Such viewpoint would condone
the steady rise in domestic demand of PMS largely resulting
from the importation of non fuel-efficient second hand
vehicles (Tokunbos). It disregards the fact that petroleum is
a depleting resource and must therefore be used responsibly
in order to leave some for the generations to come even as
we meet current needs. The Panel feels that it is possible
with the right policy initiatives to reduce the current levels of
local demand without losing effectiveness.
3. In view of the foregoing, the Panel recommends that the
Energy Policy should rigorously be implemented to diversify
the development and use of our energy sources and reduce
the dependence on oil in line with the tendency elsewhere
around the world. Nigeria is blessed with an abundance of
other sources of energy, particularly gas, coal, hydro-energy,
and even thermal and wind energies.
4. The government should invest the savings from the
withdrawal of the product import subsidy partly on the
upkeep of the integrity of the downstream facilities and
partly on the provision of social infrastructure such as
effective mass transit, roads, low cost housing, etc.
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5. Finally, the government should pay more attention to the
implementation of recommendations of inquiry panels
appointed by it and whose recommendations are accepted in
its White Papers. Such a commitment would obviate the
proliferation of future panels on the same issue and earn
more public confidence in the use of panels of inquiry to
address public issues.
Conclusion:
The members of the Panel are grateful to the President, Chief Olusegun
Obasanjo, for finding them worthy of being given this critical assignment.
The panel faced several limitations during the exercise resulting mainly
from the suddenness of, and tight deadline for, the exercise. For instance,
we did not have an approved budget and the benefit of technical staff.
Nevertheless, members of the Panel were totally committed to the
assignment and put in their best to ensure its success. It is their hope that
their report will contribute to the long-term resolution of fuel shortage in
the country.