Interview: Femi Otedola
What can be done to improve Nigeria’s competitiveness in the downstream sector?
FEMI OTEDOLA: A great deal needs to be done to make Nigeria’s downstream sector more competitive. There is no doubt that the sector is in dire need of massive investment, something that has been difficult to encourage previously due, in large part, to the current pricing regime for premium motor spirits and gasoline. These products form the basis of roughly 70% of the country’s total refining production capacity, which is also driven by the high level of consumer demand. However, it is not properly priced. There is a price modulation mechanism in place which impacts the ability of investors to gain a stable and solid return. Reforming that and loosening regulations would help encourage new investment.
Also, there is a crucial need for capital, with the refineries, the pipeline network and the inland storage facilities all needing to be revamped and expanded. But even more needs to be done: the regulatory environment, for example, requires streamlining to boost turnaround times and improve collaboration.
Furthermore, allowing private ownership of pipelines would help increase private investment, as well as reduce operating costs by limiting road distribution (which is both expensive and slow) to last-mile deliveries. The benefits of this are clear. A fully deregulated market would attract the investment needed to make Nigeria a proper hub for oil refining and exporting. This is an area where the country has a number of advantages due to its strategic location in the Gulf of Guinea, not to mention its proximity to not only the western and southern African markets, but also the European and American markets.
Beyond price regulations, what challenges does the downstream industry face?
OTEDOLA: The principal challenges I see facing the sector include: very low local refining output in relation to national demand; inadequate foreign exchange to support the purchase of imports for bridging shortfall; outstanding subsidy payments, late payment interest and foreign exchange differentials from the government; slow approval and clearance times, especially at the import terminals; and crumbling road infrastructure, which makes efficient product movement a herculean task. However, there are numerous initiatives currently under way that should address these problems. The government is already working on key transport infrastructure via the massive capital allocation to all major road and rail projects. It is also engaging with key stakeholders on payment of the subsidies, and I believe that the state’s council on ease of doing business will help relieve the regulatory burden.
There are also ongoing efforts to improve refinery capacity. For example, Aliko Dangote has commenced the construction of what promises to be the largest refinery and petrochemicals facility in Africa. It is expected to begin on schedule and would ease the need for foreign exchange to buy imports and, most importantly, it would improve supply. The nameplate capacity of the Dangote Refinery Project is approximately 650,000 barrels per day, which is greater than the current level of local consumption. Therefore, this project should effectively eliminate petroleum products importation. A great deal is hinged on the success of this project, as a favourable outcome will set Nigeria firmly on the road towards becoming a net exporter of petroleum products in the near future.
How has the black market impacted Nigeria’s fuels sector and what has been done to combat it?
OTEDOLA: We have made a corporate decision not to engage in black market transactions. While this has impacted our product volumes, we believe that black market activity is not a sustainable alternative to official purchases. Bearing that in mind, and given the pervasiveness of black market activity in the import sector, we have stopped importation altogether.
Read More from OBG
