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

ABSTRACT

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

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study Area

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

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

Consequently, the first refinery in Nigeria – the old Port Harcourt refinery was built in

1965 as a commercial venture to provide petroleum product at market related prices. It was a 35,000 bard per day refinery jointly owned by shell (25%), British Petroleum (BP)

25%, the Federal Government (20%), and the three regional governments (10% each), (Kopolokun, 2004).

However, by mid 1970s, with the advent of the oil boom government became directly involved in the downstream sector by building two new refineries and lacking over the

first. The Warri refinery was commissioned in 1978 while the Kaduna refinery came on stream in 1980. Government’s main objective was to make petroleum products available throughout the country

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

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

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

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

   Loss of revenue to government

   Petroleum products scarcity.

      Funding problem for NNPC, leaching to lack of regular maintenance of refining and distribution facilities.

   Capacity under utilization.

   Smuggling of petroleum products

   Divestment by marketers

   Wastages

   Adulteration of products

   Social and political unrest

   Poor economic growth

   Rampant pipetine ruptures and vandalisation

   Inadequate and ageing conastal vessels

(NNPC News, January, 2005).

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

For many year, NNPC was not able to meet the objective for which it was set-up as a result  of  the  underlying  factors  briefly  mentioned  above  and  this  must  have  be

responsible for government’s decision to deregulation the downstream sector (NNPC News January, 2005).

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

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

   Maintaining self sufficiency in refining.

   Ensuring regular and uninterrupted domestic supply of petroleum products.

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

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

The downstream reform is therefore expected to ensured

   Petroleum product price determination by market force.

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

   Freedom for marketers to source petroleum products locally and internationally.

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

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

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

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

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

1.2      Statement of Problem

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

   the burden of subsidies on the national treasury;

   the strain of financing state owned; petroleum business;

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

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

   licensing of private refineries;

   the need to break the monopoly of NNPC; and

   the general benefit of deregulation

These point of reference outline above excluded perhaps, inadvertently, the multiplier affect the reform will have on the domestic petroleum marketing firms. The committee recommended complete deregulation of the downstream sector of the petroleum industry. In September of the same year, the federal government announced the deregulation of the downstream sector. This announcement tended to exert enormous influence of the management of petroleum marketing firms in the downstream sector of the industry.

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

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

1.3      Objectives of the Study

The objectives of the study are as follows;

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

(2)   to identify the nature of the benefits that come from the deregulation of the sector;

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

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

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

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

1.4      Research Questions

The research question for the study are as follow:

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

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

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

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

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

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

1.5      Hypothesis Formulation

Hypothesis 1 (Ho): The strategic management system of firms in the downstream sector has the capacity to adjust to the deregulation of the sector.

Alternate Hi:          The strategic management system of firms in the downstream sector does not have the capacity to adjust to the deregulation of the sector.

Hypothesis 2 (Ho): Benefits derivable from the deregulation policy accrue more to the independent stakeholders than the major stakeholders.

Hypothesis 3 (Ho): Deregulation  generally  does  not  have  negative  impact  on  the management of firms in the downstream sector of the petroleum industry.

Alternate Hi:          Deregulation generally has negative impact on the management of firm’s in the downstream sector of the petroleum industry.

Hypothesis 4 (Ho): The risks associated with strategic change impede the growth of firms in the downstream sector of the petroleum industry.

Alternate Hi:          The risk associated with strategic change do not impede the growth of firms in the downstream sector of the petroleum industry.

Hypothesis 5 (Ho): The strategies for operating the deregulated downstream sector of the petroleum industry compare favourably with the best practice in the global petroleum industry.

Alternate Hi:          The strategies for operating the deregulated downstream sector of the petroleum industry do not compare favourably with best practice in the global petroleum industry.

Hypothesis 6 (Ho): The  leadership styles of  manager/entrepreneurs of  the  petroleum marketing firms support performance and are effective.

Alternate Hi:          The  leadership styles of  manager/entrepreneurs of  the  petroleum marketing firms do not performance and are thereby ineffective.

1.6      Significance of the Study

Owning to the fact that petroleum marketing firms play a major role in serving other business outside the  petroleum industry, this  research has  of  necessity attempted to highlight  the  strategic  implications  of  these  firms  operating  in  a  new  business environment and that returns are not guaranteed in competitive markets as they are in regulated markets, therefore, transition to a deregulated environment requires different skills and capabilities from managers than those in a regulated environment.

The study also points to the knowledge that participation in competitive environment may lead to performance difficulties and increases. In firm risk, at least in the short-run, more so  that  majority  of  the  petroleum  marketing  firms  in  the  downstream  sector  lack

executives with experience in competitive environment, especially when the transition was sudden.

In response to the challenges posed by the sudden deregulation of the downstream sector of the petroleum industry, it is therefore imperative for these firms to train their managers on the knowledge with which to identify the strategic lapses in their organization and to adopt new strategies to match the exigencies of the future.

Today, deregulation is a topical issue in Nigeria and no prior research has been attempted to address its consequences on petroleum marketing firms. This pioneer study is therefore significant as it responds to this niche. It also closes a gap in the literature.

1.7      Scope of the Study

Strategic  planning focuses  on  issue  of  concern  to  organization  top  management  in choosing and charting a path towards sustainable competitive advantage and superior performance. This include; strategic change (which is the thrust of this work), strategic processes such as decision making, entrepreneurship, creation and management of new businesses, it also focuses on the relationship between organization and its environment, political, economic and social cultural, including social responsibility issues. The current study is to examine the strategic implication of deregulation in the management of firm diversifying from a regulated environment to a deregulated environment in the same industry.  This  research  will  be  limited  to  the  petroleum  marketing  firms  in  the deregulated downstream sector of the petroleum industry among others.  It will also examine the problems associated with the downstream that have precipitated its sudden

deregulation,  the  mode  of  deregulating  the  downstream  sector-considering the  best practice in the global petroleum industry. Finally, the researcher will suggest feasible solution to the strategic problems affecting the operators of the sector particularly, the petroleum marketing firms. The period covered in this study is 1999 to date, a period commonly referred to as “Era of National Economy Rejuvenation”.

1.8      Limitation of the Study

The researcher is however, constrained by time and means to reach out to over 1570 firms in the industry located in the south-south geo-political zone of the country (Department of Petroleum Resources (DPR) but the few covered (94 in number would form useful basis for the conclusions arrived at in the study. Also, in the course of interviewing respondents, the researcher discovered that the respondent were scared of giving out information necessary for the study for the suspicious that the researcher is an agent of the much dreaded “Economic and financial crime commission (EFCC).

1.9      Definition of Terms

For the purpose of clarity and common understanding, the researcher has hereunder, defined some of the terms used in this work:

1.         Deregulation: This refers to the removal or reductions and restrictions that affect the operation of a particular market or the economy as a whole (Brettton woods

1994  in   the   context   of   the   study, deregulation is the opening up of the downstream sector of the petroleum industry to competition among all players in the industry. It means allowing every participant the opportunity to refine or import petroleum products for use in the
country in so far as products so refined or imported meet quality specification.

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