THE IMPACT OF DEREGULATION ON THE STRATEGIC MANAGEMENT OF THE PETROLEUM MARKETING FIRMS 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   nature   of   benefits   that   come   from   the deregulation of the sector, 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 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 petroleum marketing firms. The survey method was used in line with the objective of the study data were obtained form both primary and secondary sources and chi-square statistic was applied to test the hypothesis. The study reveals that 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 findings 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 maintained that the deregulation  downstream  sector  requires  a  change  in  business  modes  of operation and that the gains 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 1 970s, 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 Warn 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 (www.nnpcNigeria.com)

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 fortunes 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 ensures 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 points 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     Objective of the Study

The  objectives of study are as follows:

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

(2)     To identify the nature of the benefits that comes 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 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 establish 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 assess 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 questions .for the study are as follows:

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 favourably 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     Research Hypothesis

HA: I = The strategic management system of firms in the downstream sector has the capacity to adjust to the deregulation of the sector.

HA: 2  = Benefit derivable from  the deregulation policy accrue more to the independent stakeholders than the major stakeholders.

HA: 3 = Deregulation generally have positive impact on the management of firms in the downstream sector of the petroleum industry.

HA: 4 = The risks associated with strategic change impede the growth of firms in the downstream sector of the petroleum industry

HA: 5 = The strategies for operating the deregulated downstream sector of the petroleum  industry  compare  favourably  with  the  best  practice  in  the global petroleum industry.

HA: 6 =The leadership styles of manager/entrepreneurs of the petroleum marketing firms support performance and are effective.

1.6     Significance of the Study

Owning 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 arc in regulated markets, therefore, transition to 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).   www.afsc.org/africadebt/iargon.htm   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. It involves removal of entry barriers into  the supply and  distribution  of petroleum products. Under the policy of deregulation, no qualified and competent person/body is prevented from participating.

2.       Business Risk: This refers for the possibility that a company will not be able to meet ongoing operating expenditure. The possibility of an individual company losing with investors or having financial difficulty.

Also     called     security     specific     risk     or     non-systematic     risk www.optionskarning.com/glassaries/6/htm

3.       Best practice: This refers to a superior method or innovative practice that contributes to the improved performance of an organization usually recognized as “best” by other peer organization www.asg.org/infor/glossary/b/html

4.       Downstream:  This  is  an  oil  –  industry  term  used  to  refer  to  the

production,  transportations  distribution  and  marketing.  www.country

data.com/frd/co&bahrian/bh-glos.html&www.conocophullops/news

100m10th-resources/energylossaryd.htm

5.       Hedonsism:  The  oxford  desk  dictionary  and  thesaurus  define  it  as,

“belief in pleasure as the highest good and the proper aim of human”

http://projectparadox.f20               .org/thoughts/papers/in-defense-of-hed-

onssm.php

6.       Altruism: The  quality of  unselfish concern for the welfare of others

http://diet.net/altruism

7.       Charismatic leadership: This is leadership that possesses outstanding quality traits such as being visionary, energetic, unconventional and, exemplary  (Bass,  1985;  Conger  &  Kanungo,  1988;  House,  1977)

(http://chae.nrnus.edu/dboje/teaching/3 3 8/charisma.htm)

8.       Transactional   leadership:   Transactional   leadership   identifies   and clarifies for subordinate their job task and communicate to them how

successful execution of those tasks will lead to receipt of desirable job rewards  (Avoho   &   Bass,   1988;  Bass,  1985,  1990).  Transactional managers determine and define goals for their subordinate, suggest how to execute tasks, and provide feedback. (http:7/leadership.au.af.Mil/documents/homring.htrn)

9.       Transformational leadership: Transformational leader adopts a long- term perspective. Rather than focusing solely on current needs of their employees or themselves, they also focus of future needs; rather than being concerned only with short – term problem and opportunities facing the organization, they also concern themselves with long- term issues rather than viewing intra-and extra – organizational factors as discrete, they view them from a holistic perspective (Avoho et al, 1988).

10       Power distance: This is a term used to denote how society deals with the fact that people are unequal in physical and intellectual capacities which grow over time into inequalities in power and wealth then the extent to which people accept unequal distribution of power can be classified as either high, how, large or small power distance (Zofia, 1998) Hafstede’s) www.sha.muohio.edu/ABAS/1998/Kroskos2/pdf)

11.     Value migration: It is the art of anticipating and satisfying identifiable priorities and reasonable needs and expectation of the customer through valuable service(s) by organization. In order words, business would keep

afloat  by  thinking  ahead  of  competition  and  creating  value  for  the customer.

12.     Strategic management: Defined as the art and science of formulating, implementing and evaluating cross-functional decision that will enable an organization  to  achieve  its  objectives.  It  is  an  ongoing  process  that assesses the business and industry in which the company in involved, assesses it’s competitor and set or review strategies to meet all existing and potential challenges occasioned by a change in business environment or circumstance – such a new technology, new economic policies or political reordering etc.

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