EMPIRICAL ANALYSIS OF PROBLEMS OF PETROLEUM PRODUCTS DISTRIBUTION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The Nigerian petroleum industry has been described as the largest among all industries in the country. This is probably due to the belief that petroleum is one of the major sources of energy worldwide. The size, international characteristic, and role assumed by the petroleum industry were noted to have originated from the notion that petroleum is versatile as it currently satisfies a wide variety of energy and related needs. Petroleum is the most vital source of energy, providing over 50 percent of all commercial energy consumption in the world. The revenues obtained from crude oil in Nigeria are of absolute advantage to expenditure commitments on various projects at the local, state, and federal levels. The Nigerian economy relies heavily on the revenue derived from Petroleum products, as they provide 70 percent of government revenue and about 95 percent of foreign exchange earning. Apart from this, the contribution of petroleum to national development is many and varied; employment generation, foreign exchange earnings, income generation, industrialisation, and improvements in other economic variables.

The Nigerian economy is starkly dominated by the petroleum industry since the oil boom of the 1970s. Therefore, its economic growth and development also is dependents on the production and consumption of Petroleum product and hence, a close connection between the state and oil in Nigeria (Okunroumu, 2004; and Falegan & Okah, 1980). For instance, Wurthmann (2006) noted that oil accounts for about 40 per cent of Nigeria’s GDP, 70 per cent of federal government revenue and 92 per cent of its foreign exchange earnings. Also, daily domestic demand for Petroleum products stands at 530,000 barrels per day (bpd) which is 85,000 bpd more than the never-made 445,000 bpd installed refining capacity. As a result, Petroleum products supply remains an acid test for successive governments in Nigeria. With the inception of democracy in May 29th, 1999, the supply of Petroleum products has improved but not without a price – frequent increases in Petroleum products price yet demand of Petroleum product is still higher than supply  (Sabo and Igwo, 2007:105).

As a result people clamor for deregulation of Petroleum product. In Nigeria, the 2003 deregulation of the sector is expected to give room for competition and maximize supply sources which would transform to price reduction and deflate scarcity. Prior to this moment, attempts were made to invite private firms into the sector, most of whom, including NNPC itself, sought for the importation of Petroleum products instead. Yet still fell out due to regulated domestic prices and a whooping amount as subsidy to the consumers (Nwafor, M. et al, 2006:11). The private investors were also not willing to take over the dilapidated, disrepair, and poorly performing state owned facilities (refineries, depots and pipeline system). Thus, the sector is so plagued by, not only, low capacity utilization of the midstream sector, inadequate distribution (pipeline, rail and road) networks and storage facilities, products diversion and adulteration, black-marketing, fire incidents, smuggling as well as inefficient monopolistic/state control on prices (Oriyoosu, 2007:113-115

Hence petroleum distribution is constraint by issues arising from poor maintenance of facilities and infrastructure by government; products adulteration and pipeline vandalization; low investment opportunities; sabotage by cartels, large-scale smuggling of crude and refined oil as well as the importation of Petroleum products.); rampant black markets, e.t.c. due to inefficient market structure caused by the monopolistic control of the state on price (Oriyoosu, 2007:113-115).

As a result widespread Petroleum products shortage and unending price hikes are the daily reports bringing untold hardship to the rapid growing Nigerian populace. Therefore, the low Petroleum products from local refineries, inadequacy of Petroleum products  importation at international prices, and particularly, inefficiency of domestic prices of Petroleum products set by the state and numerous constraint that have not yet being discovered by previous researches, stand out as the fore setbacks to petroleum distribution in Nigeria. It is against this background that this study is triggered.

1.2       Statement of the Problem

Many research efforts in the area of petroleum distribution in Nigeria have dealt with macro issues, as well as conduct and performance of marketing activities as they relate to performance indices such as market share, growth, efficiency and well being of consumers and clients. However there are few researches on the problems of petroleum distribution in Nigeria (Okoh,2012).

Hence the problem of this study is to analyze the problem of petroleum distribution in Nigeria by investigating factor militating against Petroleum product distribution from government refineries as well as from the side of major and independent marketers. In this regard the research is focused on issues of sabotage of petroleum infrastructures and illegal  bunkering as well as problem of ineffective regulation of Petroleum product in the downstream sector and inefficient utilization and maintenance of Nigeria’s state-owned refineries and petrochemicals plants in Nigeria and the institutionalised corruption of government officials and independent marketers in charge of Petroleum product distribution.

1.3       Research Questions

i)          What are the constraint militating against Nigeria’s state-owned refineries and petrochemicals plants as well as affiliated regulatory agencies in Petroleum product distribution?

ii)         What are the problems associated with the distribution of Petroleum product in  the downstream sector?

1.4       Objectives of the Study

The central objective of the studies is to examine the problem of petroleum distribution in Nigeria. The specific objective are:

1. To identify the factors militating against Nigeria’s state-owned  refineries and petrochemicals plants in Petroleum product distribution.
2. To find out the problems associated with the distribution of   Petroleum product in the downstream sector.

1.5       Statement of Hypotheses

To give this work a sense of direction, the following pairs of hypotheses have been considered:

H0: Petroleum product distribution in Nigeria’s state-owned refineries and petrochemicals plants is not hampered by pipeline sabotage and illegal bunkering as well as institutionalised corruption of government officials.

H1: Petroleum product distribution in Nigeria’s state-owned refineries and petrochemicals plants is hampered by pipeline sabotage and illegal bunkering as well as institutionalised corruption of government officials.

H0: Petroleum product distribution in the downstream sector is not associated with hoarding and diversion of Petroleum products by major and independent marketers.

H1: Petroleum product distribution in the down stream sector is constraint with the problem of hoarding and diversion of Petroleum products by major and independent marketers

1.6       Significance of the Study

This study is of great relevance to the Pipeline and Product Marketing Company (PPMC), petroleum marketers and consumer. This relevance applies to researchers and scholars of Petroleum products and its distribution process. The Federal Government is likewise a beneficiary of this study as they will be aware of the cancer eating up the distribution process and a better approach to tackling it.

Finally, this study is of great relevance to the general public as they are enlightened on the process of distribution and also the dangers associated with the disruptions of the smooth flow of these products pipelines.

1.7       Scope of the Study

The study covers the Country's Pipelines and Product Marketing Company's network nationwide. The period covered is from 2006 – 2011.