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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Oil and gas industry has continued to be the mainstay of the Nigerian economy since 1956 when oil was discovered at Oloibiri in the Niger Delta region. It constitutes over 85% of total export earnings in Nigeria According to CBN report of 2011, the ratio of oil revenue to total government revenue in 1990 was 73%, it grew to 84% and 89% in 1993 and 2006 respectively. In 2010, it was 74% and 64% in 2014. The industry, no doubt, is widely acknowledged at the nation’s live-wire because it creates employment opportunities for Nigerians, contributes to Nigeria’s gross domestic product as well as government revenue, boosts foreign exchange reserves, provides cheap and readily available sources of energy for industry and commerce through the operations of the local refinery and the utilization of locally discovered natural gas (Odularu, 2008). However, Nigeria being the largest crude oil producer in Africa and seventh in the world still imports and pays international prices for the natural resources it has in abundance. Nigeria currently relies heavily on the importation of refined petroleum products despite being a major crude oil exporter. This is due to the inefficiencies in the downstream petroleum sector, as reflected in breakdown and low capacity utilization experienced by the nation's four refineries, price distortions and the accompanying limited incentives to invest in refineries, uncompetitive market structure, high distribution costs and rent-seeking behavior and the associated smuggling and other forms of leakages. (Ayodele, Obafemi, and Ebong, 2013). Considering the huge amounts spent overtime in subsidizing the consumption of petroleum products in Nigeria, the government decided to fully deregulate the retail price of petroleum.

The deregulation is aimed at reducing the government role as owner of assets and operator in the sector while maintaining an active role as a policy maker and regulator. The policy initiative is predicated upon the government objective of removing the institutional, regulatory and financial difficulties inhibiting the sector’s growth and development. Kupolokun (2005) noted that the main goals of deregulation initiatives include dismantle the natural monopoly of the state owned enterprise by privatizing and deregulating price controls, create competition in the downstream sector by encouraging more companies to get involved and eventually supplying the market at competitive pricing levels, reduce the cost government incurs on subsidizing the sector which runs as high as $1.5 billion annually, and can consequently use the resources freed up to handle the socio-economic and welfare needs of the Nigerian people, boost Foreign Direct Investment(FDI) to the Nigerian economy, reduce transportation costs of petroleum products and people, In a nutshell, deregulation is to promote competition in areas previously considered to be natural monopoly of an individual, group of people or government enterprises.

In recent years, deregulation of the downstream sector of the oil and gas industry has become a controversial issue in Nigeria. The government believes that subsidy for fuels distort the system, and encourages corruption; that deregulation will offer more benefits to Nigerians because the oil market will become more competitive and efficient, and the resulting benefits will be passed on to Nigerians in the form of lower product prices, better quality of service and ease as well as constant availability of the product (Yar’adua, 2009). Odidison (2003) stated that deregulation would bring sanity into the oil and gas industry since smuggling of petroleum products, vandalization of pipelines and all other vices in the sector will be totally removed. According to him, domestic price of oil will increase and the smugglers being irrational are

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