COMPLETE SCHOOL PROJECT TOPICS & MATERIALS :
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The marketing of petroleum products in Nigeria began in the early 19th century by Socony Vacuum Oil Company (the predecessor of Mobil) which marketed sun flower kerosene. This later expanded to include the eight major marketing companies, Mobil, AP, Total, Texaco, Oando, Agip, Conoil, Elf marketing and independent marketers. They completely controlled the marketing and distribution of refined petroleum products. (Ola 1990).
According to Grend (2009) with the ensuing expansion of economic activities in the country, after the Nigerian Civil War, the nation witnessed an unprecedented explosion in the demand for petroleum products in the 1970’s. The private marketing companies could no longer cope with this increased domestic demand for products and this resulted in severe shortages of petroleum products all over the country.
This also constituted a major bottleneck to development in the country. As a result of this, government was therefore forced at this point to venture into petroleum products distribution and marketing to help solve the ensuing problems and ease the suffering of the consumers. According to Grend, to achieve and facilitate government’s involvement into the distribution and marketing of petroleum products, government decided to construct a network of pipelines and storage depots all over the country for the effective distribution of products. By 1979, a total of 3,001 kilometers of pipelines linking 16 storage depots to the refineries had been constructed all over the country.
Four “white” products namely, premium motor spirit (petrol), five star motor spirit, Dual purpose kerosene and automotive Gas oil (Diesel) are handled by this transportation and storage system. The marketing companies purchase these products at NNPC depots and then distribute them to their various filling stations. In addition to these depot and pipeline facilities, various pump stations are located on the pipeline routes to further enhance regular supply of petroleum products.
All petroleum products consumed in Nigeria were imported before 1965. Today Nigeria does not import all petroleum products as four refineries port-Harcourt 1& 2, Warri and Kaduna refine petroleum products at 445,000 b/pa capacity. The oil marketing companies naturally concentrated their activities in areas where cost of distribution was lowest and profits were highest. For instance, Lagos and Port Harcourt were well served while the hinterland was not adequately supplied. To encourage even distribution of products to all parts of the country, government introduced the uniform pricing system on October 1, 1973 for all grades of products, and to grant subsidies to the marketing companies to compensate for the differentials in the cost of operation.
In 1975, the Decree no. 9 was promulgated setting up the petroleum equalization fund Management Board with the following functions:
a) To retain any surplus revenue recovered from oil marketing companies.
b) To reimburse companies for loses suffered as a result of sale of products at uniform prices all over the country.
c) To recover the difference between the landed cost of imported products and the open market price in the country.
The country was then divided into 26 zones (A-Z), each having price differentials which can be claimed from or paid into the fund depending on its distance from the supply points at the refineries and ports. Amu (1990) also noted that the department and pipeline construction nation-wide effectively increased product storage capacity from 0.18 million metric tons to 1.83 million metric tons estimated as 90 days national requirement. The major thrust of the economic reform measures in the structural Adjustment Programme (SAP) is the de-regulation of prices of goods and services in the economy.
According to James (2011), at present, while pricing in most other sectors have been deregulated, there is still regulation in the pricing of petroleum products. For instance, the pump price of N97 per litre of premium motor spirit (PMS) is the result of a system of regulated pricing. Government, through the NNPC, sells PMS at N80 per litre while marketers’ retail at N 97 per litre is the gross margin allowed to marketers to cover their cost, overheads and transportation. This implies that both the wholesale and retail prices of petroleum products in Nigeria are regulated. On the contrary, with the de-regulation of the foreign exchange market and a 1100% decline in the value of the Naira, the cost of machinery, spares and additives in the oil industry have risen by a corresponding 1000% as against a 77% increase in petroleum product prices between 1987 and 1992.
Government is encouraging the use of domestic cooking gas from refineries. NNPC has introduced a uniform cylinder under its Butanization programme. At the moment over 2.3 million cylinders are in circulation and net annual additions are estimated at 180,000 cylinders.
1.2 STATEMENT OF THE PROBLEM
Over the years, researchers and the general public have noticed that petroleum products have been distributed and marketed under a regulated pricing system across the country. This project is therefore, designed to assess and investigate the effectiveness of marketing petroleum products to the ordinary citizen, in a regulated downstream sector through pipeline.
According to Kotler (2002) price is the only element in the marketing mix that creates sales revenue, the other elements incur cost. He sees price as the money value of a product or service as agreed upon in a market transaction. Busch et al (1985) held that price is the value assigned to the utility one receives from products or services. He maintained that, usually price is the amount paid on goods and services.
Orji (2000) opined that, prices of goods and services are influenced by the type of channels selected for the distribution of the products. He noted that, if the prices which, the marketer set for his goods are lower than the cost of production, there is the tendency that losses will occur. It is necessary for the marketer who is producing a particular product to realize the overall cost of offering his good/service to the market and set price that would at worse break-even.
According to Okwara (1991), the price of petroleum products for sometime has not been steady. At one time the price of petroleum product experiences an increase, and at the other time, it experiences a decrease. As a result of this epileptic nature, transport fares are also unsteady. In 2012 Federal Government came up with a new price for all the petroleum products in Nigeria as follows:
- Premium motor spirit (PMS) petrol N97.00
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AGO Automated Gas Oil (Diesel) N105.00
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Dual purpose kerosene (Kerosene) N50.00
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Liquefied petroleum Gas (Cooking Gas) N2,500
It is, however, observed that the incessant change in the price of the petroleum products has precipitated untold hardship among the citizenry
1.3 OBJECTIVE OF THE STUDY
The work is aimed at assessing the effectiveness of distributing, petroleum product in a regulated downstream oil sector. This will enable government to review or maintain their strategies on marketing of petroleum products.
Other objectives are:
- To determine the effectiveness of pipeline interlink in the distribution of petroleum products across the depots in a regulated down stream sector.
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To evaluate the pump price of petroleum products through pipeline in a regulated downstream sector.
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To determine the local participation policy under a regulated downstream sector.
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To assess the extent of supervision of pipeline in a regulated downstream.
1.4 RESEARCH QUESTIONS
- How effective is the pipeline interlink in the distribution of petroleum products to the depots across the county?.
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Can distribution of petroleum products through pipeline in a regulated downstream oil sector encourage uniform pump price in Nigeria?
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Will the distribution of petroleum products under a regulated downstream sector encourage local participation in the industry?
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What is the extent of supervision of oil pipelines in a regulated down stream sector?
1.5 RESEARCH HYPOTHESIS
HO1 The effectiveness of pipeline interlinks in the distribution of petroleum products across the depots in the country is not significant.
HO2: Distribution of petroleum products through pipeline in a regulated downstream sector will not encourage uniform pump price in Nigeria.
HO3 Distribution of petroleum products under a regulated downstream sector will not promote local participation in the country.
HO4 the extent of supervision of the oil pipeline will not be effective in a regulated downstream.
1.6 SIGNIFICANCE OF THE STUDY
This study will enable the researchers and scholars to have more insight into the activities of Nigerian National Petroleum Company (NNPC) in the area of product marketing with particular attention to the operations of Pipeline and Product Marketing Company (PPMC) in a regulated downstream oil sector of the economy.
1.7 SCOPE OF STUDY
The research was carried out in the petroleum Resources Ministry, Nigerian National Petroleum Corporation (NNPC) Petroleum Products Pricing Regulatory Agency (PPPRA) all major and independent marketers, and senior staff of pipeline and Products Marketing Company (PPMC). The research was carried out among senior members of staff (between
Grade Level 9-17) of the Ministry of Petroleum Resources, Nigerian National Petroleum Corporation (NNPC) and the senior staff of Pipeline and product marketing company (PPMC).
1.8 DEFINITION OF IMPORTANT TERMS
PETROLEUM
According to Grend (2001) Petroleum is a mixture of hydrocarbon oils obtained below the subsurface. In Nigeria, it generally occurs at depths below 1,500 metres. It is the raw material around which a chain of commercial activities known as the petroleum industry revolves.
DE-REGULATION
Ejoifor, (2004) defined de-regulation as the policy of minimizing Government control of the operations of an industry, removing undesirable protections and subsidies, such that operators would freely enter and exit the market while prices are determined freely by the laws of demand and supply. De-regulation does not therefore mean non-regulation. He noted that no system can operate without appropriate regulation. What matters is the degree and the subject of regulation. Activities in the oil and gas industry are normally classified into upstream, mid stream and downstream. The upstream covers all those activities related to the exploration, discovery and extraction of oil and gas and their treatment, transportation and delivery to designated export terminals or otherwise to processing plants. Activities under upstream includes: Oil Exploration, Oil Prospecting, Drilling and Production
The Main stream sector comprises of all other activities that are related to the following: Storage of crude petroleum, Delivery of crude petroleum to Refineries, Delivery of crude petroleum to jetties for export, Exportation of crude petroleum.
DOWNSTREAM:
Soyode (2001) defined the downstream segment as comprising all other activities following delivery to processing plants. These include refining and subsequent conversion to petrochemical products, transportation and marketing of the finished products and related ancillary services such as: Refining of locally produced crude oil into white petroleum products, Importation of white and other finished products, Storage of white products in depots, Distribution through: Pipelines or Bridging by long distance trucks, Pump Delivery to consumers and users in cars and cans, “Tail-Retailing” in gallons, bottles, and quarts.
ACRONYM
NNPC: Nigerian National Petroleum Corporation
PPMC: Pipeline and Product Marketing Company
NPDC: Nigerian Petroleum Development Company Limited
KPPC: Kaduna Refinery and Petrochemicals Company Limited
WRPC: Warri Refinery and Petrochemicals Company Limited
NAPIMS: National Petroleum Investments Management Services
PHRC: Port Harcourt Refining Company Limited
OPEC: Organization of the Petroleum Exporting Countries
OPL: Oil Prospecting License
NNOC: Nigerian National Oil Corporation
NPRC: Nigerian Petroleum Refining Company
PMS: Premium Motor Spirit
DPK: Dual Purpose Kerosene
AGO: Automatic Gas Oil
CBN: Central Bank of Nigeria
IPMAN: Independent Petroleum Marketing Association of Nigeria
ECOWAS: Economic Community of West African States
PPPRA – Petroleum Product Price Regulatory Agency
NLC – Nigerian Labour Congress
TUC – Trade Union Congress
NCDA – Nigerian Content Development Act
PIB – Petroleum Industry Bill
GDP – Gross Domestic Product