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:

i.                   
To
identify the factors militating against Nigeria’s state-owned  refineries and petrochemicals plants in Petroleum product
distribution.

ii.                 
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:

1.                 
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.

2.                 
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.