PROBLEMS AND PROSPECT OF MARKETING PETROLEUM PRODUCT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Petroleum Products marketing and distribution began in Nigeria at the turn of the century by Socony vacuum oil company (The predecessor of Mobil) which marketed sunflower kerosene.  Product marketing has expanded to the extent that seven major companies namely, AP, OANDO and a number of independent are now in the trade. NNPC was established in April, 1 1977 as a manger of the Nigerian National Co-operation and federal ministry of mines and power. NNPC by law manager the joint venture between the Nigerian Federal Government and another of foreign multinational Co-operation, which includes Royal Dutch Shell, Exxon Mobil, Agip Total Final Elf, Chevron and Texaco(through the merger with Chevron)through collaboration with companies, the Nigeria Government conduct petroleum exploration and development. The lead of the Nigeria wing of transparency international says salaries for workers are too low to prevent graft. As for September 2007, Nigeria president Umaru Musa Yar’Adua plans to split the company into five (5) new companies. The NNPC tower in Abuja is the headquarter of NNPC. It is made up of four (4) identical towers, it is located on Herbert Macaulay way, central business district, Abuja NNPC also has zonal offices in Lagos, Kaduna, Port-Harcourt and Warri, and there is also an international office located in London, United State.In May 2009, the NNPC identified that the Niger Delta unrest, had no impact on its business despite fight between Government and rebels in this oil producing areas. Around 1975, the marketing and distribution of petroleum product was entirely in private hand, owing to the quick recovery from civil-war. The overall expansion of economic activities and unprecedented exploring in the demand for petroleum products in the 1970s the private companies were able to cope with the domestic demand for product and the severe shortage that ensure all over the country constituted a major bottle neck to further development. This promoted Government to venture into petroleum product distribution and marketing.

Before 1965, all petroleum product consumed in Nigeria were imported. In that year, almost 35,000 barrels per day were produced. Port-Harcourt refinery was built by Federal Government and British Petroleum through the 1962 Government which created the Nigeria petroleum refinery company. The refinery initially met the domestic need for white petroleum products and exported some quantities of products to African Countries and high pure fuel oil to the United State owing to the economic expansion in the 1970s. The demand for premium gasoline and gas oil recorded an unprecedented average annual growth rate of 30% between 1947 and 1977. To meet the domestic need interim arrangement were made from 1975 to refine Nigeria’s crude oil in Curacao and Rotterdam for importation of the product to Nigeria. As at 1978 about 175,000 barrels per day were involve. This off shore refining arrangement continued until two new refineries were commissioned in Warri in 1978 and Kaduna in 1980. The two refineries have a combined processing capacity of 200,000 barrels per day. Recent forecast, however, indicate further increase in the domestic demand of petroleum products and the fourth National Development plan provides for the building of two more refineries. Petroleum products pricing was not in uniform throughout the country. The pump price depended on point of sales and this affected distribution and even development of the country. The oil marketing companies naturally concentrated their activities in areas where cost of distribution was lowest and profit was high. Lagos and port-Harcourt areas were well served while the inter-land was not adequately supplied. To encourage even distribution of products to all parts of the country, Government introduced the uniform pricing system in October, 1 1943 for all grade of product and to grant subsidies to the marketing companies to compensate for the differentials in the cost of product operation. In 1975 the Decree 9 was promulgated, setting up the petroleum equalization fund management board with the following functions:

1. To retain any surplus revenue recorded from oil marketing companies.

2. To reimburse companies for losses offered as a result of sales of product at uniform prices all over the country.

3. To recover the differences between the landed costs imported products and the open market price in the country.

Meanwhile petroleum products could be defined as a mix of hydrocarbon oil obtained below the subsurface, in Nigeria, it generally occurs at dept below 15.000 meters. It is the raw material around with a chain of commercial activities known as petroleum resolves. It is a major sources of energy in the world today and has in fact become the bedrock of man’s progress and civilization, petroleum is the raw-materials for a wide range chemical, for the production of pharmaceuticals, fertilizers, fibers for the manufacturer of textile and numerous other products essentials for human existence, e.g petroleum jelly for the body, candle for lightening and bitumen for firing roads and some others are product of petroleum. Oil prospective began in Nigeria as far back as 1908, when a German Company, the Nigeria Bitumen’s Corporation started exploitation in the Araromi area of the present Ondo State.  Their pioneering efforts however, ended with the outbreak of the First World War in 1941. In 1937 oil prospecting resumed in Nigeria.  Shell D’Arcy (therefore runner of the present Shell Petroleum Development Company of Nigeria) was awarded the sole concessionary high covering the whole territory of Nigeria. Their activities were again interrupted by the Second World War, but resumed 1947. It was not 1956. Therefore, the oil was discovered in commercial quantity at Olobiri in the Niger Delta after several years of search and an investment of over 30million Naira. Shell started oil production and export from its Olobiri field in 1958. Oil production and export from Olobiri field was first started in 1958 by shell at a production rate of 5,100 barrels of crude oil per day. The quantity doubled the following year, and crude oil export from Nigeria, rose to 2.0million barrels per day in 1972 and reach a peak of 2.4million barrels per day in 1979. Nigeria attained the status of a major oil producer, ranking the seventh in the world by 1972. We have since grown to become the sixth largest oil producing country in the world. A refinery with 35,000 barrels per day, crude processing was established in Port-Harcourt in 1965. This met the domestic demand for white petroleum products, excess fuel was expanded. After the civil war, it was expected to process about 60,000 barrels per day of crude oil. However, from 1970, after the civil war, the Nation witnessed a very rapid economic recovery and expansion strongly impelled by revenue from crude oil. As a consequence, the annual consumption of petroleum products escalated of rate parallel only by very few countries. Premium gasoline and gas oil for example, recorded an average of 30% annual growth rate. Arrangement had to be made from 1975 to refine Nigeria’s crude oil in Curacao and Rotterdam for re-importation of products to Nigeria. As at April 1978, about 175,000 barrels per day were involved. An increase in products demand covers 290% in about seven years had thus been recorded. The severe shortage of petroleum product in the country as at 1974 and 1975 were attributed to inadequate distribution network for petroleum products. Shortage facilities provided by the seven petroleum product marketing companied could not hold sufficient stock for the nation’s consumptions.  To solve this problem, therefore, Government through the ministry of petroleum resources embarked on the planning for the construction of a country wide petroleum products pipeline network totaling of about 3,000 kilometers linked to shortage terminals (depots) 17 towns.  Four “white” product namely; premium motor spirit (petrol) five star motor spirit, dual purpose kerosene and Automobile gas oil (diesel) were handled by this transportation and storage system. Contracts were awarded between 1976 and 1978 to international pipeline construction companies and depot construction contractors, at an initial cost of more than 500 million naira. Survey and preliminary works for the project started in 1977. The bulk of the work was executed in 1978 and some sections of the pipeline system were commissioned in 1979, the major function in the 1980 and the rest were commissioned during 1987/82. The pipeline network was divided into five system made up 8 pipeline sizes, ranging in diameter from 6 inches and 16 inches. The terminal which was commissioned in 1981 will handle import of refined products from local or overseas refineries and is connected to the Mosimi Depot by pipeline. There are four single product pipelines from Mosimi to the Lagos Depot, an Aviation Kerosene pipeline from Mosimi to Muritala Muhammed Airport and a pipeline from Mosimi to Ilorin depot via Ibadan depot; all is the system 2B network.

Government share of crude oil as a result of various joint venture agreements with the international oil producing companies is highly 70% of total oil produced. This oil is sold for government by NNPC and the proceeds are paid directly into Federation account. As a member of policy, NNPC sell oil to customers without any intermediaries. The customers are mostly direct oil users and in crude oil our joint ventures partners. The only authority on who should be in control of Nigerian oil is the government.  Oil sales are made to all customers at exactly the same price i.e. the official selling price (OSP).  There is no discrimination policy in customers relations.  Government has directed that some of our neighboring countries for whom oil sales is approved should have extended credit facilities of 90 days instead of the commercial 30 days credit. The 90 days of credits from government to poor developing countries is the only area of inequality with regards to other customers. All oil sold by NNPC was on long-term contract speculation in the spot markets were not part of Nigeria sales activities.  So a member of OPEC, Nigeria jointly with other members to determine the minimum price various members country should sell their crude oil. When these prices are in balance, sales pattern are determined by the desire of users for specific crude, distance to buyer and logistic of acquisition. In these days of over-supply, there are needs for discipline amongst members both in maintaining the price balance and production allocations. The alternative is for the market to collapse in a price war, at the end, OPEC total sales will remain what it would have been if the rules lay down were observed.  The joint ventures partners normally put their 30% oil shore through their system for down-stream operations.

TOPIC: PROBLEMS AND PROSPECT OF MARKETING PETROLEUM PRODUCT IN NIGERIA (CASE STUDY OF NIGERIAN NATIONAL PETROLEUM CORPORATION (NNPC)

Format: MS Word

Chapters: 1 - 5, Abstract, References, Questionnaire
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Number of Pages: 108

Price: 3000 NGN

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