Nigeria’s petroleum minister expects oil prices to rebound

President Muhammadu Buhari recently unveiled a road map for Nigeria’s petroleum industry, highlighting the short and medium term priorities of the government for the sector. CNBC Africa’s Wole Famurewa speaks to Nigeria’s Minister of State for Petroleum Resources, Ibe Kachikwu about the outlook for Nigeria’s oil and gas sector.

KACHIKWU: A lot of the targets in the other parts of the 7 big wins are quite frankly internal. They are basically executive driven. Costs of production are executive driven. Refineries are executive driven. The one that concerns obviously the assembly a lot more are deregulations and the petroleum governance bill and the engagements that I’ve had so far is that they have a lot more energy to get this done than even we have. They have so far been the ones propelling me, saying, you need to come forward, you need to get involved with us, we need to begin to meet. I think there’s an urgency regarding how we move this forward. Obviously a lot of collaboration is going to happen and nothing says that once we begin there won’t be disagreements but the nice thing about how the present go forward reform bill is being structured is that first you have the governance aspect which deals with institutional framework, where hopefully there shouldn’t be too much difficulty in identifying what works or the lapses in the current system, and then you get into the fiscal side of things, which tends to be a bit more contentious in terms of what are the numbers that are right for investors versus the numbers that are right for the government, so you expect some engagement and then of course, the rest are basically the structures that your putting in place which are again largely executive driven.

I anticipate that at least some in a few areas should be easy to solve. We’re going to try and stay away from some of the contentious areas that usually pull you back like host community issues and other things like that, and we’ll see how this is worked in later parts of the bill. From the fiscal angle we’ll look at whether it makes more sense to amend existing laws to capture the changes that you want as opposed to writing a brand new fiscal bill. What is important is that we’re committed and if all my timelines do is ginger everybody back up because they have deadlines to deliver then that is a plus.

Can you provide more detail into the $10 billion infrastructure fund and also if you can provide some colour into role of the Ministry of Petroleum resources and other ministries and the private sector in getting these funds to the region?
KACHIKWU: I know a lot of papers made this their headlines basically saying $10 billion fund to be set up. What I said is that we’re putting together an institutional framework to enable us drive that. What I expect is that this is not asking the Federal or State government to give the full amount. I do expect them to contribute something but I’m looking to Oil companies, International Development Organisations, I’m looking to business opportunity revenues to invest in some of the projects. For example, if you set up a gas park, how much do you pull from the income generated by the business. It isn’t going to be like you bring in $10 billion, put it in an account and say hey guys come we need to start spending money. No. It is the total opportunity galvanisation into the area that is going to yield the $10 billion, and obviously there’ll be contributions from the oil companies who will hopefully see an advantage in the fact that if there’s more infrastructure in their area of operations they will have less of a problem in the future. You’ve got to compare what you’re losing in terms of security surveillances and what you’re spending versus what you will save if in fact you put in some money. So we’re going to look at what the oil companies are doing in community development.

How do we pull that in in a way that is representable, accountable and reflects the wishes of the local community. What most of the oil companies do is that they get in there and they say this is what I want to run. I want to run a malaria free program. I want to run an economic empowerment program. And increasingly over the last five years, they’ve dove tailed away from infrastructure, and placed more emphasis on economic empowerment. But the question is, economic empowerment for who? By who? What is the spread? What aspects of the population are affected. I’d like to go back and push them towards infrastructure, but even in doing infrastructure I’d like to see collectives. Say four or five companies come together and do a South-South road, involve the governors so they can contribute to it as well. The ten billion is the capacity of generative funds that you can have over a ten year period. So we’re going to launch it, get several international organisations and oil companies to back it up, and then begin to say where is the business that helps us generate that much. The mechanisms haven’t been completely worked out. We’re going to have to clear it with the Federal Executive Council, and the president, but the key thing is that we need to have a fund that addresses infrastructure because the gaping hole in the Niger Delta is infrastructure.

You’ve discussed $70 billion of investments that could potentially come from China, can you just provide an update about when those flows will be coming and where we can see those monies going?
KACHIKWU: Well, what we did when we went to the Roadshow in China was to take what we call the infrastructural gap in the oil sector: the dilapidated pipelines that have the potential for tariffing, the gas pipelines that have the potential for tariffing, the storage facilities that you can pay lease fees on, the refineries that you can turn profitable. We took all that and we came to a figure of about $50 billion and that’s what we went to sell. In terms of commitments we’ve sold all of them, but we need to move from commitments and memorandums of understanding to seeing the money physically realised. We’ve set up an internal team that is driving this process, trying to identify the specific interests of the companies that have signed up. We’re drawing up contracts and coming up with ways to provide security so that they feel comfortable investing in the sector. We’d love to push more towards investment as opposed to just a facility because we only have so much oil to pursue the payment of facilities. So we’d rather push for joint venture investments in the refining, depot, and pipeline areas and use tariffs as a means of paying back as opposed to looking for sovereign guarantees and providing collateral backed by crude.

It’s still early days, but, if all we do is obtain 20-30 per cent of the $80 billion, it will still be a massive injection into the infrastructure in the oil sector. It’s easier for you to do this in the oil sector than it is in most of the others, because for each element of the oil sector there’s a pay out sequence. You can charge the people that use your pipelines a tariff, and you can sell the end products of refineries, and you can always sell raw crude, especially in extreme cases. Once you can galvanise the oil sector to take advantage of those then the gains will percolate down to other sectors of the economy, and certainly the regenerative income will enable the government get into massive mining and agriculture. Ultimately the oil sector got us here, the oil sector will get us out of it too.

There’s been an ongoing conversation around the sale of assets in Nigeria to provide much needed foreign exchange to the private sector in a difficult time. Can you speak to the government’s thinking around this. Many have suggested for instance that we could potentially sell the government’s interests in joint oil ventures.
KACHIKWU: There isn’t yet a policy on that, there is conversation going on around that. I don’t believe that the President is mindful of selling assets. There’s a lot of politicisation of asset sales usually. But at some point, if we find that there are unproductive assets, we’ll need to look at the best way to realise yield from them. It isn’t likely to be a JV equity or anything from NLNG, but there is the opportunity to leverage income from some of the successful assets to fill up the gap and resuscitate the economy, so they are two different things altogether.

We also have to consider what other alternatives we have; where else we can get money. One way to do this is to be more efficient. I’m more keen on selling government assets where there is an uncorrectable efficiency lapse. For Joint Ventures the organisation is excellent so there’s no efficiency issue.
The only way that we’ll sell that is if there was a dire shortfall in cashflow. But then again, we can always forward sell our crude like we’re doing in India and get that cash. There are lots of mechanisms that could put money in your hands. You can leverage your dividends and get cash to put back in the system. We need to look very conservatively about having to sell assets because once they’re sold they’re gone. So you’re carrying a moral burden for society. We need to save our assets for the future.

We also have to look at the timing of sales, oil stocks are very depreciated. If you sell oil assets now you’ll get paltry assets on what would have been a very valuable national asset.

Thanks for that answer. Now, I want us to talk about your expectations for the oil price.
KACHIKWU: The Market is trending from conservative to medium term stable, that’s what I see. We started the year with prices as low as 27 or 28 dollars per barrel, and at that time everybody was shaking but I said, “no I think the market will eventually trend and we’ll end the year with an average that’s above-above $40 a barrel”. And we have. I think that in 2017 because OPEC finally listened to my push that we cannot afford to just let this go on.