Another four years of hope for stable oil prices

Oil rig

Oil rig
Nigeria’s Minister of State for Petroleum Resources, Ibe Kachikwu, was quoted two years ago to have said he would resign if Nigeria continued to import fuel by 2019. His 2019 projection was hinged on the proposed completion of Dangote’s refinery at the time. Despite sustaining the flow of products with minor issues in the last four years, deregulating Nigeria’s oil sector under President Muhammadu Buhari as the Minister and economic diversification appear to be far from reality. Will another four years change the tide? FEMI ADEKOYA writes.

After almost three and a half years since global oil prices dipped to precarious levels for major oil-producing nations, many producers and major consumers have deepened investment in gas and other renewables.

Oil prices had plunged from more than $100 per barrel in mid-2014 to dipping below the $30/barrel price point by January 2016.

While fossil fuels are increasingly becoming unfashionable, for Nigeria however, exploration is being intensified for new wells so that the government can meet its fiscal responsibilities.

This position was reiterated by President Muhammadu Buhari’s government with the unveiling of a roadmap tagged ‘7 Big Wins’ to develop a stable and enabling environment that will maximise investment opportunities in the oil and gas industry and generate increased growth in the Nigerian economy.

“Oil and gas still remains a critical enabler for the successful implementation of our budget, as well as the source of funds for laying a strong foundation for a new and more diversified economy,” notes President Buhari.

According to President Buhari while flagging off the official commencement of crude oil search in the Kolmani Well River-II, located near Barambu, Alkaleri Local Government Area of Bauchi State, earlier in the year, exploration for crude oil was part of his administration’s promise in terms of growing Nigeria’s economy.

He said: “A key execution priority of the ERGP is ensuring national energy sufficiency and this cannot be achieved through hydrocarbon resources from the conventional basins alone. Therefore, exploration in our frontier basins is a national imperative and a core policy thrust that must be sustained.”

He added: “It is on this note that I directed the NNPC to aggressively intensify its exploration campaign in the inland basins to discover new hydrocarbon reserves that will boost oil and gas production and extend economic benefits to the people within the North-East and the nation at large.

“This is a landmark of the promise kept by this administration to the Nigerian people. Our next level is to ensure that exploration efforts in all our frontier basins, namely Chad Basin, Gongola Basin, Anambra Basin, Sokoto Basin, Dahomey Basin, Bida Basin and Benue Trough are intensified to usher in prospects for more prosperous Nigeria.”

Despite the explorations, Nigeria gets relatively so little from its crude oil resource due to lack of technical input in the production and enabling laws to drive investment.

The Minister of State for Petroleum Resources, Emmanuel Ibe Kachikwu, had projected that by 2019, Nigeria would be a net exporter of petroleum products and value-added petrochemicals achieved by an aggressive revamping of existing local refining capacity and expansion of domestic capacity.

With the delay in Dangote Refinery’s operations, Kachikwu, in April 2019, said the Nigerian Government was looking at the possibilities of having the Kingdom of Saudi Arabia build a refinery in Nigeria.

He said the government had begun talks with the Saudi official oil company, Saudi Aramco, for investment in Nigeria’s moribund refineries and liquefied natural gas-producing company (NLG).

Data from the Nigerian National Petroleum Corporation showed in March, that the operating deficit recorded by the nation’s refineries rose by 39 per cent to N132.5billion in 2018, compared to the previous year.

The refineries posted a loss of N95.09billion in 2017, according to the NNPC data.

The refineries, which are located in Port Harcourt, Kaduna, and Warri, have a combined installed capacity of 445,000 barrels per day but have continued to operate far below the installed capacity for many years.

Port Harcourt refinery, which did not process any crude oil in seven months, recorded the biggest loss of N59.96billion in 2018.

Kaduna refinery, which was idle for 11 months, lost N31bn while Warri refinery recorded a deficit of N41.71bn, according to the NNPC.

A total of N13.58billion was lost in January; N8.05bn in February; N11.88billion in March; N20.08billion in May; N14.51billion in June; N10.45billion in July; N10.79bn in August; N6.97billion in September, N9.32billion in October, N9.58billion in November and N17.31billion in December.

In his submission recently, the CEO of Global Analytics Consulting Limited, Tope Fasua, said: “We own none of the technologies, and in a capitalist world, those who have the advantage utilise it to the limit. After decades of mis
management and absent-mindedness, we switched to Production Sharing Contracts (PSCs) thinking we were smart.

“The first few trials showed us that we can never beat the white man. We were and are still beaten down in that industry, but it is our fault. We cannot eat our cake and have it. The loss of $60billion that Kachikwu spoke about in an interview published in 2017, relates to contracts that we signed in 1993 with a clause for review after 15 years. But since 2008 we have not done that review.

“Even the Petroleum Industry Governance Bill (PIGB) which was advanced, was stepped down by the president, who is also the petroleum minister. Lest I forget, a major avenue for loss of revenue in Nigeria’s oil sector is the clause that allows the international oil companies (IOCs) to pay zero royalties for all exploration deeper than 1,000 metres since 1993. Most IOCs have moved deep-sea since technology has advanced, and Nigeria officially gets $0.00 in royalty from such drilling, till tomorrow”.

The International Energy Agency (IEA), said in its Oil 2019 report stated that an increase in the number of new refining capacity, expected to extend till the end of 2024 signifies major competition ahead for the oil industry, with possible shutdowns.

The IEA noted specifically that such a capacity expansion will require shutdowns to balance, estimating that 4.3 million b/d should theoretically be closed by 2024, so that the new additions do not exceed the products demand growth.

All these raise concerns for Nigeria’s state-owned refineries, with implications for other sectors.

From seven big wins to seven big whys
The first Win in the roadmap revolves around policy and regulation referring to the government’s aspiration to develop robust policies and laws to remedy existing challenges in the Industry.

The plan is to break the existing Petroleum Industry Act into three bills for easier passage by the National Assembly into laws that focus on the governance of the petroleum industry, the fiscals and the legal.

The Senate at the weekend passed the reworked Petroleum Industry Governance Bill (PIGB), which President Muhammadu Buhari had earlier declined assent to, due to ambiguities and legislative drafting observed by the president.

As its fourth Win, Buhari’s team intends to enhance the utilisation capacity of local refineries to guarantee the supply and distribution of petroleum products across Nigeria and the African sub-region. Fundamental to the success of this entire roadmap is the establishment of a secure environment.

Nigeria’s four refineries made a profit of N6.32billion in April for the first time in 10 months. Data from the NNPC showed that Warri refinery was idle in January, September, and October 2018.

The petroleum products importation statistics for Q1 2019 according to the National Bureau of Statistics (NBS) reflected that 4.87 billion litres of premium motor spirit (PMS), 1.21 billion litres of automotive gas oil (AGO), 103.05 million litres of dual purpose kerosene (DPK), 227.01 million litres of aviation turbine kerosene (ATK), 95.09 million litres of base oil, 18.12 mln litres of bitumen, 13.22 million litres of low pour fuel oil (LPFO) and 310.84 mln litres of Liquefied Petroleum Gas (LPG) were imported into the country during the period.

Speaking at the Nigeria Oil and Gas Opportunity Fair in Yenagoa, Bayelsa State, earlier this year, the minister, while delivering his keynote address, highlighted some of the achievements recorded in the past few years and left the audience with several posers.

He asked: “Why is it that we continue to be under-developed in the oil and gas sector? Our production continues to hover around 1.9 million bpd and two million bpd . Why have we not been able to lead investors and producers that are operating across Africa? Why are we not taking over from the multinationals, which have been here for over 50 years?

“Why have we continued to accommodate decaying infrastructure including pipelines and refineries? Why are we today facing the threat of divestment by some multinationals? Why are we shy of bold policies? Why are oil-producing communities left feeling disenfranchised, not taken along and under-developed? Why are we shy of resource development?”

The minister noted that the country had not made the most of its oil and gas resources over the years.

He said: “We should be producing over four million bpd of crude oil. We should be producing enough gas for power generation. We should have a rapidly developing infrastructure.

“Something is fundamentally wrong in what we are doing. There is a need for us to move. Oil is going to become a fast-degenerating asset.”

As the ninth-largest gas reserve holder in the world, the ultimate objective is to develop gas infrastructure, revolutionise gas projects, implement a gas commercial framework and maximise the use of gas to power for economic development.

With a moderated price regime, operators in the gas sector have called for a liberalised market and financial structures in the power sector as part of measures to aid domestic utilisation and encourage investments needed to fast-track deployment of infrastructure for the commodity.

Has the oil and gas sector fared well?
President of the Nigerian Association of Petroleum Explorationists (NAPE), Ajibola Oyebamiji, noted that the oil and gas industry has witnessed a lot of improvement in the past four years against the era of dwindling global oil prices, adding that the industry has witnessed some significant level of progress.

The Managing Director, Niger Delta Exploration and Production Plc, Dr. Layi Fatona, said the major challenge hindering the development of the sector is that Nigerians do not believe in each other’s capabilities.

He said no foreigner would derive joy-developing Nigeria, as he called on stakeholders to invest aggressively in human capacity development.

He stated that there is a dearth of research and development in Nigeria, stressing that no nation can develop without research and development.

He urged upcoming indigenous oil companies to replace IOCs, prioritising investment in human capacity development.

He said Nigeria’s petroleum industry is still plagued with myriads of challenges such as insecurity, lack of infrastructure, but stated that with a safe environment, adequate funding, and development of human capacity, Nigeria’s petroleum industry looks good to go.

The Director-General for the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, noted that protracted delay in the passage of the Petroleum Industry Bill (PIB) and weak commitment to the reform of the oil and gas sector continue to stifle investment in the upstream and downstream segments of the oil and gas sector that might help to check subsidy payments.

“The LCCI is worried that the NNPC has practically assumed a monopoly status in the petroleum products production and importation in the economy. It has become practically impossible for private sector petroleum products marketers to import and sell products because of the price distortions, which the involvement of the NNPC has created in the industry.

“The extant policy on pricing of Premium Motor Spirit (PMS) has made it impossible for the private sector marketers in the sector to import or produce PMS.

“It is even more disturbing that even for the products that have been deregulated such as AGO, it is impossible for private sector players to compete with NNPC because of the huge cost differential resulting from preferential exchange rate and use of crude swap for finished products importation. The situation is that of a complete crowding out of the private sector in the downstream segment of the oil and gas sector”, he added.

Way forward
A host of new finds, gradually entering into production, across Ghana, Kenya, Mozambique, Senegal and Mauritania, Tanzania and Uganda, have significantly boosted sub-Saharan Africa’s traditional upstream players.

While the declining cost of oil and gas projects means that Africa’s oil and gas landscape presents a significant opportunity, the risk that these new found resources will fail to live up to their full production potential, create rentier states, deepen corruption, and distort non-energy sectors within producer economies—risks that have dogged many of Africa’s more established producers—remains.

For Nigeria, the scenario means increased competition and a shift from traditional customers, as well as a need to improve efficiency of its operations and regulations to promote a market-driven economy.


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