‘Our new oil sector business model, accountability,transparency will return Nigeria to growth path’

The Minister of State, Petroleum Resources and the immediate past Group Managing Director (GMD), Nigerian National Petroleum Corporation (NNPC), Emmanuel Ibe Kachikwu, in this interview with the Business Editor, CLARA NWACHUKWU, explains how government is making efforts at improving operational efficiency of the oil and gas sector through change in business model, accountability and transparency. Excerpts:

Let’s start with your tenure as the NNPC GMD, during which for the first time in 15 years you were able to bring the Corporation to a profit level of N274m in May. Although the profit has since been reversed to a loss position again, what did you do to achieve such a success?
It was more of a collective effort; to lose less money and make more profit to be able to compete with our peers and other international oil companies. So the first thing we did was a mental reorientation. The second was, very early we set out with what we call the 20 fixes, to address some of the key concern areas, whether it is infrastructure focus, whether it is high cost elimination, whether it is profit or business opportunities to get us the best margins and others.
Obviously, the result that you saw was from the deregulation that happened, which had a major impact in terms of getting us there. I would imagine that although we had militancy issues also at that time, we had the one month ceasefire arrangement, and we are able to get oil production to about 1.9 million barrels per day. It subsequently went down dramatically.

That is why we are seeing a bit of negative result the following month. But in all this, what I was trying to prove is that profitability is doable if you focus on it and you have the right business models to also achieve it and the right business opportunities. But more important than even just the making profit is the fact that the psyche of the people who work in NNPC and the orientation they had; the challenge to work and the deliverables that they took on was fairly unusual. It was almost like a cult-type movement; all of us belonging to that cult and just driving it as hard as we can. So that collective will, collective spirit and the belief that you can do it yourself was very key. You know that during that period, I recorded over 40 podcasts, which were delivered every week trying to change the mindset and carrying people along to let them know what we are doing, get them to be part of the system. It was a management to attack from different layers, different spectrums or focus.

You touched a bit on restructuring and you 20 fixes, and we know that restricting is not an easy task and with the kind of system that had existed before you came, especially you coming from the private sector, what were the challenges you faced in putting up the system we have today?
The first one is the mental issue and people willing to change from where they were before. Every human, including myself resists change. That is also one of the problems the President, Muhammadu Buhari is currently facing – the resistance to change. People generally are comfortable where they are, so that was the first difficulty we faced. And again, the driver of the change was not hereditary, a historical NNPC staff, so you also had institutional resistance – a foreigner coming to tell us how to do it. But the good thing about it was that the immediate submission, basically saying, it’s not just me, it’s us and driving that message very hard and making the work approach very exciting for everybody. So the 20 fixes was a product and an idea generated by the entire organization; it wasn’t just me getting up to say, “what is wrong? And coming up with solutions and getting people to drive the various units of it. So everybody had a piece of the cake. What that did was to awake the morale that was already very low by the time we came in. so it just elevated the morale and created work opportunities. There were those basic challenges, and naturally, when you move people, some will go up, and some will go down.

So there is also the emotional aspect whether I am a beneficiary or am I losing out. There is a lot of territorialism, in a place as big as the NNPC, so if you feel you’re losing something or going to a territory you don’t think is juicy, it also has its effects.
But let me say that for an institution that was that old and has gone through the kind of history that it had, especially in the previous couple of years, with all the negative media, I found most people in the NNPC very willing to contribute their quota and very willing to embrace the change, very willing to drive the change. After 40 or so podcasts and various town hall engagements – 4 or 5 town halls, various visits to all our subsidiaries; the energy with which everybody got involved in it was very dramatic and encouraging. Let me also say that one of the things that made it easy was that Mr. President himself was very much supportive of the process, helping us to direct  and being very clear with what his vision was. I am sure that it is that feeling of a house that is going help to continue to drive the policy, and with me being out of the picture will not necessarily affect the change process that is ongoing. Everybody saw the need for it, so it was a very good experience.

It is quite surprising that the restructuring did not lead to mass sack, as was initially feared. How did you manage it?
That was more a compulsion; I am not sure I had an option. Labour made it very clear from day one that you’re going to have some hard time if you start by firing people. Also, the President was very clear that in an era where you’re trying to generate jobs, losing jobs wasn’t something that should come first. So let me not take the credit for that, let me give the credit to the President and the labour unions. If there is anything we did right was simply to understand that was our mandate and trying to work as hard as we can to work within that mandate; creating efficiency, expanding the number of companies, sucking the extra hands and those who were “not useful or not needed” to be able to find space for them and make people very useful and creating new opportunities. It is not 100 per cent done yet, we still have a large number that we must absorb into some of the new subsidiaries. That was the mandate and we just tried to work round it.

Let us look into the issue of joint venture, JV funding, which has been an issue for very many years. I know you have had series of discussions with the IOCs, what is the status right now?
That is probably one of the most challenging endeavours that we’ve had over this period, it is still ongoing aspects. The last conversation we had took place here, when I took over fully as the Minister of State, and it was very exciting engagement. I think we are basically on the threshold of the conclusion of the negotiations that we’ve had. We should expect that by the end of August to early September, we should be getting those resolutions to the various interested parties, which we refer to as the Federal Executive Council, the National Economic Council, and the Vice President-led economic team, to look at what we have done, approve it before we can begin to implement. I am hoping that we can sign that into execution sometime in September.

What we have largely done is to address three critical components of the JV cash call.  The first is the arrears of cash calls in excess of $6bn, so we are working at a time frame for pay out over a period of five to six years. Secondly, we are dealing with year-to-year cash requirements so that JV operations can return back and the third is project financing for specific projects that are meant to increase volumes and enhance efficiency in the system. We have dealt with all that and it wasn’t an easy work, a lot of people both with and outside NNPC, who helped us to work through these issues, talking with the majors and other producing companies talking hours and hours on talks and analysis to come up with what we think is the best. Obviously, I can’t give you the details of that because it has to go to various approval stages before it can be released to the public. But I can confidently say that we are at the point where we can confidently say we have negotiated a solution to these problems and once we get the requisite approvals, we sign and it will be a new horizon for the joint ventures.

Did these negotiations come before or after some of the IOCs took the NNPC to court?
No. Nobody has sued us on outstanding for cash calls. What they have sued us have been outstanding for disputes arising from liftings, where we were alleged to have over-lifted our quota because of the PSC (production sharing contract) interpretation disagreements, which are still in court. The court awarded judgment against the NNPC, but we appealed. That is another leg of that negotiation, which hasn’t quite finalised. It is not part of this cash call requirements, but relates to arrears of dispute resolutions arising from PSC liftings, where we were trying to say that judgment appreciation awards issued against us in excess of about $6bn. We’ve gone back to say, we need to basically go back to the no-victor-no-vanquished position to sort of half that amount and then get it spread out over a period to restore confidence.   That is being worked on, obviously losing 50 percent of what you think you’re owed hasn’t looked very attractive to the majors. But again, my position is the alternative of fighting inside the court on appeal digging at each other where you may win or lose is no better. So that’s ongoing, but we will first roll out the cash calls, and hopefully by December, we conclude the PSC dispute resolutions.

I thought with the zeal and the pace you were going, the NNPC audit would have been done in you time?
I guess if you ask me one of the areas where I’m not happy that I did not conclude is certainly one of those. But now, I’m going to be driving it from the Ministry, making sure that NNPc goes through with it. In fairness to NNPC it is not its fault, we have auditors, we’ve pushed for it. We had arrears from 2010, we’ve probably done three years from that 2010 to 2013. We still have 2014, and 2015 and probably to get us current. When you are doing multiple year audits, I wish I could jump and get it done on my own so that I can say I am current, but it is a historical thing and there are carry overs. You have to finish the past before you can come to the present.

Let me note that non-conclusion has not been due to any reluctance from the system, to drive it harder; we really have. The finance people have been driving this very hard, but when you have to do almost accumulated six years of audit in a period of one year; it’s bad enough doing the yearly audits, so it is a lot of work. For a company with a global reach like this one, it is tough, but we’ve done some like I said. I will continue to send them (NNPC) weekly or monthly reminders that this should be completed. I hope that by the end of the year, we can say we’ve finished all that. Again, it is in our own interest that we do it because there are all kinds of disputes out there, in terms of whether the federal government is owing or whether NNPC owes the federal government, the whole monies that are said to be unpaid by NNPC and that is a different type of audit too, which is basically, balancing and reconciliation. But certainly, the year-to-year audit helps you get a better picture of what the position is.

In essence you’re saying that until this audit is concluded we would never know the truth about who owes who?
Yes. That is true.

We come to the knotty issue of the refineries and their turn around, we still haven’t been able to do the full TAM after so many promises?
We at least have got three of them to be working little by little. This is the first time the three of them are working together at the same time for a long time. But they need real major infrastructure work to get them to and capacity template or 90 percent capacity, which is the ideal. But various components are working at various capacities – the CDUs (crude distillation units), the FCCUs (fluid catalytic cracking units). Like you know, we have started the process of getting or we had advertised for partners to come in, invest the money because we didn’t have the money, and be able to recover that through finished product sales. But that got caught up with BPE issues in terms of whether we were trying to sell ourselves and we tried to correct that, then we got into the National Assembly issues with that same thought process. So we had to have a lot of engagements to make sure that everybody understood what we were trying to do and that it is done well. If we were misunderstood, it meant that we were not communicating properly and we needed to do so. That is being done, but it has also taken three months of the time I thought I would have been able to say I’ve started the real work itself. I’m still hoping that it will finish quickly and that over the next one or two months, we can get to a point where we can actually award or select the partners.

Are you saying that the IOCs you are targeting have finally shown interest?
We are not targeting only the IOCs. We are targeting anybody who shows the technical capability and has the financing to come in and help us repair the refineries, IOCs inclusive. But like you know, IOCs are very selective of the kinds of things they get into especially at this point in time when the price of oil is very uncertain.

… but they’ve insisted that they will not get into refining except there is full deregulation
Yes, not that there is no basis for them to do, but the reality is that the oil environment has gotten very murky, look at the profitability of major companies around the world; most of them are taking heat as much as 60 percent, so that’s not a time when the chairman or CEO of any investment company will make a decision to take on a new refinery, much less turning around one that has a lot of problems as opposed to greenfield refining.

But there are lots of interests being shown by middle level players to get into some components of it, and I think we have enough expressions of interest to believe we can find funding and partners to enable us get there. But we would need to work hard, it’s so key that no matter what we do in the downstream, unless we can get these refineries working we will keep struggling. For me, it’s like having an eye on a bow, you have to keep at it until you get it done and time is running out, and its challenging the system. It is important that we must get these refineries to work. I’m sure the new GMD is aware of this and from my end, I’m going to be pushing hard at it and try to make sure that the refineries work.

So, where are they getting the feedstock for the refineries since the pipelines have been vandalised?
It is not like we are at zero production, we are still producing. Today, (Thursday) I don’t know what the numbers are, but yesterday, (Wednesday), we were doing about 1.5 million barrels versus 2.2million, so some element of that is still coming in. In some cases where we have entered into DSDP (direct sale direct purchase) arrangements, we have to allow them deliver the products. So there are all kinds of arrangement being used to cover the gap from crude.

Obviously, you have raised a very important point; it is important that we take a decision and that it is dealt with immediately however we do it so that we can finally recover back the barrels and go back to normalcy. Even with all these cash call negotiations on the table and we don’t have the barrels there is nothing we can do. We would continue to use the opportunity to appeal to the militants to cease fire, the time has now come to drop the guns and open up the way for dialogue, engagement and for us to understand that blowing up the pipelines is not a solution to the problem.  At the end of the day, you blow up the pipelines; you hurt more than the externalities you are trying to get their attention. It is important that a lot more robust engagement continues to happen. Hopefully, God willing, we will find a solution to our problems.

Coming from the Niger Delta yourself, one would have thought that more progress would have been made. I know we have recorded some measure of success in the dialogue process. What went wrong and why did we have a relapse?
Like all negotiations, there are ups and downs. If you ask the militants, they will probably say government didn’t keep their own bargain and we take a good advantage of our one month ceasefire. But government will say, one month was just too short a time for it to deal with all the issues they wanted them to do.

But no government wants to be negotiating with its hands tied at the back. Let’s be realistic, you can’t be telling a government that you have 30 days else I will blow up more pipelines. It is simply not the answer, it does not celebrate the issue from an intellectual discourse point and we can’t just sit in the valley and begin to fight one another. We all have to come up on plain land and talk and engage, and drop our weapons. Let us be honest, there is a limit to which the government can continue to step aside and watch militants take over facilities, and I think the president has shown a lot of magnanimity and calm in the face of some of these challenges; another leader would have acted differently. I think he understands that the answer, which I see is the solution, is dialogue and he has given enough room for this to happen. We will continue to engage them, quite a few other people are doing the same thing and to some extent, we have to find a way of bringing all our efforts through one pipeline of negotiations without having too many interests attacking the same subject. We are working as hard as we can, and if you’ve noticed, you find that over the last few weeks, the tempo has gone down. Certainly, some conversation is going on without being noisy about it and some work are going on behind the scenes; some engagements are taking place, some are responding, some are not and we’re getting more of the bigger stakeholders, the kings to get more involved in the process rather than just standing by.

Earlier, you spoke about the importance of timing in negotiations, and Nigeria is reputed to have one of the longest contracting cycles in the world. Even though you have tried to reduce this, there is still some kind of dissatisfaction over the contracting cycle?
I know that we set a benchmark of six months down from two years, and for some of the projects that we gave, we actually did better than the six months. There are a lot of things that influence the contracting circle, whereby the parties have not even agreed that the project should be done. If you start counting from the time you drop the project drop on the table, but you can review it and find there is no magic. Again, the price of oil has dropped, so a lot of projects are being reviewed because government is asking, why are you depleting the nation’s resources? We are doing a lot more critical analysis of some of the projects by NAPIMS, so we can decide whether to go on with some of these projects or not.

I am full of praises for the work being done by NAPIMS, for example, just cleaning up the whole arrears and depth of analysis on cash call reviews and project reviews so that we can approve all the upcoming arrears was done within one to three months, which traditionally, would have taken one to three years. They literally locked themselves up and chewed on those numbers because it is the numbers that you use to do the negotiations. I have found them a bit more efficient and a bit more organised over the last one year and I’m sure they will continue to work on improving those figures. We are not where we probably should be, but to be honest for a project that we want to do today, I’ll be very surprised if time is still an issue.

Then what about cost escalations, some of these projects are being reviewed so much above their initial values, and people are asking why?
Well most costs have been reviewed downward. But we are seriously looking at our costs on all projects and everybody went working to cut down those costs. In some cases, we decided that what we need to do is to get away from boutique and fan fair type designs that just cost a lot of money, which the oil companies try to do with some projects. For instance, Bonga is being redone cutting down from around $22billion to about $11billion, and that meant a total re-design and conceptualisation of how it should be done without losing much of the barrel projections.

This is one of the things oil companies must begin to do. One of the things we are doing in the Ministry after we rolled out our programmes is just to look at our business space in Nigeria, compared to other business spaces. What do you need to do to change the model? Some of the costs are as high as the designs can be when oil was $100/barrel, and we just went along with it. Now, we don’t have that and production from the JVs are about $26-$27/barrel and we need to get these down to $13-$14, so we still have a long way to go. Part of the work of the GMD is to begin to look and drill down from where we stopped on how to keep those numbers tumbling down. So we have to begin to look at designs, is that the best model to do it, and must we do it? We must ask those questions, if the numbers don’t look good why do it? We will focus on the low hanging fruits instead of gigantic projects. There’s still a lot of work to be done on cost of projects. Today, if it’s a new project and the costs are not right then we won’t touch it. We are going to work with oil companies who have already existing projects, which have started and ask, what can you do to bring down costs? Otherwise, you will find the oil and find that it is not worth it.

Finally, the PIB is still hanging; four bills are expected to be passed from the old one and only one of these bills have been presented to the National Assembly. But even that one is enmeshed in controversies in terms of its provisions, are we ever going to get the PIB passed?
There are going to be three bills. First, what we have is the senate bill. The House hasn’t put out any bill and government hasn’t. We are almost in the final stages of completion of a comprehensive executive version of the PIB on all three stages, which we will put before the Assembly to help the discourse. We are finishing that and it is going to go through FEC, schedule it for stakeholders’ inputs from the industry and all that. We are working feverishly to conclude that before they return from recess so it can go through the rigours of getting passed.

Certainly, if we are putting this much energy into it, it means that president Muhammadu Buhari is committed to get the PIB ultimately rolled out and passed.
Is it going to be non-controversial? Not likely, given the fact that the interests of people in the oil sector are very huge and you will continue to have, for good reasons, people respond to whatever we do.

Part of the segmenting is to enable the lawmakers to begin to pass some, while some are still being debated. But I think that once we get this out, there will be lots of engagements and people are willing to accommodate here and there, we will be able to get it passed. I’m optimistic there can’t be any other way and we are being very careful in our own drafting to ensure that some of the concerns that have been expressed are being taken into consideration. But that is not a guarantee that there will be no controversies, but it is a starting block of recognising the areas of friction.

I know that the present Assembly is also committed to having the PIB passed, the senate President, the Speaker of the House have said the same thing as well as many other groups. So there is a grand swell to have it passed and whether we can overcome some of the rift areas around the fiscal and host community issues is another thing; I’m sure something will give.