Nigeria’s oil sector needs $30b to address infrastructure gaps, says Kachikwu
Minister of State for Petroleum Resources, Ibe Kachikwu, has spent over three years in office. In this interview with KINGSLEY JEREMIAH and JOKE FALAJU, Kachikwu spoke on his achievements, the challenges facing Nigeria’s oil and gas sector and how the administration is tackling them.
It’s about three year you became Minister of State for Petroleum Resources. What would you say your achievements are?
Let’s start with the core responsibilities of the ministry, which is to give policy direction. We have been able to bring onboard the Nigeria Gas Policy, which looks at all the parameters for gas development. We also have the Petroleum Policy. We are trying to create a structure that will be more transparent, private sector-driven and infrastructure-driven. We developed the Nigerian fiscal policy for the petroleum industry, which didn’t go through. It was held back by the Federal Executive Council (FEC) for the simple reason that the National Assembly was already looking at the fiscal legislation. A lot of work is going into trying to not just achieve the day-to-day activities around subsidy and approvals.
We are building a business track that will be sustainable, predictable and long lasting and something that future leaders can take on board and use as a planning guide on how to grow the business. That’s what the policies have been able to do. So, our policy direction is very strong.
Secondly, we also position policy direction to things that are very critical to the sector, for instance cost reduction. We cannot produce Nigeria oil for $33 or $32 per barrel because by the time the oil price came down, we realised that some blocs were not making money. So, I championed the need for reduction and today we are back to $26. I hope by the time we are going into election it should be back to 20 per cent. My target is $15 per barrels. Two of our producers have achieved that and what we are now trying to say is if A and B can achieve it, why can’t C and D achieve it?
How much are you throwing in to militancy? Militancy is okay now. How much are you spending on repairs? Even if you are going to repair what is the worldwide practice? How much does it cost you to do your exploration and your engineering or storage? So, we are examining every bit of claim and benchmarking them to world best practices and that is forcing down pressure.
We are also saying that if your bloc is not making money, why do you need to take Joint Venture (JV) cash to your bloc. We put JV cash where we will have returns, which are one of the reasons why we find the Production Sharing Contract (PSC) now very challenging because on the average, the sorts of relationship done on the PSC were one sided. I wouldn’t really say they were one sided because there were reasons for them; we didn’t have money, they had money, we charge what was acceptable on interest rate and returns, and they left us with little or nothing. A curious mathematics that always gives us x number of barrels and when you deduct cost we are back to very little in our account. It does not make any sense without being an accountant and so we are now looking at renegotiation the PSC terms.
Certainly, future PSCs will be lot more stringent so that we do not have the sale of distortion in return between JVs and PSCs. JVs today have a huge amount of returns equivalent. PSC despite the fact that is almost about the same return of value in terms of one billion barrels, the returns on PSC are very insignificant. We need to address that and luckily the international finance environment is becoming a washed with financing possibilities that were not there 10 years ago when these models were developed.
Both sides risk the finances then we can do the business. But cost is key irrespective of whether it is PSC or JV. We need to drive down the cost because once you drive down the cost there is a margin to look at. Without the margin there is no business; we are just having an activity. That is one of the things that we say we have done well and let’s focus on that.
The second issue is on flare. The United Nation sets a 2030 exit date for all flare and we set 2020 because of the environmental concern. We are already down to about eight per cent of gas flare from average production. We are not flaring as much as we do before because people are re-ejecting the gas instead of faring. Our plan is to exit to zero. Though there will always be allowable flare within the international standard, but it is usually zero point something. It is nothing significant. What we did was that, since the Nigerian National Petroleum Corporation (NNPC) does not have its own cash call money to contribute for the programmes, we need to take away the flare. Whether we want to invest in gas plants, petrochemical complex or gas-to-power, government doesn’t have its own money; so, we are stranded with low penalties fee. But my position was if we don’t have the money there are third parties who have the money, and we should allow them take the flare, process them and create value for everybody. We have advertised that as part of the gas flare commercialisation programme, which was endorsed by the FEC and immediately we did that, we saw people who say they can capture the gas and develop it. So, it was clear that money was not the issue, the issue was that there was no area of focus. We have had about 350 applications so far. Most of the majors have submitted programmes that show that there can be zero flare to show that we can meet the 2020 deadline, including their procurement and contracting programmes. Oil companies are always careful about the environment. We have selected companies and the progress is very encouraging. This will equally create jobs for a lot of Nigerian companies.
Another remarkable thing is that we are able to get the Niger Delta to find a solution to the security issues when people think it was impossible. We were able to work with state governments and other stakeholders to manage the people. That has been on for over two years. It has enabled us boost production to about two million barrels per day. Without the barrels and return on those income, there won’t be money in the economy because 80 per cent of our income still comes from oil. The stability has created a level of growth in reserves and stability in the economy.
On transparency, when we came in there was a lot of issues around stolen money and all of that. I was head of transparency in ExxoMobil and so that was one of the mandates the President gave me. So, we identified new people and set new structures. If you talk to anybody who works with us, we move NNPC to a point when people begin to understand that NNPC is a company and has the responsibility to work towards profitability and not just a parastatal where anything can get done and people go away with it. We focused on fundamentals of business. When I handed over in May 2016, we declared profit. I think that has continued. We have done a lot of podcast, which everybody in the sector look forward to and that changed the way people think. We equally engaged ourselves in working hard daily. We have been having series of meetings. We have taken away the days of ‘big man’ GMD and minister. We have a team of people who are bullish about job.
We are doing Liquefied Petroleum Gas (LPG) penetration now. It has increased by over 600 per cent in supply. This is higher than it ever happened in the last 10 years. Someone is driving that, not necessarily me. We created the policy and agreed on it. Nigeria is blessed with abundance of human resource but they don’t have the opportunity and power.
I have had the opportunity of being the GMD of NNPC and the Minister of State, president of Organisation of Petroleum Exporting Countries (OPEC), African Petroleum Producers Organisation (APPO); so, I literarily drive policy direction for world oil industry, though I have handed over some of the positions, but the reality is whenever it comes to critical issues, we have a say. To a large extent, we have seen problems on the table and this ministry has shown that it can be handled.
The challenge is in the area of infrastructure. We have infrastructure deficit in this sector, properly in excess of $30 billion. This is in term of pipelines, depot facilities, refineries, petrochemical complexes, gas distribution plants and others. But the money is there, the investment potentials are there but we need to have policies that show to individuals that when you invest you can get your reward. There is too much of monopoly, in my view, in the national oil companies, which control most of the pipelines because these are government investment handed over to them. But we need to get to time when we can go out say we have numbers of investment that we can push out and put tariff on. We must encourage people to build complimentary infrastructure. Right now, we wait for government even when the infrastructure gets old but government does not have the resources; so, every day the infrastructure is dilapidating. We need to create reward to enable people to come in. We are already working around that; the Ajaokuta-Kaduna-Kano (AKK) pipeline is private sector-driven, the refineries we are talking about are private sector-driven. We need to create policies that will enable us reach out to the private sector.
You are talking about creating policies and unlocking the sector. Surprisingly, you are the Minister and this is a primary responsibility for you. What are the challenges holding you back?
You need approval for these policies. It has to go through FEC or the National Assembly. If you do not get those approvals, then the policies will not work. So, the minister sometimes is also very constrained. Everybody thinks you can do what you want. Most of what you do needs to be approved. I am not saying they should remove those processes because they bring check and balance but until everyone sits to agree on a policy direction, we won’t go anywhere.
Even the operations of NNPC are all part of that. My philosophy for example as GMD was that I was a lot more bullish in terms of private sector reach. Let’s take a look at fuel supply for example. We have gone through the fuel supply issues and we say by all means we need to provide as much subsidy to our people because things are very difficult. We also need to ensure fuel supply is always prevalent so we do not have fuel supply disruption because a day of fuel supply disruption and strike create inconveniences and losses, especially millions of man-hour. So, how do we go about it? Until we find the policies that enable the private sector to get its adequate rewards for supplying product at the right pricing, it is going to be a sole responsibility of NNPC as the last supplier. If NNPC does this, it is going to be losing money. It goes round because whatever goes round comes around. So there is a lot of motion to these things. Maybe I am just too private sector geared to leave the emotions and just deal with the problem. I think we need to first see how we can get our refineries working so that we can at least produce more and reduce cost. We need to also find a way in which private sector can participate in an environment that enables you perhaps through NNPC filling stations or whoever should provide subsidy backed product supply but yet have the private sector to also be able to supply at market rate. We need to find a mechanism there that frees us from the huge amount of subsidy exposure or under recovery exposure. When we wanted to increase the price from N98 to N145, a lot of people were angry that it was too much. But thank God, by the virtue of the president’s image, people gave us the benefit of doubt and queues disappeared in one day. There was queue at filling stations but immediately that announcement was made, between 48 hours there was fuel all over the place.
There are fundamental issues that require some very bold position. We need to work with all stakeholders to find a midway that enables the downstream sector to thrive and drive investment to the sector.
You had vowed to get refineries working and ensure self-sufficiency of petroleum products. What happen to that promise and what is the state of the refineries now?
When I was the GMD, I got approval to embark on refinery repair. When I took a tour to the refineries, none was working. It was zero and I said the refineries were bad. The crude supply to the refineries was a problem. There was this controversy about vessels carrying crude to supply. I cancelled the contract and I challenged the Nigerian entrepreneurs who were doing that to go and repair the existing pipelines at their own cost. I told them if it works after 60 days, I will give them a contract and they did. That is how we stopped supplying petrol through vessels that were almost equivalent to half the cost of the crude and now began to supply through pipeline.
In December 2015, fuel was supplied throughout the country all from refineries in Kaduna and Port Harcourt. So, we were up and running. But were they up and running in the 90-95 per cent capacity? No. I didn’t take money from government to go and do a major rebound or turnaround maintenance. What I said was that looking at the system, we can get the refineries to do some basic supply and augment with what it is we were importing so that in the time we are not just left fallowed and I delivered on that. Why this may have worked and may continue to work is because of the fact that refineries are not working in full capacity, every barrel you put there, you are actually making a loss. A finance expert would rather tell you to sell it and make return instead of refining. Also, because we are not operating in full capacity, the whole plant that is meant for 100,000 barrels will process 10,000 barrels. The effect is a loss because the overheads (staff, maintenance and so on) would be carried. So, while that is helpful in the moment of emergency, we need to move to actually repairing the refineries. But given the history of turnaround maintenance where government has voted billions and still we are not okay, I am not going to put the president through bringing money for turnaround maintenance. Let us go to the private sector and create incentives for them to bring in their money, put it in, repair it and get their return from the increased earnings the refineries would have. That is what I proposed and that is what the president approved. And once we did that the next thing was therefore to seek out financiers who were interested and in all these no government money has come out. So, when people are accusing me, I think they should look back at my stance on being a bullish individual who said we do not need to spend government money to repair the refineries. However, I was no longer GMD after the approval and that philosophy continues. I even went ahead to set a deadline that by 2019 all the refineries should start working or we stop importation. So, it was in the interest of anybody who is in the importation business to go and invest in the refineries. Those who have applied so far to participate are the ones importing because they realised the implications.
Unfortunately, the mechanics of the financial analysis obviously show there are lots of difficulties they are having because of the terms that are acceptable. That, however, is taking longer and the board is on the back of NNPC on this issue. In our last board meeting we gave a deadline to NNPC that rather than coming to us to complain about the difficulties in reaching a term, we asked what the last acceptable term to offer is. They have come back to say these terms offered are not sincere enough because the terms offered by other people were not taking into consideration. When you are dealing with money that is not your own, you have to go through this. It is $2 billion and banks have to provide that. It is not something backed by any sovereign guarantee and the only way they can get back their money is through improved yield from the refinery or through the Direct Sale of Crude Oil and Direct Purchase of Product (DSDP) contract that are associated with importation. Those are the difficulties and they are genuine. I believe they genuinely want to get it done and I believe they could be quicker than this but I understand that they are just being very conscious and careful. I understand their concern but Nigerians are losing patience about the refinery issue. I saw write-ups on papers asking me to resign because we are yet to meet our target. But if I were in charge of the negotiations, all the financial aspects, the terms and I led the process directly, maybe it would have been a different ball game altogether; but I have done the approval and I have stepped out. The right agency that should handle it is handling it. It doesn’t make sense to call for the head of a man who is driving a policy; but that isn’t the issue but to go get it done. There are couples of option. One is if we do not reach terms with the financiers, we take the money from the reserves; but I don’t think the refineries are worth going to take N2 billion from our reserves for. That is my position and it has not changed because I think there is private sector funding available for that kind of project. We may need to realise that if you don’t have money you cannot be asking for outrageous terms. We need to have terms for the individuals to have a bid of return and make them happy so that we can all move on
Most analysts are saying we are only buying peace and living on borrowed time in the Niger Delta. Is there any sustainable plan to deal with the Niger Delta issues?
There is and people who said we are leaving on borrowed time are also right. I think we probably have more borrowed time under this government than the previous governments. The dialogue system is becoming better. We have gotten states to set up teams that involve the state governors, stakeholders and the oil companies and having monthly meetings to plan on how to deal with the business environment. A state for examples produces 100, 000 barrels, and the demands the state makes can be sufficiently met by two million barrels, then there is a disconnect. Another produces 500,000 million barrels and makes a demand that is going to require four million barrels of oil. So, first is to bring everybody to reality about what you produce and what the gains are and what is the Federation Account Allocation Committee (FAAC) payment to your state. When you do that analysis you will find out that 60 per cent of the states already receive more than they actually contribute from the fiscal point of view. The great frustration in Niger Delta, apart from the environmental issue, is just the lack of business opportunities. What they are complaining is that contracts whether it is pipeline or constructions are handled by people who are from outside of the states. They complain that they are the ones suffering from the environmental issues and the money doesn’t get trapped in the state. We are trying to address that by saying to the oil companies to see that 30 or 40 per cent of the contracts should be done by those areas so that money stays there and unemployment gets reduced. We have done that and it is ongoing. About four states have signed into that and we are doing it for seven states.
We also need to launch an investment form for the Niger Delta and create infrastructure in those areas. If the infrastructure is there, things will work and it will stop the environmental exposure that we have.
Finally, we also need to find a way for compensating the communities, whether or not the state governments or individuals there are with oil blocks opportunities so that they can also take part in actual production. These people are Nigerians. The bit we can do from the policy directive point of view, I can tell you we are right hundred per cent on it. But some require legal and executive infusion above our levels and we are working hard to bring all those things together.
In summary, it is true that the borrowed time is there. We have more stability now, but it could erupt any moment and we are trying to ensure that constant engagement, opportunity creation and putting in place a permanent policy documents that will put the host communities at rest and ultimately get us to where we should be.