Samagbeyi: It will put pressure on foreign exchange
Temitope Samagbeyi is a Tax Partner, and Oil and Gas Sector Leader in Ernst and Young (West Africa). In this interview with ROSELINE OKERE, he talked about the implications of crude oil import from Niger Republic.
The Federal Government recently announced plans to build a pipeline network to transport crude oil from Niger Republic to Kaduna refinery. What are the implications of this plan?
During a recently held town hall session with the management and staff of the Kaduna Refining and Petrochemicals Company (KRPC) in Kaduna, the Group Managing Director of the NNPC, Dr. Maikanti Baru, hinted that efforts were ongoing to explore the possibility of piping crude oil from Niger Republic to the Kaduna Refinery. This will require Nigeria and Niger Republic to sign a bilateral agreement.
Over the years, inter-government trades have increasingly shifted towards negotiating bilateral and regional trading terms and have moved away from negotiations in multilateral arrangement that tends to favour more powerful countries. The consequences of these are difficult to quantify and may raise questions better attuned to moral philosophers than economists.
The major negative impact of this bilateral arrangement is that it will lead to increase pressure on our foreign exchange earnings. As you are aware, the language crude oil understands is US$. The Nigerian government will have to source for US$ to settle the purchase of crude oil that we have in abundance. This is quite separate from the humongous resources that would be invested on the infrastructural aspect of the whole arrangement.
It must, however, be noted that this arrangement would help reduce the pressure on the infrastructure (Port and terminals, roads, bridges etc.) in Lagos, since most of the fuel imported in Nigeria passes through the Lagos Port.
Would this new move reduce tension the Niger Delta and stem pipeline vandalism in Nigeria?
This new plan is a step in the right direction and laudable, but certain considerations must be carefully looked at to avoid vandalism and sabotage. The constant vandalisation of crude lines in the Niger Delta region has made it imperative to build the pipeline and import crude.
The government has to deal directly with the economic reasons that push people to vandalise pipelines.
On the face of it, an unserious government may opine that there is no need to allocate resources to resolve the issues in the Niger Delta region. A case in point is the current clean up exercise of Ogoni land, flagged off by Vice President Yemi Osinbajo, which will cost about $1b for the first five years. The cleanup exercise, which is for a period of 30 years, is expected to boost socio-economic activities in the Ogoniland devastated through years of oil spillage.
The government should confront and solve the Niger Delta crisis and pipeline vandalism before creating new ones in the North. The issues around Boko Haram insurgency in the North East has to be totally eradicated. I do not want government to think they can run away from their responsibilities. To enable Nigeria move forward in a very progressive manner, we have to learn from the errors of the past.
What is the bilateral nature of this deal, where two different countries partner to refine; what is going to be the cost to either partner?
In an economic sense, the cost scrutiny is positive. It will generate a lot of employment in the northern part of Nigeria. The benefits of the refinery will be high, as it would lead to reduced price of fuel. Many sectors of the economy would directly benefit from the resulting cheaper cost of petroleum products production.
Already, the Soraz Refinery, located at Zinder in Niger Republic, is fast becoming a hub for Nigerian oil marketers, especially those of northern extraction. Some major marketers have been approved by the Department of Petroleum Resources (DPR) to buy diesel (AGO) and cooking gas (LPG) from the Soraz. For me, this is quite sad and strange, especially because we have not successfully managed the operations of our own refineries.
The bilateral arrangement would be a good idea for the Northern oil marketers because of their proximity to Niger Republic. It would be easier to use the KRPC refinery that is currently performing at a suboptimal level, instead of going to Lagos and Port Harcourt to load petroleum products. It saves a lot business wise as the cost of transporting petroleum products from the southern part of Nigeria to the North had been a major drain in the pocket of the Federal Government of Nigeria.
If you look at the northern topography, the cost of laying the pipes shouldn’t be too high (Ceteris paribus) because of the flat terrain, solid and more secured soil formation. Information around revenue sharing formula is yet to be made available at this point, but what I advise is that the arrangement should reflect a preferential trading formation where both countries benefit equitably. It is, however, important for both governments to consider all costs elements before putting pen to paper.
How about the quest for crude oil exploration in the northern part of the country, most especially, the Chad Basin?
Kaduna refinery was built for heavy crude grade as that of Venezuela, which is similar to that of Niger Republic with high Sulphur, therefore, it would be a step in the right direction. If the pipeline was constructed as planned, government would have less trouble moving the product to Kaduna refinery.
If we will not be lazy about the arrangement, this new move would help to facilitate Nigeria’s quest for crude oil exploration in the northern part of the country. However, the funding/expenditure required to invest in and build the required pipelines may slow down crude oil exploration in the north due to scarce resources. Although, government can create more incentives that will attract business concerns to explore for crude oil in the northern region, it must be followed by serious commitment from relevant government agencies/ministries, so that interested parties will have no doubt whatsoever in exploring for crude in the Chad Basin.
Looking from a distance, it would appear that the Federal Government does not have the money to spend on building the pipelines. This is particularly because of the official declaration of recession in Nigeria. However, my view on this matter is quite different. Government does not need to provide all the resources to build the pipeline.
Different writers had over the period advised that the government does not have business running certain sectors of the economy. This is one of such. What is required here is for the government to partner with entities with the financial muscle, expertise, right technology and the long-term dream of investing in this sector. At the end, the government will even make more money through the series of taxes to be paid by these partners/business concerns.
Will this address issue of fuel scarcity?
Positively so, increasing the performance of the Kaduna refinery through the procurement of crude from Niger and laying of pipelines will significantly solve the issue of fuel scarcity. Currently, Nigeria’s fuel distribution is a logistic nightmare because the country depends mostly on trucks for distribution of nearly 90 percent of its petroleum products around the Country. There is a need to return to the use of pipelines to distribute petroleum products across the country, as these are cheaper and easier to manage, compared to petrol tanker trucks and truck drivers. However, the dual problems of vandalism and age of the existing pipelines create a major obstacle in that regard.
Although, tackling vandalism would require deploying more military resources, replacing old and problematic pipelines will also require huge capital investment. The Federal Government may find these two challenges significant considering the increased focus of the military on ending insecurity in the North at the moment and economic recession due to low revenue due to drop in oil prices.
The reality is, prices are already market driven to a large extent, especially in parts of the country where supervision of pump prices are already weak. Thus, in the far north, you tend to see fuel prices at nearly N50 above pump prices during normal times and about N100 more during periods of fuel scarcity; at regular filling stations. This bilateral arrangement would reduce fuel scarcity because of elimination of the risk involved in transporting oil from depots in the South.
How do we make Nigeria self-sufficient in petroleum refining?
Current, refining capacity from the nation’s four refineries with combined production stands at about 445,000 barrels per day. This level of production can barely meet local consumption. The major hindrance to Nigeria’s ability to process crude oil is endemic corruption and mismanagement.
Before Nigeria can be self-sufficient in petroleum refining there are quite a number of things it needs to do first to ensure that the business environment is favorable for investors to come and invest.
Issues surrounding ease of doing business, incentives, insecurity, especially in the Niger Delta and in the North East, and a clear-cut fiscal regime must be addressed; otherwise no investor will be willing to commit resources into building of refineries in the country.
The sustained development in the upstream segment of the oil and gas industry is linked to strong growth in the associated midstream and downstream infrastructure parts of the business, like Pipelines, Refineries, Terminals and Storage capacities. We, therefore, need more investors in this area. A case in point is the refinery being built by the Dangote group. This will go a long way to alleviate the national and regional shortages in petroleum products supply, nevertheless, the problems (fiscal regime) that crippled the older plants are still in place, and by the sheer size of the refinery, it may suffer the fate of the older ones if extensive reforms are not implemented.
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