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IBILOLA: Nigeria Must Review Oil Contracts To Encourage Investments

By IKECHUKWU ONYEWUCHI
18 October 2015   |   5:33 am
Dr. Ibilola Amao is an oil and gas consultant with Lonadek Consulting, Lagos. In this interview with IKECHUKWU ONYEWUCHI, she argues that a new contractual strategy with local and international oil companies (IOCs) should be drafted to favour Nigerians and, in the long run, stimulate investments that would see the industry acting as a catalyst…
Ibilola

Ibilola

Dr. Ibilola Amao is an oil and gas consultant with Lonadek Consulting, Lagos. In this interview with IKECHUKWU ONYEWUCHI, she argues that a new contractual strategy with local and international oil companies (IOCs) should be drafted to favour Nigerians and, in the long run, stimulate investments that would see the industry acting as a catalyst for industrialising the economy.

How would you access the present state of the Nigerian oil industry?
THERE are a lot of changes. We don’t have a minister of petroleum resources and the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC) has recently been changed. Quite a lot of issues left unresolved by the previous administration beg for answers. First, we have major issues with the contracts. For example, the crude swap contract and the agreements that private companies have gone into with Nigeria Petroleum Development Company (NPDC) lack equity and good conscience. The contracts do not favour 170 million Nigerians. We have marginal field contracts and licenses that require review and we also have Joint Operating Agreements (JOA) and Joint Venture Contract (JVC), which need to be reviewed, updated and signed. So, there are a lot of legal issues that are outstanding.

I felt that the current GMD, being a lawyer, that would have been his priority, and we would have got some feedback as to which contracts have been updated and reviewed in favour of Nigerians. I think that should be the priority of the GMD, the President and the minister of petroleum resources and the junior minister, too.

The Petroleum Industry Bill (PIB) has been hanging for so long. Fundamentally, the priority of the Federal Government should be to revisit and restructure the PIB. But the priority of the ministry of petroleum resources should be to review contracts that exist within the hydrocarbon industry. For the past 20 years, these contracts have not favoured Nigerians, but instead, a few people or some companies.

There are moves to review some of the contracts, in fact, it is being speculated that the new ones might not favour the oil majors; how do you think this would impact on the industry?

I think we need to have a balanced contracting strategy. The contracting strategy for marginal field owners and independents should involve some level of tax holidays that would encourage in-country investments and would attract Foreign Direct Investments. That of IOCs should be such that they would be given rewards for investing in-country. But it shouldn’t be a penal review. At the end of the day, Nigeria wants to see FDI coming back to the country, rather than going to Mozambique, Angola and other Gulf of Guinea hydrocarbon zones.

As a matter of fact, the in-country contracting strategy has to be attractive to the international oil companies within the context of the fact that they have been producing for so many years with minimal domestic investments. It also has to be attractive for independents and indigenous companies. But they are going to be separate contracts. This is something that is fundamentally contractual. In other words, the commercial part of the contract would have to look at the pain points of the indigenous companies and that of the internationals.

But it would be very negative and would send the wrong signal to the global oil and gas economy if we have another batch of divestments. The new government that is promoting positive change should not penalise oil companies. We should make sure that they have paid up on all their contractual obligations to the Federal Republic of Nigeria. That would be a lot of revenue for the government. In future, those contractual agreements that we go into with them must favour them in terms that it would encourage them to invest more in-country and not see any need to divest on the assets they have at the moment. So, it should be well balanced.

How do you think the PIB can be structured to reflect the desired change in the oil industry?
I think the PIB should focus on how the NNPC can be an income generating, economically viable and well-structured organ to drive Nigeria’s optimisation of its hydrocarbon assets. The political angle to the PIB, which is how we export, import and currently do things with allocations, has to be tackled separate from the communal issues. The communal issues should be such that oil and gas communities should capture not just people in the Niger Delta but people, who live around Kaduna Refinery and those around pipelines, tank farms, near Atlas Cove, between Mosumi and Sub-stations, should be encouraged to benefit from the environmental impact of the assets within their communities.

There is also the issue of unbundling NNPC to make sure that the corporation’s exploration and production arms compete with PETROBAS and PETRONAS, seek to develop technology and knowledge in-country and acquire assets overseas because it is competitive in the way it does its business. This is fundamentally what the PIB should address. It should be focused on building a national exploration and production company that creates maximum value for Nigeria in the country and outside. And ensure that any assets or subsidiary of NNPC creates value for Nigeria and support the growth and development of exploration and production arm of the NNPC.

What do you make of the clamour that the NNPC should mainly play a supervisory and regulatory role in the oil industry, hands-off from the business and allow private sector to drive growth?
I think there is a need for the economics of Nigeria’s oil and gas industry to encourage private investment. That is fundamental; we really need to see private investors running refineries. The economic viability of the oil industry should be freed up for private investors. I do not believe the NNPC can do as good a job as private investors because there would always be the political influence. But, if we get the NNPC to run as an economically viable entity, I think we would be doing Nigeria a great service.

It appears that the President is interested in keeping the refineries as government-run entities. If that is the case, then they would have to engage international oil companies or service providers in the capacity of project management. We already have the best model with the NLNG, where there is a joint venture with international oil companies taking a stake in the investment. Saudiaramco is a mix of international oil companies and Saudi Arabia’s national oil company. Qatar petroleum has RASGAS, which has investments from Shell, ExxonMobil in an economically viable solution. I think the IOCs should be encouraged to take a stake in local refining capacity.

Going forward, we should look at two or three business models. Some of the models should be that IOCs should refine a fraction of their oil in-country. The second option is for government and private sector, that is, international and indigenous oil companies to partner in running refineries. The third option is to have wholly-run private refineries. If the market is freed up, in time, we would see competition among the government-owned, joint-participation-owned and indigenously-owned refineries. At this point in time, once there is competition in the market for products, we would have increased supply of products, demand would be lower than supply, and, with time, the price would fall, which would reflect the price of a barrel of oil.

At the moment, we are paying exactly what we were paying when crude-oil was about $100 a barrel. I am not convinced that at about $55, $50 per barrel, we should be paying the same amount of money, whether we are subsidising it or not, because the cost of taking oil out hasn’t changed, the price of oil in the market has changed, the refining process and procedure hasn’t changed and, at this point in time, we should be paying lower for the pump price for any of the products we are getting.

So, in essence, you are calling for a change in the management of the NNPC and our hydrocarbon assets?
The management of our hydrocarbon assets, fundamentally, in terms of intra and inter exchange is largely inadequate. The management of NNPC needs the independence to operate, as it is expected to. Historically, we have people like Chief Marinho, Feyide and others, the fathers of NNPC, who had the idea of running a commercially viable NNPC. But that is not the case at the moment. I don’t think the NNPC has relegated or assigned most of its responsibilities to third-parties. I think we need to go back and look at the history of how the NNPC was formed and what it should be doing today, but above all, it should be partnered with other investors to make it more viable.

Regarding the call to go back to the drawing board of the NNPC, what do you think of the hint that the president would be supervising the petroleum ministry, especially given the fact that he has a robust experience in the oil industry in the past?

I applaud and support the president taking a supervisory role, in terms of ensuring that NNPC and the petroleum industry is well managed. For the level of poverty in the country and the corruption we have experienced, I don’t think it would be responsible for President Buhari, who has enough experience about the NNPC of the past, to allow just anybody — no matter how credible the person — to take full charge of the oil and gas industry. We are going to need a very learned and disciplined GMD; we are going to need a technocrat as minister of petroleum resources, somebody, who can stimulate the increase of exploration and production to increase our reserve base and understands the petroleum economics behind exploration and production, who has sub-surface, project and legal understanding — broad-based knowledge, technical to non-technical. Finding such a person is not too much to ask from our president.

In this day and age where technology moves so fast, the dynamics of the oil industry is very fluid. I don’t expect the president of Nigeria to be the minister of petroleum resources. He won’t be able to keep up with all his responsibilities with his primary function being a President. He could, however, oversight the work of the minister of petroleum resources, his junior in the ministry and the GMD of the NNPC to ensure there is no corruption and the confidence of investors is restored in the Nigerian oil and gas industry. I think he should take an oversight function.

So you are saying he shouldn’t be the minister?
I honestly think he wouldn’t have the time, the resources and the broad-based understanding of the hydrocarbon industry as it stands today. This is because Nigeria is more of a gas than an oil province. When president Buhari was in charge of the industry, Nigeria was an oil-focused hydrocarbon province. Today, going forward, Nigeria should focus on gas utilisation and optimisation. The dynamics of gas is much more different from oil. He should focus on restoring investors’ hope in Nigeria, based on his integrity, as well as, on meeting the needs of Nigerians, in general, in agriculture and infrastructure. He should focus on growing other sectors of the economy, but have an oversight on the oil sector.

What do you think should be the short, medium and long term plans for the industry?
Our short term plan should be to restore investors’ confidence in the oil and gas sector. We need to see people re-investing in Nigeria. We also need to restore security. The ministry of petroleum resources and the department of petroleum resources need to engage stakeholders who have left Nigeria, or have abandoned approvals for permit, to actually find out why. I understand there are quite a number of licenses that have been abandoned. We need to see more OMLs; OPLs converted to OMLs. We need more people using the licenses effectively.

In the medium term, I would like to see Nigeria’s refining capacity increase. If we increase that, the country should be in a position to export finished products. And Nigeria should not after 50 years of producing hydrocarbon, be exporting crude. We need to see gas utilisation for driving gas-driven turbines and the IPP projects tied to the gas master plan. We want to see more IPPs to improve electricity in Nigeria, which is possible since we are a gas province. Gas has to be priced and monetized properly so that it would become attractive to explore for and produce for Non-Associated Gas (NAG). The non-associated gas can feed into IPP plans strategically located near the fields so that we have power in those areas to stimulate trade parks, SMEs and have a multiplier effect on job creation for Nigerians in those communities.

I would like to see more of our gas used as feedstock for agriculture as fertilizer to stimulate agro-allied industries. If we do that, there are certain non-wholistic things that can be produced with the fertilizer. Even I think Nigeria is more strategically positioned to use gas to provide agro and allied solution whilst we still produce herbs and organically grown foods traditionally and as a specialty niche. But for things like renewable energy, where we have to produce a lot of cassava and a lot of stuff that would not be eaten by human beings, then we have to deploy fertilizer-based agriculture. I think we have to focus more on agriculture and agro-allied industries and use gas as an asset.

So Nigeria should use the oil and gas industry to drive its diversification initiatives?
Yes, absolutely. If one looks at the 1952 resource map of Nigeria, it ties into the Nigeria Export Promotion Council Map that allocates cash crops, natural and mineral resources to all the localities in Nigeria, we can see that the local councils have a lot of work to do, in terms of ensuring that the people in their domain have access and can harness the resources in their localities to create value. If we monetise gas, we can use it to grow agriculture. We can look at the linkages between the hydrocarbon sector of the economy and others. We can use gas to drive IPP projects, build infrastructure, because we need to build pipelines and connect them to the IPP projects. Hydrocarbon going into refining and petrochemicals can actually produce the kinds of things that technologies use, such as chips in phones.

We also have paints and other additives that come from petrochemicals. What we need to do is to go back to the drawing board and see where we missed it in exporting crude oil and flaring gas and how can we monetize and create value from the assets in the industry, and create a buoyant economy, where people can engage in SMEs and multinational businesses using oil and gas as catalyst, not as the primary sector of the economy, which is where we missed it.

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