BACK PAGE BY IJEOMA NWOGWUGWU (BEHIND THE FIGURES)
Of all the critical stakeholders responsible for the management of the Nigerian economy that met last Wednesday in Abuja at the open plenary of the Central Bank of Nigeria’s second consultative roundtable, it was probably only the remarks made by the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr. Mele Kyari that struck a chord. Unlike his colleagues at that event, he did not bother to toy around with platitudes about the dire economic situation in which Nigeria finds itself.
Kyari spoke barely 48 hours after the price of crude oil had tanked precipitously following the fight for market share between Saudi Arabia and Russia, in reaction to the drop in global demand as a result of the Coronavirus. He painted a grim picture of tougher times ahead. According to him, there were over 12 stranded Nigeria Liquefied Natural Gas (NLNG) cargoes because of the collapse in global oil demand associated potentially and significantly with the Coronavirus. This had never happened before to Nigeria LNG cargoes, he said. With respect to liquid cargoes, Kyari disclosed that they had been badly hit too, with Nigeria accounting for 50 cargoes that had not found landing.
Kyari acknowledged that all oil producing countries had been bad hit by the price war as Saudi Arabia and Russia scrambled for buyers for their crude grades, but Saudi Arabia, as the world’s largest producer, had the latitude to engage in the price war because it costs the country on average $4-$5 to produce a barrel of crude oil. Accordingly, if the price of oil was slightly over $30 per barrel and Saudi Arabia and Russia were offering discounts of $8 and $5 respectively, they would still be making a profit, albeit by slightly lower margins, he explained. In contrast, Kyari pointed out that the cost of producing a barrel of crude oil in Nigeria was at best $15-$17 per barrel (for onshore production), but at the top end of the production spectrum, $30 per barrel (for deep offshore production).
The long of short of Kyari’s narrative was that even in the area of crude oil production, which accounts for 80% of our export earnings, Nigeria is uncompetitive and cannot go toe to toe with other oil producing nations to fight for a piece of the market. In effect, it is faced with far worse prospects than other oil producing nations, not just in terms of her inability to find buyers for her crude oil, but is saddled with the stark reality of dwindling foreign exchange reserves and an annual budget that is not worth the paper on which it is written. As a solution, Kyari suggested Nigeria cuts its cost of production and ramps up oil output. However, he came up short on how his recommendations will be achieved. He also seemingly forgot that neither of the measures would bring immediate relief to a country already reeling from the adverse economic impact of the Coronavirus in the worst possible way.
As a cub energy reporter in the mid to late 1990s, I visited so many oil production facilities in the Niger Delta. At the time, about 95% of Nigeria’s crude oil was produced onshore or in shallow waters under joint operating agreements (or joint venture contracts) with the international oil companies (IOCs), with sole risk (independent) operators making up the balance. The initial set of deep offshore production sharing contracts had just been signed in 1993 and were at least ten years away from producing first oil, ready for shipment. In the absence of deep offshore production, the cost of producing a barrel of oil averaged $5 per barrel. Nigeria then was considered a low-cost oil producing country, even with the inefficiency that had started to crop up at the National Petroleum Investment Management Services (NAPIMS). NAPIMS is a unit under the exploration and production (E&P) directorate of the NNPC responsible for managing the Nigerian government’s investments in the upstream sector of the oil and gas industry. So how did Nigeria transit from a low-cost oil producing country to one where the cost of production is exorbitant?
According to data provided by the industry journal, Oil Price Intelligence, the cost of production of a barrel of crude oil in Saudi Arabia is $3-$5 per barrel, in Kuwait less than $10, Iran – $9, Iraq – $10, Russia – $15 on average, Angola – $40, United Kingdom – about $44.33 (deep offshore production), Brazil – $34.99 (onshore and deep offshore), Venezuela – $26, Canada – $26.24, the US – $20-$30 (offshore and shale oil) and Nigeria – $30 on average. As my colleague and Arise News Business Analyst Mr. Bode Ososami put it succinctly last week, Saudi Arabia is able to produce oil at a lower cost than its peers because of its abundant pool of oil close to the surface and the absence of taxation on oil production.
Nigeria, on the other hand, has stuck out like a sore thumb in terms of oil production cost for a number of reasons, notwithstanding inflation, foreign exchange movement, the fiscal regime, and the cost of capital, which has a limited impact as funding for major oil projects are sourced from overseas markets where the cost of funds is cheaper. For one, several of the oil fields that today account for more than 50% of the hydrocarbons produced in Nigeria are located in frontier deep-water acreages that are a lot more expensive to produce. This arises from the technology that is required to drill the fields in hostile water depths of 1,000 metres and above, as well as the construction of the costly floating production storage and offloading vessels that must be moored and linked to well heads and drilling platforms, among other facilities.
Owing to the high cost and risks associated with the deep-water acreages, it is the IOCs with the financial wherewithal and technical capability that dominate this segment of E&P activities in the country. The IOCs have also found the deep-water oil concessions more attractive, because as contractors to the NNPC, the Nigerian government has no financial input in the E&P activities, making their spending programmes more difficult to monitor and regulate. Another attraction for the oil majors is the location of the deep-water facilities. They are difficult to access and less susceptible to attacks or sabotage by militants and oil thieves in the Niger Delta. Given the almost unregulated nature of their operations, the IOCs can ramp up costs without a care in the world, much to the detriment of Nigeria.
The situation is made starker by NAPIMS, which is supposed to be the portfolio and project manager of the nation’s investments in the upstream oil and gas sector. NAPIMS, in its oversight functions, often acts in cahoots with the foreign oil firms to sabotage the nation’s interest. Its personnel are either grossly incompetent or fantastically corrupt and often turn a blind eye to the sharp practices of the oil firms. Apart from its incestuous relationship with the IOCs, because of NAPIMS, Nigeria is notorious for having the longest lead time in the global oil industry for reviewing and approving the work programmes, petroleum operations, budgets and projects costs of the IOCs. The protracted time, often running into several months and sometimes years, that it takes NAPIMS to approve major E&P activities for deep-water acreages often leads to cost overruns and compels the IOCs to factor in a premium in their project costs. More often than not, the delays are intentional and contrived so that palms can be greased. The story of the Egina deep-water oil field operated by France’s Total is a cautionary tale of how difficult and expensive it is to do business in Nigeria’s oil sector.
The second reason for the high cost of oil production in Nigeria can be traced to onshore and shallow water operations in the last two decades. As some of the joint venture (JV) fields located onshore and in shallow waters aged and were sold off by the IOCs to local operators, oil production from the JV fields that were once cheaper to produce, fell and became less cost effective. This, added to the fact that indigenous operators have to raise most of their funding for the acquisition and operation of the assets from local banks at high interest rates, the absence of economies of scale, aging fields and facilities, host community issues, their exposure to militant attacks and piracy resulting in higher insurance premiums, and of course the inefficiency of NAPIMS, has added to production cost in general. Naturally, the JV oil acreages still retained and operated by the foreign oil firms have not been shielded from the same problems afflicting indigenous firms in the Nigerian oil industry. The only thing that separates them is the ability of the IOCs to sources for cheaper funds abroad.
Crucially, a lot of the JV acreages still under the control of the IOCs have now been ring-fenced and are funded under Modified Carry Agreements (MCAs). The MCA is a financing agreement that enables the IOCs advance loans to the NNPC to fund its share of joint venture operations. The agreements were introduced in the mid-2000s to enable the NNPC fund its cash call obligations, which the federal government was unable to meet through budgetary allocations. Under the arrangement, the IOCs recover the loans extended to the NNPC by lifting an agreed percentage of Nigeria’s crude oil and retaining the revenue that accrues therefrom. However, while this arrangement has saved the federal government or NNPC billions of dollars annually that would have been required to meet its cash call obligations, it is not dissimilar to the lax regulatory regime that currently exists in the deep-water operations where cost containment will most likely not be a top priority.
The bigger snag is that by allowing the IOCs to lift a percentage of Nigeria’s crude oil, the federation is deprived of the revenue that is taken up by the IOCs. In fact, I recall that during a conversation I had on this issue with an official of the Budget Office of the Federation a couple of years ago, he revealed that due to the MCAs, Nigeria’s share of crude oil production from the JV operations had fallen from an average of 57% in the 1990s to about 42%. Perhaps, it is high time someone did a cost benefit analysis to determine if Nigeria stands to gain more by funding its share of oil JV operations, or allowing the IOCs to continue to fund the same assets under the MCAs.
On the issue of militancy and oil theft in the Niger Delta, the NNPC and the IOCs cannot with all seriousness claim that they are unaware that some of their officials collude with oil thieves and militants to destroy and breach oil facilities and pipelines in the oil region. It has long been suspected that the expertise and precision with which the crude oil and petroleum product pipelines are breached cannot be the handiwork of amateur thieves. It requires the collaboration of experts in the oil and gas sector to tell the thieves where to target and how to puncture holes in pipelines without causing an explosion that can take their lives. Hence the existence of an open-air market for stolen crude oil in the Gulf of Guinea, called the Togo Triangle. The Triangle is known for trade in illegal crude oil and is noted for the presence of pirates.
Given the above, I am hard-pressed to understand how and when Kyari intends to confront these issues headlong. Assuming he has the gumption to tackle the IOCs, is he willing and able to institute long over due reforms in the corporation that he heads? Charity, it is said, begins at home. Yet, NNPC for 12 years has been the most resistant to reforms. Every step of the way, it has blocked the passage of either the Petroleum Industry Bill (PIB), or its offshoots such as the Petroleum Industry Governance Bill (PIGB), among other legislations. Its leadership has warded off recommendations to corporatise and privatise the corporation through a public listing and continues to hold on to its wasted assets – the refineries – despite the failed promises to fix them. Kyari like his predecessors committed to fixing the refineries as soon as he took over the helm of the NNPC, but we all know that it was yet another empty promise and an another attempt to award multibillion dollar contracts much of which will end up in private pockets.
For spectators such as myself, NNPC and the rest of the oil and gas sector is nothing more than a basket case. We see the industry as one of revolving doors. Personally, I will not hold my breath waiting for Kyari to wave a golden wand and undertake the necessary steps to drive down the cost of oil production. Instead, I will place a bet that Kyari, along with his colleagues in government, will wait out the debilitating economic fallout caused by the Coronavirus on the oil and financial markets and pray for the price of oil to rise.
Here We Go Again!
The Nigerian government last Friday announced that it was still consulting with God knows who on whether to reduce the official price of petrol or not. It made this known through the Minister of State for Petroleum Resources Mr. Timipre Sylva, after a five-man committee chaired by the Finance Minister Mrs. Zainab Ahmed, submitted an interim report to President Muhammadu Buhari to review the impact of the Coronavirus on the country’s ability to implement the 2020 budget.
The committee, set up last Monday, had as its primary mandate to review the budget benchmark and the revenue and expenditure framework for the year. It was mandated to submit its report to the president by Tuesday. Unmindful of the urgency before them, the committee, however, tardily submitted an “interim” report to Buhari on Friday. With oil selling at sub-$40 a barrel, the global economy teetering on the brink of a recession, and demand for oil unlikely to recover in the near to medium term, one would have thought that the five-man panel understood the urgency of their assignment.
But no, what we got was a briefing on the disbursement of budgetary allocations primarily for infrastructure projects and no concrete recommendations on the actions needed to address the challenges confronting the Nigerian economy. With oil selling at $34.97 at the close of trading on Friday, countries like Saudi Arabia had already started to slash spending. But not Nigeria! The best we could get from the committee was a commitment to continue consultations on what to do with the pump price of petrol.
Please, they should stop beating about the bush. As of Wednesday, March 11, the landing cost of petrol had crashed to N92.89 per litre while the ex-depot price for collection was down to N133.28 per litre, according to the Petroleum Products Pricing Regulatory Agency (PPPRA). With the landing and ex-depot costs below the official price of N145 per litre, there should be no time wasting on a price reduction of the official price of petrol. The federal government should just do away with its penchant for determining the price of the commodity. With that, it will immediately free up billions of naira already allocated in the 2020 budget for the payment of subsidy on petrol to other critical sectors of the economy.
If we really want to stop smuggling of petrol across the borders in the foreseeable future and expending billions subsidising consumption, the time to act is now!