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Petroleum industry: All motion, no progress

By Michael Eboh

One year into the administration of President Muhammadu Buhari, the Nigerian petroleum industry had been bombarded with a number of initiatives, reforms, policies and strategies, but in spite of these, the industry had not recorded any significant improvement in its fortunes. Over the years, Nigeria and the international community had been consistently reminded of the fact that the Nigerian petroleum industry is bedeviled and enmeshed in an intricate web of corruption, to the extent that almost every successful player in the industry is termed corrupt or seen as benefitting from the corrupt system.

refinery 7It was believed that the rot and opacity in the industry was depriving the country of billions of foreign exchange earnings. It was also a widely held view that the petroleum industry is a symbol of everything bad about Nigeria, as the industry is claimed to be replete with widespread corruption, illegalities and irregularities, outdated contracts; lopsided agreements, theft and vandalisation among others.

With this mindset, the present administration took it upon itself to rid the sector of the massive corruption which was believed to have made it difficult for the industry to make any significant contribution to the development of the Nigerian economy. President Buhari’s administration also set out to improve the lot of the Nigerian petroleum industry and positioning it for relevance, especially with the declining fortune of crude oil in the international market.

In his early days, Buhari promised to introduce far-reaching reforms to boost accountability and transparency in Nigeria’s oil and gas industry; address the myriad of challenges in the sector, especially in exploration, production and distribution of petroleum products in the country. He also vowed to tackle the issue of insecurity in the Niger Delta and optimize investments in the country’s oil and gas industry.

To this end, the present administration, within its first year in office, introduced a number of initiatives in the entire gamut of the petroleum industry, ranging from the upstream, downstream sector to the gas sector. It is also instructive to note that Buhari’s plans for the petroleum industry did not commence until after almost three months in office, when in August 2015, he appointed Mr. Ibe Kachikwu as the Group Managing Director of the Nigerian National Petroleum Corporation, NNPC. Also, his road-map for the petroleum industry did not commence until Kachikwu was also named as the Minister for State for Petroleum Resources.

  Upstream

The upstream sector of the Nigeria’s petroleum industry had over the last one year recorded declining fortunes, with Nigeria’s crude oil production dropping from around 2.3 million barrels per day, when Buhari came into office as President in May 2015, to about 1.4 million barrels per day as at today. Widespread crude oil theft and vandalism continued, with the country losing significant percentage of its crude oil production to theft, sabotage and shut-ins.

The Federal Government, had through the NNPC, promised to review all the Joint Venture agreements and Production Sharing Contracts with oil majors in the country, but nothing had been heard of the review. The delay in the review might be as a result of the non-passage of the Petroleum Industry Bill. Also, numerous initiatives and reforms were introduced in the sale of the countries’ crude oil, such as the Direct Sale-Direct Purchase Approach for the lifting of the country’s crude and review of the terms for the Offshore Processing Agreements (OPA) and the Crude Oil for Products Swap Arrangement.

  Downstream

In the downstream petroleum sector, no significant progress was recorded despite the major reforms put forward in the sector. The sector within the last one year had been one of the major sources of hardship and pains for a large majority of Nigerians. For the larger part of the last one year, the sector was marred by an unending and gruelling fuel crisis, which saw motorists spending long hours on the queues. To quell the fuel crisis, the Federal Government gave fresh licenses to some investors to build three new refineries at the site of the country’s existing refineries.

The refineries to be built under the co-location arrangement would ensure that the refineries share facilities with the existing refineries, saving the investors the cost of building supporting infrastructure.  The initiative was also aimed at increasing the countries’ refining capacity to 650,000 barrels per day.   The government also threw open the fuel import segment open, stating that any entity was now free to import fuel as long as they can source dollar.  It was estimated that the results of the various reforms and initiatives would be seen from 2018.

However, while the country waited for the effect of these initiatives, the crisis in the downstream sector within the last one year, climaxed with the hike in the price of the commodity from N86.50 to between N135 and N145 per litre.  The price hike followed a liberalisation of the sector, whereby oil marketers were given a leeway to determine the price of their commodity within the N135 and N145 per litre band, while the marketers were asked to source foreign exchange for fuel importation from the parallel market.

The government, in hiking the price, failed to take steps to safeguard and insulate the country from the volatility in the price of crude oil, by ensuring that the country rely less on fuel import.  This could have been achieved by ensuring that the refineries work at optimal level, while also increasing surveillance on crude oil installations to forestall sabotage, like pipeline vandalisation, crude oil and products theft, among others.

Presently, the fuel crisis appeared to have been addressed, but in reality, the crisis is far from resolved, as oil marketers claim they are still finding it difficult to source dollar to import fuel. In addition, with the rising price of crude oil in the international market and a low naira value, another fuel price hike is imminent in the next couple of weeks.

  Gas

No major development was recorded in the gas sector within the last one year. No single initiative was developed within the last year in the gas sector, while the sector was marred with constant vandalism and gas flaring. No significant policy was introduced to boost gas-to-power; local gas consumption remained low; pricing remained an issue; funding challenges remained, while huge gas debts were still hanging.

The NNPC identified the a number of challenges hindering the growth of the gas sector in Nigeria, ranging from the export orientation of sector; short/medium term proven reserve; reserve development; gas pricing; revenue securitization and lack of a bankable gas agreement among others. Despite identifying these challenges, no effort was made by the government to address the issues so as to improve the fortunes of the sector.

  NNPC

The major reforms undertaken in the petroleum industry by the present administration was in the NNPC. In the NNPC, a major restructuring was undertaken, whereby the NNPC was reorganized into four business and three services components. The Group Executive Directors, GEDs, of the NNPC were converted to Chief Operating Officers, COO, and redeployed to the various business components. The  four autonomous business units are Upstream, Downstream, Refineries, Gas & Power, and supported by a lean Group Headquarters, namely -Finance & Accounts, Corporate Services and Venture Unit for non-Core assets management.

Furthermore, the NNPC took a turn towards transparency and full disclosure, as its Group Managing Director, Mr. Ibe Kachikwu, commenced the publication of the financial and operations report of the corporation on a monthly basis. Also, the NNPC entered into collaboration  with the Central Bank of Nigeria, CBN, and major international upstream oil companies to address the foreign exchange challenges faced by the marketers. The collaboration was aimed at providing between $180 million and $200 million foreign exchange to support major private importers.

The co-location initiative for new refineries was spearheaded by the NNPC, while the NNPC also entered into joint partnership on petroleum products distribution and storage facilities with capable investors. The NNPC also engaged its Joint Venture (JV) partners on alternative ways to defray the current upstream JV funding gap and Cash Call arrears. In addition, the NNPC embarked on a ‘20 Fixes’ project which identified 20 critical issues that need to be addressed in order to re-position the 37 years old national oil corporation on the track of efficiency and profitability.

The target included: Reduce and audit cost, restructure corporate centre and staffing, renegotiate existing contracts, including PSCs, streamline subsidy management, boost pipeline security, enhance transparency and accountability, achieving zero tolerance for corruption, rebrand NNPC and unbundle PPMC.

Other initiatives include: unbundling of the Nigerian Gas Company, reduce contracting Cycle, restructure refineries, improve information technology to drive business, embed staff and business performances management, restructure JV funding and reduce Cash Call, improve retail profitability , deploy and attract focused investments, re-kit NPDC, expand crude marketing and   generate power profitability.

The various reforms in the NNPC was applauded by stakeholders, but skepticism still remained, especially with the fact that the office of the Minister of State for Petroleum Resources and the Group Managing Director of the NNPC is being held by the same person. It is claimed that this was in negation of corporate governance principles, as it does not allow for clear separation of powers and would also hinder efforts by regulatory authorities to hold the NNPC to account for some of its action.

 Conclusion

In spite of the good intentions of the Federal Government and various initiatives, not much success was recorded in the petroleum industry in the first year of President Buhari’s administration.  However, in his recommendation on ways to drive growth in the petroleum industry, Professor. Adeola Adenikinju, Director, Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan, emphasized that current emphasis on crude petroleum exports must be discontinued and should be replaced with seeing petroleum as source of energy and growth enabler.

He called on the Federal Government to develop a medium to long term strategies to anticipate developments in the oil market; improve on the competitiveness of the economy and doing business conditions; promote vertical integration within the oil industry in order to develop a fully integrated economy that is able to generate jobs and development.

He also called for special incentives for marginal field producers, adding that the country must ensure that it is part of the current innovation drive in the energy industry.


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