Barry Esimone, an engineer, is the Chief Executive Officer of Crusteam, an energy and infrastructure group of companies. In this interview with Sebastine Obasi, he discusses challenging issues in the oil and gas industry in Nigeria and expectations in 2017, excerpts.
The 2017 budget is predicated on $42/ barrel of oil, at the exchange rate of N305/ USD. How realistic is this considering that the dollar sells for about N490 in the parrel market?
I will make an excuse that I am not a student of economics. However, I am a realist because I operate in this economy. I believe economics is relevant for our day to day well being. It predisposes itself to rationalisation. If you cannot explain to me how your economic activity will increase food on my table, it has no value to me. It can do numbers of growth and GDP etc. It means nothing to me.
The woman at the corner piece, who fries akara (Bean cake) daily has been there for 10 years. Then you have not impacted on her no matter the number being churned out from the Nigerian Bureau of Statistics, by way of GDP growth. It makes no sense. The growth that makes sense is the growth that people experience, people feel. That is the growth. For me, I don’t need to be a professor of economics to be able to comment on economic situations because as citizens, we are active participants in the economy. The economy is about us. If we cannot feel it and contribute to it, then it is not economics. It is something else.
We have watched the government go full circle on budgeting. First of all, I need to say this. We look at budget and numbers associated with budget. For example, last year was six point something trillion Naira. This year is seven point something trillion Naira. The uninformed imagines a big volume of money. Prior to the six point something, the highest we have done was four point something. This economy is an import dependent economy and therefore the realism of the budget was predicated on what I call equivalent dollar budget. What was the dollar content of 2015 of former President Goodluck Jonathan? What was the dollar content of President Buhari’s budget of 2016? What is the dollar content of the present 2017 budget? When we look at the numbers, people think there has been increase, but in effect dollar content of these budgets is decreasing. If you take those numbers and calibrate them with the prevailing exchange rates, you find out that they are declining. For example, the 2017, N7 trillion budget, if you use the exchange rate of N305, you will know that dollar content of that budget is low. The dollar content is approximately $22 billion. 2016 budget was about N6 trillion. The exchange rate for most of last year was about N200. For the purpose of illustration, let us use N250. The dollar content of that budget was $24 billion.
During former President Jonathan’s administration in 2015, the budget was about N4 trillion. The exchange rate was about N195. Here you are dealing with $21 billion. This means that we have not actually substantially changed the budget volume by dollar content. Therefore there will be pressure because this is an import dependent economy. Budget is in two parts; capital expenditure and recurrent expenditure. Capital expenditure explains development. It ensures that infrastructure is put in place. Recurrent expenditure is money consumed. For you to say that a nation has moved forward, or developed, you require critical infrastructure. Based on their numbers, the budget has declined.
The issue of whether the exchange rate is realistic, the answer is no. The reason is this. Being an import dependent economy, you must seek for foreign exchange to import. There are two sources of FOREX available to government; oil sales and others. Oil sales constitute almost 80 percent of the national income. Therefore if you want to finance your dollar habit, you need to have enough dollar or you change your dollar habit. As a government policy, you can drive the two ends. I expect the government to pursue curtailment of the dollar habit, while also pursuing the increase of the dollar inflow into the economy.
What is the major dollar habit of the nation? Number one principal dollar habit of the nation is the importation of refined petroleum products. At the last count, I recall that over 40 percent of the FOREX earned by government was used for importation of petroleum products. As a government you must be worried about how to cut down on the dollar habit among other dollar habits of personal effects that we all import.
In the 2017 budget, there is no provision for joint venture cash calls. What does this portend for oil production in Nigeria?
I can say this to you without any equivocation. If the IOCs willingly and jointly signed the elimination of the cash calls, this economy will enjoy bounty arising from there. The reduction in production is directly related to the lowered government ability to meet the cash calls to the JVs. Ordinarily, on a straight line analysis, I can tell you that it is a wonderful position which we have been expecting, but it must be done with full knowledge and acceptance of the IOCs. If they truly signed to that, we are in for the good days. It means that the IOCs can go ahead and raise money without recourse to government budgeting and then do the necessary works for production to come and then deduct the cost.
In fact, that is already existing in another aspect of relationship between government and the IOCs. We have the JV (Joint Venture) and the PSC (Production Sharing Contract). The JV means that both of us will jointly venture and jointly share the proceeds. Nigeria owns 60 percent in most of the JVs. It is expected to bear 60 percent of the cost of production. The junior partner that holds 40 percent is supposed to bear 40 percent of the cost. When Nigeria fails to bring its 60 percent, the partners 40 percent cannot run the show. Therefore, you cannot have production. Consistently, over time, Nigeria has failed to be able to meet their cash call obligation. That has impacted on exploration, further discoveries, reservoir ramping up and production increase.
OPEC members and non members have agreed to production cut in order to shore up price. Could this open a window of opportunities for government to have more revenue so as to provide amenities for the citizenry?
Certainly yes, not because of the cut per say, but because of the concession OPEC is willing to give to Nigeria to benefit from. You will recall I mentioned that the volume of dollar take to you is a function of the quantity you sell and the market price. It is an interplay between the quantity you put out in the market and how much the market buys your product. The two combined tells you the volume of income you get from that product. If production cut is done, that moves up price, the price increase must be sufficient that if assuming everybody takes that cut including Nigeria, that the residual cut and price increase will put you on a better position. Sometimes it may not, but why I said the concession given to Nigeria gives us an advantage is that OPEC had observed overtime that because of the challenges in our operating environment, Nigeria has not been able to send their quota to the market. So we have been short-changing ourselves because of the challenges in our production centre, which is Niger Delta, and so OPEC said we will let you retain your volume. When you say you are cutting production, you have to cut from everybody, in principle. OPEC said Nigeria, we know you have survived, stay at you volume. On that basis therefore, if the cut gingers price increase, we stand to benefit.
Sometime ago the Federal Government talked about co-locating the refineries, so far nothing has come out of it. In the past, licenses were issued for refineries, none has come into operation. What kind of incentives can government give to encourage more refineries?
I can tell you clearly that this is a very sore point in this nation’s march to greatness. Why did I say that? If you remember the analysis about containment of our dollar habit, this is a major element of our dollar habit – importation of refined products. We have refineries, total installed capacity of 445,000 barrels per day. The total production is less than 20 percent of installed capacity, whenever they work. Most times, they do not work at all. For a combination of reasons ranging from availability of feedstock, that is crude getting to the refinery, to the state of maintenance of the facilities themselves to the attitude of the operators. These are the key elements that have greatly impacted on our ability to refine products in Nigeria. The way to deal with that dollar habit is to take the bull by the horn, fix the refineries. Take actions necessary and imminent to fix the refineries so that you can cut down drastically on your dollar habit of importing refined products. Some people may argue that refineries are old and are not working well, but I can make bold to tell you that most of the products we import from outside come from refineries older than Nigerian refineries, that the people have maintained and managed their refineries till date and we go there cap in hand to buy from them when we can fix our own. For me, the first thing first. We have a base capacity of 445,000 barrels per day. The only rational thing to do is to ensure that the base is operating at its optimal capacity. It is when the optimal capacity is not sufficient to satisfy the local need that you can talk about increase in capacity. An increased capacity can come in different ways. We can increase capacity by upgrading those ones or by co-locating, the new fancy word. The Ministry of Petroleum Resources and NNPC have chosen to co-locate. I will come to that. Or you encourage other players to establish Greenfield refineries. This is the way to go.
The NNPC has put up series of adverts in the past. The first was to invite investors that will fix the refineries and operate them properly. Then another time they talked about increasing the capacity of the existing refineries by co-locating. They imagined, going by the guideline that you will dismantle an existing refinery overseas and relocate it to Nigeria and set it up. I laughed.
Why did you laugh?
Technically speaking, it is doable. Is that the best option available to the country? You cannot even do any of those things without a detailed study of the refineries to establish, by engineering analysis, that these refineries have the capacity to take on a support system that will increase their production. For example, the Kaduna refinery has installed capacity of 110,000 barrels per day. You want to add, say, 40,000 barrels to make it 150,000 barrels. For you to co-locate, you have to go through a thorough engineering analysis, you do what is called co-location study. You have to do the study on every plant to see what is possible. What is the advantage of co-location? The major advantage of co-location is to share facilities, so as not to duplicate energy. In other words, if there is a road already built in the refinery, you do not need to build another road. If the tanks exist, you do not need to build other tanks to store your products. You must do a thorough study. It is based on that study that you can recommend that for example Port Harcourt refinery can take 30,000 additional barrels or that Warri refinery can take additional 60,000 barrels. It must be based on science. It is not a fancy political statement. If you are a realist and you want to get this wisdom, that is the only way to go.
You asked about the challenges and why people have not set up refineries. You remember about 18 refineries were licensed over time and none has taken off. The only conceivable is the one Dangote is doing. The question to ask is, what is Dangote doing that others did not do? The gap lies in the ability to access finance. Every other element necessary for others to set up is also available to Dangote. Crude oil is in Nigeria. Market is in Nigeria. The money is the difference. Dangote has the financial capacity. Based on his pedigree and asset base, he can raise any amount he wants. Those 18 people with licenses have not been able to raise capital to build refineries.
Why are they not able to raise capital, sometimes it is not their fault. Sometimes it is systemic, that is government’s fault. One critical element in that is government’s willingness to issue feedstock agreement. If you do not have a feedstock agreement, nobody will give you a dime. You borrow on a project. A project should be able to show how it will pay back. Dangote can borrow without showing how he will pay back. He can say, “I will pay you from my cement factory in Zambia or Senegal.” The owner of the money wants to be paid. He does not care where the money comes from. If he can establish that Dangote can pay him from his cement factories, he can give him the money. If you do not have that capacity and you want to build a refinery for the refinery to pay itself, you must convince the financier that you have all the elements necessary for the refinery to run. One key element is access to feedstock. It is a pre-requisite.
The present administration has embarked on exploration in the inland basins, such as the Lake Chad Basin, Benue Trough, Adamawa Basin and the rest, without a competitive bid round, at a time we are talking about paucity of funds. How do you react to that?
This is one of the areas I have concern of the genuine intentions of the drivers of our oil and gas sector. The new intention in the sense that it is either due to lack of knowledge, or politically induced decisions. These are the areas I am worried about. I am actually concerned. I am worried because of paucity of fund. In a situation where you have limited income as against expenditure, our elementary economics teaches us of what is called opportunity cost, choice, scarcity-gingered choice. Choice is the basic element of economics. This is the time that calls for prudence in managing the little resource that we have. If you do scale of preference, you will find that that may not be the best application of the fund you have today.
Government on one hand is saying it does not have the capacity to finance its JV cash calls and that the partners should look for the money. On the other hand, government is saying it is searching for oil in the frontier basins. Searching for oil is a major risk adventure. Most countries avoid this risk by transferring it to experienced companies that have the capacity to make risk assessment before they make their investments. If you make the investment from a political reason, you are purely on your own. If you encourage professional exploration and production companies to make the investment, then you save yourself the agony of looking for money. They will take the risk.
You can only negotiate the relationship to your own best advantage, but you avoid the need to look for money to do that. I simply will suspect that the government’s activity in this area may just be transferred to NNPC or its subsidiary, NPDC, ( Nigerian Petroleum Development Company) that is geared towards exploration and production. Tacitly, the government is saying NPDC should handle the campaign for exploration in the Chad Basin, the Benue Trough, the Adamawa Basin and the rest basins. This means that NPDC should move in with expensive resources to take the risk of looking for what they may not find. NPDC is a government company. It is not in partnership with anybody. Therefore it is expected to fund the project. I am not sure they have the best application of the funds we have. The government may assume that NPDC will have the capacity to go to the next level relationship in another kind of joint venture for somebody that will bring the finance. In my place (Anambra State), we say that the man who sells a dog and buys a monkey, still has a squatter in his house. Something that squats is still in your house. You have not done anything really. If in one hand you are pulling out of JV and in another hand go into a JV, what convinces your new JV partner that you will behave well, when you have demonstrated to him that you are a bad partner?
You have not been able to meet your obligation. Commonsense tells you that. If you want to do business with somebody and he is told that you do not keep to your obligation, the new man will not do business with you. It is as simple as that. There is no free launch anywhere in the world. You earn your pay.
My position is that this is not the time to go into that kind of expedition. If we must, we have to do the proper economic analysis as well as the proper cost benefit analysis. I can tell you the IOCs have spent a lot of money in these areas in the past. There is what is called economics of cooperative advantage.
There are two problems when you do inland basin exploration. Number one is; how do you raise the product, if found, to the surface? Number two; how do you evacuate it? They may point fingers at Cameroun or Chad that are exporting. For Chad to export their crude oil from their inland, land locked basin, it has to go into a joint venture with Cameroun and lay the pipeline and export from Kribi port in Cameroun. That means that for that reason of seeking for right of way to evacuate, you have gotten Cameroun into partnership with Chad. You are no longer getting the maximum of your resource. We are a blessed country with huge reserve. We do not need to partner with any country to evacuate. Yet we are looking for where to spend an arm and a leg. If for example, we find it in commercial quantity and we want to export, what do we do? You do not export crude oil using tankers or trucks. You do that using pipeline. You do that using barges. You do that using water ways. Those are the economic means of evacuation. Everything will come down to economics. When you check the economics of all you are doing and balance it with the benefits, it is called cost benefit analysis.
You might find that you do not have any reason to do that. It may be cheaper that the money you are putting there should be used to take a political decision on the challenges you are having in the Niger Delta, where you have an easier evacuation plan. That is one thing I will do if I were in a position to influence decisions.
Let’s talk about local content issues. Indigenous companies complain that the IOCs outsource jobs that Nigerians can do. How can this be tackled?
Local content is good, very good. I have always said that you can legislate participation and that is what is being done by local content, but you cannot legislate performance. You can say keep 40 percent of the jobs in Nigeria. You can say that and it can be kept. Can Nigerians deliver 40 percent of the jobs? That is performance. You cannot legislate it. You have to have the capacity. You have to grow that capacity to be able to deliver the 40 percent of the content of the work in the oil and gas. That capacity as far as I am concerned does not exist.
Can it exist? The answer is yes, but there must be a conscious effort to create that capacity to exist before you can say they should leave the 40 percent of the jobs for you.
What kind of efforts?
One of the major hindrances to growth in capacity in the industry is funding. Financing has been a major challenge to service companies in the country. You find out that overseas, where these operations take place, they have stabilized and standardized leasing organizations that could afford to lease anything you want without having to raise the capital for that. There is no leasing scheme in Nigeria. Every contractor literary buys their equipment. By so doing, the capital outlay for purchase is usually very high and not available to these players who would ordinarily want to expand. What you therefore find is that few companies with capacity are filled to the brim in the opportunities they have and they are doing well. The other ones cannot come in because they don’t have the capacity to get the necessary equipment. There are other intricate things that government should look at, such as encouragement of partnerships, people putting their resources together to create capital. These are the things government should find ways and means to encourage the players. These are some of the things that have challenged the growth and development of local content initiative of government.
What can the people expect from the government and stakeholders in 2017 in the oil and gas industry?
The reality of discussing the challenges in the Niger Delta must be faced. The solution must be found, an enduring solution, especially by government because this is a political problem, it is not technical, it is not business, as far as I am concerned. It depends on how government wants to sort it out. I think government should be able to sort it out, otherwise, every other thing they are trying to do to hope that they will increase production, will amount to chasing shadow. Even the expatriates you will need, with their expertise will not like to work in a hostile environment.
If you tell them you have a battalion of army, guarding one well, they should come and look at the well, they don’t want to die from a stray bullet, even from the army. The place has to be made habitable by engaging stakeholders, so as to find an enduring, once and for all solution to this. That is the only thing that will change the landscape. If we do that and have a conducive environment, we will not be spending scarce money to explore the inland basins. Even if we have to, we would have made enough money from the one we have and then plough the benefits to the inland basins development.