Okunbo: Nigeria Operates a Wrong Model, Govt Should Cede Pipelines to Private Companies



Penultimate week, Minister of Petroleum, Dr. Ibe Kachikwu, recommissioned the 60km Escravos-Warri crude line and Bonny-Port Harcourt line which had not worked for several years due to vandalism. The repair work was undertaken by Ocean Marine Solutions. The company’s Chairman, Captain Hosa Okunbo, in this interview with Tokunbo Adedoja and Chineme Okafor, speaks on how his company got involved in the repairs of the pipelines, challenges faced in the course of carrying out the repairs, the integrity of the existing pipelines, how they can be protected against vandalism and the model that is sustainable in the long run. He also spoke on the controversy that trailed the marine vessels contract awarded to his company by the last administration for the transportation of crude oil to the refineries which was canceled by the current government

Last week, the Minister of State for Petroleum Resources, Dr. Kachikwu, recommissioned the 60km Escravos-Warri crude line and Bonny-Port Harcourt line which your firm repaired, could you explain the terms of your involvement in these jobs?

The pipelines have not been working for 10 years and were seriously vandalised. There was no political will to get them fixed. Sometime in 2009 when the NNPC got frustrated in fixing the pipelines and a lot went into repairs, NNPC set up a project team to look at the possibility of moving crude by marine vessels because they were losing more than 40 per cent of the crude that was being pumped through these pipelines through valve insertions and all kinds of vandalism.

When they throw in a million barrels of crude, 600,000 barrels get to the refineries and 400,000 barrels get missing through valve insertions by oil thieves.

They got frustrated and said they wanted to use the marine vessels option. We were invited as a maritime security contractor but a company called PPPFM won the contract for using marine vessels and we were just there providing security with the help of the Navy whom we have partnership with in protecting offshore oil assets.

We are the biggest in the industry and have developed capacity overtime, so we were called upon to offer this service to NNPC. That actually came into fruition in 2011 when the project started after the bid processes.

Two months into that project, the company, PPPFM, could not deliver crude anymore due to their lack of capacity and commitment and there we were as security company watching from the sidelines what was going on and we found out that 600,000 barrels of crude oil was stuck in Very Large Crude Carrier (VLCC) and another 100,000 barrels was in the MR berthed at the jetty for over one month without discharge.

On enquiry, we found out they had problems settling third-party debts, and of course in maritime law, whatever is on board your vessel and you are not able to pay for freight cost, you can sell off to offset your freight costs and that was the option that they were going to exercise against the government which we noticed.

We refused that to happen and when they approached us to say they will go to court, we told them that it was not possible to go to court for Nigerian crude, and more so, we were contracted to protect this crude and so there was an impasse kind of.

Because we didn’t want that sort of embarrassment for the government, we sat the Israelis down and negotiated with them to say, “listen, we know you don’t have the capacity and commitment to do this, would you be glad to sell the company to us?”

It was a model we wanted to support because we know it would work. We are mariners and these guys were just business guys. We bought the company and paid all the third party bills they were owing and for which they would have sold the crude.

If they had sold the crude then, the government would have lost about $70 million at the price of crude then, and so we approached the management of the NNPC and they told us to go ahead but in doing that we actually lost $7 million but knew that with time we could recover once we create value. Money will come when you create value and that is our business model, we don’t believe in money first but value first.

The simple definition of business to us is creating value for people to make money, and when you want to make more money, you have to create unusual value.

And so we decided to take it up and there was a project team that was attached to us and it was not just movement by marine vessels alone, there were other things that were attached: ship-to-ship operations, all kinds of securities and even the channels which were challenging with their draught to prevent the MRs from loading full capacity, and so we had to be creative and it took a while with the project team to perfect that act and once we perfected it under the prove of consent, we started delivering crude to Warri and were saving the country up to the 40 per cent loss.

Because of the record we had created in Warri, we got Port Harcourt which was even bad because they throw a million barrels and nothing gets to the other end. They saw this model as being successful in Warri, they wanted to extend to Port Harcourt and, of course, we had to sit down and negotiated under a template and a contract was put in place to cover these areas and that was the contract we were doing.

We sat with petroleum economists at the NNPC, a team headed by Dr. Tim Okon, a very strict but straightforward man, and a contract was put in place. We started moving crude but at the end of the day we were not fully utilised for almost seven months because the contract had fixed and variable costs, and for that period, we were on fixed cost and was not getting any value because crude was not allocated to us to move.

There was also no value to the NNPC because the refineries were not getting crude and it was no use having that structure set up. As at the time they cancelled that contract, in four years, we had actually moved for the NNPC, about 65 million barrels of crude, and the value for it in terms of the 40 per cent loss they incurred was 26 million barrels, that is what NNPC and government would have lost and in looking at the financial value then, it was $2.6 billion that would have been lost, so we saved that for this country.

When the new government came, the contract was no longer delivering value and the GMD had to cancel it under a term, and rather me get upset that my contract was cancelled, I got closer to him because I like to create value and asked him, “what do we do?”

He actually called for a renegotiation and perhaps creation of another model which I knew was going to take time, so I suggested to him to let us take advantage of the present phase to fix these pipelines which had been problems and I asked him if we had the political will to fix the pipeline because if he does, we could fix the pipelines.

Of course, most people thought that wasn’t going to work and that was how I got into it. I was sent to the PPMC which only gave me a letter of comfort to embark on this project, both Escravos to Warri and Bonny to Port Harcourt.

The perception of what had happened before drove me and I want people to know that I create value and my integrity is very important to me. Money doesn’t mean anything to me more than my values, and that was how I went there with my team.

It was very challenging on that line between Escravos to Warri but we provided security because that is what we do. Port Harcourt wasn’t as difficult as Warri though. We also invited the communities along the right of way of the line in Warri, over 50 communities, to a meeting and explained to them our desire to do this work as well as the government’s resolve to take down anybody that will stand on their way.

We also told them that we were ready to work with them and they had options to either work with us or allow the government come hard on them. I also have some goodwill down there and so we were able to mobilise and move people into the pipelines with a lot of insertions and blast points.

Sometime ago when we were ready for the pressure testing of the line, we had a blast and I was in the creek that day but it was a close call. That was some of the risks we faced.

Today, it is back even though nobody believed it was possible. I thank God for this and Mr. President who gave the political will, as well as Dr. Kachikwu who is doing a lot to this industry.

What were the terms you negotiated with the NNPC on this job?

I was not paid a dime, it was only a letter of comfort that was given to me. I also want to thank the NNPC taskforce which was set up to work with us because we couldn’t determine a scope for the job because we found blast points and loading points every day along the line. We found more than 70 loading points on that line and over 20 dynamite blast points.

Coupled with the integrity of the pipes, it was a tedious job but were able to deliver it. Now, they are pumping crude to Warri and Port Harcourt and for me, it is more than money, even though I have not been paid, now we will start talking because the scope of the job was totally captured by the taskforce that worked with us, it is not just anything any one can lie about.

The taskforce monitored us all through, they were in the creeks with us for that long and I want to thank those guys because they were with us and their commitment was so solid. Whenever we found any insertion, we called them and they signed off before we fix, and of course this is not the first time that the NNPC was fixing pipes, there are benchmark figures for pipe repairs and so it is not anything that anybody will throw in any figure and expect to be paid. NNPC has a benchmark and so we will negotiate.

Are you doing any other thing on the line now?

We are constantly policing the lines. I have engaged several youths in all the different communities along the right of ways to check on the lines. We have actually assigned sections of the lines to each of the communities to monitor and if anything goes wrong in their ends, there are people we will hold responsible for them.

As you explained, you had a contract that was not working in the last dispensation, was there a time you suggested the possibility of fixing the pipes to the government? if you did, was it very well received?

I personally had thrown it to the former GMD before to lay a new pipeline all together that could go six meters down all the way to the refineries, and that could be done through directional drilling given to a contractor to finance it and regain when you pay throughput for the products that will pass through them and, of course, you have to also guarantee that you will use the pipeline.

I had proposed that earlier and even before the crude contract was fully put in place, I proposed that not in writing but discussion. But I don’t think there was the will in the last dispensation.

Like I told you, they went in to fix this pipeline in 2009 and it was impossible because there was so much indiscipline.

There are talks within the sector that most of NNPC’s pipelines are old and their integrity in question.

In carrying this repair works, are you able to attest to the integrity of the pipeline?

These pipelines are very old. Pipelines life is a maximum of 25 years, most of these pipelines are well over 30 years and so the integrity is a problem that is why we are quite cautious about the pressure we put in there. These pipelines when they are brand new, we could put in up to 75 bars but when we were doing our pressure testing, we made sure we did not exceed 22 bars, so we are cautious about that.

But looking forward, I think the minister is thinking about a new model of actually building new pipeline network using the private sector. What is actually happening in the industry is that the minister is driving the industry and NNPC in a profit oriented fashion.

Pipelines are constantly broken. What sort of sustainable solution would you advise the government to adopt?

What will be sustainable would be for the government to actually award these lines to private firms, let them go there and lay new pipelines deep inside the ground and let them charge throughput for use of the pipelines which you have to guarantee.

No one will use his money to build the pipelines without guarantees that certain quantity of products will be passed through them. That should be the model because everywhere in the world, governments don’t build pipelines, they are done by established companies and everybody use the lines and pay throughputs.

It is companies that own pipelines and not government, it is a wrong model and government should cede the pipelines to private companies, that is the only way out of it because when private people own pipelines, individuals and communities that are angry with the government can no longer break pipelines because it is no longer a government asset.

But then, the pipelines pass through communities who attempt to extort because of that?

We have pipeline networks already and the good thing about this is that they have rights of way already established. You are not creating new rights of ways. They are there and had been paid for and compensated. Let them use the same right of way that exist.

There is actually a robust pipeline system in Nigeria but because of vandalism and all that it is not working. In those days, the government didn’t take note of all these because we were mostly peaceful and they didn’t think about laying the deeper, most of them are actually on surface areas.

Was there some sort of bid process from which you were qualified to fix those lines?

Let me tell you that people actually wrote petitions that pipeline works were given to people without due process but what would have happened would have been that this pipeline would not have been ready.

We started this work in November and we completed it now, in April. Sometimes a bid process takes more than eight months and by the time they stopped marine vessels in October and the refineries were fixed, there was no feedstock to the refineries.

The choice they would have had was to go back to the marine vessels and if I you couldn’t pay at $100 per barrel, I wasn’t ready to go back to that contract at $40 per barrel or less, and so I would be deceiving myself if I thought you were going to meet your obligations because as at the time I left, you were owing heavily on a $100 per barrel, so $40 barrel was an impossibility and the refineries were now being fixed and there was no feedstock, it was an emergency deployment.

Good enough, there was no payment. I can tell you that there is hardly no company that would do what I had done but I did it without collecting a dime first. In our industry, there is what we call proof of consent; there is what we call cure-and-pay, that means, you cure it and then you ask for payment, and if you don’t you will lose your investment.

If I did not deliver these lines, I would have lost my investments and in going through the bid process, the refineries would have been hanging there for the next one year while the bid process lasts. So, without a bid process, a taskforce was formed and deployed because it was an emergency work.

You said you employed a carrot and stick approach in doing the job, what really were they?

The carrot was in working with community, engaging them and making them to work for you. That way you pay money for that, you pay money for intelligence and communities are working with us. That is the carrot which means you get paid for what you are doing.

Now the stick is when you don’t work and I paid you to work and you destroy the pipeline for which we had paid you to watch, that is where the stick comes in because the government will not take that lightly. We will report to the government the community that breaches the pipeline and the government will move into the community.

So, this means that that stretch of pipeline is free from vandalism?

By the grace of God. By the system we have put in place now and also let us have the resources to sustain what we have put in place because we have a huge maintenance team along that stretch, as well as security, surveillance and community and the day you are not able to pay them, they may go back to their old ways.

Is this sustainable, and for how long because it costs a lot of money?

At least for now until we are able to do new pipelines and with time they will start getting used to these things working again and of course we too will begin to devise and deploy some new technologies of security because it is definitely better than losing a barrel of oil.

How serious is the impact of oil prices dip on your operations?

Of course, you know over time the cost of production in Nigeria has gone up unlike those days when all the challenges were not there like oil theft.

You produce and lose lots of your volumes and still sell at a lower price, at a time in 2008 and 2009, we sold for $40 per barrel and we lived in this country.

How much of local content do we have in the services end of this industry, are we where we should be?

That is one thing I really applaud the previous government for. Everything about the government was not bad and I appreciate the local content drive of the last government, otherwise so many of us would not have had the chance to improve or even develop capacity in the industry. Nigerians were not given a chance and everything was done by foreign firms but through the Local Content Act, everybody was able to develop lot of capacity and even though some people that were given the capacity abused it, it was a very good thing and where oil is produced, the locals should be given opportunities to develop their capacity.

Vandalism is seen more as criminality than agitation and after the South-South got the presidency in 2011, people thought that the spate of vandalism we recorded were more of criminality, would you agree with that?

Well, after amnesty, everything was criminality. If government has given you amnesty and you still went back to vandalism, you are a criminal. Everything after amnesty was criminal, that is the way I see it and there was no will to move against the criminals.

If you declared amnesty and you are still vandalising, then you are still a criminal, otherwise, what are you agitating for.