Kachikwu: We Have Set Oil and Gas Sector on Path of Upward Trajectory

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Ibe Kachikwu

The immediate past Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, in this interview highlighted some of his achievements after four years in office as well as challenges facing Nigeria’s oil and gas sector. He also spoke about Nigeria’s refineries, oil production, bid rounds, Niger Delta and pipeline vandalism. Davidson Iriekpen brings the excerpts:

Do you think you have set the industry for the next growth phase; let us say you do not come back, how will what you left behind be carried on by the next person taking your place so we won’t have policy somersaults?

You are absolutely right, that’s why we always talk about continuity and being able to sustain what is on-going which we have done over the years. One of the things we have done is to institutionalise the policies by going to the Federal Executive Council (FEC) to pass the policy on Petroleum Industry Bill (PIB) and gas policy.

We have submitted the final copy of the fiscal policy, unfortunately, it was not taken, but the other two were. However, the two policies taken basically encapsulate what needs to be done in those areas and it is from there that we also launched the 7big wins by the president which was also institutionalised. The things we have done around gas monetisation programme, refinery projects, infrastructural projects, Niger Delta militancy projects were also institutionalised. We have also worked with the National Assembly in ensuring passage of the bill because ultimately the bills are important. Also, we need to note that although policies are fantastic however, the bigger steps are to get them into law.

Unfortunately, the first leg of the bill the Petroleum Industry Governance Bill was not signed by the president for reasons of wanting a few amendments some of which we supported and is being done by the Assembly from what I hear. If you listen to my clearance in 2015, one of the questions I was asked by the Senate was the PIB, which I said was never really going to be able to pass because it was just too political. So there was the need to break it down into specific areas, as at that time. They have obviously embraced that approach which is why we are where we are today. Most of the segments of the bill such as the fiscal, host communities are ready so to answer your questions I think we have positioned the sector in such a way that there are places to build from. The fact that there is a continuing government also helps.

What is delaying the rehabilitation of the refineries, which is still performing poorly?
Yes, you are right. They are still performing poorly. I think it is one area we did not deliver on the mandate and I am bold enough to say that. One of the media platforms wrote a story that says “Kachukwu fails to deliver on his five promises on refinery.” I think it is a stack misunderstanding of how the system works. I started with being group managing director and also minister of state. At that point, most of the works and power were centred on me. So the first problem we had with the refineries was the fact that they were not even functioning or producing at all and because of the apparent huge fuel scarcity, it was a major challenge for me because if I have to wait for vessels each time to meet the delivery timelines we always have a problem. So I focused on trying to make them at least begin no matter how little even if it’s one million litres per day it will be good because that is something I don’t have to import. My target was to try and get five million litres on a short time frame. How was I to do that? The pipelines that were supplying petroleum products had all being destroyed if we remember clearly, and the previous government had then entered into a contract to buy products by vessels however the cost of those vessels supplying were more than the crude that was being supplied so it wasn’t making any financial sense.

So, with the president’s permission, I cancelled the contracts and challenged Nigerians who were in those contracts that if you want to add value to this entity, go and use your own money to repair the pipelines if I watch it, in three months it’s working we would pay or give you maintenance contracts which was what happened as about two or five companies came together to bid for the contract using their own funds and resuscitated the pipelines and then the refineries came to life.

By March 2016, the refineries started producing not obviously by 90 percent capacity but at least they were adding close to two or three million barrels. However, the years of Turn Around Maintenance (TAM) were all a failed exercise as billions and billions of naira were spent with nothing to show for it. The Nigerian National Petroleum Corporation (NNPC) by duty of its operation keeps charging money for the repair of pipelines with no integrated repairs. I went to the president and said we don’t have the money what we need to do is go out and find private investors who are willing to invest in the refineries, not as shareholders but on an incremental volume optic.

I created a business model whereby if repair of the refinery had it working at about 90 per cent and moved production from an average of 50,000 barrels per day to an average of 300,000 bpd the profit from it will be used to offset the loan. The president approved it however as at that time I left as GMD of NNPC and handed over.

The NNPC owns the refineries so the minister’s role is not to come in and head the negotiations with investors on how refineries are run; the minister’s work is to push for policy approval and make sure they stay on track. As chairman of the board, I worked hard in pushing NNPC on this but it didn’t deliver. By December last year, when I got worried we were not meeting the mandate that is expected from the refineries I then called a meeting and tried to resolve the hitches with investors themselves over the contractual terms and I thought I did eventually. NNPC still rejected the terms we agreed on. So when people say I didn’t deliver, I don’t know what else they were expecting from me but I think if we should look at refining, we should look less at public sector refining.

The future is in private sector refining so what else did we do outside the public sector; we worked with Aliko Dangote because he nearly abandoned the project before because of all kinds of issues such as pricing, approval, support in terms of tariff and customs duties. I have visited the refinery about four times some of my guys have been there over 20 times and we set a timeline working with them as if it was a public sector project. So there has never been that kind of corporation before. If it delivers, which I think he would because the petrochemical complex is almost ready right now.
Apart from the refinery, the government is creating an enabling environment to support investment; the modular refinery which was a concept we pushed for peace in Niger Delta is currently working successfully, three are near production point about seven others are nearing final investment decision (FID) so if those ten refineries come on board in the next two or five years that’s another 250,000bpd refinery capacity added to Dangote’s refinery. I tend to look at the refineries from the volume not physical assets.

On a longer time basis, the refinery is also an export earner we need to be able to supply product to the rest of West Africa, East Africa and Southern Africa. I am also making efforts talking to the Gulf countries like Saudi Arabia, Qatar and China trying to see whether they will be interested in coming in both for the purpose of Greenfield refinery building or the Brownfield refinery building which the responses have been positive. We are almost at the threshold of signing a Memorandum of Understanding (MOU) with South Africa which will not just cover refineries but also cover pipelines and liquefied natural gas (LNG) investment which are huge.

The PIB was intended to make Nigeria take control of substantial part of the oil resources, how much would Nigeria own after everything is done?

The bill will limit the size of acreages for splitting which will allow more investors to come in. It also protects the rights of those who have been given licences because if we don’t have a safe business environment we can’t raise money but ultimately a law is as good as its enforcement. As Nigeria, we ought to be willing to make our country grow which will never happen if we are always looking at the short time growth. So basically lack of enforcement has to be the bane of our issues.

Oil blocks seem to be awarded based on political patronage to Nigerians. Those who get them turnaround and resell same to foreigners, how did you try to end this kind of practice?

First, this government has not given out any oil block for the four years it lasted. We did not even do marginal fields. The president’s belief was that we should first clean up the sector, before we start dishing out political patronages.
In terms of what has been done in the past, my philosophy is a little bit different, because I am a private sector person. Giving oil blocks to Nigerians is not a bad thing. Who else should get it? Are they the right kind of Nigerians, with due reserve there? I do not know. Oil blocks obviously take some level of connection to get, no doubt about it. It requires some level of funding, that is, money to develop the blocks. You need some level of connection to be able to reach out to Joint Venture partners who will bring in the technical expertise. All over the world, those sorts of opportunities are given to people who have come into the upper echelon of society. If you do not have these qualities, you will likely not be able to meet up with the requirements that the DPR sets.

So, I do not think it is a bad thing but what we need to do is to make sure that those who do get it will actually work the field. They will have to pay the right royalties and taxes. The opportunity should be open to all Nigerians. Some of the people who own working oil blocks today where not there 15 years ago.

One of the things we have done with marginal fields is to develop guidelines for the President on the basis of technical skill, financial capability, work programme that is monitored and efficient. And if somebody has done well in his own marginal fields, he qualifies to be given more considerations to get more. If you fail in what was given to you then it is time to retrieve it because that is an asset that nobody is doing anything with.

Some Nigerians get oil blocks and it is like a geographical family picture that they just hang in the house. It does not do anything. They are just running all over the place to find out who is going to buy it from them. They can go on with this till eternity.

There was a time I issued a warning that unless those concerned went back to their blocks and began to work on it; we were going to take back those blocks. Some of them said we have a 20-year timeframe. They are right in one sense; you cannot breach contracts but when it comes to the time for renewal if you are not meeting your work obligation on the block we will take it off you. And give it to individuals who would work the field. The government is losing money for every idle oil block.

How many oil blocks are due for renewal?
I do not have the numbers off hand. You know we had an early renewal programme to raise N1.80 billion for the government and most of those have been renewed. The ones that are within the frame of 2020 – 2021 have already been captured by the early renewal. The ones that are after that we have not dealt with. We did close to about 40 renewals under the early renewal programme. The essence of the early renewal was to get upfront money for government to meet its financial obligations.

Two million barrels a day, 40 billion reserves target seem far off when compared to countries like Iraq just coming out of war and have grown production and reserves fast. What will it take for Nigeria to grow its oil production and reserves? Then the deregulation of the downstream sector, why is it so difficult to do?

Things you need to grow the reserves are one adequate legislation and predictability of the terms, which is why the Petroleum Industry Governance Bill (PIGB) is fine. We probably need 20-year type structure that is firm because certainty of time is very important.
Second factor is speed of approval. I went from a two-year target threshold to six months. Every delay you have has cost implications. The third is that you have to be a friendly investment destination. Nigeria is seen as a very difficult investment destination. Things take too long to happen. There is too much politics involved in making investment decisions and you cannot predict where it is going to end. Understand that oil is somebody’s future dreamland, the belief that down there is something good relying on data generated by seismic studies. But there is no certainty, it is basically a gamble. An uncertain investment environment is recipe for anarchy. They reason you find some countries doing very well is because they are predictable and things seem fast. There are no political interferences as we have in Nigeria.

I was in the private sector and when you had to do investment analysis and had a bundle of countries in which to invest say $100 million my job will be to find the one with highest return on investment. Say you have about seven countries that have potential for development, some finish their final investment decision in three months, the certainty they are giving is much better, they have skilled labour already so you do not have to bring in labour. Then another one has huge resources, a historically successful area. But things never get done. Decisions get changed midway and you are stirring at this $100 million and thinking about return on investment.

The reality is that Nigeria is sometimes its own worst enemy. We need to sit down and let the sector run professionally, let things be done with speed. Nigeria has everything it takes. We are a mature field and the certainty of striking oil is high. With this we can get tougher in our contractual arrangements, unlike countries just starting out.

We have managers and engineers and you do not have to import them. There is an enabling, attractive welcoming environment. But then there are rigours of law, rigours of delays, rigors of multiple taxes, rigours of uncertain fiscal terms, these are the things we need to work on.

I have found that in my four years as minister that if work with the private sector, very little things matter. The fact that they can come to my office and see me on no notice, unlike before when they will come to Abuja and stay for three to five days, it saves them cost.

My philosophy is that if you are producing oil or have the potential to put money in government coffers, by all means please let us talk immediately. You see projects like Egina take off. Bonga and Zabazaba want to take off because they realise sitting with this individual you know clearly where he stands. These little things matter. On short-term three to four years we can reach 3 million barrels a day.

On the downstream, I wish every Nigerian took the view that it is taking too long to deregulate. I was the guinea pig on this in 2015, 2016. I will be first person in history working with the president to make that massive a jump in prices for N85 to N145. It took away everything that was subsidy then.

We began to have over recovery. Fuel queues disappeared overnight, scarcity ended. It has been done so it is not too difficult. It is a highly emotive issue though. We should not downplay the fact that somehow the literature over the years has convinced the lower economic earners in the society that this is not good for them, even though that is not the right literature.

This wrong literature has permeated the system so much that that we need to first deal with it. One of the things we need to put in place is the refineries. When the bulk of your consumption is locally produced, it is easier to deal with that.
I am doing a book called ‘Energy 2015 to the Future’, which captures what we have done and charts a path for the future of energy in Nigeria. Subsidy as a concept is not necessarily a bad thing. America just gave how many billions to agricultural farmers because the trade war with China. It is not the subsidy that is the issue but its mismanagement. There is subsidy everywhere. Many of the things that we do as a country are subsidised – power, gas and rail even food by the virtue of the fact that fertilizers are subsidised. When we removed subsidy, petrol consumption dropped from 50 million litres to 30 million litres a day. This means there was profiteering going on. Then you have to look at your refineries.

Before the elections, you heard the major opposition political say during their time they spent billions, but today Nigeria spends trillions of naira on subsidies. What is your take on that?

I think quite frankly the amount spent on subsidies you have to get from the NNPC. The simple truth is that they monitor subsidy. They are the sole importers right now. They are the sole suppliers. I do remember that the last time I checked, it was a higher number. But we have a policy of zero scarcity and in a bid to avoid scarcity we carry reserves that ordinarily we should not carry. Traditionally we keep about a 20 to 23-day reserve. We found ourselves carrying 30 days to 45 days and even up to 60 days’ reserve. This increased the amount spent on subsidy. Now, can this be more efficiently done? Absolutely yes. We must find a way to track and determine consumption and also look at the delivery and performance indices.

Early in the life of the administration, around 2015, there were talks about pipelines and how to protect them. How do we do that now?
Again this is an operational issue, it is for the NNPC. The minister deals with policy and is not a contract awarding person. What we have done is to get the right bidding process in place. Look for contractors who are from host communities as much as it is possible and where it is possible. Set up an oversight function, whereby the community is overseeing what they contractors are doing. This is the overall action policy. But for the specifics of who gets what contract that is for the NNPC to deal with.

What is the landing cost of petrol?
The last time I checked I think it was about N180. I know that there was a differential of N40.

Recently there was a report that the federal government wants to sell down its stakes in the JVs to 40 per cent. If you do come back as minister how would that process work, was it one of your policy initiatives?

It was not one of my policy initiatives. It was a policy initiative of Budget and Planning and Finance. It was from the point of view of addressing fiscal imbalances to find money and create efficiency. But it was a policy suggestion and has not been approved.

When the President read his budget of 2018, it was mentioned but it has not been worked out in terms of timelines of what is to be sold and percentages. Everybody does agree that some of the assets of government in the oil sector need to be looked at again. There is so much inefficiency and we are not making the most of them because of ownership structures. As bullish as I am on private sector participation, I am usually conservative when it comes to selling government assets.
I would rather open up the field for people to compete on JV basis and that sort of stuff. Refineries are different, you can sell some. But depriving yourself as government of the ability to participate in the oil industry is difficult to imagine. But when you go into production sharing contracts (PSCs), I think more efficiency is needed too, especially with regards to meeting up with cash calls.

If we sold our stake in JVs to say 30 percent and got bulk money, what happens after that? The NLNG and Indorama are models to follow. However, the NLNG is about project not resource ownership. You are not selling gas; you are selling the business.