Nwakwue: Challenging Times Require Out-of-the-box Thinking

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The Chairman of the Society of Petroleum Engineers, Nigeria Council, Joseph Nwakwue, in this interview explains why the federal government must address the uncertainties in its oil and gas industry. He says the long years it has taken the country to craft the Petroleum Industry Bill will be wasted if the country does not sign it into law. Chineme Okafor brings the excerpts:

In the last few days, we have seen the world’s oil market react badly to the Covid-19 epidemic as well as the price war between Saudi Arabia and Russia. How does the SPE-Nigeria view this and do you think there will be a rebound?

The global economy was already slowing down before the outbreak of the coronavirus. In a sense, the outbreak compounded and accelerated a pre-existing disease. I suspect that once we reign in the virus, the global economy will recover some, but I doubt it will get back to pre-Corona levels in the near term. This scenario has obvious implications for all of us. For SPE, it is yet an opportunity to continue to devise tools and technologies that will enable low cost and environmentally sustainable energy production to help fuel and grow our economies to higher levels.

he challenges of Covid-19 are quite overreaching; OPEC and its allies are seemingly unstable now. Could this lead to another global recession?
The global economy thrives on our ability to move people, goods and services across the world and this epidemic threatens that seriously. US just banned flights from Europe excepting the UK. You can imagine the dislocation and economic impact this will have. Recession is defined as sustained negative growth over two consecutive quarters. So, yes, Covid-19 could push us into a recession depending on how long it takes to contain the epidemic. The longer it takes to contain, the more debilitating it is to the economic system. I hope we are able to quickly contain this scourge.

Looking homewards, oil prices are falling below Nigeria’s 2020 budget benchmark while supplies are reportedly pretty low. Is this country heading to a potential economic dilemma?
Nigeria has always been fiscally challenged for as long as I can remember. Nothing new there. Maybe we have gotten used to living on the edge. Even if the budget targets are exceeded, does that really solve our problems? Yes, low prices place additional fiscal pressures, but it is important we all realise that we have been in tough and challenging economic situation for way too long.

But one will ask, how did the legislators set the benchmark? What guided their thinking? We need to be making informed decisions anchored on data and not emotions.

So, yes, we are in economic stormy waters, have always been but has demonstrably lacked the will and capacity to make required hard and well-informed choices.

How would you define Nigeria’s economic policy priorities if oil prices continue to head downwards and its 2020 budget gets pummeled?
We really need to re-think how we manage our economy. Our policy priorities should not focus on the symptoms, though they matter… issues like funding of budgets, deficit levels, etc, but should focus more on the root causes. We need to diversify the economy and I dare say we have the tools and resources to do that through oil and gas-based re-industrialisation. This economy can hum again if we deliberately approach this with the right mind-set and reduce bureaucratic interference in the process. Where state participation is needed to de-risk the investments, it should be limited to minority equity holding.

Imagine if we can attract and build two more LNG plants, five fertilizer plants, three petrochemical plants, five new power plants etc. Our fiscal and unemployment position will be much different.

Every crisis presents an opportunity for ingenuity, do you think this could be the time for Nigeria to get serious with needed reforms in her energy sector; like, end the expensive petrol subsidy?
Challenging times require out-of-the-box thinking. My personal view around subsidy is that subsidies are good when they are properly targeted and applied within a certain timeframe with the clear objective to stimulate desired economic activity. Just like oxygen for a sick patient. If you have to keep administrating oxygen in perpetuity, then the question arises whether or not the patient should be allowed to rest. Our fuel subsidy regime in my humble opinion does not meet the criteria.

What specific economic activity is it targeting to stimulate? What is the timeframe?
We must resist the allure of economic populism; N1.7 trillion spent in 2019 according to the NBS (National Bureau of Statistics) could have been funded more productive endeavours. That could fund any of the following; 5000 MW (megawatts) of power generation, two petrochemical plants, two industrial parks, then imagine if we did these in the past five years, we would have had a different country.

How would you even describe or evaluate the country’s petroleum sector reform priorities? Do the intended reforms measure up to global standards?
We still have not seen the current reform proposals but in general terms, we expect changes that will not only attract much-needed investments, but balance investment rewards with risks, strengthen our license to operate by ensuring shared and inclusive prosperity with our host communities and emplace a better institutional and governance framework for better commercial and regulatory outcomes.

But is the PIB still relevant; how would it help grow Nigeria’s oil industry now if passed?
Relevant is probably not the most appropriate word. Once we signaled an intention to change the laws governing the industry, we injected significant uncertainty into the system which can only be addressed by making the changes. Clearly, there are lots of changes that are long overdue and are required for sustainable growth of the sector. Practically, all stakeholders are unhappy with the present state of the industry. We simply need to ensure that the proposed changes are well-thought out and properly implemented otherwise the 19-year old reform effort would have been in vain. If it took 19 years to craft these changes, they had better be good.

We are also beginning to hear about fresh legislative attempts on the PIB, does this interest the SPE-Nigeria? What would you like to see happen in terms of reforms in the sector?
SPE has over the years made far-reaching recommendations on critical challenges facing our industry and has availed the relevant authorities of these recommendations. So, we expect those will be part of the reform package. Also, as the foremost and probably largest member-based assemblage of industry professionals in the sector, we will continue to engage and offer our advice on issues that will enhance industry growth and sustainability. We await the legislative proposals and would certainly provide our inputs at the appropriate time. We see this as a duty to our industry, our country and our future.

What do you make of the government’s gas policies, especially the Nigerian Gas Flare Commercialisation Program (NGFCP); is the country serious about gas? Are the objectives of the NGFCP realistic?

The NGFCP is a novel and feasible solution to a major problem for our industry, gas flaring. Flaring is not only wasteful with severe environmental consequences, but also undermines our license to operate. So SPE considers the NGFCP as a step in the right direction and will continue to support it.

Lots of effort has gone into increasing gas monetisation but results have been dismal. We think the opportunities in the gas sub-sector are enormous and can be unlocked with the right end-to-end commercial framework; issues around gas pricing, fiscal terms, infrastructure, market structure and payment assurance need to be resolved urgently to accelerate market development and value capture. I had once said to a colleague that whilst we have missed the “oil boat”, we can yet ensure we do not miss the “gas boat”. Boat in this sense means use of these resources as a launch-pad to an industrial economy.

It is interesting how you have chosen to talk about assets’ acquisitions and divestments in the Nigeria’s oil industry during the forthcoming annual SPE-OLEF and this is despite the country’s reluctance to hold fresh bid rounds; why did you chose this, are you worried about the situation?

Yes, the industry is worried and rightly so. The delays in carrying out a licensing round invariably means no new assets have been put in the market in about 13 years. This has huge implication not just for government who will not earn any revenues but the entire industry as it increases the barriers to entry. This state of affairs, alongside other drivers has birthed a budding secondary market for assets. We think it’s about time to set clear guidelines – technical, commercial and regulatory – for this secondary asset market, hence, our decision to use our major policy platform – the Oloibri lectures – to bring all the players; policy, regulatory and commercial authorities, together to discuss this issue. We are hopeful that we will be able to influence and broker a win-win outcome.

Within the comity of oil producers, how competitive is Nigeria in the last five years?
The uncertainty occasioned by the delay in PIB has been a huge blow to our competitive position. It is clear as reserves and output has stagnated, and investment levels have dropped to record lows. It has really been a wait-and-see situation. The industry does a better job with geologic and project development uncertainties than with fiscal uncertainty. Nigeria must act to ensure clarity and reduce the uncertainty so we can get on with our business.