The global oil market is currently witnessing a significant crisis with the oil price recording an 18-year low due largely to the double whammy effect of the COVID-19 pandemic ravaging world and the supremacy war between Saudi Arabia and Russia -two heavyweights in the global oil market politics, leading to over-supply of crude amidst fewer buyers. The situation has led to turmoil in the world economic activities with the potential to enthrone high-level poverty in many nations that have little or no economic buffers, including Nigeria, if not adequately mitigated. In response, the federal government has, as usual, taken a number of emergency approaches to reduce the impact on the nation, including downward adjustment of the 2020 national budget, roll-out of palliative measures, amongst other things. However, to tackle the situation through an industry perspective, the Nigerian National Petroleum Corporation under the leadership of its current Group Managing Director, Mallam Mele Kyari, has come up with a number of interventions to enable the country come out of the woods. Kyari, who featured on a special edition of The Morning Show, a breakfast programme on Arise Television, sister broadcast station of THISDAY Newspapers, last Wednesday, stated that Nigeria would survive the current crisis with conscious change of approach about oil and gas resources as well as cost-cutting measures and borrowings. He also prescribed handing over the nation’s refineries to private hands for efficient, effective and transparent management, adding that the corporation was positioning the country as a reliable supplier of crude even beyond the crisis era. Peter Uzoho brings the excerpts:
What is the latest update from the oil market?
The oil market did some slight recovery in the last two days (last Monday and Tuesday) after a bad show last week which saw oil price collapsing below $15 for the benchmark crude of Brent, and that has recovered significantly as a result of changes to system. In this market two things played out: the market fundamentals and sentiments. The sentiments came into play after the intervention of President Trump on the possible engagement between Russia and its partners at the Saudi Arabia and the rest of us to get some balancing back into market, literally to cut supply. That worked and obviously the response in the market is the recovery to $32 to the barrel this morning.
Whether this is sustainable is another question that will depend on the outcome of the potential engagement that will happen tomorrow (last Thursday) during OPEC+ meeting. In real sense, two things also happened. Prior to the COVID-19 situation, there was actually over-supply in the market which wasn’t related to the COVID-19 and then of course COVID-19 came and over-supply came to around 6.8 million barrels per day as at last week. This is quite significant, and this is also very visible because you have a lockdown in the United States of America, in most of the Europe, in the whole of India for a month, and this potentially means that over-supply will grow. And if this is not curtailed, of course, you will still see some gradual slide back into the sub-20s if the situation is not adverted.
In real terms I know that countries will come back; everybody is doing something to come back to work and therefore economies will pick up and I see a situation where the oil market balances at a near average of nothing below the 30s.
Well, that’s being very optimistic, you expect the price of oil to pick up at some point. You mentioned a number of indicators that are giving you that confidence, but that’s always speculated about, even though I suppose in furtherance of what you are saying, China appears to be getting back to normal…
Yes, indeed, the market as I said has two fundamentals: demand and supply, and this is clearly visible to the whole world. So we can see when demand grows and we can see when it comes down. It can also manage supply, so they are all being smothered. So what I meant is that as soon as these countries come back to work you will see a growth in demand. You can put numbers around that and of course; in terms of supply, you know suppliers have control over what comes to the market and that is determined by the price and the cost of production and so many things that come into play. These fundamentals are very visible and the indication that we have today of the numbers is that these countries will come back to work and those supply will pick up. You will no longer have the six to seven million barrels of over-supply, it could be something lower than that. As long as that number goes down because of your balancing situation the prices will go up.
Now you made a comment on Nigeria’s oil production cost and what this portends for the country. You said the cost on average was about $30 to produce a barrel of crude oil. But we know oil firms operate in different areas and that is a major determinant of their production cost. So, could you break this down by telling us how much it costs to produce a barrel of oil onshore, in shallow waters, in the deep waters, off Nigeria’s coasts?
When you said average of crude oil production, what it means is that you are looking at your entire basket portfolios of investment and we do have production streams that deliver at $15 to $17 maximum. You also have assets that deliver even above $35 to the barrel and in very different environments. Typically, the onshore production is cheaper than the offshore when it is operated optimally, and many of the assets that produce below $20 are actually onshore. And of course knowing what the offshore means, the cost of production is high, it’s not coming down. So on production where there is water, but it’s not deep water, there you have much lower cost than the onshore. The reason is very simple. There are two operators in that environment, there are fewer distractions, and also the nature of the reservoir is in such a way that you can deliver at a lower cost. In a situation like this you will see different costs of production ranging from $15 to $38; and where you are faced with situation like that, you focus on the low-cost production. You take away your money from where it’s going to cost you more money to produce. But even that is dependent on your situation. When it’s an entry situation, for instance, you are just starting production, obviously, you are at the cost recovery phase and your cost of production will obviously be high until you are able to completely amortise your initial entry cost. So even where cost of production for an asset can be as high as $38 you will continue to produce because that is really a cost recovery phase and after that you come back to normalcy.
Some experts have explained that the inefficiencies inherent in the upstream oil and gas sector emanate from the development cost, which is in the range of $20 to $25 per barrel while actual drilling costs as apparently low as $10 per barrel. What are you doing to address this apparent waste in the system?
Waste may not be the right word to describe the situation. Your operating environment is very different. For instance, we know that there are jurisdictions where you can produce oil at $3 a barrel. It’s a complete environment and two things also happen in those environments. One is the global environmental issues which is the legislative framework, the nature of the government, the nature of the contracts that are in place. And secondly, you have the reservoir issues. Some reservoirs are just like the pots, you put your well into it, you take out the oil. It is very different from our environment. Here, we have two issues also: we have the environmental issues. Our cost of production is clearly influenced by our environment: cost of security, the losses that companies suffer as a result of activities of vandals and thieves. Also the issues around premium that service providers do.
You know whenever you tell them, they are coming to operate in Nigeria…. Even ordinary personnel cost are different from people who come to this country. So when you pull all these together you have a gamut of costs that are absent in many jurisdictions. And of course our reservoir itself is of different make, it’s not the same thing that you have in certain environments like the Saudi Arabia. So it costs you more, the wells are deeper in some of our locations, and also the cost of putting the assets in place are very high. It’s not really necessarily as a result of any wastages. Yes, we can agree that there are issues around governance which we are trying to address. There could be issues around plotting the cost or not picking the right projects in time, delivering on time, delays associated with non-settling of cash-call, and so many things, which cumulatively come up to increase your cost of production. Yes, I know that there are issues, but they are not the fundamental, the fundamental is the environmental issues which we have very little control over, and also the nature of our production environment itself.
Is cutting production costs something that can be achieved in the short term?
It can be achieved. You can do two things: it is to plan earlier. Planning early means that you need to be selective in where you put your money. Once you are able to tell where you are going to put your money, how you are going to put money becomes the secondary issue; and then you have to watch your contracting process. In your contracting process even a delay in time can cost you money.
But you are saying you have to. Are you doing that?
Yes, we are doing that. There are many issues. First of all, we are determined to ensure increase in our local capacity to deploy some of the services the industry requires. By law and also by sheer persuasion that this is the right thing to do. But when you make such decision just as it is done in any country and any jurisdiction the moment you decide to do it has a premium.
Nigeria clearly has an immediate challenge of shoring up its oil revenue in the face of dwindling oil demand and low prices caused by the COVID-19 pandemic and other issues, including obviously the feud between Russia and Saudi Arabia. What option does the NNPC have at this time to get more of its crude cargoes sold in the international market?
This is not typical with Nigeria or NNPC. You have a situation where you have oversupply. Demand is below supply and essentially what this means is that prices have come down to levels that in very many jurisdictions is below cost. There are two things you can do when situations like this come up. It is to cut down the price, which is what Saudi Arabia did initially to cut down the prices by $10.2 per barrel. Of course the whole world followed that, many countries did the same thing, we did the same thing. We discounted our crude from $3 to $4 so that we are able to have penetration into the market. That paid off to some extent, but it didn’t completely address the issues. So what countries normally do is to shut-in productions because you have no need to produce them if you can’t sell them.
But sometimes you are also forced to produce it even when you can’t sell it so that you look for anyone to come take it up as it is happening in the Canadian heavy oil. It is cheaper for you to pay somebody to pick it and we did that two weeks ago, to give people a cheque of a dollar so that they can come and take the oil. Literally, as you take it free I am also going to reward you. So it can be an extreme situation where companies can resort to that, but in our case we have no such need because our reservoirs in all these we can clearly very efficiently shut down our wells and bring them back into production. So if it gets to the extreme of not having a market you can actually decide to cut down the production. We haven’t gotten to that, we won’t get to that.
What we are also doing is to look at the assets themselves. You know like we have spoken earlier, some assets produce at lower cost than the others and typically that’s what every company does. It is to say let me not produce from the high cost facilities, let me produce from the low cost facility until we move in. But it is also an opportunity for us, because if you are able to expand your capacities within this period to produce more even if not at the low prices, even if it is below cost, ultimately it places you in a position in the market where tomorrow people will rely on you as a reliable supplier of petroleum that the whole world requires in times to come. And therefore you are taking a position in the future by losing today.
But you won’t also completely lose because there are many things you can do today to make sure that the revenue stream supports what you are doing, which is by cutting down your cost, slowing down your projects so that the projects you can push forward you push them forward, cut down certain services you are taking that you probably don’t need today, and ultimately you balance your books, so that at the least of resources available to you, you are still able to operate and you are also still able to meet the requirements of your shareholders. In this case, for us as a national oil company our shareholders are the whole of Nigerians. They will expect that this company delivers value to them at the end of every month. We also see beyond that, which is that the tax revenue that is coming from petroleum, the royalties that are coming from petroleum, they are all tied toward oil and gas production, including the VAT and imports. I’m sure you are aware of all these. So what we do in a situation like this is to reduce your cost, move your priorities to the assets that produce and of course, the ultimate that everybody does, which is to borrow. You borrow so that you can fill this gap of today, believing and consciously thinking that tomorrow will come. That tomorrow will bring higher oil prices that will cover for the cost of the borrowing that you have done today and the cost of the losses you suffered while still keeping your shareholders’ hope during this period.
Part of the problems is that the oil market, beyond the fact that it’s very volatile at the moment , is also the reality that oil as an energy source is under threat. The International Energy Agency (IEA) estimates that by 2040, fossil fuel such as oil will constitute less than 50 per cent of global energy demand. But for oil producing countries like Nigeria, it will take decades to replace the oil and gas infrastructure that are locked into the economy and to wean this country away from dependence on oil. Are you thinking ahead in that sense?
Very well, we do; we watch the market, we watch the demand and supply balances into the future and looking at our resources that are available to us, huge resources of gas and oil. So we have a stake in this industry to make sure that we look beyond today. I don’t want to dispute what IEA said but I know also that there are several other assessment by very many organisations and institutions. If you look at the average of the views of all of them you will see that even by 2050, fossil fuel will continue to be the source of energy. In the energy mix, it will constitute about 70 per cent. It means that petroleum will be relevant in 2050. And those that will stay there will be the companies or countries that were able to deliver it efficiently and in the best cost effective manner. So it will continue to play. And for us as a developing country in 30 years to come (by 2050) we will still be in a position to utilise oil. So the production that we are doing today, our target of 3 million barrels per day, if our economy continues in the projectile of this growth that we are seeing, in the coming years I know that this country will probably consume all the production it can have here, and it’s cheap resource. Yes, people are moving to renewable, but the reality today is that fossil fuel is that batcher that we have today, particularly gas resources and then as we grow, even as the world moves away from complete petroleum fuel we know that this country will have utility for this. It is still not yet the times of having the renewables as the major source of supply. As we all know today, the electrically-driven vehicles can’t come here because we are yet to stabilise our electricity supply and many things, and they are not within the immediate view of the country.
But it reduces your market because Europe, UK, all these countries are moving away from fossil fuel to renewable energy and they are the people who buy your products?
It rather changes your market, your market becomes yourself. That is the point I’m making. You can be the market.
There is an OPEC meeting coming up tomorrow (last Thursday) or that is supposed to come up tomorrow- Russia, other oil producers were supposed to have met previously to try and end the turmoil in the energy market, that was called off a few days ago. Is there any certainty about the negotiations between Russia and Saudi Arabia? You know these are the two world largest producers, they continue to sell their oil at huge discount to get market share?
There is a lot of over-reaction in the market which includes discount of prices and also the later on cut-down on production. But what I also know today is that my last conversation with the Minister of State for Petroleum, Timipre Sylva, is to the effect that the meeting of tomorrow (last Thursday) will hold and that is aimed at making sure that parties come on the table to see some form of balance introduced into the market, literally to cut down production such that the supply and demand balance is brought to reality.
While I know that will happen tomorrow if anyone guesses is that from the market reaction and the sentiments that you have seen during this period, it appears obvious that some sort of understanding will be entertained but I am not in the position to make a definitive statement, I can’t predict, And also the minister of state will be in the best position to make comments on this.
But would you say that Nigeria’s economy and revenue stream is tied to the outcome of that meeting?
Not at all; actually we are re-balancing our expectations from crude oil price as if we are going to have it at $30 in the year. So, while I know this meeting takes place this country will have a recourse to its adjustments which includes borrowing, includes cutting our cost such that we survive out of this situation and we also stipple the growth part that we have seen. So I am not sure it is connected in any way to what could be the outcome of tomorrow’s meeting. It will be a good thing if the meeting comes up with some form of intervention and code that will enable the rebound of crude oil price to above the level of $57. Even if that doesn’t happen, and we are not expecting that there will be full recourse to that balancing by tomorrow’s meeting because the buildup of the stock took some time, and then the recovery of demand will also take time. So it is not something that you will see the immediate effect today. Even if that is taken into consideration, we know that this country will survive this crisis through cost cutting and changing of strategies about what we do with petroleum.
Obviously, you correctly pointed out that you have to plan ahead, think, strategise; you have got a glut in oil at the moment, Aliko Dangote refinery is coming up. Will the NNPC be making overtures to that operation because of the present glut in oil?
It is not overture; we are very interested in the Dangote refinery for very strategic national reasons. Because whenever you have a situation where you become a net importer of petroleum, you are in trouble, you know anything can happen along the value chain as long as you are far away from the source of supply. So the coming on the table of the Dangote refinery and very many other refinery initiatives will first of all guarantee that this country returns to a net exporter of petroleum in the short term. What that will do is to guarantee security of supply such that we don’t rely on external resources and sources to get our energy needs satisfied. So we see the Dangote refinery as an opportunity, and there are many other opportunities.
We are doing something about what we call a condensate refinery. What that means is that the condensate resources we have which are very easy to convert to fuel, not like a typical refinery but it does work very quickly. It can put you on the deck and then we can also convert up to 90 per cent of the feedstock into for instance the light petroleum products. We have gotten commitments by one of our partners to take FID in June or July, so that we know that we are doing that, because it is almost like the off-the-shelf kind of arrangement. But it is something that you can get into work in two years. So we have four other initiatives of that nature, combined capacity of probably getting 200,000 barrels of condensate. The combination of that with the Dangote 650, 000 barrels per day and our refineries that we are fixing can guarantee energy security for the country.
Once you have that combo of opportunities, you will see Nigeria becoming a net exporter of gasoline (petrol) to the West African countries, the whole of Africa within our view and probably reverse the flow of products. Because it comes from Europe not because Europe is the source of petroleum but because the processing facilities are there and once you see this market dynamics the only thing that is going to reverse is freight. And you can see the flow of petroleum products coming from Nigeria even into Europe, that is possible within a short term.
Let’s talk about Nigeria’s refineries – production capacity of this country’s refineries; in the last two decades, there have been a lot of money put into them and a lot of money invested in those refineries but they are still not producing. What is the current state of the refineries?
First of all, we made a very conscious decision to shut them down, because you are better of shutting them down to know exactly what you want to do with them. I recognise that there were several attempts by very many managements and governments in the last 20 to 25 years to make sure that these refineries work. But there is something that is fundamentally wrong, which is, do you really know what you wanted to do with the refineries and what kind of repairs do you really want to do? What kind of rehabilitation? Is it turn around maintenance? Any name that you can call it, but without properly scoping what you need to do which was never done. You know in all the attempts at turn around maintenance, it was actually putting the cart before the horse. You know decisions are made: go ahead and do a turnaround maintenance, call a contractor and all kinds of aberrations that are not normal in a refinery rehabilitation process came into play, and ultimately, the end result is that as we speak today these refineries are not working because we never got it right, and the decision we made is conscious. We said that let’s just get somebody to tell us what exactly do we need to do. You don’t just go call some people and say let us do turnaround maintenance, as you uncouple the plans, you decide what to do. And with respect to Port Harcourt Refinery, we know what exactly is wrong which was never done. And on the basis of that, we have also secured finance for getting it done; and on top of that also we are going to have an O&M (Operate and Maintenance) contract, NNPC won’t run it. We are going to get somebody who will give us a guarantee that this plant will run for a period of time on the basis of fee for running this for us. Let’s try a different model of getting these refinery to work. We are going to apply the same process to the other two refineries, so that at the end of the day, and once we are done with the fixing of this on the basis of full scoping, getting a private partnership to put their money into it, and ultimately, we will allow the shareholders to decide what they want to do with it. Our prescription will be to make it the NLNG-kind of structure, where there is clear ownership of the private sector in this refineries, where decision making does not rest with the NNPC and where any process that is world class is allowed to come into play. As we speak today we know the number of obstruction in processes when the way that we are doing it today is maintained. So we know that this is what is different. Many GMDs have spoken about getting these refineries to work. I agree completely and Nigerians have the right to be disappointed, to be apprehensive, to be doubtful of what we are going to do. But what we will do which is different is that we will fully scope for it. We will not operate this plant and we recommend that at the end of the day the model that we have in the NLNG comes into play in such a way that that there is an assurance that this plant will run, because we have seen it work both in our plant that we sold to Indorama in Eleme, Rivers State, and also the way and manner the NLNG has worked over the years without any disruption, and delivering values to the shareholders. I think this is what is different. This is an assurance that I can give Nigerians: it is not just another promise, but a promise such that we won’t do it ourselves.
You recently said that the subsidy regime for petrol was over and that there would be no under-recoveries declared by the NNPC as the sole importer of petrol. Yet Nigerians remain skeptical about your comments, saying that you have been able to sell petrol at a reduced price at fuel outlets, because the price of crude oil has crashed, that when it goes up that will be the real test as to whether NNPC and other marketers would be allowed to adjust their pump prices upwards in sync with the price of crude oil. Is there any truth to that assertion?
Absolutely. First, let me explain what we mean by under-recovery. NNPC in the last two years plus is the sole importer of PMS, because marketers are unable to go to the market, procure petroleum and sell it at the former N145 because it was impossible to do this. You can’t do this and recover your cost and make a margin out of it, and then we said let us manage it. Of course we have no issue with that, it’s our role. By law NNPC is supposed to guarantee energy security for this country, so we can’t avoid that. So we stepped in to cover that situation. What it also means is that because we are managing the assets of the federation on behalf of all of us we are required also by law to deduct all our cost and then deliver the net cost of that value to the Federation Account. This is also provided by law. So our cost of production, cost of supply…and then we charge you to the cost of our operations and then deliver the balance to the Federation Account. You can give it any name, people called it subsidy. It is subsidy when you are dealing with private marketing company because they have no such instrument to deduct from any revenue that they have. So once you have a subsidy regime, it means that government must write a cheque to give it to those people in many forms. It can be tax rebate, it can be cash settlement. And all the problems that it has created for all of us in the past are quite huge….They will have no need for FX procurement, which is also a safeguard that we have for them, and ultimately you are seeing that supply levels can be in excess of 60 million litres every day. Anytime we attempt to bring the supply level below that level you will see queues in our streets. So we are conscious of this reality that this is not our consumption, we know this is not our consumption but we cannot supply below that level because we supply the whole of West Africa. And as a matter of fact, many people may not know that you can find Nigerian petroleum even as far as in Sudan, in Central Africa Republic and in many other countries around us. So we have just become a market for all and we are literally subsiding West Africa. And coming back home also, the whole idea of paying sub-market cost for petroleum is such that we are actually subsidising the elite (me and you)….We are taking from the masses to satisfy the needs of the elites. They are the ones who have the SUVs, they are the ones who have five cars and so on and so forth, and ultimately the end result is that we are unable to deliver on infrastructure, hospitals, education and so in the name of providing support for fuel prices. What we have done very recently is not just for today, not because the market has shifted such that we can sell below the N145, no. What has happened is that we are going to go into a modulated environment, which means that as the fuel prices move, the market forces will determine the price. We will adjust the prices within a band that marketers can play without exploiting the ordinary people while returning the value, the under-recovery or any name you call it, all the distortions that exist in the system will return that value back to the ordinary people which Mr. President is very passionate about. I know this is tough, but this is the wisest thing that we can do today, not because market prices have gone down, but because we can’t continue to afford this. We cannot continue to subside these elites that are there all over the years. Even when it comes to the fraud and everything that goes wrong with petroleum distribution and supply comes back to the elite and the brunt of it is taken by the ordinary people.
This will serve the ordinary people. It will make their leadership at every level accountable, it will also enable particularly Mr. President deliver on his objective to making sure that infrastructure projects are delivered -roads, hospitals, educational institutions are all put on the table and bring that distortion out of our entire economic framework. There is a clear distortion. Whenever you are subsidising consumption you are creating a problem. Yes, I agree that in many jurisdictions there are some form of support by government for certain production system, that is true even for agriculture. But that’s where it should go and not into consumption that is like cigarette smoking.
Let’s talk briefly about the local gas markets and their impacts on power and electricity. That’s another area that touches every single Nigerian, whether you are an elite or not. What is happening there?
Yes, two things: we are focused on delivering power to the market and the way to do this is to improve on your gas supply. We are working across our assets, across our partners to make sure that we shift that balance of providing gas into the domestic market from where we are today to at least 8billion BCF of gas per day within the short frame of time. There are issues around that value chain. Today, some of the power plants can’t take as much gas as we are able to deliver to them because there are grid restrictions that when they produce the power they cannot evacuate that power, and the result of that is that they cut down on the gas uptake. We are happy with the Siemens’ intervention that is going on, that process of making sure that the grid is freed, the Discos are able to take power and distribute it to consumers. Once that is done you will gradually and very significant increase in supply of gas into the domestic market. As we speak today some of the gas plants are curtailed by either the ability to take gas or ability to discharge the production of the power that they have done into the market.
So there are conversations going on, engagement with all the stakeholders in the value chain, from producers of gas to producers of power, the transmission company into distribution companies, so that within a short frame of time, with all the arrangements that are going on I see a situation where there will be effective delivery of power to Nigerians.