Ajumogobia: It’s Time to Restructure Nigeria’s Oil Industry

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Mr. Odein Ajumogobia, a former Minister of State for Petroleum Resources currently chairs the Expert Advisory Panel of the Nigeria Natural Resource Charter. In this interview, he highlights policy actions that may not be late for the country to embrace to reposition its oil and gas sector. Chineme Okafor brings the excerpts:

Nigeria barely made it out of an oil-price induced economic recession in 2016, and may be headed to a similar recession almost four years after, do you think the country learnt from the past?

Since 2016 Nigeria has unfortunately not taken steps to mitigate the impact of its undue dependence on the export of crude oil, although the combination of the COVID-19 impact and the oil price war has created a perfect storm for us in Nigeria. We will therefore feel the full brunt of the steep fall in the price of oil to below $20 per barrel due to the unprecedented low demand for energy, compounded by our high level of debt service from contracted revenue.

The impact of the COVID-19 pandemic and its effect on economies across the globe is self-evident. Nigeria cannot therefore be immune to the almost inevitable global recession that will result from significant decline in global output this year that has resulted in consequent negative economic growth rate forecasts.

But is it possible for the country to have avoided this looming recession?
Probably not, since the looming recession will be part of a global phenomenon. I am not an economist but I can point to a few things that the government could have done to better weather the storm: it could have between 2016 and now conservatively saved and deployed $10 billion to $15 billion dissipated in petrol subsidies; abrogated the N305 to $1 official exchange rate to immediately realise more government revenue and promoted greater efficiency by carrying out a phased reduction in the size of government by reducing the staggering number of government departments and agencies by implementing the April 2012 Steve Oronsaya Report.

In addition, our well-conceived savings mechanisms – the Sovereign Wealth Fund (SWF) and Excess Crude Account (ECA) were unduly depleted. These could have been used as a buffer to fund the budget instead of having to reduce it by N1.5 trillion.

Almost everyone talks about oil price slump as perhaps the ultimate impact of the Covid-19 on Nigeria, what about fuel supply security; do we have any real threats to our fuel supply system considering that we import almost all the refined fuel that we need to power the economy?

In 2010 I visited South Korea as Minister of Foreign Affairs and was taken on a tour of a small sections of that countries underground strategic fuel reserves. They had reserves to keep running if imports were disrupted for any reason for a considerable period. Many countries have the same. It is essential. We in Nigeria do not have material strategic reserves. I believe NNPC has assured of 60 day’s supply. We are therefore vulnerable to an interruption of fuel importation and supply.

NNPC is currently the sole importer of fuel and has said it has activated measures to guarantee seamless distribution of petrol across the country throughout the period of the lockdown and beyond. That is reassuring but we must build substantial strategic reserves, especially in the absence of working refineries.

How about LNG trading, what real obstructions do you think the NLNG will experience; will Covid-19 dent its Train-7 expansion plan, if it will, how long do you think it would take to get back on track?

The stringent measures adopted to contain Covid-19 pandemic has led to a sharp decline in natural gas demand due to fall in industrial and domestic consumption. LNG supply thus exceeds demand, with the likelihood of a further depression of demand in the coming months. With LNG storage tanks almost full, many LNG importers are unable to accept new cargoes invoking force majeure clauses. Regarding the impact of Covid-19 on NLNG Train-7, because of the long-term nature of gas contracts, it’s really about windows of opportunity, and securing future long-term buyers now for the time when the project will come on stream. COVID-19 has made that prospect uncertain. Planners will have to go back and review the market and reevaluate their previous projections that led to a partial FID for NLNG Train-7.

There are talks on what to do with NNPC’s decrepit refineries. In your opinion, what should be done to the refineries?
I think that the plan announced by the new GMD of NNPC to have them operated and managed under management contracts with private sector operators is a welcome departure from the madness of the past that has cost the country so much. I think we should try that. Refining is not a complex process. Our refineries are staffed by knowledgeable and experienced people. Our neighbors in West Africa, have old refineries that are operating effectively. I am therefore led to believe that it is a management issue. Let’s outsource the management as the GMD has proposed.

Can you give an idea of what Nigeria loses to the dysfunctional refineries in terms of GDP contribution, job creation, value addition, and national prestige?
The cost of our dysfunctional refineries is up to $2.8 billion per annum in an import bill for fuel plus all the other cuts of a barrel of crude oil that we forfeit in our swap arrangements of crude for refined products or exporting our crude and importing refined products. This is more than our educational and health budget combined. The savings would also do much to enhance infrastructure in the area of gas and power especially.

Regarding job creation, one must also lament the fate of the skilled existing workforce that have been made redundant in our largely moribund refineries. Further employment would be created if our refineries and the lubes plant in Kaduna refinery were working at the world average of 90 per cent capacity. This would boost the country’s Gross Domestic Product (GDP), especially if local demand was met and value-added refined products were exported to countries within the West African sub region and beyond, also enhancing our profile in the region.

Have you seen the recent announcement on removal of petrol subsidy and what do you think about it?

I have been a long-standing advocate of the removal of the subsidy on petrol. It was eventually removed on diesel and ironically on kerosene too which was touted as the fuel for the economically deprived. There was no sane reason for retaining it for petrol. At current crude oil prices there is no compensation due to any importer for delivering an imported cargo of petrol to the pump at the price stipulated by government, which is what the subsidy does. Indeed, the last published PPRRA template would suggest that the price should be under N90 per litre and not the current N123.50 per litre that was announced. The sector should be liberalised so that private oil marketers can re-enter the market. PPPRA should simply monitor the market and post indicative prices.

The test of the response to the subsidy removal policy is still ahead of us. It will come when the price of crude oil rises again as it inevitably will and the cost of landing a litre of petrol in a liberalised market reflects the higher price of crude and goes higher than the consumers might have anticipated. In anticipation of that time, government must target the subsidy to the poor and vulnerable in subsidising public transport for example to cushion the effect of an inevitable increase in the pump price in due course.

Let’s consider the Excess Crude Account (ECA), its content has really declined and NNRC has raised the alarm on this; what really is the NNRC afraid of here?
We have always noted that the ECA has no legal backing. It is effectively at most a voluntary contribution by the federal and state governments of the excess revenue above the benchmark price. The fact that the 36 state governments went to court over the transfer of $1 billion from the ECA to the SWF suggests it was not a voluntary contribution on the part of the state and local governments. Even if it were a voluntary subscription, the subscribers would subject to the terms of the subscription be at liberty to demand the return of their contribution. This does not allow for the stability required of a SWF.

The problem is therefore not cured by transferring the funds in the excess crude account to the SWF which comprises savings from funds earned by the federal government after distribution to states. This is really a constitutional issue where our constitution envisages a zero-balance federation account to be distributed amongst the three tiers of government in agreed ratios. The solution for savings through the ECA or the SWF if it is to include the sub-national governments requires a political consensus in a multi-party democracy and the appropriate constitutional amendment.

I know the NNRC has made several policy recommendations through its Benchmarking Exercise Report (BER) on how Nigeria’s oil resources should be managed, but in such emergency situation that Covid-19 has brought our way, what practical steps would it proffer for adoption?

We must begin to do what we have been advocating since 2012 when our first BER was published. My four broad priorities would be the following: greater public sector accountability, this would embrace greater transparency and fairness, also abrogating discriminatory policies and practices in order to rebuild public and investor trust that is essential; clarifying the framework for subsidy removal permanently and strengthening the sector regulators; updating laws by fast-tracking the Petroleum Industry Bill (PIB) and reviewing and implementing a comprehensive oil and gas strategy informed by the impact of the Covid-19 pandemic; build sustainable stabilisation structures in the oil and gas producing regions by training and harnessing the capacity of youths currently involved in illegal deleterious activities.

Depending on when Covid-19 ends, how long from then do you think it will take Nigeria to recover from its impacts?
As I have said earlier the challenges brought about by COVID-19 have merely highlighted the inefficient management of our dominant natural resource – oil and gas, in the lack of accountability, the neglect of stabilisation mechanisms such as the SWF, the retention of a wasteful petrol subsidy regime, etc. It is time to quickly restructure our industry beginning with the accelerated passage of the PIB with fiscal terms that will attract the investment that will be seeking outlets as the world recovers from this pandemic. It is time to position ourselves for the unprecedented high growth that is possible in the sector and in our economy if we set our minds and policies right towards gas development and value addition to our crude oil.