The Group Managing Director, Nigerian National Petroleum Corporation, Mr. Mele Kyari, in this interview with Gulf Intelligence’s Halftime, spoke about developments in the international oil market, how oil and gas companies in Nigeria were able to navigate the challenge posed by the Covid-19 as well as factors that would define the future of the oil market going forward. Peter Uzoho brings the excerpts:
What is your thoughts on the decision that OPEC+ made in order to extend the deeper cuts till July, what is the perspective of Nigeria on that decision?
It is obvious that market has not achieved balancing and it is not likely to do so before the end of the year and not very soon even in 2021. And everybody’s forecast indicates that we could still be at oversupply of up to seven million barrels even by the end of the year. That means that this market will not rebalance until we do some certain things to make sure we pull down the production, and the supply naturally comes down with that. And it is very understandable. The OPEC+ agreement was to extend the cuts agreed last month and to make sure that at the end of the year, we can bring down that number of the oversupply from the forecast of 79 million barrels to something lower than that, so that prices can rebalance.
The temporary shift in prices that we have seen recently in the last couple of days, or last 10 days, to be specific, is indicative of some response to the cuts and some response to the increased demand that we have seen in the market.
Looking at oil prices that have recovered quite dramatically in the last six weeks, is there a danger that they climb too fast, too high?
My thoughts are that it is actually driven by mobile sentiments than by demand because we haven’t seen that significant rise in the demand. And, of course, even the cuts, as you are aware, there are many failures in achieving the 100 per cent conformity with the cuts, which means the volume that are supposed to get out of that market are still there. And therefore, the price rise that we saw, that significant jump, appears very, very cosmetic to me. And I see that if we don’t contend with the supply, we could still slide back to the early March price level.
On that point, obviously, Nigeria was identified as one of the countries that have not yet met its commitment or obligation under the OPEC+ agreement and would be expected to do more cuts in the July-August period. What’s your view on that, is Nigeria able to make such deep cuts in July and August?
Yes. First of all, it is true that we have not achieved 100 per cent conformity by the end of May. But I’m convinced that by the end of June we will reach full conformity. The reasons are very different. Managing reservoirs in Nigeria is very different from other jurisdictions and you have to have a plan around the wells themselves because we have very aged wells. If you pull them down at the same time in a very dramatic manner, you may not be able to recover them. So, if we look at last 10 days of data, for instance, which is available, you’ll see that we are actually below conformity level. We have gone beyond conformity to a level that we are also still trying to manage that. It was a gradual process to cut down production by well and by reservoir level and I know that the current numbers we are seeing today will take us to full conformity by the end of June. So, the concern is appropriate. But obviously it didn’t see the realities around our production system. But of course, we are fully committed to making sure that we comply with those cuts. We see no problem actually with that.
There is an expectation in the announcement from OPEC+ that because Nigeria and a few other countries didn’t meet the 100% in May-June, you’ll have to make up for that in July and August. I’m wondering how much more of a cut will you need to do in order to make up for May and June?
If you noticed the numbers, you’ll see that our oversupply was a little less than 100,000 barrels, against the agreed numbers. So that’s really not significant. And you do not really need August and September to balance for that. And the cuts that we’re doing today, the shutdown that we’re experiencing today will ensure that latest by mid of July we would have come to full conformity. I think we can actually achieve that conformity even by the end of June.
Now, with the rise in shale oil production, the quality of that sweet oil coming out of the US has competed quite directly with Nigeria and other West African oils in that market and had pushed Nigeria a lot towards Asia. I’m wondering with the sort of decline in shale oil production in the US. Does that create an opportunity for Nigeria to build some market share in the US?
It’s a very flexible market situation. As you may be aware, the spread between WTI and Brent has never closed. We’ve never seen this close spread, less than a dollar between WTI and Brent, which technically means that there will be no incentive to move crude from the US even into Europe, because we can’t get cheaper crude because of the balancing that will be created by freight. You’re sure the market, even the European markets still remain available, to Nigerian grades and similar grades around West Africa. Looking at the markets beyond the COVID-19 situation, you’ll see that the Nigerian grades are strategically placed in such a way that in a market that is looking for gasoline-rich grades. As you are aware, the challenges that others will face, will not come to Nigeria. We are still seeing very significant appetite for Nigerian crude. We do not have significant overhang in the market today, much less than any other type of grade that is in the market. And obviously, until the shale oil production comes back to full production, you will not see movement from the US into Europe for a while to come. And we also are aware, of course, of the pickup in the consumption in the United States, even when you produce the producer would be very wary of this. We will not see that quick recovery even in the United States. And therefore, overall, what I see coming is a good opportunity for Nigerian grades to be the grade of choice, because all the consumption rises that we’re seeing today are coming from gasoline-rich crude oil. And of course, there would actually be a competition for Nigerian type of grades. So, we have no fears that the whole world is our market today.
In terms of Nigeria’s oil industry in the first half of 2020, everybody had a big shock from so many different things. How was it held up operationally because in other places Covid-19 impacted and literally affected operators on the field?
The Nigerian oil and gas sector was better prepared than most industries across the globe. We saw the challenges coming. We engaged our partners across the businesses to establish very clear business continuity plans such that our terminals keep operating, our rigs don’t come down. Our pipelines are operating, and literally, except for the OPEC+ intervention, we actually saw increase in production which was indicative, probably, of greater efficiency during the Covid-19 period because you have less interruptions, and also a number of resorts to technology which ensured that people work more efficiently and decision making became much quicker and ultimately. What we saw was actually some very marginal or very insignificant increase in our production number in some days outside the Covid-19 period. So, for us as an industry, the only thing we lost is price. Otherwise, in terms of efficiency, in terms of getting things done quickly and efficiently, I think Covid-19 has actually become a very good thing for us.
Soon after you were appointed, you said you were focused on building up Nigeria’s capability to produce more products and refine more products, how is vision progressing now with nearly one year into your position?
Yes, a number of things are going on to bring that into realisation. As you are aware, Nigeria is the largest consumer of finished products, gasoline, fuel, oil and everything that you can think of. We are actually the market in West Africa. About 70 per cent of gasoline consumption in West Africa is actually done in Nigeria. Therefore, it is the largest market available because of the size of our economy, our population and many other factors that play out. So, for us, it’s an opportunity to ensure that we become the supplier for the West African. You can’t do that except you’re able to refine, and you can’t refine except the refineries are in place. A number of interventions are going on. One that everybody knows is the Dangote Refinery, 650,000 barrels per day refinery, which will come on stream, possibly by the end of 2021 or maybe early 2020. If that happens, it will be a game changer for the whole region because the overall production will be far higher than the consumption that Nigeria will require in current circumstances. And then we have a combination of four refineries with total capacity of 445,000 barrels a day, all of them are on shutdown today for very clear reasons. And it is a very informed decision. We shut them down so that we can get them fixed properly. We are rehabilitating them, we are getting the best of class to make sure that they work. And our plan is to make sure that these come on stream, latest by the end of 2022 or early 2023. Once that is done, you have a combination of 450,000 barrels per day refinery capacity owned by the national oil company. You also have a 650,000 owned by the Dangote Group. And a third level intervention we’re doing is to create the splitter units, the condensate refineries. Total capacity plan of about 200,000 barrels per day and that could also come on stream by 2022, because, as you know, putting up a splitter plant is much quicker, much easier and much cheaper. It also gives you all the white products that you need as quickly as possible. So, when we have a combination of the 200,000 barrels per day condensate refinery, 445,000 of our own capacity put back on place, and you have the 650,000 barrels per day at Dangote, all in place within three years, what you will see will be a monumental shift in the demand and supply direction. Actually, we have seen a possibility of a reverse flow into Europe because many of the refineries in Europe, as you are aware, are being shut down permanently and therefore there may be requirements to provide white products even to Europe in the short term to come. And of course, the African market will become the market for Nigeria. This is our target, this is realisable, and every step is being taken to make sure that we can put this on the table.
If you consider the financing aspect of what’s required for those major projects and for any capital investment into oil production and oil processing, it is so large and yet the appetite from the typical sources of financing is shrinking due to both the economic reasons, but also due to climate and other sensitivities. How do you envisage the availability of capital to meet your goals?
I can share with you. When we tried to look for private finance to fix one of our refineries, actually it was oversubscribed surprisingly. And as we are trying to see private sector investment in making sure that we don’t finance this refinery from our cash flow, we had significant interest indicated by very serious financing institutions. It may be a global challenge, but for us we don’t see that local difficulty because we see apatite, we see many banks talking to us. And the reason is very clear and understandable. When you produce gasoline here, you have a market for it. You have 52 million to 60 million liters of PMS consumption per day. And it is a country on a growth line and we have a lot of people in the informal economy. Our four refineries can only make 80 million liters of gasoline and the 200,000 barrels per day condensate refineries will also not make all of it. Probably only 10 million liters of gasoline. So, you still need the Dangote Refinery to come in place to meet the national demand.
What’s your thoughts are about coming out of this very tumultuous period for the world and for the energy markets?
A number of things will change. First of all, the only companies that will survive the future are companies that are able to produce at the lowest cost possible. Cost will become a major issue because if you don’t produce cheap, nobody will buy from you people, will have options. Secondly efficiency becomes a major element of every operation. Now, if you are not able to deliver on time and on schedule and on cost, others will leave you behind and you will not catch up. Thirdly, but most importantly for National oil companies, they must look outwards, they must look at the situation where third party injection of capital becomes the primary line of business because the states can no longer fund some of these businesses and the combination of these three is such that this industry going forward will become very dynamic, will be petrochemical centric. And definitely we have seen through the Covid-19 period, people have now learnt that you don’t have to leave your home to work and that means less consumption in the years to come or particularly of the liquid products and what will become material now are companies what will be able to convert the petroleum resources they have and in the oil business into petrochemical products because even when you stay at home, you will still make use of petrochemical products and variations of our power-related products. So, what we see coming and we’ll adjust that as a company is to see that this world is changing, the forecast for 20 to 30 years is no longer holding and we have to be more efficient, we have to be more cost prudent and ultimately, businesses in the oil and gas will survive only when you do the combination of this.