The Group Managing Director of the Nigerian National Petroleum Corporation, Mallam Mele Kyari, in this interview spoke on the future of hydrocarbons, vis-à-vis the much talked about ongoing transition to carbon-free fuels. Emmanuel Addeh who participated in an online energy forum, presents the excerpts:
There’s a lot of talk going on with the ongoing energy transition. What’s your take on this?
The world wants to get carbon neutral by 2050 and many things will have to happen between now and then to get to that. One of the many things is the reduction in reliance on fossil fuels. A number of estimates are on across the industry and many believe that by 2050 we will probably be at 35 per cent contribution of fossil fuels to the energy mix.
Obviously, in the next five to six years, things are already happening. A number of investment decisions are delayed, a number of lending institutions are very reluctant to put money on fossil fuel related businesses. And that has got its own challenges because in a short time, what you see is some form of inability to make maximum use of the market and in five years’ time, we will have a potential energy crisis if this is not properly managed. But we know that a number of things are going on in the transition journey at renewables. Many oil companies are transiting to renewables in the future. And that means that emphasis will be on gas and I see a very turbulent next five years and potentially some stability in the next 10 years.
What does that mean for Nigeria and the NNPC; have you diversified or are you giving yourself a little bit of more time to actually understand the best way to do it?
First of all, the transition is a reality. Many businesses are doing it across the industry. But for us in Nigeria, what is very clear is that we are deficient in infrastructure. Power is a key issue, electricity is a big problem for us and there’s significant poverty in the country and therefore, to solve this, you need resources to do that. We do know that we have a transition fuel available and we are an enormous gas country, over 203 TCF in reserve. So, for us, to transit means to go for a low-carbon option and move towards more of gas development than the liquids. Of course, the liquids will provide the resources of today, but in the long term, we do need to see a way out of it such that our emphasis moves away from it. This is what we are doing as a country. Renewables are real and we are making efforts to go in that direction, but obviously our first step is to develop our gas resources.
If you look at some of the transition overall for the industry, will it really be pushed by public companies where you have shareholders up in arms, forcing them to do more work quickly or is it also like corporations like yourself really leading the charge?
I think it’s a combination of both. In this industry, you can’t do anything except you have the financing and financing is now clearly constrained both in terms of available resources and the decision of some of the shareholders of some of the lending institutions. There are a number of activist investors that are very prominent in our business today. So, it’s a combination of the decisions that companies want to make sure that we face the reality of carbon neutrality in 2050 and the very fact that we need other people’s resources to out that in place. So, it’s actually a combination of the two and both must speak to each other and there’s the reality that some countries will move faster than the others, but ultimately, those realities must come out.
One of the things really invaluable in this transition is carbon pricing. Do you just need the price of oil to be a little bit higher to force change in the industry?
First, the whole idea around the energy transition is to find a more climate friendly energy source. The second issue is to find alternatives and what technology can do. You can see the movements towards electric vehicles. People are looking at options of producing much cheaper and much cleaner energy, and when you look at all these, the carbon credit issues, it’s a fallout of these engagements. And carbon credit must be surely a deliberate effort by operating companies, including national oil companies to ensure that they invest in areas that give them carbon credit. Yes, they will do things that will add little to carbon dioxide emissions and as you do this, you must be aware that you need cash to get this done and you need resources from banks. Therefore, what you are dealing with is a very complex situation and that is the reality of what the whole world is trying to do.
So when do you think that we’ll actually see peak oil. Is it sooner than some corporations think?
It is tough to fix a time on peak oil. Everybody is saying next 10 years, we will get to peak oil. But nobody has said peak gas. And it’s too difficult to distinguish the two because as you get peak oil, in many cases, you know, oil is produced alongside gas. In most countries, you will see that exploration for gas only is very minimal and therefore, peak oil is naturally in a decision point, probably in the next 10 years. Yes, it’s possible, it can be in 10 years’ time but you also know that what we are doing today in the industry is also curtailing investment and meeting the transition target in 2050. What that means is that in five years’ time, you could be in a situation of shock and this shock will mean that people will have to come back and put more money to producing the liquids and that means that it will defer the date for liquid oil and potentially pushing it by 20 to 30 years.
Does the pandemic actually make it easier to transition because there’s the thinking that it’s easier to wean ourselves off oil into something that is more transition friendly?
There were real issues before the pandemic and demand collapse. Actually about four million barrels was being lost to that. And that led to loss of optimality in the market and that also led to the economic decline that we saw. What the pandemic did was to affect pricing due to excess supply last year. We were forced to reduce supply and of course we have still not got to the level we want. And then of course, getting back to that level is not a commercial decision. The four million barrels we lost may never come back because people’s choices have changed, patterns of lifestyle have been changed by the COVID-19. That means that you will see those losses of demand sustained. What COVID-19 did was actually to distort new balancing for demand and supply.
What’s the perfect price for the barrel of oil in your opinion; are higher prices automatically good for Nigeria?
Crude oil prices in a resource-dependent nation like Nigeria, when it gets too high, it creates a big problem because your consumers shut their demand. Demand will go down and obviously even as the prices go up, you will have less volume to sell. So, it’s a chicken and egg story and that’s why in the industry, when people make estimates for the future, they always make it about $50 to $60. Nobody says beyond $60. But for us as a country, as prices go up, the burden of providing cheap fuel also increases and that’s a challenge for us but on a net basis, you know, the high prices , as long as it doesn’t exceed $70 to $80, it’s okay for us.
OPEC plus will meet on July, 1, to consider restoring these 5.8 million barrels a day that it still has offline since the pandemic. What do you think they’ll do in terms of consensus?
It will be a difficult decision to make because today, oil is at $72 per barrel benchmark and the industry is apprehensive. We know that consumers will make the decision to probably go down lower on demand and therefore, adding that number to the market today will surely stabilise the price and bring in down to $60 level or a little below $60 and that’s a comfort zone for every producing company or country. I don’t see them having any difficulty agreeing to add additional volume to cushion the effect of these obviously high prices for this period. And we also know that having the high prices could actually impact people’s decision to transit more and more into renewables. And I am not sure oil and gas companies are very keen on that at this moment. Yes, they will like to transit, but they will like the cash of today to invest in renewables.
So what do you think the position for Nigeria is actually; will it support such an increase in August?
I don’t think we would have any difficulty in doing that. As Nigeria, we are already producing well below our capacity. As you may be aware, in early 2020, we actually produced up to 2.4 million barrels of oil per day for both oil condensates, but today, we are in the region of 1.7 million to 1.8 million barrels of oil and condensates. We do have a very huge capacity that is so clearly aligned to ensure that we come back, but without also compromising the price level.
The next phase agreement basically means that Nigeria could go up to 1.9 million barrels a day and you’re pretty comfortable that you can reach that level?
Today, we are doing 1.7 to 1.8 million barrels per day for both crude oil and condensates. As you are aware, the OPEC quota is about 1.4 to 1.5 million barrels and that’s what we are doing today. The other difference is coming from the condensates. So, what that means is that we would like to see crude oil only production hit 1.8 million barrels without the one from condensates.
Have you lost any capacity as a result of a lack of investment or militant attack on pipelines or even uncertainty over the petroleum industry?
Yes, of course, it’s very obvious to say that there’s some instability issues. I am happy to say that the senate of the country has declared that the petroleum industry bill will be passed this month. What this means is that we will have more clement business environment, clarity and much more competition, and therefore it will allow more investments into our country. In the last 20 years, there’s been some instability and investment has been very low, so we are conscious of these things, and the PIB will sort that out. Of course we didn’t wait for that and I am sure that you know we had a commercial agreement with our partners just two weeks ago, and the meaning of that is that the deep-water is now open for business because we did not wait for the petroleum industry bill. We have created some stability in the production sharing agreement and it’s competitive and the world can put their money on it. We have that in our line of sight and there are a number of deep-water projects this year.
How do you see the global oil market this year and 2022?
Yes, uncertainty will remain, decision to invest will continue to be a challenge and of course, ultimately, the business environment that will survive is where you have low production costs, and that’s where we’re focused on. This is to make sure that anyone finding oil in this country, can produce at the least cost and you know that we have one of the sweetest oil anyone can find. It is premium oil we produce in this country. It’s a very turbulent two years to come in terms of inability to produce oil, in terms of pricing of petroleum in the market and the decisions that will be made across the industry in terms of financing. It will be very tough few years. But we are positioned to take advantage of the new opportunities and properly positioned to take advantage of the situation and producing gas both for the domestic market and for export.
With the price of Brent at around $70 a barrel, what does it actually mean for shale producers; Will they come back online?
They will come back online and introduce additional barrels for the OPEC+ cartel. Obviously, price will come down and shale producers will still come back to the same situation. We will still need up to $45 to survive.
Overall, what’s been the biggest surprise; you’ve worked in hydrocarbons for quite some time. What’s been the biggest shift?
Let’s put this in contest by geography. For clearly underdeveloped countries that are resource-dependent, the transition will be much slower, but obviously they don’t have a choice than to do a few things to make things work. This journey will probably be a difficult one for most countries, including my country because of the absence of the clear infrastructure that we need. The other side of it is that we have companies that are resident in very developed nations, where poverty is much lower than what we have in this country and they will have different decisions to make. Therefore, for international companies and national oil companies, they will make decisions for their shareholders and the reality that this business is changing and there’s a new way of doing business. As you are aware, 20 years ago, the top five companies were oil companies. Today, that has changed. The industry is changing and must do new things to survive. Ours is to improve on our gas production, so that we can have the resources to compete and get more employment for our people, reduce poverty level and bring lasting peace in our country.
So, do you think that we’ll see the end of oil era in our lifetime?
For me, I’m 56. For a lifetime, it is tough, but if you mean 50 years to come, I am not sure that will happen. I don’t believe that will happen in 50 years to come. In 50 years, we will still need energy, people will need to move around. There are limitations with renewables like we all know. Uses of petroleum is changing. I don’t know how the 50 years will be. But obviously, petroleum will not just be used for what it is now. I am not sure it will vanish. It will still be useful in years to come.
What about the price of renewables. Do you think if they fail to make huge progress, that’s what will kind of accelerate the change?
Obviously, if you look at cost of renewables in the last 10 years, we don’t know what the future will look like but we know a lot of researches are going on and as you scale up, prices will come down and as costs will come down more people will come into the business. The future still remains something to balance. I am sure you are aware that most of the forecasts we have, nobody is seeing the end of gas in 10 years, so as we move towards renewables, we are increasing the use of our natural gas resources.
In NNPC, what do you see as the biggest challenge in the next 12 months; you were looking at cutting costs, how is that going?
The biggest challenge we have today is the cost of production. We have been focused on this and now we are engaging our partners to make sure this comes down. We are achieving that and we have seen substantial decline in our cost of production, and that’s one area we keep focusing on. Second is to get the stakeholders and partners to understand this. We have had agreements on OML 118 and other assets that are subjects of conflict and that understanding will create opportunities for us. Thirdly, the security around our areas of operations. In the Niger Delta we had a lot of issues, but the good news is that we have made significant progress. We’re not where we were five years ago. There has been significant decline in the number of vandal activities on our assets. Yes, we still have issues, but I am also aware that there is concerted effort by our partners and government agencies to protect these areas to make sure that we bring it to near zero. Lastly is automation. This industry is undergoing automation in all our assets and its one key area we are focusing on. In addition, this company is going to focus on more transparency and making our accounts more accessible to all. We have released our statement of accounts and we publish our transactions for people to access from any part of the world.
