Agenda for the new incoming minister of petroleum

Whomever President Buhari nominates as the Minister of Petroleum in the coming next few weeks frankly deserves more sympathies than felicitations. Almost little cause for celebration for the Minister as daunting, decades old challenges await swift reforms under the intense, critical scrutiny of an expectant nation. The honeymoon would be short, speed would be essential and the margin of error would be small. The job is definitely not for the faint hearted.

Going by the events of the recent past, popular opinion suggests that the new Minister of Petroleum’s most critical attribute would be forthrightness and integrity. While these are very important, we opine that the candidate’s capability, audaciousness and understanding of the industry’s global and local levers are equal critical qualities. The Nigerian petroleum industry has equally suffered from pending issues; PIB, Gas reforms, regulatory effectiveness. It is therefore important that the Minister appreciate what really matters; the core industry challenges, opportunities and options. We would like to help.

Dwindling Nigerian crude oil sales

Nigerian crude oil is faced with a ‘double whammy’. Prices are generally low but structural changes in refining hubs and a glut of light sweet crude oil is eroding quickly the historical advantages Nigerian crudes enjoys. Nigerian crude used to be in high demand but these days, much of it now linger on the market pushing price differentials down by over 60 percent in over two years. Current June market data estimate that about 80 Million barrels of Nigerian crude are stranded and looking for buyers. Reforming the archaic, opaque and detrimental crude oil sales mechanism adopted over the years is overdue.

The Bern Declaration report on the trading of crude oil in Nigeria described the current process as a ‘beauty pageant’, riddled with ‘monumental corruption and intense uncertainty’. In the current arrangement, NNPC does not sell most of the Nation’s crude oil entitlements directly to customers as many countries do but through middlemen (largely traders and briefcase companies) who naturally make a margin and are motivated to corrupt the system. In a buyer’s market, this is a deeply flawed strategy.

The new Minister must urgently establish measures to ensure that Nigeria sells most of its crude oil directly to customers – refineries, traders, National Oil Companies in our major markets. There is no alternative. Furthermore, a robust crude oil marketing strategy that confers advantage to Nigerian blends over rival light sweet crude oil even in a buyer’s market is a necessity. Angola’s ingenuity in marketing its crude oil sales is a good example. The country has established bilateral agreements with some of its major markets effectively eliminating rival crudes in some instances. The Angola – Chilean crude oil bilateral agreement secured Angola a lion share of the medium sour demand knocking off Ekofisk and other crude that competed for the Chilean market. Nigeria’s major targets for bilateral crude slaes agreement should include India, Brazil, South Africa, Indonesia etc. It might be prudet to ascertain what the impact of the EU – ECOWAS Free trade deal might have on our crude oil sales to the European Union in analyzing the nation’s strategy.

Pioneer status: Cronyism or an essential incentive?

Utilising a provision in the Industrial Development (Tax Relief) Act, many indigenous oil and gas companies in Nigeria have been granted zero tax, ‘pioneer  status’ by the Nigerian Investment Promotion Commission, a non-oil industry actor resulting in enormous revenue losses for the Federal, States and Local Governments. Different estimates of lost revenue to Pioneer Status have ranged from about $1Billion – 5Billion over the last 10 years.

The new minister must intervene. First, the provision in the IDA that confers pioneer status on companies in the petroleum industry must be eliminated and all pending applications rejected. There are incentives already enshrined in the Petroleum Profit Taxation Act and available for indigenous/new companies. Furthermore, the illegal approval of a straightforward 5 years zero tax in flagrant contravention of the extant law should be reversed. The IDA provides only for an initial 3 years zero tax status plus a possibility of renewal for another two years. We suggest that existing approvals should not be totally reversed but a limit of 3 years as provided by the law be adhered to.

OML relinquishment/retention fees: The devil is in the details

Schedule 1, Section 12 of the Petroleum Act states that; “Ten years after the grant of an oil mining lease, one half of the area of the lease shall be relinquished”.

This provision of the law was aimed at dissuading companies from hoarding undeveloped assets in their portfolio and ensuring rapid development of reserves. Companies that have been grantedmining leases (OMLs) are expected to relinquish 50% of their acreages. The relinquished acreages are then expected to be resold to interested parties even though there is a case for the relinquishing parties to have Right of first refusals on the relinquished areas.

As at today, this provision is rarely implemented but that needs to change. The Minister must aggressively pursue the implementation of the legal provision by ensuring that all qualifying companies relinquish or take up their ROFR option on the acreages.

Bid Rounds: The lost decade?

The last oil licensing bid round in Nigeria was conducted in 2007.We consider this a ‘lost decade’ of opportunities, revenue and capacity for a resource rich country.  We suggest that the new minister conduct a transparent bid round for the marginal fields and oil prospecting licenses in the nearest future – within a year. The 2002/2003 bid rounds have been adjudged the most transparent and rewarding in Nigeria’s oil history. The Minister might want to borrow some ideas from stakeholders who participated.

Pipeline Vandalism 

Nigeria loses and defers about 400,000 barrels per day to pipeline vandalism and crude theft leaving the refineries idle, revenue depleted and armed gangs enriched. It’s noteworthy that these losses/deferments are more than the total daily production of the middle east quartet – Brunei, Yemen, Uzbekistan and Bahrain.Recent governments adopted light-touch, incentive only strategies hence the proliferation of crude theft and in some instances sabotage by locals seeking for collateral damages. But with theimpact of pipeline losses/deferments on revenues and the fiscal crisis in all the tiers of government, addressing these illicit activities have become critical.

There is no silver bullet for pipeline vandalism and sabotage but solutions would always involve a delicate balance of consistent force, incentives, education and surveillance. One of our recommended solutions would be the establishment and fortification of permanent multi-functional team focused on tackling economic sabotage around the country. This team could mirror the likes of UK Centre for the Protection of National Infrastructure or its American counterpart, the Federal Protective Service. The Minister could also influence the listing of major arterial pipelines such as Trans Niger Pipeline, Trans Forcados Pipeline as ‘National Strategic Infrastructure’ whom by their significance are expected to enjoy enhanced protective resources.

Ministerial consents 

The wave of divestments and mergers/acquisitions in the last half a decade are characteristic of mature basins where old and new players in the industry recalibrate their portfolio. The usual trend of smaller players snapping up IOC divestments has redefined the Nigerian landscape, promoting industry efficiency and capacity. However, the discretionary interventions by government in the recent M & A deals in the industry have become a principalrisk and encumbrance.

The administration of the ministerial consents to M & A and divestment deals should be reformed.  Certainly, government must have the opportunity to intervene in the industry for strategic reasons but such interventions must consider the efficiency and growth of the industry. We recommend that new minister publish regulations and guidance on the process for receiving ministerial consents in M &A deals amongst others. The guidance must provide timelines and reconsideration/appeal options that extend beyond the sole discretion of the Minister.  Certainty and transparency is key for industry growth and efficiency.

JV funding & fiscal uncertainties

Finding an enduring solution to the Joint venture funding deficits is germane to Nigeria’s oil and gas aspirations as the lack of funding for the government’s equity over the years has severely constrained production and stunted the growth of the industry. About $5 Billion is reportedly been owed to the JV partners. Rig count in the country has dropped by about 50% in the last five years. Production has never returned to the pre 2006 peak. This is clearly unsustainable.

Various options have been advised in the past with the most radical been the total sale of government equity in the JV assets. We consider that an extreme and ill-thought option. Government’s equity in assets especially in developing countriesare essential for strategic reasons.  What happened to the Incorporated Joint Venture model been used by the NLNG? Would the Modified Carry Arrangements be a better long-term option? Ring-fence assets and raise bonds? Many options for the new minister to consider but only one result is essential – perennial funding deficits must be addressed.

Gas Pricing: follow the money

Nigeria produces over 6bscf/day but only a fraction getssupplied to the domestic market. About 40% is exported through LNG, 35% reinjected, with about 12-15% been sold in the country. Sobering facts but it’s an indication that gas production in Nigeria over the years have simply ‘followed the money”. As at 2011, domestic gas prices was pegged by government at a measly $0.40.mscf while LNG inlet gas prices hovered above $2.00/mscf/d, a 500% premium. Investments by the IOCs/NNPC naturally were biased towards the export projects – NLNG, WAGP, GTL etc.

Low gas prices and a fragilegas commercial framework have seriously stymied the development of the domestic gas market. That is changing though. The recent administration has correctly identified this challenge, allowing an upward rise in gas prices and providing policy support to strengthen the commercial domestic gas value chain. What the new minister would be expected to do is ensureproper, official communication of these gas prices as there are still some confusion in the value chain about the effectiveness of the new prices and also resist attempts by non-oil and gas agencies to takeover the regulation of gas prices. Removing commercial uncertainties in the gas sector would be a big fillip for the industry’s growth.

Gas Infrastructure: He who lays the pipe dictates the tune.

Nigeria has a gas infrastructure problem, not gas supply. Poor and shortsighted policies have constrained investments in domestic gas infrastructure leaving available gas resources that would have been used in-countrystranded. Typically, gas infrastructure attracts gas supplies beyond the ‘anchor’ projects as the Escravos Lagos Pipeline System has proven.

What Nigeria needs now are policies and measures that can accelerate gas infrastructure projects in the major demand hubs.Critical pipeline projects like the Oben – Obiafru/Obrikom  (OB3) pipeline project, Northern Option Pipeline (NOPL), Trans-Nigeria pipeline project must be actively pursued and monitored by the Minister. Without these gas infrastructure projects, the countries domestic gas consumption ambitions might remain a pipedream.

LPG Consumption in Nigeria

Biggest gas reserves in Africa but our usage of LPG (cooking gas) can only be compared to that of conflict-ridden countries. On per capita consumption basis, Senegal, Ghana, Benin Republic, Libya utilise more LPG than Nigeria. How we have failed to reinforce the utilisation of an available, cleaner and cheaper (on energy basis) cooking fuel remains a mystery. But it was never like this. LPG usage as cooking fuel is underpinnedby constant supply and affordability and until the early 1990’s supply was constant as the sole sources then, the refineries were in good shape. The degradation of the refineries later on meant that supply disappeared and most of the other sources were designed for export.

The country now has a good opportunity to restore LPG usage as the preferred cooking fuel of choice. A LPG revolution must be a priority for the minister as it is beneficial to the economy and also politically rewarding. The key issues to address are supply certainty and safety regulations. It would be in order for government to impose ‘domestic supply obligations’ on Mobil (Oso), Chevron (Escravos) and encourage the likes of NLNG who have been supplying in recent years. The various LPG projects been delayed around the country also needs to be keenly monitored and pursued.

The hugely successful kerosene conversion programmes in peer countries like Indonesia and Brazil also offer a template for Nigeria

The array of issues highlighted above underscores the breadth of work awaiting the Minister. We posit that the country may not be able to afford the idea for the President to handle the petroleum industry as handling the industry demands more than integrity. There still exist within the industry those with right balance of integrity, capability and audaciousness. It is the President’s job to find them. We wish him best of luck.

Oloibiri Advisory

Oloibiri Advisory. Oloibiri.advisory@consultant.com