‘FG should allow policy drive investments in oil, gas sector’

Emeka Akabogu, Chairman of Oil Trading & Logistics (OTL) Africa Downstream, a Pan African platform that promotes businesses and policies in oil and gas downstream sector speaks to BusinessDay’s ISAAC ANYAOGU on how government could use policies to drive investment in oil and gas sector which forms the basis for some far reaching recommendations made at the OTL conference last year. Excerpt:

What is your view on the current model of downstream operations?

We have always been of the view that it is a sub optimal solution to the challenge which the country faces.

At the time that the NNPC and the Ministry of Petroleum Resources through the Minister announced last year that the industry was being deregulated, we thought we were going to witness absolutely full deregulation of the market, but what we have is a situation where the government announced deregulation but capped the price of petroleum products at least fuel.

Capping the price automatically removes any pretense to deregulation and the chickens have come home to roost now that the foreign exchange differential between the open market and the government’s Central Bank rate is widening.

So at the end of the day, the only reason why the NNPC is doing all the importation is because the marketers simply cannot afford the petroleum products at the capped rate. They cannot afford it because they are not getting foreign exchange at the government rate.

There is no way they will be able to sell at the capped rates and make profit, so for that reason, there is no point importing refined products.

If the government wants a situation where the market is flowing, where there will be competition, then it has to ensure that the price cap is removed. Once  that is done, then you are talking of full deregulation, because the marketers even with all the foreign exchange challenges can import, using their own business networks, financing models and with the range of options available, make specific plans around importation and be able to sell commercially. The challenge is the foreign exchange and to the extent that it remains, it impacts on the market.

 You advocated for an oil and gas protection squad, what is it about and how is it going to be implemented?

Calling it an oil and gas protection squad makes it sound romantic, but it is essentially a team developed from the oil and gas industry players themselves, who have the interest, who have the knowledge of the environment and who are able to lock in these interests in a commitment towards ensuring that the pipelines are secured.

We have technology available to be deployed to monitor the entire pipeline network. The government and IOCs who have full knowledge of the network should be able to work together to deploy monitoring technologies which relates to the movement of products on various platforms.

If the government is able to deploy these technologies at the very least for the purposes of identifying key points of typical compromise of the pipelines, they can then  begin to plan towards either preventing or dealing sustainably with those key areas where the breaches occur.

Ultimately, it is a technology driven proposition which is focused on monitoring pipelines not from a patronage based point of view, which is what we currently have, but from an empirical technology based point of view.

But if the issues relating to the development of the Niger Delta are not resolved, how will this work?

Of course, the developmental issues of the Niger Delta should be part of the framework, which is why I said the key stakeholders who have these interests must be involved.

Evaluate the level of compliance of Local Content and Cabotage Act.

I think there has been significant compliance as far as the oil and gas sector is concerned. The challenge has been the availability of local capacity. There is still need for more transparency in the entire system both within the International Oil Companies (IOCs) and in the government circles. The IOCs could claim to be carrying the flag as far as compliance is concerned.

As far as Cabotage Act is concerned, it is not the same story and that is curious given that the Cabotage initiative was birthed much earlier than the Local Content initiative and for me that’s a question of the commitments and competence of persons charged with implementing the Act.

The approach of the regulator is what is responsible for the consequences which we have seen.

How is lack of foreign exchange impacting on the activities of the downstream?

The problem has become serious particularly at a time like this where the availability of foreign exchange is so limited and the disparity between rates proposed by government and rates available is wide.

The range of fees payable for instance to the Nigerian Maritime Administration and Safety Agency (NIMASA) and the Nigerian Ports Authority include, port dues, berthing charges, freight levies, sea protection and a range of others. These are basic, statutory dues you have to pay. But when you have to pay levies in foreign currency or at either the open market or much higher than official rate of exchange, the prices are higher. Why don’t we have a rate which from the onset is denominated in naira terms?

There won’t be a problem if all rates are denominated in naira from the onset; with that you will be able to make projections in naira. That is the issue.

These charges in foreign exchange cause a serious depletion of the available foreign exchange because of the high demand; it weakens the naira, and significantly alters the final pricing equilibrium.

Liquefied Petroleum Gas (LPG) is currently an issue as the price has skyrocketed? What policy intervention is required to get the country out of this situation?

I think that capacity needs to be developed to produce more. The Nigerian Liquefied Natural Gas Limited (NLNG) has dedicated a percentage of its production for domestic needs but we are also aware that NLNG has long term contracts with other international offtakers and these commitments have to be met.

Many times, the most important challenge affecting the local market is not really that of availability but relating to logistics of supply, storage and transportation.

Currently, there are just two LPG storage facilities in Lagos, one owned by NIPCO and other by NAVGAS. In the east, it is even much more limited. The parties involved in bringing LPG are concerned about the nature of the market, compared to the potential market which exists. The market is still very limited.

The Nigerian LPG market hovers between 250,000 to 400,000 metric tonnes per annum while ideally we should be talking about something in the range of 3 to 5 million MT.

So a lot of investments are still required within the LPG value chain to ensure that the logistics which are needed are in place. But for those investments to happen, decision makers from a business case point of view need assurance that their investments will be worth their while.

I also think that foreign exchange consideration also plays a major role because there are times when despite the NLNG domestic obligation, logistic challenges ensure that those domestic obligations are not met.

Some of the larger operators will need to bring in gas and when they do, they’ll bring it using foreign exchange and they have to reflect this high exchange rate at the point of sale.

Ultimately, logistics challenge relating to vessel availability, berthing space and discharge functionality prevents the importation of LPG when it is available as they simply can’t come in due to infrastructure challenges.

There is an overall need for policy to promote and prioritise LPG, before infrastructure requirement will also be promoted.

Government does not need to build storage facilities but it should facilitate their construction by policy means. This is because there are operators who need to have certain guarantees in relation to markets, even in terms of reduced taxes when they are constructing these facilities.