Managing Director, Nigerian National Petroleum Corporation (NNPC), Dr. Maikanti Kacalla Baru, speaks with journalists in Lagos on topical issues in the Nigerian oil and gas industry. ADEOLA YUSUF was there. Excerpts:
Nigeria is in recession. What roles do you think the oil sector played in this?
We are all aware or should I rather say that we are technically in a recession. The oil sector accounts for approximately 90 per cent of the nation’s foreign exchange earnings.
Therefore, there is no gainsaying the fact that some of the challenges in the industry are part of the root causes of the recession. As we very well know, oil prices have dropped by over 50 per cent from $110/bbl in June 2014 to the current level of slightly over $50/bbl.
The Joint Venture (JV) cash call debts have been stagnating or dipping production through JV contracts. How did we get to where we are?
The chronic Joint Venture funding shortfalls being experienced in the industry have resulted in declining JV oil production from about one million barrels of oil per day three to five years ago to about 800,000 barrels of oil per day.
This is coupled with the vandalism of critical production infrastructure that has to be repaired as emergency cases at exorbitant costs, at most times, which further compounds the utilisation of the available funds.
The truth is that it is difficult to deliver the volumes without adequate funding. With average JV cash call requirement of about $600 million a month coupled with flat low-budget levels over the past years, this had led to under-funding of the industry by government, which has stymied production growth.
Consequently, managing these funding issues is part of our most immediate challenge. In contrast, production from the Production Sharing Contracts (PSCs) arrangements, where NNPC does not provide the funding for the production, has increased almost proportionately to the JV production decline over the same period, thereby making the national oil production relatively flat.
What do we lose as a country as all these play out?
Unfortunately, unlike the PSC arrangements, the JV system provides more revenue to government through equity liftings and higher royalties and taxes due to the higher fiscal take from onshore and shallow waters fiscal terms. The low crude oil price regime further amplifies this anomaly.
What are you doing to resolve this problem?
What are we doing to tackle the reality of challenges highlighted above? As stated by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu and myself at different fora, we are working assiduously with our joint venture partners to see that we exit the JV cash call system and also clear our funding arrears.
To address this structural funding problem, which is further compounded by the security challenges in the Ni-ger Delta, we are exploring alternative funding mechanism that allows the joint venture business finance itself by retaining its operating costs and capital allowances (fiscal costs) in order to sustain and grow the business.
Where the fiscal costs for any year are not sufficient to fund the budgetary requirements of the joint venture, part of the profit margin could be retained to fund the budget and, where necessary, external financing could also be sought to finance commercially viable and bankable capital projects without recourse to government treasury.
The import of the above is that the joint ventures will relieve government of the cash call burden by sourcing funds for its operations (estimated at $7-$9 billion annually). In 2016 alone, under-funding of NNPC Cash Calls is estimated to be about $2.5 billion.
This is aside the inherited arrears estimated at over $6 billion.
Tell us more about plan to exit JV cash call model?
The JV cash call exit model we are pursuing guarantees government most of the revenue that normally accrues to it from the JV operations by lifting the royalty and tax oil upfront. This contributes 75 per cent to 85 per cent of the accruable revenues to government. Consequently, the effect on government take would be minimised. We are working assiduously to kick start this from January 1, 2017.
What is the update on exploration at the Chad basin?
Well, over 1,900Sq.km of new 3D seismic has been acquired and processed in the Chad Basin. Current expectation is to mature the leads mapped from the interpretation of that data into drillable prospects to ensure commencement of drilling in early 2017.
That way, we would have diversified our production mix and terrain of operation. As we are all aware, an indigenous company – Yinka Folawiyo Petroleum – has pioneered exploration and even development in the Dahomey Basin.
They have opened up the basin for further exploration and development. It is time for NAPE to show its prowess by rapidly identifying the reserves in the Frontier Basins.
Notwithstanding the current efforts at Frontier Exploration, we are not neglecting the golden goose that has laid the eggs. I have directed NNPC’s GED Upstream and GGM NAPIMS to ensure that we continue to have ring-fenced exploration budgets in both our current JV and PSC arrangements to ensure there is work for all our service providers.
We will take advantage of the lower-cost opportunities in identifying additional reserves for the expected boom years that would definitely come due to the cyclical nature typical of our industry.
There is no better time to invest in exploration than now. I have a personal commitment to see that we grow our reserves under my watch as GMD. On this note, I congratulate our OML 139 partners for the recent discovery of the one billion barrels Owowo Field offshore Niger Delta.
Of what relevance do you think the theme of NAPE conference is to the industry and your agenda at the NNPC?
The theme of the annual conference, which is “Nigerian oil and gas industry: Tackling our current realities,” is, indeed, quite relevant in the current clime as in the past few years the business environment has been quite challenging for our industry.
We have faced challenges relating to low oil prices, production challenges due to infrastructure vandalism, inadequate JV funding, low reserves replacement, adequacy gap in technology and shortage of skilled manpower, amongst a host of other issues.
What is the relationship with these challenges you mentioned?
Most critical of all these challenges is the fact that they are all intertwined in a viral fashion. For example, the low oil price and deferred production challenges will lead to lower government revenues, which will have a negative impact in the amount of funds available for re-investment to sustain base production as well as incremental production. Similarly, there would be fewer funds to ensure proving up additional reserves to ensure adequate Reserve-Replacement-Ratio.
The security challenges in the Niger Delta are still a major issue in Nigeria’s oil space. What are you doing about these?
In terms of security challenges, may I once again use this medium to appeal to those behind these indiscriminate acts of infrastructure vandalism to put an end forthwith to these despicable acts of sabotage.
The destruction of critical energy infrastructure is a great threat to our environment, the economy and energy security. The outage of these key infrastructures is detrimental to the development and growth of the industry in particular and the country at large.
It also has a negative effect on the level of funds to be distributed to the various tiers of government resulting in the ripple effect on the economy. Year-to-date in 2016 alone, we have recorded over 1,500 cases of vandalism of our pipelines; the cost of repairs is quite mind-boggling.
So, what are you doing about this?
Well, during my visit to the Chief of Defence Staff a few weeks ago, I informed him of my intention to set up an all-inclusive advisory council on security mainly to address all security and host community agitations at the industry level.
The advisory council would be made up of representatives of key stakeholders. Aside this, we are continuously working with our host communities and security forces to see an end to this scourge.
I am aware that the security forces around all areas of production operations have set up choke points. The security forces have given assurance to me that they will continue to be civil in and live by the rules of engagement to ensure that we operate in a safe and secure environment.
We would also review our community and social responsibility programmes to see that we continue to touch the lives of our stakeholders in more positive ways.
How are you contending with low oil price?
With respect to the low oil prices, we have adopted cost-reduction and cost-saving measures to ensure that we stay profitable and in business. Prior to my assumption as GMD, I drove the process as GED E&P with our JV operators and production sharing contractors to duly renegotiate downwards all contracts in line with the collapse in crude oil prices.
This exercise alone has saved the industry billions of dollars. We are also adopting synergetic and collaborative approach to doing business going forward such as resourcepooling, reduction of contracting cycle times, facility-sharing for clustered assets as well as standardisation of operating framework, increased use of general specifications and so on.
Indeed, the low oil price presents opportunities for home-grown solutions in our industry. For the economy, it is a chance to diversify the source of government revenues and capture value across the entire value chain of all streams in the industry.
For us in NNPC, we will aggressively pursue domestic refining to take advantage of improved refining margin during periods of low oil prices. To address the current suboptimal performance of the domestic refineries, a new rehabilitation strategy, which includes the rehabilitation of all refine r i e s , modification of the refinery business model and governance structures that tie capital investment performance to actual refinery output are being pursued.
What roles can stakeholders like NAPE play in all these?
In summary, let me link all I have said with the mandate of NAPE, which, in part, relates to advocacy and advisory on matters relating to oil and gas exploration.
On assumption of office as the Group Managing Director of NNPC, I set out a 12-point key focus area as a way of pushing forward the on-going NNPC reform process. One of my cardinal focus is increasing hydrocarbon reserves and growing production.
I am fully committed to this mandate and with the support of NAPE, I am confident that we have a win-win partnership. As part of the renewed exploration efforts, the corporation is to resume oil exploration activities in some of the nation’s inland basins, which include the Chad Basin and the Benue Trough.
As you well know, our neighbours in Niger and Chad have had successful commercial discoveries of oil and gas within their portions of the Chad Basin and have since been producing from these fields.
There is no need re-inventing the wheel. We are now progressing with the use of exploratory techniques that have worked on their own side of the Basin to prove up our side.
This will also provide a vista for NAPE and its professionals to further analyse the concept of oil generation, expulsion and entrapment in rift basins, which we now know is different from the Niger Delta Basin that we are used to.
What is your advice to all major stakeholders in the industry?
Well, we are, indeed, at a vantage position to address the current realities of our industry. I enjoin us all as explorationists to dig deeper for collaborative “out of the box” solutions to ultimately create sustainable pathways for the industry’s development.
I congratulate NAPE for pulling together the oil and gas industry stakeholders to discuss such a soul-searching theme and hope that by the end of the conference and exhibition, we will all go back to our various desks thinking, proffering and actualising actions that will ensure a sustainable and dynamic industry