Interview
In this interview Ms Ronke Onadeko, Principal Consultant, drnl Consult Limited, at a training by Facility for Oil Sector Transformation, FOSTER, in partnership with FICAN speaks on oil and gas development in Nigeria and how government can derive enormous benefits from abundant gas reserves.
Yemisi Izuora was there for Oriental News Nigeria
Excerpts
The FG has promised to harness the gas sub-sector. Is this the time to switch attention to the potentials of the gas sub-sector? Is it a time to conduct Marginal oil fields bid?
Gas exploration is Nigeria’s plan B. We have an abundance of gas resources and the utilisation and optimisation of gas is easier to launch into once we can get gas infrastructure in place (it is however not cheap). Marginal fields can’t be attractive to any industry stakeholder/investor at the moment. Investors are expectedly reluctant to invest their cash in country that has failed to pass the PIB.
The way to go is to Block the revenue leakages, some MDA can be done without, Full deregulation of the petroleum downstream sector via the liberalisation route, Activate the gas plan, Pass the PIB and Outright sale, commercialization or privatization of the oil and gas assets
On the average, how much in demurrage cost is Nigeria incurring daily, with crude oil cargo on the high seas without a buyer?
There are unfortunately no alternative uses for crude oil. A vessel could cost about $300,000 per day, with over 70 cargoes and some haven’t found homes for over 30 days. You can imagine the losses, but this is currently a global crisis and not peculiar to Nigeria alone.
Nigeria may have to shut down production as hard as that is to admit- the world doesn’t have buyers; storage is used up and prices are still on the downward slide.
Shell is the only IOC that plans to drill in 2020- for now, all others are on hold. Support companies that provide services in production, exploration and logistics are downsizing, folding up or exiting the Nigeria market-the picture doesn’t look rosy at all.
That’s a lot of money we cannot afford to be losing at this time. Is there a way out?
Our refineries must find buyers by force. We have to off load them, its priority. If we did what we did to Eleme petrochemical when it was sold to Indorama we will be singing to the bank now.
Nigeria also needs to open her markets to competition across the oil and gas value chain- let investors find our space attractive, let them take out their profits when they make it. Nigeria will be better-off than if we self-protect.
If we get our house cleaned up quickly and right, we may be able to attract some global investments and funds if our part of the world is the least hit by the pandemic (fingers crossed).
What can be done in the Oil and Gas sector to avert the covid-19 influenced economic challenges?
Assent to the Petroleum Industry Bill,mPIB, shrink NASS, liberalize the downstream sector, commercialize or privatise all state-owned enterprises. The government should only regulate not get involved in commercial activities.
Nigeria spent N10trillion on subsidizing fuel. This is far more than what is spent on education, health facilities, and research, is it sustainable?
Can you imagine how much we could have saved over the years and today we have nothing to show from all the years of subsidy. Our SWF and ECA funds would have been our go-to source for funding to tide us over this period but because we have depleted those sources, we are having to go cap in hand to beg for funds to help us while we ride through the storms of this looming recession.
What unique role can artificial intelligence play in the development and deepening of the downstream sector and the role adoption of technology?
With the liberalisation and deregulation of the sector there will be fierce competition
Bringing Crude Production Cost down, what are the tools to achieve this?
I can’t say there are tools, the line items for crude cost have been distorted by a few things security, expensive contractors, middle men costs, cost of funds for high rik fields – onshore and shallow onshore because of kidnappings etc, some projects are not cost viable, high insurance costs are high based on country risk, additional cost of putting in place infrastructure also makes prices high for example having multiple evacuation of crude routes in case a pipeline is vandalised and you have to result to barging that is more expensive and time consuming.
The government has promised to work on bringing down the cost to about $10. The current range is between $9 and $22 depending on the terrain. On PSCs, the range is between 10$ and $30
How do we get infrastructure development and deployment into the sector?
There has to be a wholistic national plan we are following whereby our national assets are identified and infrastructure such as roads, rail, power and security are developed and built around areas, these underlying factors will not only attract projects and finance to these areas it will also enhance homogeneity in development across the asset area and ease the business cost tremendously.
What role can local financial sector play to help indigenous players realise their dreams to participate in the energy sector?
Oil and gas projects are usually long term and so using available short term funds to support long term businesses is a mismatch of funds and has many advantages, its costlier and poses exit problems especially if any of the indices change, we have to attract long term finance into the sector from international banks, venture capitalist, development funds both multilateral and bilateral institutions by collaborations, risk sharing, syndicated loans where funds are polled together and risks shared.
Can the Nigerian local content fund change the narrative?
My opinion is perhaps aggressive here, the fund should not only support local participation with affordable loans and good long term tenures but a greater portion of such funds should be towards identifying and cultivation smaller and new businesses with younger talent that will play side by side in a stipulated number years with no props. There has to be a cut off period where the recipients are weaned off and the structure collapses. We should be working towards a level playing field in the medium term.
What changes can the Dangote Refinery bring in the downstream sector?
Dangote may come on stream on or about the 2nd quarter of 2021. It will bring a dynamic change to the downstream sector, There will be increased refining capacity,
The cost of transporting crude out and importation of products will bring a relief on some line items in the pricing cost at the pump-however, we should understand that he has spent dollars putting this refinery in place and has to service his debt in dollars and also buy the crude oil in dollars from the government.
I only see a positive side to the entry of the Dangote dynamics. Its entry into the market will be able to do good to prices as he will be making money from refining bi-products that will go into the petrochemical plant.
If other downstream players that want to develop in the area of refining capacity come into the space they can play in a niche areas to operate. For example, if a refinery is situated in a shallow costal area and focuses on diesel production for local industry there is no way a Dangote including logistics will be able to compete.
The consumption needs of the sub-regions are so high that no number of new entrants will cause a glut in the market. Different models and different client-base will keep the sector lively and competitive.
Why is it taking the government so long to deregulate the oil sector?
This is an unknown factor, there are almost only advantages to this but for some reason the government is scared of letting go of one of their geese that lay golden eggs. There have been claims that the government considers PMS supply a strategic issue that has to be controlled and managed by government, if that is the case strong regulators can achieve same. There must be more to it than meets the eye. We are on a journey down that road, we will attain it either voluntarily or otherwise.
What is the impact of the petroleum income tax on the oil and gas sector?
Political will is a quick and easy pointer.
The downstream sector has been used as a cash cow for politics for many years and the inefficiencies have been exploited- deregulation will block this source of leakage. It could be disadvantageous to the political class.
Are we likely to see a spike in NPLs from the oil sector, and is it possible to blame the government’s inconsistent policies for the bad business in the oil sector, Again, how do we expect foreign capital investment when our policies keep changing?
Non-performing loans will be on the increase largely from the contraction of the economy, reduced production levels, shutting down of fields, low profit margins and in some cases losses. Many companies invested in oil fields when barrel prices were above $100/bbl and now is as low as $15/bbl. The industry will see a lot of challenges but they will improve and efficiencies will also improve in the long term.
What will happen to petrol equalization fund under full deregulation so that every part of the country will have petrol at the same price?
PEF will have to be removed if truly we are deregulated. Market forces of demand and supply will play larger roles in determining where fuel ends up at and the efficiencies will determine the overall prices. My view is that prices will differ by location but not in a significant way.
How do we avert post-covid 19 economic crisis?
Cash is key. I’ll look at exploiting some existing gaps to add additional streams of income with the hope that a team of knowledgeable people will come on board to help the government plan a less painful transition.
Government, corporates and individuals should:
a. Spend less
b. Look for other income streams
c. Avoid purchases that are dollar-related (switch from Kellogg’s corn flakes to Akamu)
d. Buy made in Nigeria
e. Pass the PI(G)B in its entirety
f. Sell, commercialize or privatize oil and gas assets.