New Transparency in Oil and Gas

Though Nigeria’s crude oil production nose-dived from 2.13 million barrels per day in May 2015 to its current level of less than 2 million barrels per day as a result of a resurgence of militancy, Ejiofor Alike reports that the past two years, no doubt, w

Before the present administration of President Muhammadu Buhari took over on May 29, 2015, a key issue that had dominated public discourse was the alleged massive corruption in Nigeria’s oil and gas industry and the need for a comprehensive reform to overhaul and usher in transparency and efficiency in oil and gas business.

Reports of various probes had alleged sharp practices perpetrated by key players in the industry, with allegations of missing money and unremitted oil revenues dominating the political and economic landscapes.

Buhari had before he assumed office, set up a Transition Committee in April 2015, which also added its voice to the urgent need for a reform of the oil and gas industry, specifically, recommending it overhaul.

The committee had in its 800- page report recommended an overhaul of the then corruptionridden state-run Nigerian National Petroleum Corporation (NNPC), and the removal of petrol and kerosene subsidies, among others.

Another key recommendation of the committee was a review of the contracts between the NNPC, and the international oil companies (IOCs) on one hand, and the contracts between the NNPC and oil traders on the other hand.

A quick passage of the old version of the PIB, which sought to create incorporated joint ventures (IJVs) between the IOCs and the NNPC, was also recommended.

The non-passage of the PIB had created uncertainty in the operating environment and hindered the needed investments in the oil and gas industry.

Restructuring NNPC/oil Contracts

After the initial skepticism, the government commenced the reform with the personnel restructuring of the NNPC, which obviously required no legislative instruments.

Barely one month after Buhari had promised measures to improve the oil and gas sector at separate meetings with delegations from ExxonMobil and Nigeria LNG Limited, Dr. Ibe Kachikwu, who was then the Executive Vice Chairman and General Counsel of ExxonMobil (Africa), was named the Group Managing Director of the NNPC.

Immediately on assumption of office, Kachikwu initiated a raft of measures targeted at personnel restructuring to enhance transparency and competitiveness of Nigeria’s operating environment.

The high point of the reform was the monthly publication of NNPC’s financial results to end the era when the corporation’s business was conducted in secrecy.

He also ordered a forensic audit of the NNPC, and pledged to split the Pipelines and Products Marketing Company (PPMC) into three portfolio companies that will manage the refineries, pipelines and supply of petroleum products, which has since been implemented.

In line with the recommendations of President Buhari’s transition committee, Kachikwu cancelled contracts with oil traders and called for fresh tender for oil lifting contracts.

The crude-for-products exchange arrangement popularly referred to as crude swap, under which few Nigerian downstream companies and Swiss traders shortchanged Nigeria, was replaced by a Direct-Sale–Direct-Purchase (DSDP) arrangement.

Before this administration took over, the crude-for-products arrangement was shrouded in secrecy as only top echelons of the NNPC knew the details of the deals and the identities of the companies that benefitted between 2010 and 2015, thus fueling the massive allegations of corruption that charaterised the scheme.

Kachikwu said he adopted DSDP to replace the Crude Oil Swap initiative and the Offshore Processing Arrangement so as to introduce and entrench transparency into the crude oil for product transaction by the NNPC in line with global best practices.

During the previous administrations, crude oil was exchanged for petroleum products through third party traders at a pre-determined yield pattern.

The present administration has also made the yearly lifting of Nigerian crude for the NNPC more transparent and competitive, involving more Nigerian companies, unlike in the past when only few Nigerian companies connived with international firms to corner the contracts under an opaque arrangement known to only the top management of the corporation.

Another major achievement of the present administration within the past two years was the country’s exit of the joint venture cash calls arrangements with the international oil companies operating in the country.

The country exited the JVs with an outstanding debt of $5.1 billion, to be paid over a period of five years through incremental oil production volumes.

With the savings to be made under the new arrangement, the federal government’s revenue is expected to increase by $2 billion annually, while Nigeria’s oil production will increase to 2.5 million barrels per day (mbpd) by 2019.

The development is also expected to result in a reduction in the unit technical production cost of oil from $27.96 per barrel to $18 per barrel.

The new model will also give the NNPC and the joint venture partners the opportunity to grow outside of the previous constraints of government’s inability to meet its obligations.

Militancy/crude oil production

With the Amnesty Programme introduced in 2009 by the late President Umaru Musa Yar’Adua, Nigeria was able to ramp up oil production to 2.3 million barrels per day in 2013, following the return of peace to the oil producing Niger Delta region.

However, by 2015 when the current administration took over, crude theft and pipeline vandalism had forced a drop in production to about 2.1 million barrels per day.

After the present administration enjoyed what seemed like a honeymoon in the first seven months in office, production increased to over 2.2 million barrels per day in February 2016.

However, as the country was celebrating these achievements, there was a resurgence of militancy in the Niger Delta, led by the Niger Delta Avengers (NDA), which launched fresh attacks on oil facilities.

To restore peace in the region and boost investments in the oil and gas sector, this administration launched the ‘7 Big Wins’.

The first of the Big Wins, according to the petroleum minister, was getting the Niger Delta stabilised through engagement, empowerment and enforcement.

The other aspect of the Big Wins is righting the wrongs through remediation and education.

After the apparent failure of military option to return peace to the Niger Delta, the dialogue initiated by Kachikwu and backed by the acting President, Prof. Yemi Osinbajo encouraged the militants to declare cease fire, thus allowing oil companies to ramp up production to the current level of about 2 million barrels per day.

Though the country’s current crude output of about 2 million barrels per day is still below the level inherited by the present administration in 2015, it is far above the 1.4 million barrels per day produced at the peak of militancy in 2016.

Passage of PIB

The Senate under this regime has also passed the Petroleum Industry Governance Bill (PIGB), which would institute a new governance structure in the management of the nation’s oil industry assets and the NNPC, when concurred to by the House of Representatives and assented to by the president.

The PIGB is the first leg of the 17-year-old Petroleum Industry Bill (PIB), which has been broken into five separate bills by the 8th Senate.

The new bill scraps the NNPC, the Department of Petroleum Resources (DPR), the Petroleum Products Pricing Regulatory Agency (PPPRA) and several government agencies in the oil sector and now creates three new entities to oversee activities in the sector.

The three new entities are the National Petroleum Company (NPC), the National Petroleum Assets Management Commission (NPAMC) and the Nigeria Petroleum Regulatory Commission (NPRC).

Under the new governance structure, the NPC would be an integrated oil and gas company, operating as a fully commercial entity that will run like a private company, while the NPAMC would be a single petroleum regulatory commission, which would focus mainly on regulating the industry.

The PIB journey started on April 24, 2000 when the former President Olusegun Obasanjo set up the Oil and Gas Reform Implementation Committee (OGIC), headed by his then Honorary Special Adviser on Energy and Strategic Matters, the late Dr. Rilwanu Lukman, to carry out the first comprehensive reform of the oil and gas industry.

Obasanjo left office before he could implement the National Oil and Gas Policy (NOGP) report that was submitted by the Lukman’s committee.

The late President Umaru Musa Yar’Adua reconstituted a new committee, also headed by Lukman, on September 7, 2007.

Lukman’s new committee, which submitted its report on August 3, 2008, was mandated to “transform the broad provisions in the NOGP into functional institutional structures that are legal and practical for the effective management of the oil and gas sector in Nigeria”.

The PIB, which also seek to replace about 16 obsolete legislative and administrative instruments in Nigeria’s oil and gas industry and transform them into a single law, emerged from the report of these two committees.

Unfortunately, 17 years after the bill was submitted to the National Assembly, the reform bill has not been signed into law because of the politics associated with the fiscal regime and other controversial provisions, which the successive law makers could not resolve.

Failed refineries and unfulfilled promises

Despite the success achieved by the present administration in the area of opening up the oil and gas sector to public scrutiny and restoring the confidence of investors, the country’s refineries have defied what seems like the best efforts of the administration to make them work under NNPC management.

Desirous to make the refineries work, Kachikwu had in September 2015, as the then Group Managing Director of NNPC, given a 90-day ultimatum to the Warri Refining and Petrochemicals Company (WRPC), to commence full production at 125,000 barrels per day.

However, 18 months after the expiration of the ultimatum, the poor performance of the country’s refineries in Warri, Port Harcourt and Kaduna have forced the country to depend solely on imported petroleum products.

After failing to bring back the refineries to full production, the government is wooing private investors to invest in the old refineries and in the co-location of refineries.

The federal government in May 2016 took a bold step to encourage private sector to invest in the downstream and private refineries when it partially liberalised the downstream sector by ending the subsidy regime and increasing the pump price of petrol from N86.50 to N145 per litre.

But the challenge of accessing forex has hindered the private marketers from taking advantage of the opportunity to engage in massive importation of petroleum products, while few investors who wanted to invest in modular refineries went back to drawing board to review the project economics as a result of the high cost of forex.

Today, the country has returned to the era when NNPC was the sole importer of petroleum products, while the huge investments made by fuel markers in private depots continue to waste.

President Buhari’s transition committee had recommended the merging of the Ministry of Petroleum Resources and the Ministry of Power to form a new Ministry of Energy but this was not implemented by this administration.

Former President Obasanjo had created the Ministry of Energy to oversee the oil and gas industry but the late President Umaru Musa Yar’Adua split the ministry into the Ministry of Gas and the Ministry of Petroleum Resources, while a separate ministry was in charge of power.

However, former President Goodluck Jonathan later collapsed the Ministry of Gas into the Ministry of Petroleum and retained the power ministry, a structure, which the present administration has sustained.