Nigeria’s gas master-plan is chaotic – Adesanya

Gbenga1JPGMr. Olugbenga Adesanya, an Energy Economist and Environmental Accountant is worried by the level of losses Nigeria has incurred in recent times due to poor management of its energy resources. He believes that the federal government needs to review its investment policies and lobby for the speedy passage of the Petroleum Industry Bill (PIB) to ensure sustainable development of the energy sector. Mr. Adesanya who is currently a Lead Consultant on Energy Pricing, Liquefied Natural Gas and Sustainable Development at Diekolop speaks on key issues in the sector in this interview with Olisemeka Obeche. Excerpts:

How would you appraise federal government’s efforts so far towards transforming the country’s energy sector?

I think the federal government is giving the problems in the sector its best shots. However, my worry is the stalled progress of the Petroleum Industry Bill (PIB) at the National Assembly so far. I think the president should have lobbied the lawmakers to ensure that the bill get speedy passage. If the PIB is not passed into law early enough, a lot of investments – new and existing investments – would either be suspended or relocated to other places. Of course, some of the International Oil Companies (IOCs) are divesting, starting with the marginal fields and ancillary services. They are moving to Angola, Gabon, Ghana, and Australia’s Sakhalin Island which is currently one of the best places for Liquefied Natural Gas (LNG) investment.

In my research on LNG at the University of Manchester, England, I was opportuned to know one development in LNG investment model. That model which encompasses the producing nations such as Nigeria, the buying nations and the tanker fleets in between, spanning a period of 25 years against 10 variables, shows a lot about what is happening now and what would still happen in that sector. For instance, the term contract for LNG is usually between 22 and 25 years, but you find out that there is little investment to add to be able to add other (LNG) trains. And that is what Nigeria is trying to achieve with the NLNG at Bonny. Regrettably, the federal government is not conscious of the benefit. For me, I believe they can see it by bringing up the Olokola and Brass LNGs.

Nigeria stands to gain a lot from the LNG investment because the country is a gas province. Nigeria is more endowed in natural gas than crude oil. In fact, the Presidency should make it a matter of national policy action to start treating gas as an independent resource, free from crude oil. I make this call because gas resources are suffering due to much attention on oil. It’s like in sport where so much attention is on football at the expense of other sports.

If the government treats natural gas as a separate resource, Nigeria will develop parallel structures for natural gas and oil. It will no longer be a subset of oil, and that will help the Nigerian economy. Natural gas is regarded as the interface between moving away from fossil (dirty) fuel (oil, coal) to clean energy. It is a fuel that gives comfort to the environment. So, I suggest that President Goodluck Jonathan should give natural gas its own identity and place its development on a higher priority.

But why has the government not been able to stop gas flaring?

Gas flaring has not been curbed so far in Nigeria because of the problem of ‘sloganization’ and the fact that government has not been firm in its policy implementation. You don’t just decree that ‘by June 2015, any company that fails to stop gas flaring would be sanctioned with hefty fines’. Of course, it is cheaper to pay a penalty in this instance. I believe it can only work, if government calls the IOCs to a meeting, discuss and agree on a new time-table for stopping gas flaring, and follow up with its implementation.

But has this been taken care of by the government’s gas development master plan?

The gas master plan in itself is chaotic. It has not addressed the issue of ownership and that is why the non-associated gas has not been fully exploited, even though it is the bigger endowment. Incidentally, no oil company will invest heavily to exploit this non-associated gas, because at the moment the Nigerian Gas Company (NGC), a subsidiary of the NNPC still regard that as an exclusive property of the federal government. So, the issue of ownership of non-associated gas has to be addressed first before the country can derive maximum benefit from its non-associated gas endowment.

Don’t you think the PIB will address this ‘ownership’ issue when it becomes law?

The PIB could address that but it would not do that in its present form. I see problems ahead in terms of its provisions because it appears to be lopsided. The PIB as it is will even lead to lean investment templates. That means it will discourage investment in the country as it will be cheaper for the IOCs to invest in other terrains than ours. The only thing that makes Nigeria to still hold onto the IOCs is its high quality of oil; otherwise it is more lucrative for them to invest elsewhere. The investment environment in Nigeria is hostile; both at the corporate level (government agencies etc.) and at the local (community) level. The issue is that if you want real investment, call the IOCs to a meeting and find out from them what their concerns are and find a way to address them.

Beyond that, the promoters of the bill believe that it would generate more revenue for the government, and that Nigerians would have greater benefits from the oil endowment. That’s fine, but the problem is that it is concentrated on taxation and revenue without addressing the issue of structural framework upon which the industry can actually thrive. Indeed, the IOCs are the major operators in the oil industry. Government could hold 51 percent of equity shares and they have 49 percent, but they remain the operators. And because of poor economic management, when it comes to raising capital for investment, in this kind of Joint Venture investment, the federal government often delays in providing its own part of the counterpart funding, leading to what we call cash-call delay in the joint ventures. After about two years delay, which holds back business and projects development, they would now request the IOCs to go to the international capital market to raise the fund. And that is largely due to poor management of the country’s resources by the government.

Could that be part of the reasons some of the LNG projects in the country are not making progress so far?

Certainly, it is part of the reason the LNG projects are stalling. It is so because most often government fails to fulfill its own part of the bargain in the deal. Sometimes, government funding comes late or never. Government should have used production sharing contract, which empowers the IOCs to source for the funds 100 percent while the proceeds are shared using agreed sharing formula. But because some civil servants want their hands in the pie, they will insist on agreements that cannot be implemented.

There was a sad experience last year when Tompolo, one of the ex-militants, was disrupting activities of the Nigerian Maritime Administration and Safety Agency (NIMASA) in Lagos. The Nigerian LNG has a term contract of 22-25 years, and if you disrupt the free-flow of gas operations, it would affect the ability to meet up with the terms of the contract signed with other international business groups. And when such occurs, Nigeria pays a penalty, which is charged per day, seven days a week. I think the fine is about $2.5 million per day.

Incidentally, Tompolo and his group used their own patrol boats to block the passage-way to Bonny LNG, disrupting both inputs and outputs meant to service the contract. And there was a stalemate for months which cost the nation a lot of money in terms of penalty and revenue. I had to call the attention of some persons in the presidency to what was happening before they intervened. But the country had already lost a lot of money.

Why did all these things happen?

It happened because NIMASA insist that NLNG should pay tax to its coffer. The agency was too pent up with the revenue drive, forgetting the agreement government signed with the LNGs which included tax exemption. The tax exemption policy was designed to make investment into the country’s LNG attractive to foreign investors. Initially, NIMASA took the matter to court when it dawned on them that the LNG officials were not ready to yield to their demand. But some senior lawyers told them that they can’t win the case, forcing them to withdraw it and resorted to blockade of the LNG passage. Such kind of action does not speak well for the country’s investment profile. Oil and gas is our cash-cow, therefore, we need to manage the resources. Above all, we must see the IOCs as partners in progress.

What other issues do you think federal government needs to give priority in the petroleum sector?

There is need for Nigeria to add value to its crude oil extraction activities by reviving the refineries. It is not enough to say that Dangote wants to build a private refinery, even though it is a good venture. We must address the issue of what happened to the 18 licenses granted by government for private investors to build refineries about 10 years ago.Government should find out why any of them couldn’t build the refineries. This is what we expect President Jonathan to pursue to its logical conclusion because we need to find out their constraints and avoid a recurrence. Government needs to know if it would be better to grant the refinery investors tax holiday, lower tax rates or other necessary incentives. Nothing stops government from encouraging some of the 18 private refinery licencees to return or even go into merger to ensure that the country actually attains self-sufficiency in domestic refining of oil.

We should add value in the petroleum downstream sector, especially at the refinery, petrochemicals because Nigeria stands to gain a lot from the huge African markets if it fully develops its oil and gas industry. For instance, if we develop our refineries and dams, we could sell energy products – oil, gas, LPG, electricity to the sub-Saharan Africa and beyond.

Do you think the recent move by federal government to privatise the nation’s four refineries would be the best solution to the importation of petroleum products?

Well, it would make the refineries work better than they are working now. The biggest problem we have is inept management of public enterprises. It was the same thing that brought about privatization of the power firms. But, if I was consulted, I would have told them not to sell.

Why would you suggest so?

I don’t see the gain in putting about $1.6 billion dollars for Turn Around Maintenance (TAM) on the refineries you have penciled down for sale and $971 million for fuel subsidy. So, it is like they run counter in terms of policy. If you want to sell, let the investors buy it as it is and go ahead to develop. But what I see as the real solution to the country’s fuel import wahala is making sure that those investors that benefitted from the 18 licenses actually build refineries. That would liberalize the sector and ensure healthy competition as well as put paid to fuel importation and subsidy quagmire. So, instead of revoking the 18 licenses issued to private refineries, the private investors should be encouraged and supported by government to come back, but make sure they have good technical partners and access to credit. This will go a long way in developing the sector and transforming the economy because we have a huge energy market in Africa that is waiting to be tapped. Even the ECOWAS sub-region is equally a viable market place for Nigeria to exploit.

What is your take on the controversy trailing the alleged missing $20 billion and the government’s decision to embark on forensic audit to get to the root of the matter?

The decision to engage in forensic audit is good. What the government is doing is to assure that corruption is not condoned.

There is also the unresolved kerosene subsidy management scandal. What do you make of this too?

The way the kerosene subsidy was handled is a bit confusing. Of course, it is one thing to have high subsidy re-cost; and another matter entirely not to see any end-user benefit in that scheme. Petrol, for instance, is sold at N97 pump price in most parts of the country and everybody is benefiting from that. But in the case of kerosene, it is zero benefit to the end user. Between 2010 and 2012, about N686 billion was said to have been consumed by Kerosene subsidy. And the question remains, where did the subsidized kerosene go to? Who benefited from it?

We were told that the landing cost of Kerosene is N108.24k per liter, with a margin of about N13.22k, making it about N121.46k per liter. And when government set the price at N50 per liter, it means that about N71.46k, yet the cheapest you can get it across the country is N100 per liter. In fact, those that invested in small tanks across the country sold their products for about N600 per 4 litter gallon – that is N150 per liter. The only place one can get kerosene at N50 per liter is NNPC mega stations. Incidentally, speculators take advantage of that and line up jerry cans that can stretch kilometers which they resell at higher price. So, it creates room for corruption/manipulations which forces many consumers to patronize the ones sold at high price. If you calculate what it would cost you to go to NNPC stations and queue for hours before buying 25 liters of kerosene, for instance, you will prefer to buy it at higher price somewhere closer to your house. And I am sure that was why there was zero allocation for kerosene subsidy in the 2014 budget which prompted the National Assembly to begin to probe it. When you have such a scheme that is supposed to provide succour to the poor, a kind of safety net and it is not reaching them, you are supposed to ask questions. It is like the case of petroleum subsidy where some people collected subsidy claims but did not import fuel, while others imported but inflated the quantity figures. The kerosene subsidy is just like a ghost movement, where you can feel it but you can’t see or hold it.

If you  were the Petroleum Resource Minister, how would you have handled this subsidy issue?

Well, it depends on the angle you approach it. For Kerosene, NNPC is the sole importer now because most oil majors are shying away from it since it is not profitable to them. Due to delay in payment of kerosene subsidy, it tied down capital for them, and due to its octane amount, most people avoid kerosene. Outside the refineries in Nigeria, there are just two main refineries in the world that refine kerosene.

Another issue affecting kerosene importation is ATK, aviation fuel. Most times, marketers source kerosene at the subsidized price of N50 per liter, mix it with a little chemical and sell as Aviation fuel which is costlier and in high demand across the world. Aviation fuel is a lucrative business and many of them are taking advantage of the Kerosene subsidy to engage in this lucrative trade. They also use kerosene to dilute diesel and sell which is risky. So, the whole process is corruption-laden.

As petroleum minister, I will set up a monitoring unit composed of good heads and disciplined staff that would come up with a new policy that would ensure that any subsidy scheme would reach the end users. Racketeering can be stopped by ensuring that only those that are pre-qualified are given license.

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