Petroleum sector reforms lead revamped drive for new policy direction

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Wednesday, January 20, 2016 02:08 PM / ARM Research

 

We continue our series of cut-outs from ARM’s core strategy document – The Nigeria Strategy Report, but direct focus towards developments in the domestic oil sector in H2 2015 and outline their views on policy trajectory in 2016.

 

The Minister of State for Petroleum—Dr. Ibe Kachikwu—communicated NNPC’s adoption of “20 fixes” to reposition the ailing state-owned institution in the aftermath of his swearing in. According to him, the fixes are structured to resolve challenges such as asset integrity issues, crude oil and product theft, sub-commercial contracts, low capacity utilisation of refineries, subsidy management, and the overall inefficient business model of the NNPC.

 

Highlights of the reform initiatives include resolving the perennial JV cash call challenge by raising funds from international and private investors as well as replacement of Offshore Processing Agreements (OPA) with more efficient Direct Sales-Direct Purchases (DSDP). The switch to DSDP is intended to eliminate the activities of middle men, facilitate direct sale of crude oil by NNPC as well as permit express purchases of petroleum products from credible international refineries.

 

On the regulatory front, a new Petroleum Industry Bill (PIB) has been proposed. The bill splits the NNPC into two distinct entities: Nigeria Petroleum Assets Management Company and a National Oil Company (NOC) which will run as a private commercially viable company.

 

However, the process of redrafting the PIB would require large scale engagement with all stakeholders in the sector with the current minister of state already guiding to a one year time frame for execution. Thus, in spite of the underlying good intentions, leads ARM to believe that the elongated process involved will no doubt delay the passage of the legislation.

 

Twenty fixes, one ailing institution

 

 

Consistent with expectations, the Senate’s ministerial ratification accentuated ongoing reforms at the NNPC, with the new Minster of State for Petroleum—Dr. Ibe Kachikwu communicating NNPC’s adoption of “20 fixes” to reposition the ailing state-owned institution in the aftermath of his swearing in. According to NNPC, “20 fixes” is structured to resolve challenges such as asset integrity issues, crude oil and product theft, sub-commercial contracts, low capacity utilisation of refineries, issues of subsidy management, and an overall inefficient business model. In laying the foundations for the proposition, FG had ratified the trimming of NNPC’s top managerial hierarchy and operational directorates respectively from 122 to 83 members and 8 to 4 directorates, attempt to make the institution lean, efficient, business focused, transparent, and accountable.

 

According to the minister, the overriding objective is to ensure the institution remains a business concern in spite of global dip in crude oil prices.  So far, NNPC has reportedly reduced cost and restructured its corporate centre but there’s more to be done. According to NNPC, the process of realizing the end outcome would require renegotiating existing contracts including Production Sharing Contracts (PSC’s) strengthening of subsidy management, improving pipeline security, and enhancing transparency.

 

Table 1: NNPC’s “20 Fixes” reform proposition



Perhaps a more pertinent move of the FG—looking forward—is its resolve to end the perennial JV cash call challenge, given its impact on oil production and overall economic output in recent times.  To address this, FG expressed willingness to raise funds from international investors and the private sector to fund joint venture cash calls between NNPC and oil multinationals. According to the minister, this move will relieve the FG from bearing the burden of funding capital intensive projects in the upstream sector.


Importantly, this could also forestall scale down in oil production by oil multi-nationals who have often had to wait endlessly for the NNPC to meet its JV obligations. In this light, the proposed initiative ties neatly with FG’s resolve to raise oil production to 2.4mbl in 2016 (vs. an average of 2.1mbl for 2015).   

 

On the downstream sector, the minister communicated plans to privatize over 5000 kilometers of NNPC’s pipelines across the country in a bid to enhance efficient management of the infrastructure and reduce vandalism to the barest minimum. In addition to this, technical support and technical joint venturing models were also proposed for refineries.  Reportedly, with these models, refineries would be granted semi- autonomy to buy their own crude oil, refine it and subsequently make remittances to the Federation Account. In the interim, the corporation has outlined plans to replace Offshore Processing Agreements (OPA) with more efficient Direct Sales-Direct purchases (DSDP).

 

The switch to DSDP is intended to eliminate the activities of middle men, facilitate direct sale of crude oil by NNPC as well as permit express purchases of petroleum products from credible international refineries. The ultimate aim is to enhance PMS availability and reduce its cost.

 

To be clear, the corporation noted that only bona fide owners of refineries who have scaled through due diligence and analysis by NNPC appointed consultants will be engaged in the DSDP transactions going forward. 

Figure 1: Capacity Utilisation across Nigerian refineries



Domestic environment to benefit from reform thrust…..

 

 

As premise for this inquiry, we restate that moving that tackle JV cash call challenge represented one of the most pivotal economic game changer of the current reform polices given that JV partnerships accounts for over 60% of total crude production in Nigeria. On other fronts, NNPC is being strategically positioned to lead the charge for improved symbiotic relationship with host oil communities—in a development that should mitigate vagaries associated with constant unrest in oil producing areas. However, the resultant impact on government revenue remains slightly blunted by OPEC’s quota restriction as well as continued declines in oil prices. Whatever the case, the greater insight into oil reform intent is expected to attract over $20 billion in foreign investments in 2016 which should facilitate funding for major oil projects.

 

On other fronts, while the switch to DSDP and ongoing restructurings in local refineries—with Kachikwu guiding to ~50% cumulative capacity utilisation as early as January 2016—looks set to re-write recent history of incessant PMS scarcity around the country. This should have the two-pronged effect of stemming harsher cost of living for the populace as well as keeping cost of running businesses contained in the near term. Besides, the attendant greater availability of the product could also guard against major production downtime akin to that of May 2015 which contributed to lowest GDP growth, in more than five years, of 2.35% in Q2 15. Beyond these, the more benign regulatory environment that has seen downstream retail margins expand 50bps further provides backing for FG’s expectations for some positive outcome in the coming period.  

  

In closing, the more efficient regulatory handling could facilitate soft landing for Dangote Refinery as it looks to ease into operations in December 2017—one year ahead of the earlier scheduled December 2018 date.  The revision of the business’ commencement date is consequent upon the early completion of preliminary works at the refinery. Interestingly, the United States Trade and Development Agency (USTDA) had, in August 2015, already signed an agreement with Dangote Group for a grant of $997,443 for the training of Dangote Oil Refining Company’s personnel. The USTDA grant will fund a multi-year programme to train over 100 Dangote Company staff on refinery fundamentals. Through the training, the Dangote staff will be able to operate and maintain the Greenfield Refinery in Lekki, Lagos.

 

…though investors remain wary of PIB

 

In a deft move, FG approved the splitting of the long-dragging Petroleum Industry Bill, which is now styled “Petroleum Industry Governance and Institutional Framework 2015” with a focus to creating commercially oriented profit driven entities. Amongst other things, the proposed bill is reportedly structured to reduce the powers of the minister and split the NNPC into two distinct entities: Nigeria Petroleum Assets Management Company and a National Oil Company (NOC).

 

Whilst running as a private commercially viable company, the NOC is billed to retain its revenues, deduct costs, and pay dividends to government. In addition, the minister disclosed plans to remove the contentious taxation element of the bill to speed up its passage. According to Kachikwu, the country loses an average volume of investments of about $15 billion annually due to the non-passage of the PIB. FG further affirmed that quick passage of the bill will reduce overall uncertainty in the sector. However, this process of redrafting the PIB would require large scale engagement with all stakeholders in the sector with the current minister of state already guiding to a one year time frame for execution. Thus, in spite of the underlying good intentions, we believe the elongated process involved will no doubt delay the implementation of a piece of legislation that seeks to establish a new legal framework and regulation mechanism for an industry that has been scarred by commercial-scale theft, sabotage and corruption.

 

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