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The Illogical World of Nigeria’s Oil And Gas Industry

Oil & Gas	5389 VIEWS
Oil & Gas
5389 VIEWS

Tuesday, October 16, 2018 10.08AM / OpEd By Tope Fasua

Nonsensical, simply means (because) it makes no sense – its synonyms include meaningless, senseless, illogical, unmeaning. Nigeria’s oil and gas industry is her mainstay. So the government says. I hear that most people gunning for the position of President of Nigeria are doing so just to lay their hands on that industry. It’s no wonder the current president is also the petroleum minister; a position of responsibility that has however not improved that sector much.

Indeed all is going on as usual there save for one hopeful lucky break in the gas sub-sector. For one, Nigeria’s petroleum industry is NOT as profitable as we make out, for several reasons. Certainly nowhere near as profitable as to be able to afford the tastes we have now developed and the way those who run that industry award themselves with crazy salaries and allowances, foreign trips, five star medicals and everything in between. Nigeria has therefore been building castles in the air thinking it has a profitable and robust industry upon which we could build magnificent castles and establish greatness. But if we were wise, we will scale down our spending and expectations immediately.

Why do I say these?

First, let’s Hear Kachikwu in a news report published on August 7, 2017:

“When people say we have a bit of time to change, we really do not have any time. At best, we probably have not more than five years to make very dramatic decisions in this country in this field… The issue is the fact that we must deal with the inefficiencies within our system, whether it is embedded within our national oil company and parastatals or the ministries, or embedded in the private oil companies. The reality, whether we accept it or not, is that every side has benefitted from this lack of efficiencies. A country where after the prices of crude oil moved past $20 – we couldn’t even enforce the PSC requirement terms that could enable us to negotiate with the multinationals to plough back what has been calculated as close to $60 billion of monies paid to the oil companies that didn’t get into Nigeria because people didn’t do their work. That is the level of inefficiency that we had…. For countries that have not saved and we (Nigeria) haven’t saved – we haven’t saved sufficiently. I was meeting with my colleagues from the UAE and Saudi Arabia and sometimes, I am ashamed to say what I have in my reserves because when I am celebrating $30 billion, they are celebrating reserves in excess of a trillion dollars in some countries. So, I wonder what happened because we earned fairly close to what most of these countries earned… but we did one thing: we sucked out a lot of our money; a lot of fraud; a lot of diversions; a lot of our money is sitting in countries where we can’t even find them and even when we find them, they give us conditions under which they are going to return this money. We went through processes recently with a country that wants to return our money giving us terms where the money will be invested. This was our money, by the way, but you know, we so belittle ourselves with what we have done with oil proceeds that nobody in the world can give us respect”.

I recently appeared at the Development Dialogue Series organized by Mej Obada and Oke Epia at the prestigious Eko Hotels for Presidential Aspirants. The dialogue was focused on the oil and gas industry and afforded me the opportunity to further research the industry. I learned that there is a recent 70% dip in capital investment in that sector, caused by uncertainty around the upcoming elections as well as the controversies around the Petroleum Industry Bills which have now been split into four; an administrative bill, a fiscal bill, a bill to take care of host and impacted communities, and a governance bill. I learnt that Nigeria is actually a gas country with a little bit of crude oil, as we presently have around 37.2billion barrels of crude in reserve, but a proven 5.29Trillion cubic meters of gas. Another British Petroleum statistical survey has it that we have between 300 to 600 trillion cubic feet of gas. The resources seem to be endless but we actually have absolutely no input in the technology around exploration.

After 58 years of independence and over 60 years of discovering crude oil in commercial quantity, Nigeria cannot extract a barrel of crude oil on its own, with its own home made technology, competence or implements. Our intellectuals have not assisted us in this area. If the foreign oil servicing and production people upped and left today, we will be as stranded as a stark illiterate fiddling with the engine of an aeroplane. The shocking thing is that we are still extremely profligate as noted by Kachikwu above. It seems that the average Nigerian sees nothing wrong in totally wrecking a place, an institution, a whole system, a country, generations living and yet unborn… even a whole human race, just to satisfy immediate gratification. The petroleum minister has proven to be absolutely ineffectual or even conniving in the performance of his duties. $60billion is down the drain according to Kachikwu, and it’s as if nothing has happened.

Now let’s talk some technicalities. These are facts that Nigerians are used to anyway.

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Nigeria used to produce most of its crude oil - about 97% - using a Joint Venture system in which we contributed our quota and the foreign oil companies contributed theirs while we later share profits. But profligate Nigeria, and her maniacal managers of the oil sector, ensured that we couldn’t meet up with paying our Cash Calls… meaning we were willing to enjoy the goodies but never wanted to pay our share of obligations. Under Kachikwu (i think the man meant well for Nigeria), we started to move towards what is known as Production Sharing Contracts (PSCs), which is essentially a scenario where Nigeria takes absolutely no risk and contributes nothing in capital to the exploration and production, but shows up in the end after all the work has been done, to collect its share of profits. Trust the white man. He is too smart for us. And so many PSCs have failed in the past or Nigeria gets shocked by how little it gets from its Smart Alec idea. According to NEITI (Nigerian Extractive Industry Transparency Initiative), Nigeria got only $38Billion out of the $104Billion proceeds of crude oil. This is like 36%. That is our true portion, so we need to correct the usual error among our compatriots, who simply multiply our daily total OPEC-quota production by the current price of crude oil to determine ‘what Nigeria is getting’ on a daily basis. Crude is also sold ahead than on the spot market.

The reason why we get relatively so little from our crude oil resource is simply that we have no technical input in the production. We own none of the technologies, and in a capitalist world, those who have the advantage utilize it to the limit. After decades of mismanagement and absent-mindedness we switched to PSCs thinking we were smart. The first few trials showed us that we can never beat the white man. We were and are still beaten down in that industry, but it is our fault. We cannot eat our cakes and have it. The loss of $60billion that Kachikwu spoke about in the quote above, relates to contracts that we signed in 1993 with a clause for review after 15 years. But since 2008 we have not done that review. The same contracts were meant to trigger a review if more than 500million cubit feet of crude oil is found in any one location, and if the price of crude oil goes higher than $20. Yet we did not review. In 2008/9, under Yar’Adua, the price of crude oil went as high as $140 and he was the only one - working with late Rilwanu Lukman, who tried to review those contracts. Since Yar’Adua died no leader has tried anything useful. Even the petroleum industry governance bill which was advanced, was stepped down by the president, who is also the petroleum minister. Lest I forget, a major avenue for loss of revenue Nigeria’s oil sector, is the clause that allows the international oil companies (IOCs) to pay zero royalties for all exploration deeper than 1,000 metres since 1993. Most IOCs have moved deep-sea since technology has advanced, and Nigeria officially gets $0.00 in royalty from such drilling, till tomorrow. Of course in 2009/10, the major oil companies almost swore that the PIB will never see the light of day. The non-passage of the bill is the chief reason why Nigeria cannot even run a reasonable budget for its people; why smaller countries like Angola generate twice our revenue yearly!

The Nigerian Natural Resource Charter (NNRC) published a report recently wherein they observed that Nigeria loses N3.8Trillion to the mismanagement of the sector, including the inability to control the amount of pilferage of that natural resource. Nigeria loses anything between 300,000 and 500,000 daily to pilferage. Our non-investment in capacity development where it matters (technical research and development) means that we are watching as shale oil made its debut and the USA became by far the world’s biggest producer and a net exporter. Nigeria has shale oil too - especially in rock formations around old abandoned rigs. We shall also wait until the day the white man decides to develop our shale oil and gas deposits, just as they will have to help us exploit our trillions of gas deposits. That is who we are; we bring no innovation.

But we must quickly caution ourselves. Our flamboyant tastes are ahead of us in that sector. The illusion that we are rich just because we have crude oil has created fundamental, long term problems for us. Not only do we get very little from our crude oil - as the IOCs who own the technology get the lion share - we are also stuck with a scenario where crude oil hurts our economy whether prices go up, or stay down. When prices are down, our governments say they have no money to run the economy. We slip into a quick and deep recession. We produce millions more of ‘food poor' people. When the price of crude climbs, since we get only 35% of the proceeds, we also suffer as the price of importing refined petrol and diesel rises. The current administration jerked up the price of fuel from N97 to N145 and damned all consequences. We thought the agony and rigmaroles were over. Now we hear that the landing cost of petrol is N205 and that we are underpaying. The fuel subsidies, now rechristened ‘under-recovery’ has hit the trillions again.

There may be another price hike. The deregulation of the industry has failed once more, not because deregulation is not the right way to go, but because the benefit of the resource has been eaten up by mindless mismanagement, thievery and recklessness. The private-sector Alecs are out on the kill again, milking Nigerians dead. My research shows that in 2017, Nigeria spent $6bn importing fuel for 9 months. This is $9bn for one year. If we average that out for 3 years, that is $27bn. Yet we earned $38bn in 3 years. If we back out the cost of running NNPC and other subsidiaries, Nigeria probably gets less than $5bn from this famous crude oil on a yearly basis, yet we spend like drunken sailors and successive governments have kept NNPC as a slush fund! They stretch their hands and take money from there like some emergency bank! Again what is the essence of Buhari being the minister there? What are we doing differently?

I did an analysis I had longed to do. It is titled “How Many Barrels Does it Take?”. I tried to cost everything we buy in terms of crude oil. I quickly realized that crude oil is not too expensive. Though that resource traded at $3.00 for more than 100 years before the unprecedented spike to $12.00 in the wake of the Yom Kippur War of 1973 - and the formation of OPEC, I wouldn’t say it is such a goldmine even today.

If a barrel of crude oil sold for say $80, that is N24,400 in today’s money if converted at the official N305. This is gross value, without taking cost of production into consideration. A simple phone, worth N200,000 in the hands of some lucky girl on our campuses, is 8 barrels of crude oil. An official Toyota Prado bought for some ministry director at N60,000,000 is 2,500 barrels of crude oil. The new EFCC Headquarters - which the Chairman built for a bargain price of only N24billion - cost a tidy 1,000,000 barrels of crude oil in today’s prices even though they built when prices were much lower. The budget for maintaining Aso Villa this year 2018, at N4.8Billion, is a tidy 200,000 barrels of crude. Ditto, in 2017, Nigeria budgeted N1.9Billion for clearing sewage and fumigating Aso Villa. This is a 80,000 barrels of crude oil. We can do the remaining math(s) ourselves. The fact is that there are 190,000,000 Nigerians to be fed, clothed, housed, transported and secured with this crude oil. The truth is also that out of every 1,000,000 barrels drilled, only 350,000 belongs to Nigeria. So at an average of 2,000,000 barrels daily, ours is around 700,000. It is from this we must back out the cost of running our oil and gas parastatals, and also the fact that we import refined oil worth at least 70% of the value we get from exporting. We must be insane to spend the way we do.

Enough already. Let me quote a bit from Jeffrey Sach’s classic article “Pass the book; hold the oil”, which is trending again; an admonition to countries like Nigeria in particular, to remind us that he who owns the technology owns the resource, and he who is knowledgable can create any resource by using his brains. Enough of the nonsense about ‘awa oyel”. There is no ‘awa oyel’ without the Oyibo man’s technology, and as at now, the Oyibo man is doing us the required abracadabra in that sector, in addition to our self-inflictions. Until we talk to ourselves and gradually - yes gradually - build our own capacity, there is no hope. We haven’t however shown that presence of mind, or capacity for contrition, for foresight. No, not we. We spend it all once it passes through us.

Hear Sachs: quoting Schleicher, “knowledge and skills have become the global currency of 21st-century economies, but there is no central bank that prints this currency. Everyone has to decide on their own how much they will print.” Sure, it’s great to have oil, gas and diamonds; they can buy jobs. But they’ll weaken your society in the long run unless they’re used to build schools and a culture of lifelong learning. “The thing that will keep you moving forward,” says Schleicher, is always “what you bring to the table yourself.”

It’s not all gloom though, in that sector. Currently PSCs account for 44.81% of our production, Joint Ventures 31.35% and Local (NPDC and alternative financing) accounts for the remaining 24%. As at 1998 - JVs did 97% and PSCs, 0.5%. Nigeria has made some progress with local content actually. This must be counted as a gain. The other great thing going on in that sector is the drive to end gas flaring by Year 2020. I hope the Minister and NNPC will steadfastly follow through. They intend to tie new contracts for drilling to plans for utilization of gas, while also jerking up the penalties for flaring. That is commendable. Let us add that as a feather to Buhari’s cap; fair is fair.

Still, we are living on borrowed time as a nation. We are surviving on loans. We have been patching this economy along for so long. This crude oil economy is totally broken. No wonder Adeosun borrowed $33bn in her 3 years as finance minister. But how, and why, does an oil-drunk serial-borrower country get a few of her people to live like oil-sheikhs everyday, while majority remain in the Stone Age?

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About the Author

Tope Kolade Fasua is a Nigerian businessman, economist and writer. He is the founder and CEO of Global Analytics Consulting Limited, an international consulting firm with its headquarters in Abuja, Nigeria. He is the presidential candidate of the Abundant Nigeria Renewal Party (ANRP), which he founded.