A Review of the Nigerian Energy Industry

Deregulation of oil industry, only way to sustain economy – Alison-Madueke

Nigeria's Minister Diezani Alison-Maduek

Oscarline Onwuemenyi 19 March 2014, Sweetcrude, Abuja – Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, has emphasised the absolute need to deregulate the petroleum  industry if the nation aims to survive economically.

She said that it is only through a deregulated oil and gas industry the country could achieve its aim of stemming the negative impact of on-going divestments by some multi-national companies. 

Alison-Madueke, who spoke Tuesday in address at the on-going Nigeria Oil and Gas Conference in Abuja, also called for a repositioning of the nation’s oil and gas industry, noting that the focus of the industry should turn from oil production to gas.

She said: “In terms of downstream deregulation, now that the power sector reforms are well underway, the Nigerian government’s commitment to restructuring the oil and gas sector remains unwavering. In this regard, downstream deregulation remains an important part of the reform framework going forward that seeks to resolve financial sustainability and investor confidence in this vital sector of the national economy now and into the future.

“We are aware that the government has sought to deregulate the downstream sector and continuing regulation, we are aware as well has negative effects; it is fiscally unsustainable, it is resource demanding, it discourages investments and principally, it benefits the rich, not the masses in the society that we intend to reach in the first place.”

She added: “It is true that deregulation remains the only way in which capital investment can be encouraged and new employment opportunities created for both foreign and local openings. At the same time, we are aware that been a democratic society, that there has to be a balance among different policies and processes of government and the needs and desires of the people of Nigeria at all times and of course, Nigeria strives to keep that balance at best we can.”

Regarding positioning the gas sector, the Minister observed that if the first 50 years of oil production in Nigeria from 1958 to 2008 can be regarded as the oil age, “I think it is safe to say that the next 50 years would be considered if not now then in retrospect in the future as the age of gas”. 

“Government commitment to gas utilisation is reflected in the gas master plan and gas regulations that were issued in October 2008 which laid the framework for reforms in the gas sector which are basically three-pronged; domestic supply obligation, gas pricing framework and gas infrastructure blueprint,” she added.

The Minister noted that the annual NOG has “now become quite an important event in our annual calendar, to discuss the current status of our industry, the achievements made by the current administration in the sector, the roadmap for moving the industry forward.”

She noted that, “The oil and gas industry in Nigeria has always been in the center stage of public discourse and this is to be expected given that it is the mainstay of our economy in terms of export and foreign exchange earnings.

“Recently of course, this public discourse has taken what we might consider unprecedented negative overtones but again, there are pros and cons to everything in the scope of transformation and reformation programmes and the changes that Nigeria is rapidly going through at this time and I think that even in the phase of these negative overtones, there are great possibilities and advantages to be found in the inherent challenges and I think that that is the way we have to look at them and face them as we go forward.”

Despite these challenges, she said, it does present an opportunity for increased transparency, increased accountability and responsiveness in the oil and gas sector of Nigeria today.

Alison-Madueke observed that in terms of challenges, with regards to security in the upstream sector of our industry, the nation has been subjected to the menace of pipeline vandalism and sabotage on an ongoing basis for at least a decade but it has become much more prevalent in the last few years as we have all seen. 

“In 2013 alone, all the major crude oil export pipeline systems including the Trans-Forcados line, the Obangwere, Temidaba-Brass line, the Nembe creek line and the Trans-Niger pipeline were severely vandalized and at different point in time sabotaged,” she said.

She added that, “The Bonny-Escravos line that convey crude oil to NNPC refineries were not spared either, needless to say that pipeline vandalism and sabotage create significant losses for the industry and for our country, these include but are not restricted to the direct and indirect cost for provision of security, crude oil and petroleum product losses, the loss of production, environmental pollution and degradation and the associate remediation costs to that and of course resulting escalation of project implementation cost cycle.

“These losses in turn add pressure on the adequacy of budgetary provision for the oil and gas projects within the sector. In spite of these setbacks, I think the country has managed to maintain an average crude production of approximately 2.3mbpd in 2013, with an estimated 300,000 barrels of deferred production.”

Still, she noted, Nigeria remains Africa’s largest producer with the inherent capacity to boost production to over 3mpd from renewed operations in divested assets and planned deep-water projects. 

According to her, while there has been “some concerns over divestments that are going on by the oil majors in our shallow water and some of our onshore assets, it has created an opportunity for much greater entry participation of the indigenous private sector.”

The Minister remarked that apart from security challenges, the industry has also suffered from limited institutional capacity, poor funding of investments, high technical costs, obsolete laws, outdated fiscal regimes and infrastructural constraints with particular respect of course to gas commercialisation.

“In terms of institutional incapacity, it is a well-established fact that the petroleum laws in the country were mainly designed for oil production with limited coverage for gas. On the other hand, gas been less fundable compared to oil requires complex commercial and technical regulations designed to ensure its commercialisation.

“As the country moves towards liberalising this sector and encouraging new private investors, new regulations along with guidelines and strong regulator are obviously needed. Capacity enhancement in areas such as open access routes, network codes, tariff methodology, especially for oil terminals and jetties are urgently required if we are to better manage the interface between technical and commercial regulation which is currently rather poorly understood,” she stated.

She added that in terms of funding, the competing fiscal needs by other sectors of the economy have meant that the joint ventures have suffered for a long time and we are aware of this that despite the fact it yields much higher benefits to us than the production sharing contract. And as oil prices have risen, so have costs escalated, most of our oil producing facilities are actually in our onshore and shallow waters and they are ageing and would need to be refurbished or replaced; additional funding will be required to enable these facilities meet current fire safety standards.

“Lack of financial depth in domestic capital market and non-commercialisation of our national oil company are critical factor limiting access to domestic and international capital financing.

“In the downstream, there is also the need to establish a critical oil and gas infrastructure protection squad with the responsibility for dealing with crude and product thefts, vandalism, outright sabotage and general criminality in our sector.

Additionally, 5000km of product pipeline network that was built in the 1970s are now virtually unusable in certain areas and this affects product distribution as we have all seen.

She noted that the Petroleum Act 1969 as amended and the Petroleum Profit Tax 1959 are the two main laws for the oil and gas sector both of which are mainly for oil and gas export and exploration. The reform agenda of government requires a complete overhaul of these laws to reflect 21st century realities.

The growing importance of gas in the energy mix both globally and locally requires a new focus on creating robustness in the fiscal and contractual agreements for gas to support Mr. President’s agenda for gas particularly in relation to the power sector and so the proposed PIB is meant to give a holistic legislation that as you know replaces 16 existing laws in the Nigerian oil and gas industry and should when promulgated into law, proffer the much needed clarity, transparency, and optimum revenue potentials for the Nigerian state and I do believe a lot more protection in terms of protection on existing investments and investors.

“We have managed to maintain unprecedented stability up till very recently in the supply and distribution of petroleum products across the country. The recent episodes of shortages which are unfortunately in the country is as a result of combination of supply glitches created I think by some false perception, panic buying, hoarding and diversions and also rumours of increases in prices of petroleum products which somehow have refused to go away.

“I think that it is important to state in mitigating crude oil theft and pipeline vandalism, there is of course a dire need at this time to enhance Nigeria’s efforts to stem the scourge thereby increasing government’s revenue,” she stated.

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