A Review of the Nigerian Energy Industry

Cost concerns frustrating oil, gas projects —NNPC

NNPC05 August 2014, Lagos – Former Group Managing Director, the Nigerian National Petroleum Corporation, NNPC, Mr. Andrew Yakubu, recently had a chat with journalists in Uyo, Akwa Ibom State, on the state of affairs in the nation’s petroleum industry. He spoke about a number of issues including the state of the refineries, petroleum industry bill, bunkering, and sundry matters. SEBASTINE OBASI was there. Excerpts:

The rehabilitation of the refineries is becoming a recurring decimal. Also, government talked about building more refineries. What has become of that proposal?
Rehabilitation of refineries is of upmost concern to us. We have to extract value from the money we spend. We have been having turn around maintenance without getting value. One of the reasons is partly technical. We have seen a lot of somersaults in the past. Remember where we are coming from. We came from a point where the refineries were completely dilapidated. You cannot maintain an asset like that.

They cannot just pick the asset up immediately. You are going to face so many challenges, especially if it is a brown field that you are operating. These are assets that require continuous intervention. When you dump them for many years, it will take time. You can see how long it took us to bring Warri refinery to production. What we are saying is, if you want to bring the refineries to production, it is pertinent to bring the original equipment manufacturers, so that they employ their expertise in the maintenance of the assets.

That is what informed the decision we took. But a complete shutdown would not have augured well for our country. Unfortunately, we are faced with the challenge of these people accepting to come in to give the full benefit of their experience and expertise. We had to look for another way around it.

We don’t have to wait until we do the full turn around before we run the assets. The assets are operational as we speak. We cannot take all the assets at the same time. That is why Port Harcourt refinery was done first. Kaduna and Warri will soon follow suit. That is the sequence.

One of the challenges we have faced is the issue of cost. The initial estimate we got and what we have today is a substantial deviation, which is typical of any brown field refinery. Until you open the refinery you will not know exactly what is involved. We now have what is called variation.

We are handling a substantial deviation of what we saw, what we thought we will do and then because the people we have on ground today who are the sub-contractors and the other people who were recommended by the original builders were having challenges of extracting commitment on the scope, that is where we are today. We will continue with the negotiation. As soon as we finish with the negotiation and we are able to extract commitment, we will address the cost, the value we are going to get in association with the cost and the performance of the unit after the turn around maintenance.

What is the level of the operation of the four refineries?
The capacity utilisation as we speak today is about 60 percent. We have this challenge of crude supply. If you don’t maintain the pipeline that supplies your crude continuously, you cannot maximise the volume you put in. If you have to go through marine and you don’t have alternative sources, you are constrained based on the volume that those systems can deliver. That is where we are today.

The Escravos pipeline to Warri end is completely abandoned. Bonny to Port Harcout, the same thing. It is absolutely impossible. These are the two areas that constrain our capacity.
Talking about the green field refineries, you must have heard about the 18 companies that were given licences some years ago. The issue now is what do you want to do? If you want any player to build refinery, you must get the commercial arrangement right to be fair to any investor.

That is one of the key impediments to green field refineries. No private player will like to operate in a regulated environment without having a guarantee of his income. All the private players in the downstream today are either handling deregulated products or they are candidates for petroleum support fund. And any day you don’t give them, they stop. And then who do you call, you don’t call them, you call NNPC. And NNPC will have the attention and say yes sir. We therefore have to address the commercial arrangement. We have to address the business model to ensure that players are encouraged to participate and get us out of this predicament.

About $2 billion investments have gone into Brass LNG . What is delaying the final investment decision, as well as that of OKLNG?
We are global players in the LNG. As at last year, we had 10 percent share. We are doing 22 million tonnes out of the global consumption of 250 million. There is a projected growth of 400 metric tonnes by 2030. We have other key players that have lined up to come in. Yes, that is why we have the two projects on our drawing board. There are so many conditions precedent to FID.

Nobody takes any investment decision like this when there is one iota of doubt. That is how projects are all over the world. We have continued to develop the project. We have done the engineering. The tender package is done. But if one of your major players pulls out, we were at the point of taking FID when ConocoPhillips gave us the notice and as shareholders and investors you cannot ignore it, over $20 billion was involved. If you take 17 percent of that out, you know what that means. You also need to be sure about who the player is.

You cannot take an investment decision when you are in doubt. We have completed the tender. We were at the verge of taking the commercial decision to release the commercial result of the tender when this happened. Since last year, we have been discussing. ConocoPhillips was the technology provider and the licensor of the LNG project. At the point of the pull out, the implication was that they are going to pull out with their technical partners that were supporting the project. We were at the point of concluding the negotiation for the technology.

If you are a player in that field, you want to be reassured that look, we are going. I hope the zeal that you came with; that we are to go together on board, the technology you are going to give me, there is guarantee that I will have full support from you. We were on that when everything turned out to be a blessing. We are aware of the Angolan LNG. We are aware they are using ConocoPhillips technology. Therefore we had to learn from their lessons.

– Vanguard

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