A Review of the Nigerian Energy Industry

Cutting costs will improve efficiency, profitability – Kachikwu

14 October 2015, Lagos – Recently, the Group Managing Director, Dr. Emmanuel Ibe Kachuikwu, had an interactive session with journalists in Lagos. A Q&A session ensued as captured by Sebastine Obasi. Excerpts:

Dr.Emmanuel Ibe Kachikwu, NNPC GMD-480x500
Dr. Kachikwu

What is the NNPC going to do about the joint venture contracts, some of which have been taken away from the NPDC?

They are under review. People signed contracts, and what I have tried to do is to review those contracts and get the best value yield. When you enter into an operatorship agreement for a certain number of years and people go ahead and make some investments, sometimes we presume that you just cancel it and walk away like that. It has some financial implications. What I am doing is to review each of those contracts, get the best value we can from them. We are now migrating from sole operatorship of third parties to joint operatorship between them and NPDC (National Petroleum Development Company).

Basically, we are setting up operatorship clubs in which both parties have to meet and take decisions together. The reality is that NPDC lacks the capacity. They do not have the funds for their cash calls.  They do not have the skill set. They do not have the speed because of the nature of bureaucratic bottlenecks, some of which are being worked.

For example, the very first week that I resumed, one of the operators called me to say, “Look, we have a field that has been shut in for two months. Every day I come to talk about it.” What was the issue? It is about community work that required a payment of about $3 to $4 million. The contractor he has offered to pay for it and be reimbursed later, so that he could go back to production.

For somebody coming from the industry, I did not find it funny, because I cannot imagine a situation in which a 50,000 barrel production field would be closed because of a $3 million payment. It does not make sense at all.  Of course, I issued an instruction like man who was coming from outside. At Mobil, when I issued instructions they are carried out within 24 hours. I issued instruction that all necessary actions should be taken to ensure that the agreements are signed and the man get paid. They said, “Yes sir.”

Two weeks later, when I called the man to ask how production was going, he said nothing has happened. I quickly called my people and said:”We are not going to leave the office for two days until the man is paid and the field is back into production.”You can’t leave that kind of authority with NPDC and focus on the emotional aspect. Why are third parties operating? How do you take it back from them? I can tell you that you can’t take all of them. But the efficiency and approval levels are such that you find a lot of those fields shut down. We want to ensure that if you have a contract model, you follow it to the letter; we review it consistently and make sure we get value.

What I have done is to begin to migrate from the sole operatorship to joint operatorship. Bear in mind that NPDC is the owner of the assets. Even when you are operating, in most cases you are operating as a contractor for NPDC. It is actually an anomaly to think that somebody else has taken over your operatorship. We are doing more of sanitising the process.

What is NNPC doing with regard to having more women at the management level of the Corporation?

I am focused on that. I know it is a big mind set change to have a lady as the head of PPMC (Pipelines and Products Marketing Company). I can assure you I have been vilified a lot for doing that with all kinds of write ups. I am not bothered much. After the history of PPMC, we needed somebody with integrity in terms of character, probably more than skill set, because skill set is provided by a lot of executive directors, who sit on the Board of PPMC.

What we need is a good manager, a good person who understands the system and somebody who you believe at least has integrity and for a change, let a woman run it so that we can have some sanity. I am happy with her. I will continue to provide her with the technical skills that she requires to succeed. I know there are lotsof people who want her to fail so that they will say to the GMD, “we told you so.” But I know she is not going to fail. She is doing a good job.

There are lots of areas where I think women are very critical, such as corporate social responsibility, CSR, areas where you have a lot of passion, but also in engineering. I met a lot of women at the refineries, who are doing very well. We are going to continue to identify them. The problem has been that we have not a system of evaluation that throws out people. People only get noticed when they come within the purview of their immediate supervisor. We are putting a three-tier system of evaluation.

We are looking for fast trackers, people whose performances have shown that they stand out from the crowd. Those are the future of NNPC. We are identifying them. There is an equal platform to put both male and female in that club.

What is NNPC doing about the availability of kerosene, which is mostly used by the common man and what are you doing about rural penetration?

Kerosene is not my product, for two reasons. One is that it has its own toxic effect. Increasingly, we are beginning to hear that because of the subsidy, some people are using it for aviation purposes. There is a lot of fraud involved in it. More importantly, I lose a lot of money when I do kerosene. I don’t have passion for it right now. Ultimately, there is enough gas in this country, for us to be able to have every family revert back to cooking gas. Before the end of next year, we plan to give out free cylinder to every Nigerian family that wants it. Once we do that, we force the NNPC retail business to expand so as to ensure that gas is available everywhere for people to fill their gas cylinders.

It is a project the President is passionate and excited about. We are going to see more of that. I hope that by the end of next year, we would have reduced dramatically the quantity of kerosene that people use in cooking. As we do that, we begin to step out of the kerosene business, because it is costing us a lot and begin to show profitability in the other index.

As for rural penetration, we are working on a particular penetration model under our CSR that need special interventions in various areas. For example, look at what we have done in the power sector, we have some dramatic work. People probably did not notice that in the last two months, power production has been very good. The reason is that the injection of gas has increased by 200%. About 80% of that is being done by NPDC. As at today, we have 2,000 TCF (trillion cubic feet) stranded gas that if we had the transmission lines, we will move our power production from 4,300 MW to about 6,000 MW.

Another thing we are thinking about is how to invest N40 billion in building those transmission lines. Once we do that, we can now make use of the 2,000 TCF of stranded gas. As we do that, we need to look at the unique power spectrum potential for each area. Those are part of the penetration. As you go to the North, for example, solar for me is key.

All the sun shine was given to us by God for a reason. How do we harness that so that the dependence on national grid will begin to drop? As you go to the East, you have coal. So, there are all kinds of models that we are looking at. Also, if you look at the distribution of retail business, less than one percent are women. The best penetration in the environment is provided by women. They are the ones that sit tight and drive the economy. How do you ensure some of those opportunities are given to them so that they can drive penetration? Men tend to be a lot more mobile.

How do we get back to the vibrancy we used to have in the upstream sub-sector, given that most of the rigs have gone due to little or no exploration?

We will deal with the issue of external financing to deal with the arrears and the immediate gaps. It will be encouraging to put in money. One of the things that I will do very quickly as soon as I settle down is to go to the Headquarters of the oil companies and get commitments on investments. We need to reduce the contracting cycle from 24 months to six months.

That is a tall order!But we can accomplish it. We can accomplish it by working with the Nigerian Content Development Management Board, so that we do not finish our process and they begin theirs. We have also been able to get approval from the President in terms of the Public Procurement Act, to enable us get exemptions in certain fields. The essence is to reduce delay. As you know, more recent interpretation from the Public Procurement Board is that the NNPC Board should not be the approval level for NNPC contracts. It should be NNPC GEC Group.

If you take all that together, you will bring down the contract circle to roughly 12 to six months. That is the target we are looking at. So, contracting time will improve. Efficiency will improve. Hopefully, funding will improve. The key though is that we do not want a recurring decimal of indebtedness. The problem in the sector has been that on one hand, somebody says to you, “you are owing certain amount of money.” On the hand, he says to you, “keep doing projects.”

They do not go together. Usually, if you take a loan as an individual, you try to hold down and pay before you move to the next. As much as we want exploration, all these things will expand. The first and immediate focus for us is, say in the immediacy, what are the projects that will enable us fund, pay and be current in terms of our financials. Two, who are those willing to work with us in a long gestation period to put in investments that take a lot of years to mature?

As long as you get them in a good value chain basis, then we will allow them do it. Ultimately, if you do not have credibility within the financial system, you cannot run the oil industry. There are lots of other issue affecting investments – security for example; people get kidnapped always, such that workers do not want to work here. Consequently, things get too expensive. So, we need to drive down the cost of production, drive down the issue of security and get to a point where the oil companies can see a reasonable amount of passion both in the government themselves and the projects that they do. Right now, the way it is being worked on is very minimal.

We have our unique challenges in Nigeria. However, one of the things going for us is that the return on oil sector investment is still very good. If we can deal with those things that create difficulties for the oil companies, I will focus on that, both on short and long term basis. I am also going to look into counterpart commitments for companies that are healthy.

As for lay-offs in the industry, a lot of the lay-offs were contractors’ staff, a sort of third party staff. The lay-offs were as a result of down turn in the industry. When the price of oil was about $100, companies expanded massively in expectation of huge projects, but in a $40 situation, those businesses may not survive. There is a natural attrition. What we need to do is to expand the oil sector by bringing in and domesticating the external contracts. We also need to expand the service zone of the oil sector and internalise them so that we can capture the skill sets that were being done by the third party contractors.

We also need to look at the cost elements and see how best to drive down costs, by reducing expatriates and getting more of local hands. We are looking at a number of models. If you look at NNPC today, the staff strength is about 30,000, with the refineries alone in the region of 8,000. If I were to run the corporation as my father’s business, I would not need 30,000 people. Unlike the majors, who are bent on maximising profit, we look at some other reasons why we have to keep our staff.

What I am doing in this case, is to unbundle so as to create a huge amount of income streams. Subsidiaries that were not profitable must be profitable this time around. In getting them profitable, you are creating new career lines. My emphasis on the General Managers today is for them to tell me what they want to turn around and I have my own plans.  If you tell me you want to run IDSL, how do you grow it from an average of $500 million earnings a year to more than $1 billion?

So, we share those stuff and understand the goals. Managers in the system, in a very challenging environment must put in different thinking caps. They have got to jump out of the box. It is no longer business as usual. As beautiful as our relationships might be, if you cannot add value, you need to give way to those who can add value. That is the reality.

What is happening with the review of PSCs?

There was a lot of energy around it during my visit to France with the President. If you look at some of JOAs (Joint Operating Agreements), for about 20 years, they have not been looked at. The PSCs (Production Sharing Contracts) also have not been looked at for about 20 years. I know that contractual certainty is key for foreign investors to remain here. I am not looking at the issue of chasing them out.

What I am saying is that we need to look at existing contracts and ask:Are they being well interpreted? Are there areas where we can fine tune things, even when the contract has given us the right to go in? There are also areas that the joint venture partners have very serious concerns about how we operate the PSCs and JOAs. It is not a one shift catalogue of issues on government’s side, the foreign investors also have their own issues. We will like to begin to engage and say, where are those issues? What do we need to do? What are the quick wins?

I obviously will not touch fiscal regime at a time when the price of oil is very low, if on both sides we cannot sit down and say it makes sense to. And they are not unreasonable I think. A lot of them will gladly tell you that on this area, you will do better, on that area, you will do better. Nigeria continues to be one of the toughest fiscal environments to operate.

If I don’t review a $4 billion contract properly, where the $4 billion contract would have been done at $2.5 billion, it does not require a change of fiscal regime to add chain value. When I say review, it is not in the sense of contractual modelling review. It is in review of operations of the PSCs and JOAs to ensure that we are really ploughing back on the value chain. And obviously with the PIB (Petroleum Industry Bill), we will look at the fiscal conditions.

I don’t know where PIB is going. With the existing laws today, we can run the oil industry. That is not to say the PIB is not needed. Of course it is. But we cannot continue to say, the absence of PIB is why things are not being done. I don’t have control over the PIB. I am not a legislator. However, I should be able to sit down with investors and the majors and find out, what are their concerns?

How can we get them better? What do we do to ensure that you feel comfortable and what do you give back to the country that ensured you are comfortable? Those are the kinds of conversations that we will be having with them at their Head Offices, as I visit them. I think there is a general will power to do well.

Why were the oil tankers banned and are there no plans to bring them back?

I was not here when the ban was placed, but  I learnt that there were complaints that a lot of the crude oil tankers that come into Nigeria, rather than load what they are supposed to load, they were doing what is called toping. By the time I came in, a lot of the tankers were not carrying our crude, as we were having inability to meet our haulage requirements, because the tankers were already full. I therefore took the position to the President to cancel that, with some provisions. We have not asked oil tankers to give us guarantees or comfort letters.

We have asked oil companies that licensed those tankers to ensure that they give us a comfort letters, such that if anything happens, they should take responsibility. What that does is to compel the oil companies to be sure of the quality of tankers they use. I am pleased to inform you that almost all those companies have filed in their letters of comfort. So, most tankers are back to lift Nigerian crude. It is not really a problem.

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