31 October 2016, Lagos – The Chairman, Integrated Oil and Gas Limited, Mr. Emmanuel Ihenacho, speaks with ’FEMI ASU about petrol pricing, recent divestments, the nation’s refineries, deregulation and other vital issues in the downstream sector of the oil and gas industry
What is your assessment of the state of the Nigerian downstream oil and gas sector?
It is fraught with a lot of risks. There is a lot of fine-tuning of policies that need to be done so that people who take risks in importing petroleum products for local consumption don’t over-expose themselves. There are major issues in relations to pricing. For instance, you know that historically people have been advocating that the market be liberalised so that people can import at the prevailing price and be able to sell with the fair mark-up, which can be regulated by competition. But what we currently have is a situation where we are supposed to be under price modulation.
A cap is set on selling price; but a cap is not set on international market prices. So, if you are using a template from which you have extracted a selling price and the international market price moves against you, you have had it. And that is what we have at this point in time. We have a dilemma that a lot of people are faced with where you import a cargo as per the template and it lands at N134-N135 a litre and you are required to sell at N132. If you made a loss of N3 a litre in a 30,000-tonne cargo, straightaway, you are losing N120m. No business in Nigeria can sustain that sort of loss. So, unless something is done very urgently, I think that we will find that there will be a scarcity of products because people will no longer have the motivation at all to import products.
How will there be scarcity of products since the Nigerian National Petroleum Corporation is said to be importing the larger portion of what is consumed?
Let me tell you something and don’t make a mistake: the NNPC buys in the same market that we buy. If we do best in defining the landing cost through a very well thought-out template and it comes out at N131, the NNPC must be spending at least N231. But if the NNPC buys a product at N131 and sells it at N111, it is losing N20 on every litre that it sells. At the end of the day, it is every Nigerian that will be responsible for bearing the cost of this problem.
So, does it mean there is subsidy somehow?
There ought to be subsidy at this point in time. If there is no subsidy, then the market should be fully liberalised so that people are at liberty to set their own prices. Competition will beat down prices, exactly like what is happening in the Automotive Gas Oil (diesel) market; you can’t just have anybody selling at monopoly prices.
Over the past few months, there have seen some divestments in the downstream sector; first it was Forte Oil, which sold 17 per cent of its stake to Mercuria Energy Group, and then Oando sold a majority stake in Oando Marketing to Vitol and Helios. Few days ago, ExxonMobil announced the sale of its 60 per cent in Mobil Oil Nigeria to Nipco Plc. What you do make of these divestments?
It is a very worrying development. Look at the pattern of divestments; you can look at a Nigerian company who has actually spent resources, time and money to build up local businesses and to take those businesses downstream to the market. And conditions are now so tough that exactly the reversal of what we want is what we are seeing. Anyway, it depends on how you look at these things though. But we are looking at a situation where the local companies are cashing out and the majors will come back and actually working their way downstream. I think that it is a reflection of how tough the market really is. The market is very tough, and unless you have a very rich treasury of dollars, then chances are that you are going to be squeezed out. So, this is what is going on. Local players are really being squeezed in the current environment.
Given the tough environment, do you think we are likely going to see more divestments or mergers by smaller firms in the sector?
I am not entirely sure whether we are going to see mergers by smaller firms. If you have 100 small Nigerian firms and all of them are afflicted by the same problem of lack of foreign currency liquidity, then the problem will persist. What needs to happen is a situation where policies are put in place to ensure that the local firms survive. Availability of foreign currency is critical, and the liberalisation of the market also will help.
What is Integrated Oil and Gas = currently doing in the downstream space?
Integrated Oil and Gas has been a market leader; profit is a good thing and it is nice for us to make profit but we don’t always go out to make profits. We have a plan to metamorphose from a firm that imports and sells to a firm that actually refines our own products in-house. So, in that regard, we have conceived a feasibility proposal for developing a 20,000 barrels-per-day refinery; we have drawn up the front-end engineering and we are at the point when we are looking at the detailed engineering. Our hope is that within the next three months, we should be in a position to receive the authority to start constructing our refinery. Why we are doing it is this: a litre of crude oil will be about N82 but once you export that crude oil and refine it abroad and you re-import it, it comes up to about N185. So, if you say a litre of diesel is N185, how much of that money is spent locally? It is N82. And the balance of that money is spent elsewhere, creating jobs and profits. Our responsibility now is to repatriate that benefit that has been forgone; we need to bring it back. Cancel out the transport cost, the refinery cost stays steady, what you will have at the end of the day is lower landing cost for the products that are being consumed.
How much do you intend to invest in the refinery?
To build a refinery of 20,000 bpd capacity, in the location that we have determined, we are looking to spend about a $100m to $120m. I am a businessman; I conceive of plans and there are people whose job it is to provide capital once they see a viable business. So, we will give them the plan and we will show them and defend it. And if they see that it is something that is worthwhile, they will provide the funding for the refinery to be built.
When do you expect the refinery to come on stream?
I am hopeful that within the next one and a half years, it would come on stream by the grace of God.
In May this year, there was partial deregulation of the downstream which saw the increase of petrol price to N135 – N145; do you think there have been benefits from that liberalisation?
There is, to my mind, nothing to be gained in partial deregulation. There is no such a thing. Look at the problem that we have now; selling price is capped and buying price is not capped. So, if we are talking about the template price, it has been breached. And what are we going to do?
In terms of foreign exchange for import of petroleum products, do you think there is still a challenge?
There is a major challenge; where are we going to get forex from? The government, of course, tries and provides forex through its own resources. But in terms of the arithmetic, it doesn’t really matter because government provides it at a particular rate. And that goes in there; we don’t make anything out of it. It only makes sure that we have the opportunity to import. So, the forex has to be got from somewhere.
The NNPC has said some marketers are rejecting dollar supply; how true is this?
That’s true. Do you know why they are rejecting the dollar supply? It is because when you supply the dollar and you cannot regulate the international buying price, the landing cost is higher than the price at which you are expected to sell. That is why they are rejecting the money.
Apart from the refinery project, what other expansion plans does Integrated Oil and Gas have?
We are really expanding in several ways; we are expanding in terms of the refinery and strategic infrastructure that we are building. There are so many things that we are doing but this not the time to unveil these things. In due course, we will unveil them. But they are spectacular and absolutely wonderful things that we are contemplating.
Are you worried about the state of the nation’s refineries?
I am worried about it; everybody is worried. If the refineries are not working, we can’t move our vehicles. If you cannot move your vehicles, goods and services cannot move. And if goods and services cannot move, the economy will absolutely stultify and die. We really need to deal with the issue of the refineries, make them work, create opportunities for people who have ideas to start new refineries, help them, give them encouragement and all the necessary support so that they can achieve the objective of moving us away from being a net consumer of refined products to a net producer of refined products and we can sell to other people.
The lack of full deregulation is said to be hampering investment in refining. Why are companies like Integrated Oil and Gas building refineries despite the state of the downstream sector?
It is because I have seen that this is the only way that we have to go, and it is better for us rather than sitting down there and talking about it forever. We make a move and when we encounter any difficulties; we address those issues and we move forward.
The Dangote refinery, regarded as the largest in Africa, is expected to come on stream in a couple of years; don’t you think this is a threat to smaller refineries like yours?
It is not at all. It depends on your mind; the size of the market you are looking at is the Nigerian market. The size of the market we are looking at is the whole of West Africa. So, if the Nigerian refiners are the ones who produce the finished products, we will consume and then export to Ghana, Ivory Coast, Sierra Leone, Gambia and everywhere. The market is there.
How is the low crude oil price in the global market affecting the downstream oil sector in Nigeria?
The market price of oil is not low at this point in time; it is moving up and has gone over the $50 mark and causing problem for those who are playing in that sector. The price that the Petroleum Products Pricing Regulatory Agency uses in determining the pricing template of petrol is lower than the current market price, and so your landing cost is higher than what they want you to sell. It will make that product not to be available in the near future because nobody will touch it. And that is why the NNPC told you that people are rejecting dollar supply. In this day and age, do you know of anybody rejecting dollars? There must be a very serious reason why people reject dollar. It is because they know whether or not the dollar is available, you are going to lose money.
Do you see the government increasing the price of petrol anytime soon?
I don’t think that they should do that. I think that the next adjustment that must be made is to declare full deregulation and allow prices and volumes to be determined by market forces.
One of the fears of full deregulation is that marketers may extort fuel buyers by selling at extremely high prices. What is your view on this?
Don’t fear that. Diesel market is fully deregulated and nobody is taking advantage because they can’t. When people see that there is money to be made, they bring their money in, and when there are too many people, the price falls and some people move out. So it goes like that, and that is the same thing that would happen.
The price of kerosene, used by many in the country for cooking, has skyrocketed largely because marketers are focusing mainly on petrol imports. What needs to be done?
That is the way it is. People are not going to buy kerosene at a certain rate and sell it at a giveaway price. Where are you going to find money to buy kerosene if you can’t find forex? You have naira and it is depreciating all the time and the volume of goods you can buy with the naira is falling. So, you are bound to have this kind of problems given the issue we are facing in relations to the availability of foreign currency. The same thing applies to the AGO market. If you look at the AGO market that has been liberalised a long time ago, right now, we see a situation where because of the scarcity of forex to buy the product, the price of the AGO is now shooting up and it has gone past N180 per litre. Chances are that it will continue to mirror the rising prices of refined products in the international market. Liquefied petroleum gas is a very good substitute for kerosene; so, we really need to put policies in place that will encourage people to invest in gas development in the country.