NNPC Is a Nightmare – Nda Don (allAfrica.com)

Dr Suleiman Sa’ad, a lecturer at the Nigerian Defence Academy, asserts in this interview that the Nigerian National Petroleum Corporation (NNPC), when compared to some other national oil companies, is an underperformer. Dr Sa’ad states that for the NNPC to operate at optimal level and effectively compete with its counterparts in other countries, it has to be free from government interference. Nigeria, the NDA lecturer declares, also suffers from what he calls energy poverty
The Nigerian oil sector has been in crisis for more than three decades. What are the sector’s main challenges?
For over four decades, oil has been playing a pivotal role in the economic well-being of the country. However, for more than two decades, the sector has been facing some daunting challenges that are threatening it. Those challenges include political and bureaucratic corruption, regulatory uncertainties and too much political interference in running the sector.
There are also unfavourable government/ international oil companies (OICs) relationship, competition for oil resource rents among the various tiers of government and regions, as well as the incessant crises in the oil producing areas fuelled by abject poverty and environmental damage. These led to loss of billions of revenues that should have accrued to the states.
There have also been cases of divestment by IOCs. Many times, IOCs had had to declare force majeure on their operations, with the consequent loss of thousands of barrels of oil.
Despite those challenges, I believe the sector has great potentials to contribute more than what it is contributing today. However, government needs to be more serious. Oil prospecting and operation licences need to be allocated transparently through competitive bidding. All revenues from sales of such licences should be paid directly to the CBN and Nigerians have the right to know how much revenue accrues to the government from the sector.
Investment-friendly policies should be pursued to encourage influx of foreign and local investments into the sector. Government should ensure security and protection of lives of property of both foreign and local entrepreneurs operating in the sector. A programme similar to the USA’s Marshall-plan should be introduced to address environmental crisis in oil producing areas and poverty generally. Finally, oil prospecting in the inland basins should be pursued to a logical conclusion.
What are the most promising prospects for the oil and gas sector?
The potentials are huge, as a major income earner for the economy and as clean energy for electricity generation. There is a large and underexploited world oil & gas market which Nigeria can lock into. For example, less than 20 per cent of the world oil reserves are under the control of the IOCs. These companies are ever ready to inject billions of dollars and technical expertise into the Nigerian economy. What they only need is an enabling environment and the security for their investment.
Furthermore, there is a large market for refined petroleum products in the West African sub-region yet to be harnessed; what Nigeria needs is to inject capital into its refining business and work at exporting petroleum products to the neighbouring countries. We may need to have a uniform pricing policy for petroleum products with our neighbours. This would likely eliminate smuggling of the products out of our country.
It may interest you to hear that Saudi Arabia is not only a major exporter of oil globally; it is also the largest exporter of diesel in the Middle East. Recently, Saudi’s Aramco, jointly with ExxonMobil, built a new world-class export refinery with a refining capacity of 400,000 barrels per day. Similarly, the Kuwait Petroleum Company bought many refineries and retail outlets in Europe and developed their own brand, the Q8.
Finally, natural gas is considered as the fuel for the 22nd century. Gas is likely to displace oil in the international energy market. The potential for natural gas is that it is used both directly as a relatively clean substitute for other energies, and indirectly as an input into the electricity industry. But the startling fact is that most (associated) gas is currently flared. Estimates suggest that current levels of gas production, if properly used, could supply more than the whole of Nigeria’s current usage of energy.
There have always been allegations of large-scale corruption and inefficiency in the oil sector, particularly in the NNPC. How true can this be?
The NNPC has been performing far below average by all standards. This is a company that was established 40 years ago, but as at today is not capable of providing even 60% of our domestic requirements of light products. We have never seen their profit and loss reports published.
When you compare the NNPC and other national oil companies like SONATRAC of Algeria or PETRONAS of Malaysia you will find that our case is a nightmare. For example, PETRONAS was established three years after the NNPC was and is today considered as a hybrid national oil company. PETRONAS has since gone international; it is present in more than 30 countries, including some West African countries. According to its chief executive, less than 20 per cent of its revenues is generated from its Malaysian operations. Today, PETRONAS is competing favourably with international oil companies such as Shell and BP in securing market and contracts globally. In some cases they have secured contracts in areas where those IOCs have had less success.
Similarly, Saudi’s Aramco and SONATRAC have also gone international. They can today independently attract foreign investments, and raise capital at the international capital markets for their expansion and new projects. They have outlets in other countries.
I believe that for the NNPC to be efficient and meet the current challenges facing the industry globally, it has to operate like a private entity, independently attract investments from both within and outside the country and be able to raise capital for its activities at the international capital market. My dream is to see NNPC mega stations in the city of London or, at least, in Cotonou or Niamey; to see the posts of the NNPC Group Managing Director and executive directors advertised in influential international publications like the London Economist or the New York Times; and to see the NNPC publish its balance sheet in both national and international newspapers.
Furthermore, the Minister of Petroleum Resources and the ministry’s Permanent Secretary should have no influence on NNPC’s activities and their offices should be relocated from the NNPC Towers. It is only through partial or complete privatization of its activities that the NNPC can be able to meet the current and future challenges facing the industry. After all, what we have as BP, the third largest private oil company globally, used to be the Anglo-Iranian Oil Company wholly owned by the British government.
Oil subsidy has been a most controversial issue in Nigeria. What is your view on the oil subsidy controversy?
Unlike crude oil, there are no international prices for refined products; they are country specific. For example, last week, a litre of petrol in the USA was 54 cents while diesel was 712 cents/litre. However, during the same period in England, a litre of petrol was 198 cents and that of diesel was 192/litre.
The existence of differentials between USA and England is because in the USA, taxes on gasoline and diesel are 14.2% while in England it is 57.8%. By selling at those rates, both British and US companies, apart from paying taxes, still cover their production cost and make some profits.
Ok, if we look at the prices of petroleum products in Nigeria, N97/litre for petrol and N150/litre per diesel are far above what obtain in the US. Arguably, subsidy exists here because we have to import petrol from other countries. When you buy oil from another country, apart from paying their domestic pump price, you probably have to pay domestic taxes as well as shipping charges and insurance. By the time the products arrive our ports, the price per litre is already above N100.
Presumably, if our refineries can function at optimum level, then they can sell a litre at less than N50 and still make profit. For each barrel, you get 40 gallons of light products.
I believe there is some vital hidden information about this subsidy that those working in the industry are hiding from the public; they are making a fortune out of this vital information.
I believe pricing policy, as a demand management tool, should be in place to promote efficiency of energy use. Several attempts to increase pump price of petroleum products beyond certain limits were resisted with a backlash. Therefore, after the price hike, the government needed to provide a safety net for the poor in the society. For example, revenue generated from the price increase could be directed towards provision of primary health care for rural dwellers or provide universal education for the children of the less-privileged in the society.
What is the situation as regards the consumption of energy in Nigeria?
The use of energy has more than tripled since 1971 at an annual average rate of growth of 6% per annum. The consumption of energy in both industrial and households is dominated by traditional biomass, woods and charcoal. There is clear evidence in disparity in both biomass and commercial energy consumption among regions. Similarly, there is a perfect correlation between consumption of traditional energy and poverty, cost of clean fuel and cultural factors. All these have negative consequences on health, environment and other socioeconomic effects on women and children. From the information on commercial energy consumption, there is clear evidence that Nigeria is suffering from Energy poverty.
Despite the fact that Nigeria has four refineries, the production of liquefied petroleum gas (LPG) is very limited, resulting in significant wastage in flaring of gas during refining of oil in the local refineries. Increased penetration and use of LPG would save billions of naira. LPG potential in Nigeria is considerable and it could replace biomass and electricity in all domestic and small commercial operations. Yet, despite these advantages, domestic use of LPG on any significant scale in Nigeria is non-existent compared with other countries at a similar stage of economic development, such as Algeria, South Africa, Morocco and Egypt where LPG is used extensively.
The current problem of LPG as a fuel is that pricing of LPG in Nigeria is based on the international pricing with value added tax imposed on locally produced LPG. These, coupled with high cost of logistics due to poor infrastructure and illegal levies at depots and refineries, helped to raise its retail price.
Another approach is to promote the use of smaller LPG cylinders. These would lower the initial deposit fee and refilling costs, encouraging more regular LPG consumption, especially in rural areas, and more widespread use of the fuel. This approach has had some success in Morocco and South Africa.
Consider the potential for natural gas, both directly as a relatively clean substitute for other energies, and, indirectly as an input into the electricity industry. The startling fact is that most associated gas is currently flared. Estimates suggest that current levels of gas production, if properly used, could supply more than the whole of Nigeria’s current usage of energy. Moreover, with appropriate infrastructure, gas supply in Nigeria, and hence electricity production, could be greatly expanded. The bottleneck is, of course, infrastructure.
What about kerosene?
The major challenge facing the availability of kerosene in Nigeria is there are always incentives to substitute it for diesel because the government still maintains some subsidy for kerosene. This encourage its adulteration to make diesel or use it for other purposes and black marketing. As a result of that, the price of kerosene in markets tends to be higher than even that of deregulated diesel.
Arguably, total removal of subsidy on kerosene, like what the government did for diesel, might likely work in the opposite direction and neutralize the intended objective of encouraging the transition from biomass to clean fuels, leading to losing the likely positive socio-economic positive externalities that the society may gain from migration to clean fuels. The removal can only be effective if the government introduces a sort of safety nets for the poor.
Pro-poor programmes implemented in India and Indonesia could help to alleviate possible negative externalities that may follow the complete removal of subsidy on kerosene. In the case of India, the government adopted a unique identification number for all intended beneficiaries of subsidy. This number is a sort of biometric identification, a record on each targeted beneficiary, including his name, family background, monthly income and other important information. But tribe and religious inclination are not included in it, they are recorded in a national database. Each beneficiary is allocated whatever welfare package in either cash transfer or monthly litres of kerosene or foodstuff allocation.
The best option of the Nigeria government may be to use the current INEC biometric identity to allocate unique identification numbers for all households in both rural and urban areas. It would be worthwhile to explore new technology-aided options not just to improve the mechanism of subsidy delivery in Nigeria, but, primarily, to ensure that the subsidies reach the intended beneficiaries.
Using a biometric unique identification number, each household’s information is stored in the national database. Probably on either a smart card or using his mobile telephone number, every month, certain litres would be allocated to a household, depending on the size of that household. Once a household buys his entitled litres of subsidized kerosene this month, it is already recoded in the national database; the system will automatically detect any attempt to buy over and above its monthly entitlement. Such measures would also minimize inefficient and illegal usage of subsidized kerosene.
Interesting. Now, let’s still talk energy. How can such feasible technicalities be applied to steady, uninterrupted supply of electricity?
The electricity sector in Nigeria has been in incessant crisis for over two decades. The situation suggests that there isn’t simply enough electricity supply for both households and industry. The situation has an implication for the socio-economic development of a county that is aiming to be among the 20 largest economies globally.
When you compare our situation with that of other African countries like South Africa, Nigeria’s available power generation capacity as at 2012 was 4.5 megawatts. Our population is about 160 million. South Africa with a population of only about 40 million generates a capacity of 36 megawatts.
A study by the UNDP/World Bank suggests that, on average, Nigerians experience about 321 power outages in 2009, with a hidden cost of about $3292.6 million, representing over 548% of the total revenue generated from the industry. Due to unreliable supply of electricity, it has been suggested that over 70% of our industries have to rely on private generators as the backup for their electricity needs. It is also important to note, that Nigeria has the lowest electricity tariffs and bill payments among African countries; this discourages private investment in the sector.
It will be advantageous to go into regional cooperation with other African countries to get sustainable electricity supply. For example, the Grand Inga is the world’s largest hydropower scheme proposed for the Congo River in the Democratic Republic of Congo and could produce up to 40,000 megawatts of electricity. Already, the South African government has gone into an agreement with the DRC to purchase about 4,300 megawatts from it. A treaty was signed in May 2013 by the South African and DRC governments to that effect. Another agreement was also entered into between the DRC and Botswana. Nigeria may look into the possibility of going into similar arrangements with the DRC; after all Nigeria is closer to the DRC than South Africa.
Alternatively, Nigeria and its uranium-rich Niger Republic neighbour can look into the possibility of constructing nuclear power plants in Niger. The project could be financed by loans from international financial organizations like the World Bank, African Development Bank and Islamic Development Bank. It is important to note that, although electricity was discovered in England, today over 30% of electricity use in England comes from France. The world has become a global village; this bilateral cooperation among countries is the order of the day.
At rural levels, the government could explore the possibility of decentralization of electricity supply in rural areas. Here, the government could invite the private sector to supply electricity to rural areas. In Morocco, for example, a rural electrification programme (PERG) put in place in 1996 increased the rural electrification rate from 18% in 1995 to 97.4% at the end of 2011.
Morocco entered into a public-private partnership with private companies to electrify rural households by using solar energy to produce electricity. The first stage of the programme focused on a public-private partnership set up to provide rural households with solar photovoltaic (PV) systems to produce off-grid electricity.
The second programme encouraged energy- intensive industrial groups to produce their own renewable electricity up to 10 megawatts. By 2008, 3163 villages with 44,719 homes were equipped withindividual solar PV kits not connected to the grid. Under the programme, each client received a solar panel, one battery of 150 amp-hours, one PWM regulator and one 12 volt outlet with two sockets, but those who were willing to pay for higher capacity systems were able to install more lamps (overhead lights). The battery can store enough power to last up to five days, allowing the equipment to run the year round, even when the weather was not favourable. The client is expected to pay an initial connection fee of about $300 and a monthly service fee of $18.
What exactly should be the role of government in the energy sector?
Gone are days when government should be involved actively in the energy sector. In many countries today, activities in the energy sector, particularly, oil, gas and electricity sector, are market-driven, with government playing only a supervisory role, concentrating on policy formulation and regulating the activities of the private operators in the sector.
This is the only way to make the sector more effective. Supply side policies such as energy diversification and intensification, as well as demand management policies such as market-based pricing and incentives, as well as energy efficiency standards and enlightenment programmes are likely to help in the development of the sector.