Mearsk oil

Nigeria’s oil business is undergoing a self-proclaimed radical transformation: but will it be enough to attract new investment into exploration, field development and other aspects of its downstream industry? Shannon Manders reports.

Nigeria’s bid to clean up its oil sector has been well-documented in the local and international press. President Muhammadu Buhari himself has identified the turnaround of the Nigerian National Petroleum Corporation (NNPC) as a self-imposed task that he and his government are taking very seriously. The end game, it has been reported, is that the NNPC will have its first initial public offering (IPO) in 2018: in January the government announced its plans to break up the corporation and list it on the Nigerian stock exchange.
Achieving this goal is unlikely to be easy: the NNPC, while being the largest business entity and investor in Nigeria, has long been thought of as the most secretive – and corrupt – organisation in the country. But because it manages all government interests in Nigeria’s oil and gas industry on behalf of the government, it is where recalibration of the industry must begin.
“The NNPC’s challenge, which it has been saddled with since nearly its inception, is its role as both revenue collector, industry regulator and commercial operator in the same industry,” said head of energy research of Ecobank in Nigeria, Dolapo Oni, at the GTR West Africa Trade & Export Finance conference in Lagos in February.
Among the many problems plaguing the corporation is the fact that its financial reporting has been poor and not public. “A lack of transparency and accountability have ensured that lots of unrecorded transactions occur and end up outside the government’s pockets,” said Oni. What’s more, the NNPC lacks trading ability and retains the services of too many middlemen, creating difficulty in the marketing of its crude. Other woes include the fact that domestic crude allocation for the country’s refineries (which have been functioning at less than 25% for many years) has simply not been working, and that the NNPC has been retaining too much money for itself, most of which is not properly documented.
Speaking at the conference, Oni provided an overview of planned and ongoing NNPC reforms (see tables 1 and 2), and spoke to GTR about the future of the country’s oil and gas sector.

GTR: In terms of the NNPC’s ongoing reforms, who can Nigeria look up to?

Oni: It is difficult to say because it depends on the strategy that the government is trying to use to commercialise the NNPC. For me, the easiest way is not the upstream; it is to commercialise the NNPC through the downstream, and Ethiopia has done fantastic work there. The NNPC is already following that model, and I know that part of its plan now is to expand the retail business and invest more in storage and pipeline infrastructure for moving products around. That is fantastic and that follows more what Ethiopia is doing.
In terms of sustainable finance, Saudi Aramco is still the model that we need to aspire to. For instance, the borrowing base for Saudi Aramco has been expanded to US$10bn, which means that on a revolving base it would constantly have access to US$10bn. The NNPC does not have access to more than US$1bn or US$2bn at any point in time, so it needs to expand that. When looking for money in the market I think that Saudi Aramco is our best model too. They also want to move to IPO, which is something the NNPC is working towards as well.
I think the most important bit that the current regime might achieve is in improving the transparency of the NNPC. While a lot of audits have been done, they’ve never had the full co-operation of the agency, resulting in poor results. However, the current minister has been publishing results since August and for the first time in a long time we have results for the NNPC. This should be continued and expanded to cover all its subsidiaries and joint ventures.

GTR: How will the removal of sanctions in Iran impose a threat towards Nigeria and its oil exports?

Oni: It is quite straightforward: Iran produces a lot of crude grades, which are also light and sweet, which is really Nigeria’s forte. Pretty much all of Nigeria’s production is sweet crude;
most of it is light; a little bit of it is heavy. India particularly prefers the light sweet crude, because most of its refineries were built to process Iranian light crude. When Iran was sanctioned, the refiners switched to Nigeria, naturally, because that was where they could get the largest source of lights with crude in terms of the volumes they needed. Now Iran is coming back into the market, and in March is planning to bring two new light and sweet crude grades on stream.
It brings a bit of a worry for Nigeria because Iran is very close to India. They have had a historic relationship with India and Nigeria does not have term contracts with India, which means that most of our sales with India are by spot. You can easily switch buyers when you are doing spot.
I think that it is not likely to be sudden, but there will be significant displacement of Nigerian crude cargoes. What typically happens is that those cargos will eventually get buyers, but they will stay in the market much longer and you will get what we call ‘overhang’. We saw a lot of this in the early part of 2015, where a lot of Nigerian cargos were in overhang almost every month. They will then clear the market; the European and Asia buyers will pick them up at significant discounts to the official selling price (OSP). So in my view, what will happen is that more of the Nigerian cargoes may go into storage this year. As more Iranian cargos come onto the market, we will likely see more Nigerian cargos go into storage, stay in overhang a lot longer and be sold at more of a discount.
It is really an issue in the sense that a lot of Nigerian grades are priced at major discounts already, and that is likely to continue next year. We will lose market, but it will go slowly: it will start in the form of discounts, and then we will see more cargos go into storage and then as storages fill up they will start to feel the pain.

GTR: If oil demand – and supply – is waning, there’s always gas, right?

Oni: Exactly. If you look at gas revenues, they have been growing significantly, and because the government we have now is one that is being led by people that understand that we need the right commercial terms to drive that industry, they are already graduating prices. We are hoping that they can push it up to US$4 per 1,000 cubic feet, which is what more producers want so that they can actually invest in gas infrastructure.
There is also the external side. Ghana needs a huge amount of gas; Nigeria is sitting on it. Ghana has not even drilled wells into its gas reserves yet. Nigeria has the existing wells, and is flaring the gas. We need to see how we can increase; it would be a quick win for Nigeria if we can find how to get more gas into the West African gas pipeline. The gas pipeline has the capacity of 120 million cubic feet per day and we are pushing about 80, so we can increase that. Part of the plan for the pipeline is to expand its capacity to 470 over the next five years and that is a massive opportunity for us as well.
In gas, again, we have a lot of industrial users who currently, in the market, pay about US$7 per 1,000 cubic feet: companies like Lafarge, Dangote Cement and Nigerian Breweries; there are several of them. They buy gas for their own generation. They are totally off the grid and they have their own plants, so there is that market as well. They also complain because they are not getting an adequate supply, and that is why they are paying as high as US$7. In the US, Henry Hub gas is about US$2 or US$3, so there is room for all of that in the market.

GTR: Do you think that gas could ‘save’ the Nigerian economy?

Oni: It would take a while because the infrastructure is not there; for gas you need processing capacity. Right now the gas processing capacity in the country is quite limited, and that is why Oando is investing in it, as is Seplat. The government also has to invest in pipelines because the bulk of the gas is in the eastern part of the Niger Delta, while most of the users are the in western part of the south.
Right now there is only one existing pipeline system, the Escravos-Lagos Pipeline System (ELPS). That is the one that brings gas out of the Niger Delta to Lagos and to the West African gas pipeline. That is the only existing system and that has to change. So you need investment in pipelines in the next 18 to 24 months to build a standard one. It is not going to save Nigeria immediately but it could potentially help with some revenue.

Overview of NNPC reforms – planned

Category 1 – Stop the bleeding: Reduce waste and stop leakages

  • Reduce and audit costs
  • Restructure corporate centre and staffing
  • Renegotiate existing contracts, including PSCs
  • Streamline subsidy management
  • Boost pipeline security

Category 2 – Shine the light: Ensure end-to-end transparency

  • Enhance transparency and accountability
  • Achieve zero tolerance for corruption
  • Rebrand NNPC’s image

Category 3 – Increase efficiency: Push for best practice efficiency in operations

  • Unbundle PPMC
  • Unbundle NGC
  • Reduce contracting cycle
  • Restructure refineries
  • Improve information technology to drive business

Category 4 – Manage performance: Drive delivery and execution

  • Embed staff and business performance management

Category 5 – Push profitability: Maximise profitability

  • Restructure JV funding and reduce cash call
  • Improve retail profitability
  • Deploy and attract focused investments
  • Re-kit NPDC
  • Expand crude marketing
  • Generate power profitably


Overview of NNPC reforms – ongoing & proposed

Some of the changes so far

  • Changes in top brass of oil industry (Category 1)
  • Personnel changes at the NNPC and its subsidiaries (Category 1)
  • Adoption of open accounts system, publishing of NNPC accounts monthly (Category 2)
  • Cancellation of former crude oil swaps and offshore processing agreements (Category 2)
  • Reduction of crude oil lifting contracts from 43 companies to 21 (Category 1)
  • Increased funding for JV ventures (Category 5)
  • Move towards Incorporated JV for some oil blocks (Category 5)
  • Unbundling of the PIB, presentation of first draft – governance segment
  • Revamping of gasoline pricing template and reduction of subsidy (Category 1)

Proposed reforms

  • Sell equity in refineries (Category 3)
  • Refineries to source crude oil themselves; no more DCA
  • Privatise pipelines to raise cash for JV cash calls (Category 5)
  • Refineries to engage in direct crude sale and direct purchase of petroleum products (Category 3)
  • Take the NNPC public via IPO (Categories 1-5)