PIA: ‘Exit from hydrocarbons requires structural adjustment’

Dr Chijioke Nwaozuzu is a Petroleum Engineer and Director, Emerald Institute of Petroleum Studies, University of Port Harcourt, Rivers State. In his assessment of some of the provisions of the Petroleum Industry Act (PIA), in this interview with Managing Editor, Sustainable Economy, Clara Nwachukwu, he insists that whatever shortcomings there are in the law should give way to its strategic and effective implementation for the benefit of all Nigerians. Excerpts:

After many years of politicking, Nigeria finally has a Petroleum Industry Act (PIA). In view of all the unresolved issues, what do you see as possible sustainability challenges before the PIA?

This Act should have been passed 20 years ago, so I pray it is not a case of too little, too late. There are global targets ahead and we are a part of this community. We cannot say we are not in the business of energy transition; we must be because the world will not wait for us.

Carbon emissions have devastated our climates and those who feel it the most are those in the tropical and temperate regions, as well as the Islands. The ozone layer is depleted, cosmic x-rays are penetrating and even some of the viruses that were not previously harmful are becoming quite dangerous.

As commendable as the law is, how do you feel about some of these unresolved issues in the Act starting with the three per cent Host Community Development Fund?   

Whatever percentage has been granted by the PIA, it is important that strategies and measures are taken to ensure that the common citizens benefit from the Fund through adequate provision of potable water, good road infrastructure, good markets or trading places, ample supply of electricity, and all the amenities that make life work are provided for the benefit of the communities.

The only measure of effectiveness of whatever funds accrue to the oil communities is when they are channelled toward the provision of these amenities.   

What about the 30% of NNPC’s profits devoted to Frontier exploration?

I still don’t understand where this came from. We all know that exploration and production of hydrocarbons is a very risky venture and we still don’t know how much has been thrown into the frontier basins and whether the outcome justifies further investment. If there was a big find of hydrocarbons that would have provided the justification for throwing scarce resources into those terrains. The oil majors prefer going deep into the water where the risk is higher but the reward is good relative to the risk and the cost

Shell is divesting their onshore assets and some other oil majors are equally doing the same, so their emphasis is on deep and ultra-deep offshore, where the chances of militancy activities are almost nil, and where they can make huge finds of hydrocarbons.

But these frontier basins, I don’t see the major attraction that would necessitate NNPC committing 30% of their profits to develop those areas; there is no justification yet.

As you noted, the oil majors are divesting from onshore to focus more on the offshore, and the law provides that if no one else is interested, NNPC can develop the frontier basins on their own. Does NNPC have the capacity to do this?

The financial situation of the Federal Government at the moment is precarious and this is captured by our propensity to seek foreign loans in recent times. When a country is at that point where it has to go a-borrowing, you don’t see a justification for a national oil company to throw such a huge percentage of its profits into searching for hydrocarbons where commercial finds are very unlikely.

The unbundling and incorporation of the NNPC is expected to happen within six months. Given the bureaucracy in government circles, do you see this happening within the stipulated time even as a Steering Committee has also been approved and given 12 months to commence the full implementation of the PIA?

Speed as a proxy for efficiency can only be achieved when you have the right professionals with a clear understanding of how the situation is and accurately executed. In terms of the composition of the Steering Committee, this should have been made up of outstanding oil and gas professionals, mingled with finance experts and management consultants. If the mix is proper, it can be achieved in three months or less.

Exploration and production of hydrocarbons is a very risky venture and we still don’t know how much has been thrown into the frontier basins and whether the outcome justifies further investment.

Still on the NNPC incorporation, there is the argument about who should own the shares – the government, ordinary Nigerians or private investors?

If you are floating a company, you have to float shares as well, and people will subscribe to your shares provided it is done transparently in the stock market.

… But the incorporation is not conceived as a public-quoted company only as a private limited liability.

Yes, I saw that and I see a country wanting to run the same former corporation as a business entity instead of as a public charity, as I’ve always said that NNPC is currently run as a public charity organisation. Perhaps it’s a way of privatising or commercialising the Corporation. If they are floating shares in the stock market, then it is privatisation, which means private people will own shares of the company. But if it is still a national company, then it means we are commercialising NNPC operations.

Will it be able to compete favourably under the new structure with the likes of Saudi Aramco, Malaysia’s Petronas, Brazil’s PetroBras and the rest?

We are starting rather late relative to these other companies, where the governments have hands off and they operate as businesses; but better late than never. My concern from what I read from the Act is that the chief executive and the commissioners will still be appointed by the President, so it becomes difficult to say the NOC will be free from the executive interference.

It’s been said that the PIA fiscal regime is friendlier now, and the IOCs are expected to reciprocate by investing more in E&P activities. Against the backdrop of energy transition do you foresee this reciprocity?

It actually depends on the percentage of the hydrocarbon tax that we are prepared to levy in the deep and ultra-deep offshore. If we are prepared to drop the tax rate so low as to make it very attractive and economical for the IOCs, why not. They will dig deeper for oil in those shores, so it depends on the extent the Federal Government is willing to go.

But I don’t think a lower tax rate for onshore and shallow water will cut it for the IOCs; they need volumes and economies of scale kick in – the more the volume of oil the better. If you then drop the taxes lower, you encourage them, and it becomes even more attractive to look for oil even deeper offshore. We need to know what the taxes are so they will be able to do some kind of analysis to know the impact of the new asset on their operations. If the net present value and the rate of return takes a huge leap based on the analysis then they will be encouraged.

But there is a cap; we all know that the world is on a race to zero carbon. As we discussed previously, car manufacturers are to wind down on hydrocarbon combustion by 2035, that is, they should desist from producing vehicles that run on diesel or petrol, and all E&P activities target zero carbon by 2050.

Haven said that hydrocarbons will always find some uses. For instance, fuel oil could still be used for heating in temperate regions. Then there is lubrication, particularly the heavy crude oil where we extract base oil for vehicle oils and greases.

I don’t think a lower tax rate for onshore and shallow water will cut it for the IOCs; they need volumes and economies of scale kick in – the more the volume of oil the better.

I found it curious that recently America’s President Joe Biden encouraged OPEC to increase their production, especially from a country that is also in the lead for energy transition and pushing for cleaner energy and renewable fuels?

For now, we don’t have perfect substitutes so those activities will still be going on, while efforts are also in place to throw more funds into renewables. It’s a gradual phase out process and we can’t exit oil because natural gas will still be useful.

Is gas really a green fuel because sustainability professionals insist that as long as it comes from the hydrocarbon process it is not clean energy?

It is cleaner because natural gas has multiple uses and environmental friendliness. You have cooking gas or LPG also used for transportation, you have gas for industries, and then you have liquefied natural gas (LNG) for industries as well.

Although we are talking about zero carbon, this is just an indication that we should stop producing carbon-related gas to save the world. Targets are set for that and we both know that it will be absolutely difficult to achieve zero.

…because if they are discontent, there will always be some elements in their midst that will use that as a basis for vandalising oil and gas infrastructure for personal gain.

Talking about zero carbon, the environment is one of the resolved issues in the Act, and against the backdrop of the continued delay in the clean-up of Ogoni land, do you the law sufficiently covers this area?

I know that in the past an organisation or government agency was set up, HYPREP, to engage in those remediation. I don’t know how active or how effective the agency has been in that regard. I also hope that the agency was set up with all good intensions and not as an avenue for siphoning resources. Truth is we haven’t heard much from HYPREP.

Recently, Shell agreed to pay about N48 billion for remediation, but how they will disburse this fund is a source of concern, and if it’s through the community lawyers, that’s going back west because in the past all their efforts have been geared toward providing monies for the communities, and how these monies are disbursed have always been shallow. If they wanted to have a proper process, they would have commissioned a well-qualified company that deals with remediation efforts and award a contract for the clean-up.

…The Shell money is for compensation and not for remediation.

This is even worse because what would they rather do; remediate the environmental mess or just engage in some kind of bonanza, and leave the people and the generation yet unborn with that mess?

…The latest report from the IPCC declared, Code Red for Humanity, and called for urgent elimination of hydrocarbon emissions.

I can go on and on about that, even the COVID-19 that we are experiencing; you can’t say those viruses did not exist in the past, but something has activated them and made them more virulent than they were previously. Icebergs in the Arctic region are melting very fast and that’s why the sea levels are rising, and we are experiencing more storms and hurricanes, and tornadoes and wildfires. These are the effects and they are very serious. Code Red was like 60 years ago. We are currently experiencing natural disasters in many parts of the world; you saw what happened in Haiti, Japan, Germany, India, and wildfires in the US and Australia and all kinds of disasters happening around the world. We don’t need to be told that the energy transition must go on.

How about the issue of insecurity, what are your concerns in this area?

I wish they had pandered to the wishes of the oil bearing communities even if it is to play to the gallery, because if they are discontent, there will always be some elements in their midst that will use that as a basis for vandalising oil and gas infrastructure for personal gain. I don’t think the government should have given that latitude. Some individuals will want to cash in on the discontent to foment assault and disruptive activities.

Regardless of that, there are a lot of elements within the Niger Delta that have constituted themselves into cartels with known leaders, and as far as they are concerned, the oil belongs to them and they engage in acts of vandalism. How do you check that? The way they operate sometimes can be so impervious and difficult for the government to contain because of the terrain in which they operate.

Some people are talking about using drones to monitor oil production corridors, but it’s a very expensive technology and they need to work out the cost benefit analysis to justify that kind of expenditure.

But will the use of drones really help in curbing these activities?

It might help in open fields but within the creeks that are covered with shrubs it will be of limited effectiveness.

Code Red was like 60 years ago. We are currently experiencing natural disasters in many parts of the world. We don’t need to be told that the energy transition must go on.

There has a lot of talk about trimming down the cost of governance and having a structure that is fit-for-purpose, but under the new Act, we now have multiple regulatory agencies. Do we really need this many regulators?

When talking about cost, we have to be very careful. For instance, we have refineries that have a total of about 4,000 staff. The question is: Is that the global standard? No. You find that our refineries are over-staffed by three times according to global standards, so cost is about efficiency.

I think that the industry is almost subdivided into three major sectors – the upstream, the midstream, and the downstream. I think that a regulatory agency like DPR is too omnibus to handle all three segments of the industry, which on its own will create inefficiencies. My advice is that each of those components of the value chain should have a regulatory agency for efficiency purposes.

But the staffing is where the cost component comes in, so if you make it lean and efficient, you will still achieve the same objectives. The problem is that we use some of those agencies for patronage of an unutilised labour force. For instance, they will go to the President and say: my niece wants a job, and he says: Ok, director, take care of it.

As long as employment processes and procedures are inefficient, then those agencies end up being over-staffed. That’s where the cost element arises and not through the condition of more regulatory agencies, which in my opinion will bring about efficiency in regulation.

Talking about labour, do you think the unions will accept all of these without a fight since you mentioned over-staffing, particularly at the refineries, which you said is three times the normal?

Talking about PENGASAN and NUPENG, those two unions operate with the same principle of: injury to one is injury to all; so these are passionate trade organisations and sometimes impermeable to reason. For them, efficiency of the system is not important, what is important is securing the continued employment of their members even when the situation doesn’t justify it like spending N600 billion in a year on remuneration for the refineries, which operate at zero capacity and you dare not sack any worker.

What I think is, if you have to disengage labour, it has to be done in a systematic way that will encourage people to disengage like Shell does; their disengagement package is so attractive that such staff will voluntarily accept the package and go and set up a business.

In that case, do you think the NNPC should retain those refineries after its incorporation?

To be quite honest, NNPC has demonstrated incapacity to operate the refineries and should let go, perhaps, not let go 100%. In a privatisation exercise, NNPC could retain 20% of the shares under the holding share principle, whereby if those refineries were to operate against the national interest in the future, then they could turn the 20 to 100% and reacquire them.

You can then distribute the remaining 80% – 40% to a core investor, and you can say, those companies that own tank farms; the IPMAN group 10%; and 10% to the general public floated as shares in the stock market; another 10% to domestic crude oil producers; and 10% to the host communities.

This can be done in a systematic way, whereby the NNPC still has shares but not majority stake. A core investor could invest in rehabilitating the refineries and take 40%, which is not also a majority shareholding, and all the stakeholders from those who store them, to those who produce the crude for the refining process, the host communities will gain from it. You will now have a balanced mix of participants and achieve some kind of equilibrium in terms of ownership.

For them (labour), efficiency of the system is not important, what is important is securing the continued employment of their members even when the situation doesn’t justify it like spending N600 billion in a year on remuneration for the refineries, which operate at zero capacity and you dare not sack any worker.

Despite all these negatives, can we work with the PIA 2021 in its current state and still derive some benefits from it?

This will be in the short term because if you consider that we are in 2021, and we are looking at 30 years from now oil may be phased out as a product for transportation, and 30 years in a life of a country is nothing so we are looking at the effectiveness of the Act in a short period of time.

In the meantime, we have been talking for a very long time now about the need to start a structural adjustment to prepare for when oil revenue will become very minimal. Oil revenue accounts for 90% of the government expenditure, and this is very worrisome, since it contributes far less to the GDP about 12 to 15%, and contributes about 95% of foreign exchange earnings. You then find a government that is dependent on proceeds from a product that is being phased out in the next 30 years, so we need to be prepared for when oil revenue will thin out. My fear for our country is that the revenue is shared among the three tiers of government – Federal, states and local councils, at a particular ratio. Those monies feed into the ministries, departments and agencies (MDAs). It is the same thing at the state level, including the payment of salaries for the government workers. And when there is very little to be shared, what would happen to employment? We are talking about more than 200 million people.

If not anything, future revenue from crude oil should be used to diversify the economy. The first thing is to find ways and means to domesticate crude oil so that when the world moves on, we can at least be able to fuel our vehicles and say: you (developed economies) can move on but we have diesel and PMS here because we can refine our crude and utilise it here. There should be domestication of the oil and gas resources; we can use the gas for our industries or compress them and use them for vehicles and other uses for the fertiliser companies, urea, petro-chemicals and the rest.

We also need to open up the mining and agricultural sectors and prepare for the rainy day. Revenue from current oil wells and increased production in the deep and ultra-deep offshores should be channelled into development and opening up of more economic sectors.

Lastly, and perhaps the most important, is to ensure that the power sector works so that we can become less dependent on imports. Importation is a GDP killer, and when you consider that we import consumer goods, including the petrol and diesel we use in the vehicles then you can imagine the situation we are in. We must minimise these imports; the power sector must work so that we can diversify to agriculture and mining, which will also open up the industrial sector, and we can weather the storm with our oil and gas resources.

The agenda is: domestication of oil and gas resources, and diversification of economic activities, which should go on simultaneously. 

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