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Wednesday, December 31, 2008

Thrills, intrigues of oil, gas sector in 2008, expectations for 2009By Yakubu Lawal, Yetunde Ebosele, Taiwo Hassan and Sulaimon Salau

THOUGH stormy, it can’t be compared to big storms like Catrina, Ike or Gustav, the nation’s oil and gas sector in 2008 experienced situations that made a lot of people edgy and unbalanced.

Amidst the uneasiness that enveloped the sector during the outgoing year, government had no room for slumber, while the operators had no course to relax, with consumers taking a permanent sit at the edge of their chairs expecting what may either be the next succour or hardship.

It is an open-secret that so many opportunities were available for our dear nation, the acclaimed giant of Africa to explore the oil market and make good use of the gains, but the usual corruption and non-focused attitude has once again left the country slumbering.

Year in, Year out, series and lots of solutions were proffered for the development of the sector, which is basically the mainstay of the nation’s economy, but successive governments are yet to really use the immense benefits inherent in the sector to either develop it or use it to impact positively on the lots of the citizens like other oil nations.

Having crippled so many industries in the Nigerian economy, the so-called political statement that has been the driving force of Nigerian leaders past and present, has taken its toll on virtually on the sector of the nation’s economy, including the oil and gas industry.

Industry experts, whom have been directly affected by the ranging storm, have described these situations as the cankerworm that has eaten deep into the country’s polity. Various challenges that faced different sub sectors of the economy cannot be quantified, while the opportunities and threats are also numerous.


IN the upstream sector of the oil and gas industry, activities during the outgoing year was generally affected by crisis in the Niger Delta region leading to shut-in of about 1.4 million barrels of crude oil per day. This development impacted negatively on the country’s performance in terms of crude oil production and export.

On the average, production was around two million barrels per day against country’s three million barrels per day capacity and the Organisation of Petroleum Exporting Countries (OPEC) quota of 2.4 million barrels per day.

OPEC adopts several strategies in the year to ensure stability in oil market and shore up the dwindling oil prices. Nigeria has its own share of this sacrifice.

In all OPEC cut output by 4.2 million barrels per day of which Nigeria announced a reduction of about 278,000 barrels from our national production.

The Minister of State for Petroleum, Mr. Odein Ajumogobia told The Guardian that Nigeria’s share of the 2.2 million barrels cut announced last Wednesday in Oran, Algeria is 165,000 barrels per day representing 8.2 per cent the total OPEC cut.

He stated that all ministers also agreed that member states must complied with the new cut in output in order to bring about the desired stability in the global oil market.

But an NNPC official explained that cumulatively Nigeria is reducing 278,000 from the market haven fully complied with the October resolution of OPEC to cut output by 113,000 barrels per day.

“Our current output is less by 8.2 per cent which translates to 165,000 barrels per day. Our current quota was 2.05million barrels per day but with the 165,000 barrels to be added to 113,00 barrels. Our new quota now is 1.885 million barrels per day effective January 2009,” the source said.

According to the NNPC official, production is expected to be around 1.85 million bpd in January as a result of the latest cuts.

This reduction in output already had its financial implication on the country. The Federal Account Allocation Committee (FAAC) admitted that Nigeria lost revenue to the tune of N177.52 billion in the month of November due to the sliding oil price.

FAAC during their meeting in Abuja said revenue was N353.34 billion from mineral and non-mineral revenue in November as against N530.8 billion in the month of October given rise to a shortfall of N177.52 billion during the period.

FAAC described the shortfall as the biggest loss since the oil crisis began in July this year.

Inadequate funding of the Joint Venture (JV) operations, particularly government counterpart funds through the Nigerian National Petroleum Corporation (NNPC) was a challenge. While the oil Multi-nationals who are partners and operators of the JV operations are alive to their financial obligation to the venture, NNPC was found wanting.

The JV operations accounted for over 85 per cent of oil and gas production in the country. The government equity participation in the venture amounted to 57 per cent while the balance is shared among the foreign oil companies. The under-funding is actually not new to the entire process. For example, in 2006 government approved cash call funding of $4.2 billion at initial stage and later through supplementary budget the figure went up to $5.5 billion.

In 2007 government approved the sum of $4.5 billion but the actual JV demand was $7.8 billion with a shortfall of $ 3.3 billion. Similarly, in the outing year-2008 total budget projection for the JV is $8.8 billion but actually approved in the budget was $4.97 billion and a shortfall of $3.8 billion for this year.

For the incoming year government’s share of the JV budget is estimated at $10.87 billion but in the budget that was presented to the National Assembly, provision was made for $5.5 billion.

Group General Manager, National Petroleum Investment Management Services (NAPIMS), Dr. Mikanti Baru through the combined efforts of NNPC, the Ministry of Finance (Budget Office), and other key stakeholders, government granted approval for some form of alternative financing to raise fund to meet the short fall in the funding requirements of the JV operations.

NAPIMS which is the arm of the NNPC responsible for the supervision and management of government share in the JV and production Sharing Contract (PSC) also revealed that during the year under review there were 24 rigs and 25 wells being operated during the period but the figure in PSC was not given.

During the period in question, government completed the Gas Master Plan while NPAIMS took the lead in the provision of Preliminary strategic Blueprint for PSC deepwater development, JV block areas development, and frontier basin exploration and development.

As a result of the need to satisfy domestic market with natural gas, activities on the two major gas export project Brass and Ok LNG were slow down.

With the sacking of Minister of State for Gas. Mr. Emmanuel Odusina, it became obvious that the deadline for ending gas flare in the country is not feasible.

It is important to note that intrigues enveloped the 2007 oil blocks awarded at the twilight of President Olusegun Obasanjo. Several of those blocks were withdrawn from the prospective winners while millions of U.S. dollars are tied down as the signature bonuses paid by these companies are yet to be refunded by the government.

Government also announced that a new company would take over oil and gas operation in Ogoniland of Rivers State.

The government also directed the Director of the Department of Petroleum Resources (DPR), Mr. Tony Chukwueke to proceed on compulsory leave to enable it investigate circumstances surrounding the oil blocks allocations and the complaints that ensued. Alhaji Aliyu Sabonbiri, who is retiring early next month, was asked to act for Chukwueke. At the end of the day, no concrete evidence of wrongdoing was established against the director.

The House of Representatives also sets-up an ad-hoc committee to investigate the activities of the oil and gas industry since 1999 to 2007.

The oil companies including the service firms continued to battle with kidnapping and disruption to operations.

Government during the year set up a technical committee on Niger Delta to give recommendations on how to tackle the problem. Ministry of Niger Delta was also created with the appointment of former Secretary to the Government, Mr. Ufot Ekaette as minister.


It became obvious that failure to take advantage of the boom oil prices in the mid-year may not have been unconnected with the dilapidated state of the nation’s refineries, which has positioned the country as an importer of petroleum product rather than an exporter since the crude oil resources could not be refined locally.

Citing the drastic drop of oil prices at the international market from above $100 to $40 as at Monday, Nigerians have clamored for a reduction in domestic pump price of petroleum products especially PMS, which the Federal Government had continually turned down.

Reacting to the agitation, the NNPC said the price would remain intact because of the inability of the government to deregulate the petroleum industry.

The corporation said, “In the developed countries, there is no need for anybody to agitate for a reduction in fuel price as a result of the fall in price at the international market. It is automatic for the fall in the international market price to reflect locally and for local consumers to feel it.

“But, in our own situation in Nigeria, it cannot be so because of the rate of subsidy the government still gives. When the pump price was raised to N70 per litre, the actual price was well above N100. So, what comes in now as extra fund in the eyes of the public is not really extra but just a little out of what the government has been expending on the citizens in terms of subsidy,” it said.

However, it is not an overstatement to mention here that Nigeria’s four oil refineries have remained dilapidated and moribund thereby having less or no impact in the refining of petroleum products in country. But the ailing and ageing Kaduna refinery was lucky to have received little attention when it underwent a Turn Around Maintenance (TAM) around November. Even though the once in a blue moon TAM was said to have cost the nation a princely sum of $57.9 million (details shows that about $35 million was used for the TAM and another $22.9 million for materials for the services).

With national installed capacity of 445,000 barrels per day, other refineries such as Port Harcourt (old and new) and Warri refineries have continued to work at their lowest ebb crying to be upgraded, since these refineries equipment and facilities are over thirty years behind in terms of modernity, safety and efficiency.

As a result of the poor state of the refineries, which are now producing below 10 per cent of the national demand, the nation is left with importation of about 90 per cent of products. To foster smooth importation, the Nigerian National Petroleum Corporation (NNPC), which is the agency saddled with the responsibility of importing fuel through its subsidiary PPMC could only import 24 per cent while major marketers accounted for 76 per cent of the national demand.

With this problems yet to be resolved, the industry price regulating agency, Petroleum Product Pricing Regulatory Agency (PPPRA) busted into its own crises of alleged distortion of petroleum funds to the tune of N36.2 billion, which latter culminated to the eventual dismissal of the Executive Secretary of the Agency, Mr. Oluwole Oluleye in September 2008. This has since taken its toll on the agency’s activities as regards disbursement of funds to marketers under the government’s Petroleum Support Fund scheme (PSF).

The problems trailing availability of products in the country took a new dimension when major marketers threatened to withdraw from importation alleging undue delay of payment of outstanding from the Petroleum Equalization Fund (PEF) and the Petroleum Support Fund (PSF). This brought about fresh fears of fuel scarcity in the country. Although, the scores are yet to be settled, their are indications that the issue may be carried over to 2009.

According to the Executive Secretary of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Obafemi Olawore, the major marketers are owed approximately N61.99 billion under PSF while PEF owes them over N8 billion for 2007 and 2008 bridging freight reimbursements.

He said, the major challenges that faced the sector in the year was the financing of downstream projects, which were almost stalled by the undue delay in PSF/PEF reimbursements, high local bank interest rates and Libor rates.

“All these have affected our abilities to expand, but we are trying our best, because even though the banks are charging us high interest, if PSF is able to pay us on time, we believe that projects that we have started would be completed,” he said.

The six major marketers affected are African Petroleum, Chevron, Conoil, Mobil Oil, Oando Plc and Total Nigeria Plc.

The stormy situation in 2008 would not be complete without mentioning the crisis that trailed the proposed privatisation of Petroleum Product Marketing Company (PPMC), Nigeria Gas Company and Eleme Petrol Chemical Limited. The move to privatise these national assets among others raised a lot of dust during the year.

Following the release of privatisation and commercialisation timetable in the next two to three years, workers in the oil industries raised palpable fears of loss of jobs and other benefits should government go ahead to change the ownership structures of the oil firms.

The National Union of Petroleum and Natural Gas Workers (NUPENG) and Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) quickly intervened and the issue was eventually laid to rest. Although the BPE statement denied such privatisation plans.

The latest issue in the industry at the end of the year is the controversy which trailed the appointment of the former Minister of Petroleum Resources and Secretary-General of OPEC, Rilwan Lukman as the new minister of Petroleum, and the looming restructuring at the NNPC.

Lukman was believed to have been appointed due to his wealth of experience and the government’s quest to revolutionalise the oil and gas industry through the implementation of the OGIC recommendations.

Though some operators have queried the wisdom behind the appointment of Lukman on grounds that he is too old and being part of the team that have been guiding the affairs of the industry for years, whose policies had contributed to the problems facing the industry today, he could not have fresh policies that is required to save the ailing sector.

The implementation of the OGIC recommendations is expected to reposition the nation’s oil and gas industry to be at par with its contemporaries all over the world.

Besides, the industry also witnessed a remarkable turn of event as the importance of gas was brought to the forefront.

Government in its drive to ensure that the utilisation of gas is prioritised, President Yar’Adua gave a marching order to Multinational companies to ensure that certain percentage gas are available for domestic purposes.

Besides, as the world tilt towards cleaner fuel, the country’s gas potential was also dwelled on and the dare need to exploit all the nation’s proven gas reserves also gained relevance that various forum during the evolving year.

Reviewing the activities of the sector in the outgoing year, a prominent expert in the industry, Mr. Oladiran Fawibe said it has been a tough year for Nigeria, lamenting the failure of the government to utilize the opportunities that came up during the year. He, however, predicts serious challenges in the coming year as a result of the downward trend of oil prices at the international market coupled with the lingering Niger Delta crises.

“Tough in the sense that the oil market was very good, the price of oil reached over $140 and given our production capacity to produce close to about 2.5 million barrels per day, but unfortunately we could not take advantage of these situation because of the problems in the Niger Delta region. If we were able to produce an average of 2.5 million barrels per day at that price level, even thought the price was not stable throughout the year, but we would have reaped a lot of dollars into the treasury, which of course Nigeria desperately need for development but unfortunately we were not able to take advantage of this as we ought to have done,” he said.

Fawibe, who is the managing director and chief executive officer of International Energy Services Limited (IESL) stresses, “It appears that peace is returning to Niger Delta, thanks to the constructive engagements initiated by the government and also the confidence that is now been in place between the Nigeria government and the stakeholders in the Niger Delta, so if we are able to build on the present situation, things may be better, we may witness production level going up next year if the oil market will permit this, because recently even the consuming countries as reflected in the forecast of the International Energy Agency (IEA) may reduce oil demand in 2009.

“Aside from that, if OPEC would have to stabilise the oil price that means there is going to be production cut which will definitely affect Nigeria. Being a responsible member of OPEC we know it is mandatory upon us to maintain our production quota, which means we are going to have reduced production if the price of oil has to be maintained at a reasonable level.

“Besides, it may be of interest to note the budget was predicated on 2.19 million barrels per day at $45 per barrel, so people are now worried that the price is going below $45 but mind you we shouldn’t be unnecessarily anxious because we are talking of 2009 and given the fact that OPEC would be meeting from time to time to stabilise the oil market then we expect that the cut in production would push the price up to a level, not necessarily $100 per barrels but something around $45 per barrel which we have made as benchmark for the budget.

“But the question is can we achieve production level of 2.1 million barrels per day, lets hope we would be able to make a case with OPEC to be able to go up to 2.2mbpd, but if we don’t even achieve that target and the price is above $45 million per barrel, we might be on the average in times of total revenue, due to the fact the shortfall in production can be made up through the increased price level and, so next year will not be too bad a year but we have to keep our fingers cross, its too early now to say what precisely is going to happen,” he said.

Commenting on whether there had been any milestone achievement during the outgoing year, the Principal Consultant, Lonadek Oil and Gas, Mrs. Ibilola Amao said the best thing that has happened to the industry in 2008 was the decision by the government that domestic gas utilisation should be made a priority.

“And if you begin to look at gas utilisation in line with the IPP projects and energy being widely available, I think that would have a very huge impact from medium to long-term on the consumers, manufacturers, the SMEs and make Nigeria a more viable business terrain for foreign investment, so re-addressing the issue of domesticating gas projects was the major milestone that we have been able to achieve, so we are now more in country focus than exporting crude resources which at this point in time is not economic viable,” she said.

However, she noted that one big gap is the fact that we have not monetised gas in an attractive manner such that foreign investment is encouraged into the country to invest in huge gas projects.

Expressing her expectations in the year 2009, Amao said, “I think a pronouncement from the Federal Government of Nigeria stating the true and actual cost of gas and actually giving a blueprint on how gas project will be viable for domestic use and for foreign investment would stimulate a lot of activities in the industry in 2009.

“And we need to look at collaborative gas projects whereby the federal government of Nigeria is involved in public-private sector partnership in the power industry as well as oil and gas, so they need to come unto the table whereby gas pricing is correct such that it would be very unattractive to flare gas and very attractive to stimulate gas projects to enhance the industry and create employment, so that is really what we like to see.”

Commenting on the gas flare out deadline slated for December 2008, the energy expert said, the major disaster is that if we intended gas flare out to end by December, 2008, about three, five years ago everybody (investors) should have been at the point of Final Investment Decision and kick-off of gas utilization projects so that is a major mistake on the side of government, and that is poor planning. So we cant be expecting gas flare out at the end of 2008, if by 2003 and 2005 we could not have the projects going on stream, it is not possible.”

Amao, who is at the forefront of the campaign for improved local participation in the industry, also described the development as poor, noting that without putting much projects in place, the local content drive would not improve.

“I think the tragic part is that without projects in place we can never have local content, because the local content is the simultaneous development of capability and competence alongside value addition in-country. If you don’t have projects, what are you developing? So local content suffered a bit set back in the year because we did not have enough projects to drive and sustain indigenous capacity in the local content development and value addition became a mirage.

That is why it is very important for the federal government to make pronouncement early in the new year to give the industry a direction concerning which project are viable and which must be executed in 2009 so that we can continue to stimulate value addition and develop in-country capacity capability, without projects, it’s a mirage,” she urged.

In his own summation of the sector in the about elapsing year, and the expectation for the incoming year, the Managing Director of Platform Petroleum, Mr. Austin Avuru decried the performance of indigenous firms as a result of poor funding mechanisms and unascertained credibility of some of the firms.

He said the only exposure that Nigerian operators have in the industry is buying and selling of fuels while they find it difficult to graduate to the upstream operations due to huge financial requirements.

Avuru looks forward to a new year where the federal government would create an enabling environment that would foster financial support for the operating firms. Also he urged the companies to imbibe the culture of transparency and commitment to loan refund

According to him, “credibility and discipline poses the accessibility of loans, these companies must keep to standards, sincerity and job done with faithfulness.

“Credibility is very important, some companies are fond of getting loans from banks which they don’t bother to payback, others numerous ones are strategizing to beat the payback time.”

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