• Fri. Mar 31st, 2023

    PIA: Why 3% allocation to Host Oil Communities Fund is adequate for Niger Delta – Sylva

    ByBassey Udo

    Aug 18, 2021

    Second year performance review

    The PIB has been signed into law. But we are not here to speak about PIB. We are here to discuss our stewardship in the Ministry of Petroleum Resources in the last two years.
    When we started in August 2019, the President handed down nine mandate areas. So far, I can tell you without any fear of contradiction, we have ticked all the boxes – from eradicating cross border smuggling of petroleum products; completing the gas flare commercialization and LPG penetration; increasing crude oil production; reducing cost of oil production by at least 5%; facilitate the passage of the PIB; implement the deep offshore and inland basin Act; work with the private sector to increase domestic refining, and collaborate with private sector to create large number of high paying jobs.
    That does not mean that it is time for us to rest on our oars. We believe it is time to do the job; to clean up and deliver legacies that would outlive this administration.
    We are talking about the ongoing development of the Ajaokuta-Abuja-Kano (AKK) gas pipelines project; Train 7 of the Nigeria LNG project, a major project the final investment decision was taken at the most challenging period of COVID-19 pandemic; the 2020 Marginal Field Bid Round in which 57 oil licenses were awarded to different indigenous operators; the passage of the PIB into law, and sundry issues, like the TSA, which is a major milestone in our anti-corruption war under this administration, and our efforts to tackle the Boko Haram insurgency.

    Transition Committee on the incorporation of the NNPC

    The PIB has clearly stipulated a timeframe of six months within which the new NNPC will be in place. Within this time, the Ministry of Petroleum Resources and Ministry of Finance will together incorporate the NNPC Limited. That process will soon start in line with the law that in place now. A transition committee is very desirable. I believe the President will make a statement on that.
    Cost of producing oil amid devaluation of the Naira and inflation
    We have successfully reduced the cost of oil production significantly, the declining value of our national currency notwithstanding. Recently, the NNPC launched the NUCOP, a cost reduction programme. The DPR also launched another similar programme. Both have really helped to ensure that the industry brings down the cost of production of oil.
    But, what also helped us was from a very unlikely quarter. That is the COVID-19 pandemic. With the pandemic, prices crashed to all-time low levels. A lot of oil contracts were rationalized. We had to renegotiate and get everybody on board, reduce the cost of production.
    Also, the fact that a lot of expatriates left the country in the wake of the COVID-19 crisis gave our local operators the opportunity to step in. The locals are cheaper. We had to find local solutions to some of the industry problems at cheaper rates.
    On the whole we have been able to significantly bring down the cost of production even beyond 5%. So, the government’s target now is not just 5%, but 10 %, which is in sight and achievable.

    Nigeria’s daily consumption of fuel
    It is not correct to say that the country’s daily consumption of petrol has been going up. Of course, we have flashes or spikes. When we have arbitrage possibility, where the country’s products are cheaper than those of all its neighbouring countries, some unpatriotic elements would take advantage of. But the government has been able to bring down the consumption level. Recall that our daily consumption was about 66 million litres per day when the government came in. We were able to bring it down to about 52 million litres per day, which is the average consumption figure today. But once in a while there is that flash as a result of spikes, because of the illegal activities of smugglers.

    Why 3% is good for the Host Communities of the Nigeria Delta
    A lot of figures have been bandied about on the issue of Host Communities Fund allocation. Some say 10%. Others 25%. Some extremists even say 100%. But there is a need to understand the philosophy behind whatever is approved as allocation in the PIB, and the times we stand.
    Today the industry is in the last mile of the oil economy. That is common knowledge to everybody. What that means is that in a few years, oil will no longer play a significant role in the global energy mix. That means, more than ever before, we are in the race to produce as much oil as the country has and can produce because if in the end, global trend of alternative sources of energy overtakes the country, even though there would still be oil in the ground, there would neither be the need or market for it. For instance, coal did not finish in the ground before the world moved away from its under the coal age.
    As a country, we have a direction we are heading. So, right now talking about the 3% allocation to the host communities in the PIB, for the people of the Niger Delta, the question to ask is: Which is better? Between 3% of something you know and 100% of what you don’t know? The philosophy behind the PIB is to attract more investors to Nigeria’s oil and gas industry; to produce as much of this crude in the ground as much as possible.
    So, everything the government wants to achieve must be measured against the objective of this philosophy. So, the Niger Delta people must see it from the perspective that if activities are not going on to ensure oil is continued to be produced, the payment of 3% or 100% will not be possible. Investors look at the numbers to make their investment decisions. If the numbers don’t add up, they move to the next location.
    When we say 3%, 5% or even 100% of whatever, under what sub-head would the payment be charged? Is it from the investors’ profit, or the operational cost?
    As far as I know, these charges all go to the operational cost. Today, the industry has a lot going under that sub-head. There is the 3% allocation to the NDDC; 1% to TETFUND; 1% to NCDMB, all of which go into and hike the production cost.
    So, we have a situation where the production cost keeps going up. In that case, we have to be very mindful of decisions to heap more costs under operations.
    The 3% approved in the PIB will also add up to what have already been deducted from the operational cost side.
    With this scenario, where would Niger Delta people hope to get the benefit from?
    If it is taken from the operational side, the effect of it will reflect on the profit of the business. So, it’s a matter of cutting your nose to spite your face.
    So, if because of that investors say they cannot come here because operational cost in this territory is too high, as there are too many deductions to be made from their bottom line, then there will be no investment. If there is no investment, there will be nothing to allocate to the host communities, even if 100% was approved.
    That is one part of the story. The other side is the argument on frontier exploration. But I always say that we must know first what that is and it’s objective.
    Frontier exploration has to do with exploring for oil in areas the country has prospects but has not been able to find oil. Every frontier area is aspiring to become a host community if oil is found eventually.
    These are not in one area of the country alone. There are frontier territories in the southern part of the country as they are in the north. So, it is wrong to locate frontier territories in one part of the country.
    We must come together as a country – frontier and host communities to make the industry work.
    The host communities must realize that in the end the philosophy is about bringing investments to the industry, particularly those areas investors have not been for a long time.
    We have about 37 billion barrels of national oil reserve. For the past ten years, we have not added any fresh barrel to our reserves. The country’s daily production, which was growing towards about 3 million barrels, started going down at some point until government started doing some work on the industry.
    We need to bring some vigour into the industry to produce as much oil as is possible. We cannot go back to where we are coming from. Let’s look forward as a country and avoid being parochial, and say one part of the country has an advantage over the other. We must look at Nigeria first. Who is gaining? If we allow this to work, Nigeria will be the ultimate beneficiary.

    Update on Fuel price
    The PIB has actually deregulated the pricing of petroleum products and the downstream industry. But that does not mean immediate implementation of the price review or deregulation policy.
    What the PIB provides is that products would be sold at market dictated prices shouldered by all Nigerians. The government is also mindful of the fact the policy will bring some hardship and difficulties on Nigerians. That is why the government is not going to jump into its implementation until the implementation framework has been established, to cover how the government is going to alleviate the sufferings and problems that would come from the policy. Its not going to be an automatic something. The Ministry will be working together as it has been doing with the Nigeria Labour Congress to establish a framework that would allow the government to implement the deregulation policy in the PIB.

    Update of Government/NLC meeting on Fuel pricing framework
    The meeting between the government and NLC on petrol price is still on course. The issue is not just about discussing with the NLC. The government has agreed with the NLC that we need to put a framework in place for the implementation of deregulation. There is consensus across the table now that deregulation is desirable. But, how to achieve it is the question now. We are now in the process of putting the infrastructure and the process in place. Once we are able to agree on that process with the NLC, then we are ready to deregulate.
    So, we will keep the price of fuel within the N162-N165 price band for the meantime, while trying to work out the processes to allow deregulation to come to fruition. Right now, with the PIB we do not even have a choice anymore. It is a matter of law. We have to ensure that this happens. But, we have to ensure also that ordinary Nigerians are well catered for before that law becomes operational.
    We are also working on giving Nigerians alternative fuel, which is gas. The Autogas programme was launched in December 2020. That is ongoing.

    Governors’ clamouring for fuel hike.
    I can confirm that the governors are indeed clamouring for fuel price hike, because they are aware fuel subsidy is not in their interest. In the end, who is subsidizing who?
    Crude oil cargoes are ring-fenced to import petroleum products for our cars at a subsidized rate. In the end, the cost of the subsidy is borne by the Federation of which the states the governors are heading are members. With the increased payment of subsidies and operating cost, the governors are getting less and less allocations every month.
    If one talks about the 3%, it could be taken from the operating cost side, or the profit side.
    So, when Nigerians are enjoying fuel subsidy with their cars, they are burning the money in the subsidy without realizing that without subsidy, they would have even more at the profit end available for distribution through the Federation Account.
    They will burn it from the operating cost end via subsidy, and when it comes to the profit end, there is less money, because there are less products cargoes to be sold to fund the Federation Account.
    So, the governors have realized that in the end they are just cutting their noses with fuel subsidy to spite their faces, because one way or another they are paying for it.
    Products are being subsidized and the money taken on the operations side and they just realized if the government did not subsidize, then the cargoes would have been available to be sold and whatever is realized would be shared as part of the Federation Accounts revenue.
    That may have been what informed the governors’ decision to clamour for deregulation and fuel price increase because in the end, it pays everyone better.
    The 3% allocation we talked about earlier that if the money is deducted from the operating cost side, it will result in less of the profit available for sharing.
    On the other hand, companies can decide to say that because operating cost is becoming too high, they do not want to come and invest in this territory.
    So, if less companies come to invest, it means less revenue would be available to share as profit. This is a balancing act. Nobody is going to charge the 3% to their profit. We must realize that in many cases, Nigerians are just cutting their noses to spite their faces.
    My view is that the government has been very fair to the host communities on the issue of 3% to the host communities. My advice is that they should take it. Even the 3% amounts to quite a lot as they would see. Fortunately, this is the only Fund that is targeted at the host communities in this country. All other such Funds were not really targeted at the host communities.
    The NDDC, for example, was actually established for this purpose as well – to douse the tension in the oil-producing areas. But today NDDC is not targeting those host communities. Sometimes the NDDC’s expenditure is different from where the problem is happening, leaving the host communities to continue clamouring.
    There is the 13% derivation, which was also instituted to douse these problems, is not targeted at the host communities.
    So, the 13% is spent somewhere and the problem is happening somewhere else.
    So, the 3% is the first Fund that is targeting the host communities. The management of the Fund also involves the oil companies who know where the shoe is pinching.
    I believe the coming together of the oil communities, the oil companies and the government would, for the first time, will address the problem of the host communities’ development.
    I have always said that deregulation is desirable, because that is the sustainable way out where the country is right now. But the reality is that deregulation is going come with some changes.
    When people are used to certain behavioural patterns, like being used to subsidies for this long, it will not easy to change that without a change management process in place, to look at some of the problems the change might create.
    One of the problems we know is that deregulation will result in increase in price of petroleum products. If this is one of the expected outcomes, how do we alleviate the problems that would come with this increase?
    This is not a mindless government. This is a government that really cares about Nigerians. So, we have to really look at all these possibilities and work out ways to alleviate the pains and problems that might come as a result of deregulation. That is why the government is taking its time to ensure it does not happen overnight. There is a provision in the PIB that will make deregulation happen. But we have to jointly be able to come up with a workable way of making this happen. That process is already ongoing.

    3million barrels per day oil production target
    The race to produce more oil is already on. But our production keeps fluctuating. Before now, the country’s production was over 2million barrels per day. The drop in our oil production was not necessary because we do not have capacity. Part of the issue is the OPEC quota, which requires all members countries to produce up to a certain output ceiling. As a very responsible OPEC member, who is celebrating 50 years of our membership of the group, we are fully compliant of the agreement. Because of this our production came down to about 1.5 million barrels per day. But hopefully, with the global oil market situation improving, we will ramp up to the 3 million barrels production that is the country’s target.
    Today, we already know that we have the capacity for the 3million barrels target. But, we have to be mindful of our international commitments, which has kept us where we are today.
    I want to assure you that we are in discussion with our partners and with OPEC to see how we can improve our quota and begin to produce more.

    Gas flaring down to 8%
    Often, this issue of gas flaring is over-exaggerated. Today, only 8% of our produced gas is flared. The country has actually reduced gas flaring to that level. This is quite significant. And with the gas flare commercialization programme, which has also been completed, the country will be able to bring down her gas flaring close to zero.
    As a country, we have done very well. Sometimes, there are figures and statistics that are a few years old, which still say Nigeria is one of the highest gas flaring countries. Today, I can assure you we are doing very well in this area. Apart from going down to 8%, we are in the process of eradicating the 8% gas flaring level.

    Shell and other IOCs exiting Nigeria’s oil industry
    Yes, there are ongoing discussions about Shell exiting the onshore acreages as part of its portfolio rationalization process, which is not really against Nigeria’s investment environment. It is not that they are moving out Nigeria in one day. It is part of a process, which we are discussing. They are not just rationalizing their portfolio in Nigeria, they are doing so in other places as well. This is Shell’s policy in most places. It is not because the Nigerian environment is not attractive. Shell has told the Nigerian government it is still committed to investing in the Nigerian environment. From my discussion with them, they are still very keen on OPL 245, so also is NAOC (Nigerian Agip Oil Company), apart from some unresolved legal issues that need to be unraveled, so that the country can move forward with it.
    We have been in discussion with the Attorney General of the Federation. Very soon, we will come up with a programme for OPL 245 development. I am not aware of any other company trying to exit Nigeria, especially on the onshore. But everything depends on the policies of these companies. Most of them feel that the onshore is already mature, and they have been able to develop local competence here that can take over from them and they hand over and move on.

    Customs accusation of NNPC of smuggling
    The issue of petroleum products smuggling is as much a problem of distribution as it is a law enforcement problem. We are doing quite a lot on the issue. We are seeing the numbers reduce, from 66 million litres per day down to 52 million litres.
    That’s where we are. I do not want to join issues with the Customs. All we require is continued collaboration between law enforcement and NNPC to reduce the problem. As a country, we cannot continue to be discussing this same issue as a problem and not solving it. Law enforcement agencies, marketers and the government must come together to ensure this matter is resolved.

    Update on AKK pipeline project
    AKK is going on very well without any problem. The project is on course to meet deadline. The construction process is ongoing from two ends – from Kaduna to Kano and Ajaokuta end to Kaduna.
    We have licensed quite a bit of modular refineries. A few of them are under construction. Very soon, we will be commissioning at least three new modular refineries. Last year, we commissioned the Walter Smith Refinery. It is functioning very well. Since them, I have laid the foundation for Atlantic Refinery. There is the Niger Delta Refinery that is currently ongoing. It is almost ready to be commissioned in Port Harcourt.

    Raising OPEC quota

    Nigeria had very interesting discussions with the OPEC Secretary-General, who happens to be a Nigerian, who also knows that there is a need for the country to increase her production. But, there are processes in OPEC that must be followed to increase members’ production quota.
    The discussions have started on that. But those processes cannot be circumvented.

    Cooking gas price

    The Ministry is not in a position to determine the price of gas, because this is not a regulated product. But the government is very concerned that gas prices are rising. We are actually doing something about it in the interest of the ordinary Nigerians. We have invited some of the suppliers to meet with them to discuss the reason for the hike. But, in actual fact it is not the Ministry’s role. But, in the interest of Nigerians, we are trying to see how we can intervene with the suppliers and have discussions that would allow us to see how we can bring down the price of gas to a level that would be more affordable.

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