Oil, gas sector: 2016 in retrospect

The year 2016 has been a challenging year for both the government and Nigerians. This is because during the year the government officially admitted that the economy had slipped into recession. In this report, OLATUNDE DODONDAWA examines how
the oil and gas sector has fared amidst global uncertainties in 2016.


Introduction


Nigerians entered the year 2016 with acute fuel scarcity which rocked the country since late 2015 when the federal government declined to settle marketers’ outstanding of subsidy debt. Long queues at petrol stations in major states including the capital city, Abuja, commercial cities such as Lagos, Kano and few others have refused to disappear. This resulted into heavy traffic, road blocks, blaring sirens, cursing and fighting among motorists as citizens scramble daily to fill up their cars, generators and jerry-cans in preparation for the uncertain times.


The government was in a fix and needed to provide lasting solution to the menace of perennial acute fuel scarcity. This led to formulation and introduction of price modulation system.






Price modulation


Price modulation is an act of modifying or adjusting prices according to due measure and proportion. In other words, it is adjusting pump prices of premium motor spirit (PMS) otherwise called petrol to ensure ‘fair’ pricing without provision of subsidy.


Minister of State for Petroleum Resources, Dr Ibe Kachikwu, had announced in May 2016, removal of fuel subsidy and posited that pump price of petrol would be determined by price modulation.


The policy provides a price band of between N135-N145 per liter and he pledged that the price would be reviewed quarterly to conform with fluctuations in the international crude price.


However, one major challenge confronting this policy in 2016 is unavailability of foreign exchange needed by marketers to import refined petroleum products.


Either deliberately or not, this has turned the Nigerian National Petroleum Corporation (NNPC) to sole importer of refined petroleum products when stakeholders were calling for the liberalization of the Corporation. The components used to calculate the prices are kept secret and many stakeholders wondered if government still pays subsidy or not on imported petroleum products.






Govt’s inability to fix the refineries


Former President Olusegun Obasanjo expressed dismay when late President Umaru Musa Yar’Adua reversed the sales of two refineries to a business consortium led by Aliko Dangote. Obasanjo said he sold the refineries for $750million in 2007 but predicted that in 10 years time, the government must have spent twice the amount he sold the refineries and that yet they won’t work.


In reality, that’s the truth today. The refineries are in comatose as always due to lack of the much required Turn Around Maintenance (TAM). Nigerian engineers, according to industry sources, have been battling with the refineries to ensure they work by whatever stage they are now. They said the truth is that the refineries have become obsolete and may never attract investors as envisaged by the federal government when Kachikwu announced that the government will introduce Joint Venture arrangement with private investors to put the refineries back to life.


Indeed, while being screened as a potential minister by the Senate in 2015, Kachikwu, who then was the Group Managing Director (GMD) of NNPC, stated that any refinery that works below 65 per cent of capacity will be shut in December 2015. He said the reality is that functioning refineries were operating at only 25 per cent contrary to reports that they were doing well. He also said that it was not enough for a refinery to produce at 65 per cent today and at zero per cent the next day, stressing that anytime crude was not utilized by a refinery, the government lost money.


However, as at December 2016, the refineries are not utilizing up to 50 per cent capacity, yet, they have not been scrapped.






Cancellation of crude swap, offshore processing deals


In August 2015, the federal government cancelled all crude swap and offshore processing arrangements with the NNPC. This arrangement allows foreign refiners to take part of the 445,000 barrels of crude allocated daily to the moribund refineries for processing abroad and return refined petroleum products to the NNPC based on terms.


In less than six months after cancellation of crude swap arrangement, the government replaced it with Direct Sales Direct Purchase (DSDP) policy. Kachikwu noted that the policy is aimed at reducing the gaps inherent in the OPA and the losses incurred by the NNPC in the past.


Recently speaking on the status of its implementation so far, the Group General Manager, Crude Oil Marketing Department, NNPC, Mallam Mele Kyari, stated recently in Abuja that the NNPC was already netting off good value from the process.


According to him, “Today, I can tell you that the DSDP which we have, I led the negotiations and today we bring products into this country and we can recover the full value of the product completely plus margin.


“That means it is not the problem of swap or OPA, that is not the issue but the content of the agreement that you have which is why you are seeing about N500billion losses because what we literarily did in the past was that we give you a $100 crude and ask you to bring $90 product, but today, we give you a $100 crude and ask you to bring $110 worth of product, that is what is done today. Changes are going on, let us stop this idea of blanket address of issues.”


He stated that while the swap arrangement was often condemned, it still had some benefits.


“The swap and OPA have their issues, but it allows you to plan long-term, it gives you a 12-month contract that means you are buying 12 months ahead of time which means your suppler will give you better price. This country must decide if we want the private sector to participate in the sector,” he said.






Proposed cancellation of JV funding/ cash call arrangements


Prior to the proposed cancellation of Joint Venture (JV) funding and cash call arrangements between the NNPC and the International Oil Companies (IOCs) and other stakeholders, the Federal Government owed its JV partners about $7billion in counterpart funding.


Speaking at a forum organised by National Association of Energy Correspondents (NAEC) in Lagos, Kachikwu said the government was working to opt out of JV funding scheme and allow its partners to find their operations and remit government’s share into the federation account.


As a parting gift to Nigerians for the year 2016, Federal Government approved proposal for cancellation of JV funding scheme and adopt alternative funding scheme.


Kachikwu had hinted that “As you are aware, current cash call arrears in the oil sector over the last five years up until December 2015, is about $6.8 billion unpaid in the 2016 period.


“We also have accumulated unpaid cash call arrears of over $2.5 billion. Obviously in the year we earned a lot of money from oil, $110-120 per barrel, there really wasn’t any justification why these monies shouldn’t have been paid in terms of the five years arrears but it is what it is, if that is what the arrear is.


“Thus, one can understand why we have what we have: the effect of militancy, the drop in oil prices from $110 to $40, has meant revenue coming to government has been unable to sustain our ability to meet our cash call obligations and what does that do when that happens.


“You find that your reserve begins to deplete, your ability to maintain production at current level will begin to despair and cost of per barrel of production at JV continues to rise because of the very little volumes chasing the cost and at the end of the day, the investor’s confidence begins to wane.”


On 16th December, the Federal Government disclosed that it has formally exited the joint venture cash calls arrangements it has had with the international oil companies operating in the country for more than four decades.






Conclusion


It suffices to say that the oil and gas sector has experienced mixed experience in the year 2016. While Nigerians should be ready for possible increase in pump price of petrol in 2017 following potential rise in crude price at the international crude market, the government is expected to save over $2 billion from exiting the JV agreement.


Stakeholders have urged the government ensure passage of petroleum industry bill to attract the much needed investment in the sector because fiscal regime has always be contentious between the stakeholders and the government.





Source Nigerian Tribune