NUPRC owes the petroleum industry a recovery plan  __Avuru

The chairman of AA Holdings, Mr Austin Avuru, is arguably the boldest industry analyst in Africa, who confronts burning issues with fiery verve and also proffers viable, practicable and often tested solutions to toughest industry challenges. He was part of the industry group that authored the Petroleum Industry Bill (PIB) which has been legislated into PIA. He has run a string of successful exploration and production business in the country before retiring to preside over an investment group that offers solutions, including funding and technical partnership to upstarts. AA Holdings also runs a charity foundation that offers growth ladder to the less privileged. In this chat with SOPURUCHI ONWUKA, Mr Austin Avuru challenges the NUPRC to live up to its regulatory plate and wield as much influence as the CBN and the NCC. Enjoy the excerpt.

Impressions were that the PIB was a major obstacle to new investments in exploration and production in Nigerian petroleum industry. But expectations that the PIA would open a floodgate of investments are beginning to wane. What do you think is still stalling new investments in the industry?

If any person thought that the PIA, now being the effective law governing the industry, would be the effective solution to FDI flow in the oil and gas industry, then conceptually we are missing a few things. It is true that PIA brought clarity to fiscal issues in the oil and gas industry. It has. It has even attempted to solve the issue of gas treatment in the deepwater. However, a combination of crises in the onshore and shallow water over the past 10 years has not been too good. It got so bad in the past five years that if you were a multinational you will worry about the future of your operations. The problem for them that time is about NNPC not paying its cash calls.  Unit cost of operations had ballooned. For the same barrel you were chasing with $2 in those days, you are now chasing it with $15. So, we are coping with cost of over $15 per barrel in a terrain we produced at $3 per barrel.

Overall, if you were a multinational, you look at it this way: we are in a mature basin; so cost of exploration and development (finding cost) becomes huge. The easy fields are longer there. To make matters worse, you have above ground crises that contributed to the higher cost. So, if you were a multinational you would start rationalizing your portfolios. And it happens. It is not unique to this place. The multinationals discovered the North Sea, and at maturity they moved out and the independents moved in.

So, it so coincided that by the time you are passing the PIA, thinking that was the solution you were looking for, it fell into the time when all these factors I have described have combined to make the big players start rationalizing their portfolios. So, within this petroleum basin, the multinationals can only be interested in big ticket items in the deepwater where costs have remained fairly stable, because they are not affected by these factors we are talking about. They are also not affected by the cash call problem of NNPC because they are run as PSC. So, that region has remained stable and that is the region to stay for now. I hope they make additional discovery because once production falls to a particular threshold, they will not think about it. They are also going to leave the deepwater.

So, we are talking about a mature basin: declining production, higher cost, higher unit cost of incremental production. And that is normally when multinationals leave. So, if you were an ExxonMobil taking over 10 billion barrels of fresh discovery in Guyana at $3-$4 per barrel; you are likely to move your capital there instead of coping with all these crises around here.

So, those who are managing the industry have to understand the context because that is when you would stop chasing the multinationals as if they are the only sources of investment into a sector from which they are pulling out. When you understand the context, you will be looking for credible independents that would replace the multinationals. It is a well known movement whether it in North Sea, whether it is in Gulf of Mexico, when the big boys are moving out because the basin is mature, the independents move in to mop up.

Unfortunately, between the NUPRC and NNPC managing the industry, they never came to grips with this context. So, you are there chasing the multinationals as if their decision to leave came from the government agencies (these are corporate decisions and they are not going to change their decisions), and then, becoming some obstacles to independents coming to take up the positions of the multinationals. So, as we were discussing earlier, we have seen transactions that should not take more than three months to conclude taking more than two years and still running. So, during the intervening two years, neither the exiting multinationals nor the incoming independents are making any new investments. And those assets continue seeing declining production. So, if those managing the industry had seen the context very well, in the past five years they would have spent most of their energy determining which credible independents that should come in. That is key!

It shouldn’t also become an all comers affair. But because they didn’t understand the context and did not know what to do, it became an all comers affair. And probably no more than 30 percent of the number that came in as independents that have the competence to run the industry.

So, it is easy to put your nose up and say ‘yes since the independents came what are they doing?’ But again, it is the part of the regulatory process that brought them in that made it possible for those that don’t have the competence to come in and take over the assets. It is a regulatory issue.

So, if you ask me, the regulator has to wake up and design a recovery programme. No other person will do it. Unfortunately people think it is the fault of NNPC. I tell that NNPC has no role to play in the design of a recovery programme for the industry because it is a player like all the others. It is just like all the things that NNPC is currently running about with interventions. You cannot be the one running surveillance on the pipelines that are operated by others. Is NNPC the operator? It is the failure of the system that prompts NNPC to take responsibility on security of the assets. Those pipelines are operated by two retreating multinationals: Shell and Agip who are no longer interested in the assets associated with the pipelines. And because you have not brought in credible layers to fill the gaps, that is why NNPC is filling the vacuum. NNPC is a non-operator, so it cannot be awarding contracts on assets that it does not operate.

So recovery can happen, but it cannot happen by mere chance. There has to be a clear industry recovery plan by the government midwife by the NUPRC.

Drilling reports on Africa has indicated high level activity across petroleum provinces except in Nigeria despite the movement of the IOCs to the deepwater. You are a geologist. What has caused the break in the trend of exploration campaigns that discovered the existing deepwater reserves?

There has been no major discovery in the Nigerian deepwater in the past 10 years. The same multinationals that made the string of discoveries between 1993 and 2003 are now engrossed in producing them.

Go and look at the production profile of the Nigerian deepwater oilfields. What was Agbami doing five years ago and what is doing today? What is Bonga doing today and what was it doing five years ago? So, anytime they tell you they are in deepwater, what they are telling you is that they are producing what they discovered in deepwater.

Like you said, apart from now that I hear from you people that fields like Owowo and all these small satellite fields they want to bring on, the only next big thing you are going to see is when Shell and their partners and NNPC sort out their fiscal issues about Bonga Southwest and Bonga North. Those are the only big ticket projects that are going to come in the deepwater.

Probably Zabazaba?

Well, yes. But Zabazaba is more political than anything in the field. What is the size of Zabazaba? About 500 million barrel reserve is big but not a giant for a field in over 1000 meters of water depth. Again, Zabazaba has been discovered long time ago, so it is not a new thing happening.

So read the lips of these multinationals when they say ‘we are not leaving, we are in the deepwater.’ What are they doing in the deepwater? Recovery, production!

So, we interpret it to mean that the IOCs are cashing out existing deepwater assets?

Correct!

You mentioned the need for the independents to replace the retreating multinationals. But some of the brownfield acquisition deals by the independents actually run into a halt at the approval stage. What could be done to push these deals through and activate production recovery?

That is the point! The NUPRC, as you said, must bring these acquisition deals to a close as part of the industry recovery plan and process. And the NUPRC is well empowered if they want impose conditions for acquiring these assets.

For instance, if you provide that a new acquirer should submit a five year development programme as part of the approval process, it is well within their powers to do so. If you want to acquire the ExxonMobil assets and the fields are doing 150,000 barrels a day today; then the NUPRC could say ‘come and tell us where you will take the production to.’ And the acquirer might say ‘in five years I will be doing 350,000 barrels out of these assets.’ Then that becomes part of the conditions for approval and you will hold them to it and there will be consequences for failure.

The NUPRC can within their powers ensure that those who are acquiring can work the assets. You can impose conditions on them: and if that is what you want to do, do so and get it out of the way and let the people go and work the assets. I don’t really understand how the NUPRC is managing the recovery process, if you ask me.

Analysts have also described the NNPC as the large elephant in the room, choking out every other stakeholder, be it players of regulators?

It is really not a very popular thing to say, but unfortunately, that is the truth! One of the biggest problems besetting the industry today is the unrestrained influence of the NNPC. This has made the company appear to be a net destroyer of value in the industry.

Can NNPC be challenged?

Only the NUPRC can do so. It can only be an effective regulator that can put every player, including NNPC, in its position. Otherwise, right now the NNPC is too big to be challenged.  They are so powerful. They are literally the custodians of the federation account, mainly the dollar revenue to the federation account. So, anybody coming into office sees NNPC as the custodian of the industry, whether regulatory or revenue or asset control. So, when you are such a close commercial and financial confidant to the president, nobody can challenge you.

Ministers have tried in the past without success. Go and ask Udo Udoma his experience with this subject when he was the Minister of Planning. He specifically worked out the revenue accruable from selling down NNPC’s interests in the industry. The revenue target was around $3 billion, and it was approved by the federal executive council but it never happened. Once NNPC didn’t want it to happen it never did happen. That is how powerful the company is.

Go and ask Ibe Kachikwu when he was Minister of Petroleum. He would tell you that NNPC is so powerful that it is only the president that gives it instruction. Even at that they flout the instructions once the president leaves. So, NNPC is that powerful.

Some of these challenges are constitutional and some are legal. You participated in drafting the Petroleum Industry Bill (PIB) which was legislated into PIA. Did your committee not discern that NNPC has become too large for the industry to carry? What did you do about it?

The PIB took 20 years from concept to becoming a law. There is only one reason it took that long. Once every succeeding minister that looked at the draft and realized the larger than life powers of the minister and NNPC are being curtailed they slowed down the process. Every new minister slowed down the process until it came to Buhari’s regime.

Buhari just determined that it should be passed into law. Otherwise, every succeeding minister paid lip service to the PIB only for the simple reason that the law was going to dilute their powers. And if you go and read the law today, it places NNPC where it should be. It does. But the president is yet to understand that the regulator is the go-to place when you want to run the industry. So, the go-to place still remains the NNPC and the regulator continues on its secondary role. The regulator is playing in the shadows. Otherwise, go and read the PIA and you will see that the NUPRC is more powerful than the minister.

Inside the PIA, everything the minister is approving should be a recommendation from the NUPRC. Yes, the minister is the approving officer but the NUPRC is the hub of industry technocrats. But an agency can only exercise as much powers as the boss wants it exercise. That is why NUPRC is still playing in the shadows.

See, I tell people that the way you should look at the NUPRC and the industry is like the relationship between the banking industry and the CBN; and how the NCC drove the telecom revolution. That is how it works. Don’t forget that NCC in those days of Ahmed we didn’t even know that there was a minister of communications. It was only the NCC that drove the industry. The same way, when you talk about the banking industry, it is not the Minister of Finance. It is the CBN. That is how the PIA has positioned the NUPRC to play in the industry; but it is not doing it. So, the go-to place is still NNPC.

Things are rapidly changing with the revival of local refining in the country at a time cumulative national oil output is declining. We see a situation where net crude oil export will diminish as local refiners demand increased feedstock. How do you think this would worsen the prevailing forex squeeze and associated inflationary trends in the economy?

The increase in local refining capacity should be a source of happiness for Nigerians. Not the way you put it. It is not a source of concern. As a matter of fact, the country would be better served if would refine all our crude oil.

Even when you are earning 100 percent dollar for every barrel you produced, you still converted the dollars you earned from 450,000 barrels per day meant for domestic refineries for importation of products that you sell in Naira. That is how it worked.

So, really, the dollars you are earning into consolidated revenue fund of the federation account is outside the 450,000 barrels per day allowable for domestic consumption. That is why the NNPC is able swap the crude for products. So the federation was not earning any money from that volume, because that was meant for the domestic. The same way, whatever we are consuming here in our domestic refineries, within the volume that is meant for domestic consumption, is a matter of how the CBN manages that for you. So, nothing has changed.

In practice for instance, the NNPC can still allocates the 450,000 barrels per day domestic consumption to the local refineries. And those local refineries could pay NNPC in Naira because even if it were in dollars, CBN is still going to change it to Naira to run the budget anyway. So, it is just a matter of the exchange rate that applies. Once the exchange rate is the same rate with which the CBN is going to lodge the naira revenue into the federation account, you have lost nothing. In any case, the total refining capacity over and above what we require internally can only go for export. So, rather than export crude, we are saying, export products. If Dangote Refinery is operating at full capacity, at least half of its output would go for export. So would its petrochemicals go for export. Then his LPG would displace imported LPG. So, in terms of value add, there is no way it wouldn’t be better for us to have total refining capacity.

Problem is that because we have run an industry for the past 30 years with zero local refining capacity, and now we are beginning to revamp local refining; to manage the foreign exchange interface between the NNPC and the CBN appears to bemuse them. Otherwise I would ask you, why should NNPC still be the custodians of the 450,000 barrels per day with which it only does swap to bring in products when this refinery here is importing crude oil from the US?

At least 300,000 barrels per day of that 450,000 barrels per day that is meant for domestic consumption should logically go to the Dangote Refinery! Once we agree on the exchange rate, that is it! In fact all of that 450,000 barrels per day should go to domestic refineries.

It is the management of the 450,000 barrels per day dedicated to domestic use that is causing the distortion that you are seeing. Otherwise we should be happy that our local refining capacity is higher than our consumption. We really should be happy. We don’t manage it well and we are dancing around; which why you have the impression that the dollars we would have earned are lost to domestic refining.

Nigeria’s LNG position in the global market appears vulnerable to the local asset divestments by its major shareholders and gas suppliers, including Shell, TotalEnergies and Eni. This is coming at a time all sources of global gas supply are oversubscribed. How do we manage the onshore asset divestment process so that growth projection for the NLNG is sustained?

It falls into what I have been saying that those who manage the industry- the minister, the NNPC and the NUPRC- should bother about how they meet some of the prime national economic aspirations for the industry.

Now, the NLNG is predicated on shareholders’ supply of gas feedstock. The shareholders are now divesting their assets where that gas will come from. Part of the regulatory approval for the new divestments is to ensure that gas supply to NLNG is guaranteed by the new owners. So, the Bonny LNG now has to transit from shareholder supplied gas to third party gas. It is a commercial transaction.

Do you know that if Seplat starts operating the ExxonMonbil assets, it can supply 400 million cubic feet of gas to NLNG per day. They are next door. One partner is already there with potential for 150 million cubic feet per day. It is just to tune in that pipeline. The gas is there. It is already processed. It is lean.

So, it is a strategy idea. Then the context has to be understood so the strategy also changes. There will be enough third party supply of gas to ensure that Bonny LNG does not sub-optimize. But I am asking you, if the managers of the industry understand what they are doing, why are they promising that there will be no shortage of gas for the pipeline going to Morocco at a time you don’t have enough gas going to NLNG? You heard the minister promising that there would be no shortage of gas. Will the gas come from heaven?

What did the GCEO of NNPC go to do in Korea? They are trying to put up a consortium to revive OKLNG. Is it the South Koreans that will bring the gas or do you build an LNG without gas supply?

So, I do not see anything to demonstrate that those who are managing the industry are out to solve national problems. I do not know. Otherwise you should pose these questions to the minister, the NUPRC and NNPC let me know what they are thinking.

Shell is leaving onshore, Eni is leaving onshore, TotalEnergies is leaving onshore…?

No, TotalEnergies is not leaving onshore. It is the only company that will stay. I have told you that before and I can always say it again that on Christmas day 2025, the only IOC JV partners that would remain on ground is TotalEnergies. So, they are not going anywhere! What they will not do is hold a minority stake in a JV where they are not the operator. None of the IOCs will accept that. That is why they and Agip will sell their stakes in Shell operated JV.

There is a number of undeveloped deepwater fields that call for deep pocket investments: Zabazaba, Bonga Southwest, Bonga North, Nwa/Doro, Bosi, Uge, Aparo, Owowo and many others. Why would the operators be in a hurry to cash out?

They want to squeeze the government and NNPC. I will give you an example so that you can understand it. If you look at the fiscal terms in any of the PSCs, the profit share is in tranches. So at the beginning, NNPC gets 30 percent. The operator gets 70 percent of the profit. Up to certain bands of continuous production, these figures start changing up to a point where NNPC is actually getting up to 55 percent and the operator is getting 45 percent.

If you take the Shell operated Bonga Main which has done over a billion barrels, it has maxxed out and the NNPC is now taking the bulk of the profit share. This is how PSC works. The operator does the work because he funded it. You pay your royalty if there is one, you take out your cost (cost recovery), then the rest is profit. That profit is split and the operator takes 70 percent and NNPC takes 30 percent in the first fiscal tenure. It is designed in such a way that, progressively, the NNPC’s take gradually reaches a maximum of 55 percent as production continues. That is the way PSCs work.

So, if you ask Shell to develop Bonga Southwest as part of Bonga Main, then from day one they will be getting 45 percent profit; whereas if you allow them to take it as a new development, they will start off with 70 percent of the profit share. So, the NNPC is doing the right thing by insisting that Bonga Southwest should be part of one discovery and development programme. They say, ‘tie it in and let’s continue production’ and people are saying no. And I hope we don’t have one dullard that goes into NNPC and falls under pressure and they grab what they demand.

To answer your question directly, all the fields that should be developed and have not been developed are tools for twisting the arms of commercial discussions. That is all that is playing at the moment. And at some point there has to be a compromise for the businesses to move forward.

With little or no new discoveries and a lot of empty blocks, why are we not doing licensing rounds?

We started now with four deepwater blocks, and they say they will conclude it.

But those ones are still Dahomey basin?

Yes. Remember that part of these other blocks was carved out when they changed to OML. So, it is continuous licensing round that will give rise to exploration works. That is when people make discoveries and spend good time developing them.

It is when there is licensing round that even the people who are on ground and who think there is prospect out there would now participate in them and spend money in exploration. Bid round has not happened in the deepwater for so long.

Again, it is a regulatory issue. I keep saying that as a regulator, you should ask yourself ‘what is our aim, what do we want to achieve?’ What happened that Prof Aminu instigated activity in the deepwater? It was a regulatory issue. ‘Go to deepwater and these are the terms that we will give you.’ And they went to deepwater! ‘If you make discovery, this is what we will give you;’ and as their discoveries were maturing they adjusted the terms. It is all regulatory issue.

You don’t drive exploration by just sitting down and hoping that somebody will stake money in exploration.

So it is not as if the deepwater is mature?

 There has to be more exploration for us to answer that question. There is scope for more exploration before that is determined. They went in and within a space of 10 years of massive exploration and found between 8 to 10 billion barrels of reserves, and they have been trying the produce that 10 billion barrels since 1996-97.

With advances in exploration technology, especially in seismic interpretation and modelling, it is possible to revisit some of the deep and ultra-deep missteps that were taken in the 1990s in the JDZ?

There were no big elephants in the JDZ. That is what lowered interest in the region. But again as you said, there is enough technological advancement for deepwater exploration, including the onshore! We believe that there is a lot of bypassed opportunities in the onshore, but there has to be activity. Appraisal exploration is driven by activity. When a company that is producing is running out of reserves, it has to stake money in new exploration. That is the cheapest way to build reserves. There has to be investment.

Is there anything you think we have missed out in this discussion?

Just go and ask those who manage the industry what their set goals are, where are they taking the industry and how are they planning to do so. You asked all the questions. Why are there no explorations in the deepwater? Why are there no licensing rounds even in the onshore?

Go and read the PIA. You will find that it is drill or drop. You are either working your assets or you give up the assets. There are provisions for third party explorers. Why are they not happening?

• The Oracle Today has since reached the Commission Chief Executive of the NUPRC on some of the issues raised by Mr Avuru; and his response will soon be published in our channel of interviews. Keep following.