PENGASSAN May Have A Point on PPMC But…

A few days ago the Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN, suggested to the Federal Government of Nigeria that in order to solve the perennial problem of petroleum products availability, the subsidiary of the Nigerian National Petroleum Corporation, NNPC, in charge of delivering such products nationwide, the Pipelines and Products Marketing Company, PPMC, need to be repositioned for better service delivery. PENGASSAN added that some of the challenges affecting the efficient operations of PPMC include insecurity of pipelines and staff and aging and substandard operational equipment, shortage of manpower and irregular capacity building for existing staff of the company, inadequate funding and poor safety standards.

All the problems mentioned by PENGASSAN are real. And yes, a well run PPMC would not only supply products to all nooks and crannies of the nation but also engender job creation and economic growth. No arguments there.

The PPMC is one of the more, if not the most, ubiquitous of the NNPC subsidiaries. In spite of the fact that it is a pipelines company that has few operational pipelines and depots that are mostly dry, the PPMC is responsible for every litre of fuel you buy in the country. This very important arm of the NNPC maintains the artery, be it through pipelines or by trucks, that supplies petroleum products to all retailers in the country. It manages 5,120 km of product and crude pipelines, 34 terminals, storage depots, jetties and pump stations. It receives a daily allocation of crude oil from the NNPC which it refines in NNPC’s refineries and supplies to the domestic market using its supply infrastructure. Any refining shortfall is compensated for by importation.

Breaking down the PPMC business model into its base components, it can be seen quite easily that both ‘pipelines’ and ‘products marketing’, in other climes, are successful business in their own right and can be both self-sustaining and hugely profitable. The question to be asked is why and how such a company has turned into drain on the nation’s resources.

Of the three main liquid derivatives, that is diesel, gasoline and kerosene, only diesel is fully deregulated. So PPMC is performing a social service in its product supply business and not expected to turn a profit at the end of the business day - not unlike any public school or hospital.

The pipelines business is also performing well-below capacity and even when it does perform well, it is part of a business system that, ab initio, is not primed to for profitability - it is also not profit centre for the NNPC. There is hardly a country in the world where such an infrastructural outlay is not used by a private company to generate profit for its investors or by a nation to generate revenue for the common good.

An example is Kinder Morgan, an energy infrastructure company based in the United States of America which is a 130 billion dollar company with a business is mostly derived from owning and operating petroleum products pipelines and terminals. The company neither refines crude oil nor sells its derivatives. All it does is efficiently transport and store products on its over 68,000 miles of pipeline and in its 125 million barrel capacity terminals. The company transports on the average 2.3 million barrels of liquid products and 1.3 billion cubic feet of gas per day. All over the world there are hugely successful companies that do nothing but that.

This column avers that the issues PENGASSAN highlighted are real and cogent, but they are neither the cause nor the ailment but the symptoms. They are symptoms that have been manifest and in the face of the citizenry, the government and more importantly the management of the Nigerian National Petroleum Corporation, NNPC, for a very long time and are only acknowledged because there is not enough sand for the ostrich to hide its head. They are symptoms of a systemic failure that has its roots in the way and manner PPMC, NNPC and the nation is run and has been run in the recent past.

Even if all the problems of the PPMC as enumerated by PENGASSAN are remedied and the pipelines are transporting products and depots are all ready to receive and store these products if the refineries are performing at nil, or near nil capacity, and the nation is dependent on imports, the products scarcity problem shall persist and can only be remedied by importation. Products importation is an expensive and highly inefficient option and cannot be a long term panacea to epileptic refineries in a nation with the energy consumption profile of over one hundred and seventy million people.

Moving up on the chain, even if the refineries are working and feeding the pipelines and depots with products the problem shall still persist as long as the subsidy regime is in place because such a model robs the entire value chain of a profit motive. Neither the refineries, the pipelines nor the depots  are currently not profit making entities even when they are all working at full installed capacity. Like a wheat mill that adds value to the grain by turning it into flour for a fee, refineries receive crude and turn it in to various petroleum derivatives for a fee. As a processing centre, a refinery should charge for its services in refining PPMC’s daily crude allocation. And when the system works as it should, an NNPC refinery may refuse to process PPMC’s crude because a competitor to PPMC is ready to pay more for that refining slot or vice versa.

But even if there is no subsidy and the entire value chain is focussed on making a profit as long as there is no sustainable profit-oriented plan that ensures technical competence, prudence, discipline, accountability and sound business management system the products supply venture will not generate enough revenue or profits to be sustainable. Highly technical maintenance and supply contracts would still be given out to friends and incompetent suppliers as favours or for a less wholesome motive. This would,  in turn, see the gradual decay and obsolescence of the infrastructure, the erosion of capacity and plummeting of profitability.

Security of the pipelines, manpower capacity, inadequate funding and all the  problems mentioned by PENGASSAN shall be remedied if the PPMC is run like a company that is out to make a create value and reward its investors and which will lose money, go bankrupt and cease existing if it does not perform. Given the size of its market and the infrastructural outlay at its disposal, the PPMC is more likely to swim than to sink if left alone.

In a way it is a good thing that PENGASSAN is wading into this. The union is one of the few national bodies that are qualified to know the issues bedevilling not only the PPMC or the products supply end but the entire Nigerian oil and gas industry. They will be doing a disservice to themselves and the nation if they put any lustre on the situation.

So for PPMC to get to where PENGASSAN and the entire nation wants it to be there is a need to rethink the entire business model of the subsidiary in light of the challenges of petroleum products supply in the country and business profitability. The problems stated may be manifesting in the PPMC but they definitely do not have their roots there. The issue of PPMC and the efficient supply of petroleum products in the country is an excellent example of how much work lay in store for the incoming government.

Creating Our Own Oligarchs

To paraphrase the opening sequence of the modern day American movie phenomenon, Star Wars, “A long time ago in a land far, far away there was a garage sale. It was the biggest the world has ever seen”.

The break up of the Soviet Union was an interesting affair. Mikhail Gorbachev is credited to being the architect of the break up because, as the General Secretary of the Communist Party and the leader of the Soviet Union from 1985 and 1991 when the union was formally dissolved, he oversaw the liquidation of one of the most enduring political and social systems of the 19th and 20th century. A system that, apart from the fusion of diverse ethnicities of eastern Europe and the Caucasus into one entity, political and economic control or influence over dozens of other countries all over the world, a diplomatic reach second only to the United Nations, it also acted as a counter-balance to the overarching and ravenous capitalism championed by the western world with America at the helm.

Like De Klerk in Apartheid South Africa, Gorbachev, was not the first to realise that the communist system was fatally flawed - that realisation started during the time of his predecessor, Yuri Andropov, who initiated some tentative reforms. But Gorbachev it was who took the first really bold and concrete steps towards reshaping the system, steps that would lead to his   political demise and the dissolution of the Soviet Union as a political entity. He did not survive his own actions.

His policies of reform and openness, called Glasnost and Perestroika led to the erosion of Soviet power and gave a rise to ethnic nationalism in the various countries that made up the union. Invested powers in the system launched a military coup in 1991 while Gorbachev was on holiday in Crimea but the coup was foiled by the president of the most powerful of the states that make up the union, then Russian President Boris Yeltsin. By the time Gorbachev returned to Moscow the balance of power has shifted to Yeltsin who went ahead and completed the dismantling of the Soviet Union.

And that was when the garage sale started and the term ‘Russian Oligarch’ slipped into the English lexicon. The oligarchs are individuals, mostly Russians, who became fantastically rich beyond theirs and anyone’s imagination from the break up of the Soviet Union. They took advantage of the relaxation of various apparatus of state control; from security to borders to financial regulation, and built empires from small scale but unthinkable business dealings in a communist state, such as petty smuggling of apparel and cigarettes.

To succeed in what they do, they bankrolled and depended on the connivance of those that held the levers of power in Russia, by far the largest and most powerful country in the just dissolved Soviet Union. During Yeltsin’s first term in office, their access and influence went all the way to him and his inner cycle. Fortunately for them, that coincided with a time when the Russian economy with its communism-induced inefficiencies was opening up to the scrutiny of the west and a time when Yeltsin had embraced a policy of drastic economic reforms that would eventually see to the contraction of the Russian economy by over fifty percent. The principal component of his reform programme was the privatisation of inefficient state enterprises at all levels of the economy in a programme called ‘loans-for-shares’ from which few of the state-owned Russian companies were sacrosanct or protected. Because of the simmering distrust between the old Soviet Union and the west and the west’s understandable risk aversion, the oligarchs, who had by then infiltrated the Yeltsin political and family inner circle - especially the President’s daughter, Tatyana, were the only ones with the ready cash and the influence  to take advantage of this mega-scale garage sale.

Almost all the companies were sold at a very small fraction of their actual value. Boris Berezovsky bought the main TV channel in the country for a few million dollars which a few months later was valued at over 3 billion dollars. Mikhail Khordokovsky took control handful of Siberian oilfields, which were unified under the company name Yukos, which made him a billionaire many times over overnight. Then there was Anatoly Chubais who took control of the power monopoly; Alex Konanykhin who founded the first private bank in Russia; Mikail Fridman, the financial services mogul, who founded the Alfa Group and is worth over 15 billion dollars. He recently bought RWE Dea the German oil company for over 7 billion dollars. The list goes on.

When Vladimir Putin came to power after Yeltsin there was still more to be shared. So he vilified the existing oligarchs and created his own.

Oleg Depripaska, the youngest of the lot, bought the third largest aluminium smelter in Russia at the age of 26 and a few years later took control of Rusal (Russian Aluminium), the largest aluminium company in the world. Rusal currently employs over seventy thousand people and accounts for almost ten percent of all the aluminium used in the world. Aluminium Smelter Company of Nigeria (ALSCON) in Akwa Ibom State is the company's outpost in Nigeria. Alisher Usmanov, worth over 20 billion dollars and the second richest man in Britain, owned 30% of Arsenal Football Club of London. He made his money by taking control of Metalloinvest, steel conglomerate, in the 1990s. Vitaly Malkin founded Russia’s third largest bank, Rossisskii Kredit; Roman Abromavitch, the owner of London’s Chelsea Football Club, partnered with Boris Berezovsky to take control of Sibneft, the biggest oil company in Siberia for less than one hundred million dollars - again, a fraction of its actual value.

The concoction of political instability, inept and corruption leadership and poorly thought out economic reforms gave birth to what brought about the  original Russian garage sale which well-positioned economic opportunists with a few dollars at their disposal took advantage of and ‘legitimately’ robbed the state blind. The Russian commonwealth was sold off like no one wanted them.

A similar scenario is playing out in the dying days of the Jonathan administration and it did not start with his losing the March 2015 election. It built gradually over several months to that. But there are two main differences in the Nigerian case. The first is that the assets being sold are well sought after and the second is that, ab initio, access to power provided the opportunity for the rapid growth of some new companies through opaque processes that load the risk in their favour. As the Jonathan government entered its twilight, the massive war chest of accumulated funds from such companies started foraging the system for investments. A band of small well-connected individuals with access to the lucrative petroleum product subsidy gravy train, some with direct entry pass into the upper bracket of the product import system that involves the hyper-lucrative oil swap programme, accumulated an unheard of amount of money in the shortest possible period of time. With such a war chest of investment funds, the companies then ventured into the upstream end of the market and scooped some oil and gas assets being divested by the international oil companies. The upstream end of course provides a less risky, less ubiquitous and more enduring business than the contentious subsidy programme.

This scenario has played more than once with a few more companies in these last few months and many such deals may be in the pipeline before May 29th.

When recently Mr. Lai Mohammed, the spokesperson of the the party of the incoming government, was credited to have said that their government may reverse a particular upstream asset divestment from one of the major international oil companies in the country to a local Nigerian company many observers questioned why the net should not be cast further back in time and wider to include other companies that are of similar make up and engaged in similar deals as the company in question.

Apparently Mr. Mohammed is piqued by the fact that the company in question, Aiteo, up till a few months ago, had nothing but its involvement in the much-maligned products subsidy programme in its oil and gas industry calling card.

Legitimate Nigerian indigenous operators are known to any keen observer of the industry. These are companies that over the years went through the grind of marginal field bids, farm-ins, spare no effort to form enduring business partnerships, struggle to raise capital, both local and foreign, and over the course of many years or decades build their portfolio are known. Fortunately, the pretenders are known too.

So it makes justifiable sense to question how a company, any company, that less than a countable number of years ago could not rub two dollars to its name is now mopping up multi-billion dollar assets. A closer look at these deals may even reveal the unfortunate fact that some of these assets were sold by the IOCs at inflated prices which says a lot about the buyers - many it may seem did not get the valuation of these assets right or are simply in a hurry to convert their liquidity. This has a negative effect on the market as legitimate indigenous investors will find it difficult to compete for divested assets due to such over valuation. Legitimate indigenous Nigerian concerns taking over JV assets from international operators is a good thing for the country and must be encouraged and protected. It is the ultimate gain Nigerian content.

However, it is worthy of note here that the IOCs are merely selling off their minor JV equity holding in these assets and the major JV equity is still held by the Nigerian state through the Nigerian National Petroleum Corporation, NNPC, which has an active petroleum development company, the NPDC, headquartered in Benin City. It also happens that according to operating JV agreements, the major equity holder, the NNPC can take over the operation of these assets in the situation where the IOCs feel the need to withdraw their participation. So a first step for Mr. Lai Mohammed and the incoming government, if they feel so strongly about this situation, is to first of all invoke that section of the JV agreement and revert the operatorship of these assets to NPDC, a company that definitely has more upstream operating experience  and can manage these assets better than one that just a couple of months ago had nil upstream experience.

Yes, like Russia of the 90s, Nigeria is also coming out from nearly two decades economic dislocation, pervasive corruption and an era of political impunity. Be that as it may, we can still go about creating our own oligarchs in a much saner way if that is what we want to do.

Restructuring Saudi Aramco

Last week, it was a toss up whether to discuss changes in Saudi Arabian national oil company, Saudi Aramco, or the Price Waterhouse Coopers (PWC), forensic report on the non-remittance of $20 billion into the federation account by the Nigerian National Petroleum Corporation,  NNPC. The two news items hit the headlines about the same time and, obviously, the $20 billion dollar story won the day because not only is it local, it was also more sensational. But only after a promise to discuss the Saudi Aramco story in today’s edition.

The management reshuffle at the world’s biggest energy company, which also doubles as the national oil company, NOC, of Saudi Arabia, Saudi Aramco by the ruler of the Kingdom of Saudi Arabia, King Salman bin AbdulaAziz Al Saud, sent tremors through the financial capitals of the world. Time was when such news shakes many a western capital to its foundation, but gone are also those days of feared OPEC supply cuts and politically motivated oil embargoes. It is a different world and Saudi Arabia along with many other oil-export dependent economies have challenging years ahead.

Rumbles of some change started about two years ago, several months before the ascension of King Salman to the Saud throne. In the 2013 edition of the Saudi Aramco annual revenue, the company enumerated a three-pronged strategy to transform the company - expanding the kingdom’s resource base through a major step-out into unconventional oil and gas development, further downstream expansion into petrochemicals and curbing domestic oil and gas consumption.

Saudi Aramco recognises that unconventional oil & gas resources, especially shale oil & gas, are game changers in the industry. So, buoyed by the large discoveries in its eastern operations, the development of the of the Manifa heavy crude field and the Karan gas field, the first non-associated gas development in the kingdom, the company announced that its unconventional gas programme will be fully operational by 2013. Both Manifa and Karan are not typical Saudi Aramco type of developments and they signal a major step-out, both operationally and technically, for the company.

In the downstream, the company is focussing on being the global standard bearer for a petrochemicals-focussed NOC. A statement of intent in that direction from the company is the almost completed Sadara petrochemical complex in the Jubail industrial city, a joint venture with the American giant Dow Chemicals. Sadara is the largest chemical complex ever to be built in a single phase, with 26 integrated world-scale manufacturing plants. It is estimated that Sadara will be a Fortune 500 company within the first year of full operation. The country’s Master Gas System, MGS, launched over a decade ago has seen the country surpass the United States and most western European economies in per capita consumption of gas. Industrial use of gas is a major component and success of the MGS - Saudi Arabia now hopes to develop car and aircraft parts from the aluminium it is smelting and more advanced plastic goods from its plastics.

The third leg of this strategy tripod is a move to curb the domestic fuel and power consumption within the country by venturing into renewable energies. This calls for a brief raising of the eyebrows considering Saudi Aramco’s extensive oil and gas reserves, but it is a real concern for the country. Just recently the Saudi Basic Industries Corporation, SABIC, the country’s largest industrial concern, complained that it has not been getting enough gas from Saudi Aramco to meet its production obligations. Likewise, the immediate past head of Saudi Aramco, Khalid al-Falih, warned in 2010 that even with production increases, Saudi Arabia’s oil export capacity might be reduced by 3 million barrels per day by 2028 if skyrocketing domestic energy demand is not curtailed by more efficient usage. Citigroup even went as far as to suggest in 2012 that Saudi Arabia could turn into a net oil importer by 2030 if current energy demand growth patterns continue.

So although analysts see the transformation as Saudi Aramco’s way acknowledging the challenges ahead for it and other NOCs, it is not for lack hydrocarbon reserves. Considering that of the 30 mega oilfields with over 10 billion proven reserves in the world five are Saudi Arabian. The biggest oilfield in the world, the super giant Ghawar field, discovered in 1948 accounts for nearly half of the production coming out of Saudi Arabia. The field has an estimated 71 billion barrels in reserve and for the past half century has been producing an average of 5 million barrels of oil 2 billion cubic feet of gas a day and has the capacity to maintain that for another half century. Currently Saudi Arabia exports about ten million barrels of oil a day and has the capacity to ramp that up to twelve at will.

The change has been long in coming. Saudi Aramco and its owners have, by and large, been successful in policy planning and execution in the last few decades but such success and the expected bumps ahead for the global energy industry call for a transformation to both keep up with the successes and to prepare for the challenges. What is most instructive is how King Salman approached it.

Two weeks ago the management of the company was reshuffled with Khalid al-Falih, the CEO, moving up to the position of chairman, a position held by the 80-year-old oil minister, Ali al-Naimi. Amin al-Nasser, the senior vice president in charge of upstream operations moved up to be the new CEO.

Firstly, early in the year the Supreme Petroleum Council, led by the King, which is in charge of all policies and decisions relating to the petroleum industry was scrapped and replaced by the Supreme Economic Council headed by the monarch’s son, Prince Mohammed Bin Salman. The change is not in the name only, it is another way of affirming that the kingdom’s hydrocarbon resources will be shaped by the nation’s economic needs and not the other way round.

Ten days ago, the council approved the separation of Saudi Aramco from the Saudi Petroleum Ministry. This move, seen as a first step to wide ranging structural changes in the company, belies the new focus of giving the company the flexibility to have full financial controls and take commercial decisions without undue political interference.

The separation of Saudi Aramco, a commercial entity, from the Saudi Arabian oil ministry is said to be influenced by a need to divorce Saudi Aramco from foreign policy agenda of the Saudi government. This is a strategic move that underlines the understanding of the kingdom’s rulers that the game has changed and oil reserves should be seen for what they are - a strategic economic asset and not a political tool. This, in a way, means gone are the times when Saudi Arabia used its oil resources and clout in the Organisation of Petroleum Exporting Countries, OPEC, to declare an oil embargo on the West over the actions of Israel.

It is also a move steeped in realpolitik. Firstly, it has been a policy of the Kingdom for decades now to use the leverage it holds in maintaining the stability in both the supply and price of the commodity in its interest and that of the wider global economy. The recent price plunge of the last twelve months could easily have been averted if the Saudis had so wished. Secondly, even nations that would hitherto be hurt by a Saudi-assisted oil embargo are on the way to being energy independent and self sufficient.

What has all this got to do with Nigeria? If a giant like Saudi Aramco after climbing to the summit of the reserves pyramid and building an extensive indigenous industrial base on the back of petrochemicals is looking into the horizon and preparing for challenges aheads then it behoves on every oil exporting country in the world to examine its future vis-á-vis, its relationship to  its hydrocarbon resources. The smart move for any country is to de-emphasise the resource, any resource, and focus on the economy. As many other petroleum-rich nations can attest, oil has the capacity to both improve and wreck an economy. All the Saudis are doing is taking the right bend at the fork.

Knowing that a nation’s level of economic development is directly related to its energy consumption, let us all pause and imagine the level of economic activity that could see Saudi Arabia, a country of less than thirty million people, consuming over ten million barrels of oil a day internally in fifteen years as projected by Citigroup above! That is half of what the United States of America, a fully developed economy with five times the land area and ten times the population of Saudi Arabia, consumes today. Nigeria, Africa’s largest economy, in comparison consumes about 300,000 barrels a day.