This Has To Be The Iceberg

The two major news items on the oil and gas realm in Nigeria and internationally n the past week may not be the same. But they underscore the complex and intricate relationship between nation states and those entrusted with the management of their hydrocarbon resources. In Nigeria it was all about the report on the forensic audit carried out on the national oil company (NOC), the Nigerian National Petroleum Corporation, NNPC, by the external auditors, Price Waterhouse Coopers (PWC), which was submitted to the President on Monday last week. While on the international scene, the news that dominated was the management reshuffle at the world’s biggest oil company, which also doubles as the national oil company of Saudi Arabia, Saudi Aramco.

The discussion this week will be on the allegations - or actions - carried out by officers of the NNPC, apparently at the behest, or at least with the blessing, of compromised officials of the ruling government. While next week, unless another more important news breaks, hopefully a positive one, we will go farther out and have a look at why the ruler of the Kingdom of Saudi Arabia, King Salman bin AbdulaAziz Al Saud decided to reorganise his country’s NOC. Political meddling is something public-owned and economically sensitive institutions anywhere in the world have to contend with. And institutions don’t come any more economically sensitive than national oil companies.

This latest forensic audit was commissioned to look into allegations of the non-remittance of over 20 billion dollars due to Nigeria labelled against the corporation and, by extension the Jonathan government, by the then Governor of the Central Bank of Nigeria, Mr. Sanusi Lamido Sanusi, now Emir Muhammadu Sanusi II of Kano. Instead of doing a forensic article on a forensic report, we can cast our collective minds to the recent past and build a pattern of behaviour that our collective amnesia may have erased from our  collective memory.

In 2011, the Federal Ministry of Finance, commissioned a forensic audit that was carried out by another international audit firm, KPMG. Their findings indicted the NNPC with, among other things, the over-deduction of funds relating to petroleum products subsidy claims to the tune of 28 billion Naira. It is likely that if not for the enormous sums involved in the Sanusi allegation the PWC report will enjoy the same fate as the KPMG report, which is likely lying in some cabinet and gathering dust. This is not saying 28 billion Naira, in any currency, is not an enormous sum.

Looking further back, before the KPMG audit report there was the Halliburton bribery scandal that ran from 1994 to 2007 which saw the payment of $182 million to senior members of the ruling party and officials of the NNPC. This particular corruption scandal also saw the indictment of the CEO of Halliburton, former US vice president Dick Cheney, by a Nigerian court and the sentencing by a US court of Jeffrey Tesler, the UK attorney who oversaw the bribe payments. The bribes were paid by Halliburton to secure a six billion dollar engineering and construction contract on the Bonny LNG project.

In 2004 when, legislating under the Foreign Corrupt Practices Act (FCPA), the US Department of Justice announced that the Swiss energy giant ABB Vetco Gray has admitted to foreign bribery payments to a tune of one million dollars to officials of the NNPC subsidiary that evaluates and approves companies for contracts. This was said to be in exchange for confidential bid information and favourable recommendations for seven upstream construction contracts.

A few years later an American company, Willbros Group Inc. was caught in the same net by the US Department of Justice for bribes paid to the officials of the same NNPC subsidiary and to senior officials of the ruling government to assist the company in obtaining $387 million worth of work on the Eastern Gas Gathering System (EGGS) project.The payments were to a tune of $6.3 million paid between 2003 and 2005.

Everyone as of that time thought and hoped that as far as official corruption in the Nigerian oil and gas industry goes, we had seen the iceberg and not just its tip. Until the coming of the Jonathan government when questionable deals are in billions and not in millions of dollars. Making everything that happened before look paltry in comparison.

In 2013 a Swiss NGO, Erkalung von Bern, or ‘The Bern Declaration’ in English, wrote and published a damning report titled ‘Swiss traders’ Opaque Deals in Nigeria’, where it alleged collusion between NNPC officials, Nigerian petroleum products importers and Swiss companies to perpetrate heavy fraud against the Nigerian state. The report placed NNPC on suspicion of illegally diverting $6.8 billion and pointed fingers to many products importers and their Swiss collaborators. The national assembly ordered a probe into the allegations and not much has been heard of that ever since.

In the former CBN governor’s allegations, the missing $20 billion was lost in the 19 months between January 2012 and July 2013. While Sanusi’s allegations cover huge shortfall in oil revenues and the mismanagement of the petroleum products subsidy programme of the current government, the Swiss NGO focussed on the opaque deals between swiss oil traders and Nigerian businesses on one hand and the underhandedness of the Nigerian authorities on the other, both of which cost Nigeria billions of dollars. Looking at the huge sums involved, the hope now is that this is the iceberg and not just its tip.

Whatever its failings, NNPC is a national institution in Nigeria. No other establishment or company in Nigeria “touches our lives in many positive ways” as NNPC does. With a clearly defined technical and commercial agenda, focus and discipline it has the capacity not only to touch our lives but also to mould them and that of the nation more positively than it does now.

For a company that controls the most extensive oil and gas reserves in Africa which also rank 11th in the world, there is definitely more to the NNPC than corruption scandals and embarrassing fuel queues. Unfortunately that is what the corporation is now judge by and what history may hold it to account for. In just over half a century from today, when the centenary of the corporation is being written, what achievements are there to be celebrated in the third and fourth decade of its existence may unfortunately be blotted by these allegations of corruption. And blame would more likely to be placed squarely on the management of the corporation of this era first before adding, as a footnote, whichever government or oil minister was in power. That is why a lamentable feature of the last six or seven years is how ruling politicians have  eviscerated the roles and duties of the exalted office of the Group Managing Director of the NNPC. For holders of the office, it became less about enduring legacy and more about survival.

The emasculation of the powers of the office of the CEO of any corporation will reduce it to being a rudderless ship in stormy seas. The intricate power play at the top is best handled by someone who is not only technically sound but also savvy enough to know that history will judge him by the quality of his decisions and the naked, unadorned performance statistics of his stewardship rather than the longevity of his/her stay in office. Someone who executes the mission with eyes firmly focussed on the vision.

In all the allegations above, but especially in those involving product subsidy, a pliable NNPC leadership was seen to be at the beck and call of a powerful cabal of political office holders and their businesses that have somehow, momentarily, found a way around legality, accountability and reason.

The government officials and the managers of the corporation that midwifed such corruption cannot be unaware of its scale or effect. To put these huge sums in context - one of the main battlegrounds of the upcoming  general elections in the United Kingdom is on the issue of the which of the two main parties, Labour or Conservative, is better suited to manage the £115 billion pound annual budget of the UK National Health Service, the NHS. The $6.8 billion dollars claimed by the Swiss NGO to have been lost in unjustifiable subsidies payments between 2009 and 2011 is three times the national health budget of Nigeria for 2013.

The nation has almost been brought to its knees economically by the actions of the last few years - but the situation is still not irredeemable. We were approaching the tipping point before the political revolution of March 2015 happened on us. This could be what will pull the nation away from the crag.

The Case for Compressed Natural Gas

The company car that picked me up at the Simón Bolívar International Airport, Maiquetia, on the outskirts of Caracas, Venezuela, was running on compressed natural gas, or CNG. This was in August 1998. I recall asking the driver why he had a gas cylinder in his car boot next to where I put my bag and getting back a response that the cylinder is for CNG. CNG is a clear, odourless and non-corrosive gas stored in cylinders under pressure and used in vehicles as fuel. I would later learn that many cars in Venezuela, including the over ten thousand sleek and spacious white taxis on the streets of Caracas, run on CNG. At that time, the South American country, which refines more oil than it needed and, at less than five US cents (less than ten Naira) a litre, boasts of the cheapest gasoline price in the world, had also rolled out the use of CNG as vehicular fuel.

But my arrival in Venezuela in 1998 was not the first time I came in across CNG. Ten years earlier in my modest high school library in northern Nigeria we had access to various newspapers, national and international magazines and trade newsletters from various companies. One of such publications that I particularly took an interest in and which I had always looked forward to seeing on the rack was Napetcor, the in-house newsletter of the Nigerian National Petroleum Corporation, NNPC. To this day, it beats me how that newsletter gets there but I am sure, like it did in my own case, it opened a window to a possible career in oil & gas to many young minds in the school. Towards the end of the eighties the magazine carried many news items relating to NNPC’s push to have Nigerian cars run on CNG. In one edition it even published the story of a prototype car developed by Nigerian Gas Company, NGC, a subsidiary of the NNPC, which ran on CNG.

Vehicles that run on petrol or diesel can be converted to run solely on CNG using an off-the-shelf kit. In many countries vehicles are now manufactured to be bi-fuel (dual fuel), that is, run on both CNG and conventional fuels. Brazil has taken a step further by developing one that runs on three fuels; petrol, NGC and Ethanol.

Venezuela did not add CNG to its fuel mix because they were experiencing a cost or availability crisis as Nigeria currently is, they also did not do it because of CNG’s much-touted environmental benefits. The motivation for a country like Venezuela to add to the types of fuel available to its motorists is both commercial and strategic.

Commercial because it can now boast of one more hydrocarbon derivative it can sell to its citizenry, albeit too cheaply, and possibly add to the list of what it exports to neighbouring South American countries that depend on it for energy. In many countries fuel cost for a CNG vehicle is less than half of that of a gasoline vehicle. In Venezuela, where a litre of petrol is the cheapest in the world, CNG is almost free. In addition, you can have your CNG system routinely serviced for free at various service and conversion workshops scattered across the country.

It is also strategic because by embracing the CNG technology quite early, Venezuela has now become one of the pioneers of the technology and may, at some point in the future, export not only CNG but also expertise in CNG technology. At least, that was the hope of late president Hugo Chavez when in 2011 he charged the national oil company, Petroleum de Venezuela SA, or PdVSA, to accelerate the setting up of a manufacturing plant for CNG equipment. PdVSA has nearly 120 conversion workshops spread across the country and nearly 100,000 vehicles in Venezuela have been converted to CNG.

The Government of Venezuela passed legislation, effective April 1, 2009, that decreed assemblers, manufacturers, importers and marketers of motor vehicles to have either CNG or bi-fuel (gasoline/CNG) vehicles for sale in their dealerships at all times. Forty percent of the over two thousand cars assembled in Venezuela in January and February this year are powered by CNG.

The added value to the country is job creation as it requires a multitude of trained and skilled workforce to work in the conversion garages and fuelling stations within and outside the country.

Petrol is neither as available nor as cheap in Nigeria as it is in Venezuela now (or was in the 90s). The two countries, both members of OPEC, are ranked 8th and 9th in the world in proven gas reserves but Venezuela's population is about 18% that of Nigeria. So the demand curve for CNG if it ever takes off Nigeria would certainly be much steeper than that of Venezuela. As it stands today, and has been witnessed countless times in the country, a serious scarcity of petrol and diesel can potentially immobilise almost all land transportation in the Nigeria - with attendant hardship for the populace. If conversion for existing vehicles to run on CNG or bi-fuel and the manufacturing of new vehicles that run on CNG is encouraged in the country that would immediately ease or eliminate such hardship, reduce the demand for petrol - most of which is imported at great cost to the country - and also create an industry, with resultant jobs and infrastructure that did not exist a few years earlier.

Venezuela compares well with Nigeria because of its energy resources endowment when compared to countries in its immediate vicinity. This presents an opportunity to benefit from a home market and also access a wider one just outside its borders. Nigeria shares these unique features with Venezuela.

Opening this write-up with Venezuela does not in anyway negate the impact and pervasiveness of Natural Gas Vehicles, or NGVs, in the world. The take-off of NGVs, vehicles running on compressed or liquefied natural gas, in the wider world is nothing short of extraordinary - thanks in part to a deeper environmental awareness in developed nations and a desire to cut the cost of transportation in developing nations. CNG is cheaper and less polluting than fossil fuels such as Petrol or diesel, and for countries with the infrastructure, it is also more readily usable. In the USA, Phill, a home CNG refuelling compressor, is now available that enables motorists to fuel up their vehicles overnight at home.

Both Brazil and Argentina each undertake over 80,000 vehicle conversions a month and have almost two million NGVs on their roads. This is an infrastructural capacity and a number of NGVs that is almost ten times greater than Venezuela has. The growth in South America is fuelled by a drive, no pun intended, to bring down the cost of transportation to the public.

Iran on the other hand is driven by necessity to develop a robust CNG economy. When the former Iranian president, Mahmoud Ahmadinejad, wanted to mitigate the effects of crippling sanctions on the people of his gas-rich country, he anchored his energy independence drive on building a sustainable supply of cheap transportation fuel based on CNG. The aggressive plan started a programme to convert all the vehicles in the country to run on CNG within five years at a rate of 1.2 million vehicles a year. During the same period, over 10,000 filing stations were to be retrofitted to dispense CNG. To underline the seriousness of his ambition he ordered all six hundred thousand state-owned cars to be put on the conversion programme immediately. It was also decreed that by a certain date in the near future all new cars built in the country must be GNVs. Today Iran has more NGVs on the road than any other country in the world.

In Europe, the shift is to have all public intra-city transportation to be powered by CNG. France and UK are ahead of most other European countries in achieving that - the trend in Europe unlike Iran is predicated by a concern for the environment and comes with some incentive in the form of monetary grants or tax relief for individuals who convert their existing vehicles or buy new ones that use CNG.

Almost all the Nations of western Europe, the Balkans, most of the Americas and many nations in Asia are on the CNG bandwagon. Most of these countries did not have any plan on CNG when NNPC developed that prototype vehicle in the late 80s. There are currently nearly 20 million NGVs in the world, 35% of them are on South American roads.

Edo State in Nigeria leads the rest of the country in embracing the promise of CNG. It has just over ten refuelling points and, as of two years ago, about one thousand vehicles running on CNG, this is modest by all standards. Even in Africa that statistic compares unfavourably to Egypt which has nearly 120 refuelling points for over 150,000 vehicles and South Africa, a late arrival to the NGC arena but whose entrepreneurs are already harnessing plans to dominate the sub-saharan Africa CNG market.

At the NGV2014 trade show held in Johannesburg in November last year, Zazi Dladla, the Director of CNG Holdings of South Africa, set out his company’s target of accessing markets in gas-rich countries like Nigeria and Tanzania and setting up conversion garages and fuelling points. He confidently projects that his company can set up distribution infrastructure in those countries in a matter of months.

Nigeria can create an entire economy based on CNG if it so wishes. A starting point would be to turbocharge what is happening in Edo State and roll it out across the entire nation; After a head start of nearly thirty years, innovation and entrepreneurship in NGC should be exported from Nigeria and not imported.

Low Oil Price and Way Out for Nigeria

As we approach that day in May the montage of policies of the incoming administration of President-Elect Muhammadu Buhari on all sectors of Nigerian life will become less fuzzy. It is easy to deduce that due to the ideological polarity of the incoming and outgoing governments, the changes afoot will be sweeping. One of the sectors that is bracing itself in anticipation of these changes is of course the nation’s prime industry, the oil and gas industry.

There is so much hope riding on the expected changes to the industry; the PIB and eventual reorganisation and reform of the sector, environmental remediation in the Niger delta, job creation, to mention just a few.

An important but unasked question on the immediate future plan of the industry is that of increased production in light of depressed revenues. Pertinent to this is a re-strategising of the sector to give added weight to local consumption against exports. Of importance is a consideration of how much value the nation can derive from its oil if it is refined locally into fuel and petrochemicals products for local consumption and export. Weighing local value addition against export is a toss up between industrialisation, innovation and job creation on one hand and liquid cash on the other. The former improves  the national economy and standard of living of the populace and the latter oftentimes promotes indolence, profligacy and corruption.

To focus the national attention to producing more oil and not more export revenue from oil is not going to be an easy task after four to five decades of singular focus to easy petrodollars. But seeing that those petrodollars have not taken us very far in terms of national development a change of focus should be an easy sell. Especially if the gains of the change can be well articulated and sold to the citizens by a trusted political leadership at a time when the nation’s balance of accounts is unfavourable and austerity and prudence is forced on it.

In a lecture titled "The Strategic Importance of Nigeria's Oil and Gas to Global Security and the World Economy" delivered at her alma mater, Howard University, in the United States on a balmy April day three years ago, out-going oil minister, Mrs. Diezani Allison-Madueke, outlined the country’s oil production ambition by the end of the decade. According to her, the ambition is to raise Nigeria’s reserve base to 40 billion barrels of oil equivalent (BOE)  and the daily production to 4m BOE by the year 2020.

As is usual with such speeches given in such gatherings, there was no supporting data to inform the audience if the current exploration and production (E & P) infrastructure and assets in the country can support that ambition, what strategic plans are afoot to achieve that or if there is enough investment going into the sector to realise that.

Or more pertinently, why 4 million barrels per day? Why not 6, 8 or 5? Is there a reason behind the 4m BOE/D target? Does that figure reflect a knowledge of what is possible under the circumstances at that time or was it merely a reflection of the extent of our collective ambition for the sector? Can we aspire for more? Is the plan to process the excess production into products locally, request an upward review of export quota from OPEC  or of shutting it in? I am sure there are more questions that can be asked from the minister’s Statement of Intent.

Almost coincidentally, in February of that year, two months earlier than the Minister’s homecoming speech at Howard, Ian Craig, an executive vice-president of Royal Dutch Shell stated at the 12th Annual Nigeria Oil & Gas Exhibition that his company, Shell, alone, can produce 4m barrels of oil in Nigeria if the funding issues and oil theft can be sorted by the Nigerian authorities.

The word ‘almost’ is used at the beginning of the above paragraph because it is hard to fathom that Mrs. Allison-Madueke was unaware of the above position from her former employers before her speech at Howard University. But that is a discussion for another day.

The minister herself mentioned in that same speech that with some deepwater projects coming on stream, Nigeria can add another one million BOE/D from its current production ‘in the next few years’ (her words exactly). Since the country currently boasts of 37 billion barrels in reserves and produces 2.37m BOE/D then, going by this plan, ‘in the next few years’ the nation would be only about 600,000 BOE/D short of the 4m daily production target.

Yes, ‘in the next few years’ is both ambiguous and noncommittal but considering that the context in which the statement was made is as an additional rider to a stated target, then one can interpret here that the ‘few years’ were meant to come earlier than the projected eight years (2012 - 2020).

Suffice it today that Mr. Craig’s offer of hitting the 4m BOE production refers to the capacity of his company, Shell, only and not that of the entire nation and considering that his company is the nations number one producer we can infer here that if Shell alone, through its two companies, Shell Production and Development Company (SPDC) and Shell Nigeria Exploration & Production Company (SNEPCO) can take us to that promised land, then producing far more than 4m per day is achievable if production from other operators such as ExxonMobil, ChevronTexaco, Total and Agip, to mention only the major IOCs, is factored in. Add to that the contribution of indigenous producers such as Sapetro, Oando and Seplat.

So with some effort the a level greater than the 4m BOE/D target is achievable. But before we roll out the drums from a celebratory ‘owambe’ let us consider a few points.

Oil revenue dependent economies normally adapt two strategies in times lower oil price. One is to pump out more oil to compensate for the revenue loss and the other is to process the produced crude into higher value products for internal consumption or export which should also make up for loss of revenue due to falling prices. Considering that the 4m BOE/D target was mooted at a period of high oil price it is safe to assume the intention was simply to increase capacity. Which makes it more apt to consider pursuing that line of thinking now that oil price has fallen and it becomes a bit more necessary to pump out more oil.

In addition, increasing production is dependent on Nigeria’s OPEC export quota at one end and processing capacity for fuel and petrochemicals at the other. OPEC usually considers a request for quota increase based on a country’s reserve base but, unfortunately, Nigeria’s oil reserves have not increased substantially in the last few years. Our refineries are also still working far below capacity.

So despite the good intent of increased oil production, the country will find it difficult under the current circumstances to push for an increase in production unless, of course, ‘in the next few years’ an aggressive campaign for the rehabilitation of the existing refineries, or building new ones, is commenced and an expanded E & P offensive is launched to increase the nation’s reserve base. Of course, the preferred destination for any additional barrel produced should be a Nigerian refinery and not an ocean-going crude carrier.

But even if a justification is found for that push there is currently a dearth of investment into the upstream sector because investors are simply staying away due to the uncertainties surrounding both the content and the future of the Petroleum Industry Bill, PIB.

The restiveness in the Niger Delta which has now greatly abated did not help matters also as it forced many operators divest their onshore producing assets. Few of such assets are now optimally producing.

So while the current low oil prices present us with an excellent opportunity to expand our hydrocarbon output and improve our local processing capacity we are, unfortunately, more likely to be held back by our unpreparedness to take advantage of such an opportunity and all the benefits it brings.

Expanding Nigeria’s capacity to process its hydrocarbons internally may be the best thing to happen to the country’s march economic greatness. Whoever said lower oil export earnings are all about doom and gloom?