Hector Igbikiowubo
2 December 2008
interview
MR. Odein Ajumogobia (SAN), the Minister of State for Energy (Petroleum) has been superintending Federal Government's policy initiative and implementation in the oil and gas sector of the Nigerian economy since June last year.
In this interview with Hector Igbikiowubo of the Vanguard, the minister tries to address these questions noting that there are systemic problems in NAPIMS and ambiguity with regard to responsibilities between his office and that of the Group Managing Director of the Nigerian National Petroleum Corporation, among other issues.
When we spoke earlier, you gave the impression that there are systemic problems within the operations of NAPIMS and that this is one of the problems you inherited when you came into office. Can you elucidate on this?
This is a system in which it takes an average of 24 months from inception of a project to the time when it is approved by the board. Imagine a contractor who has to bid for a project and he is not going to know whether he gets the project or not for 24 months after he has submitted his bid. That is going to affect the dynamics of the contract.
First of all, he is likely to overcompensate for that time. So NAPIMS contracting process is one of the issues that the industry has lived with for a long time and we are trying to address that, to try and shorten the contracting period to something that is reasonable, something that is comparable to other countries.
Twenty-four months or more is something that is unacceptable. That is one of the issues that contractors would always complain about, that is something that our joint venture partners would also complain about because although the joint operating agreement provides that if at least, (with regard to the joint venture contract) there is, I think, two weeks period, I think that also is unreasonable - that if for two weeks they don't get the money, they can go ahead and spend the money and recover it. So I think that whole process needs to be reviewed.
When you say shorten, is this going to be part of the reform process that we are awaiting?
Yes, it is part of it. The reform process entails many things. Clearly, one of the primary aims of the reforms is to create a more efficient and transparent framework for the operations of the industry. Certainly, this would be one of the things that would be addressed.
Apart from this problem you have highlighted, we have had instances where work programmes intended to improve upon production in producing fields are put off by NAPIMS because according to the leadership there, production targets are being met. Can you react to this development sir?
That would surprise me. First of all, it would be completely contradictory to government policy, which is to increase production. So I would be very surprised if there is anything like that. I think that such complaints should be thoroughly investigated. What I am aware of is that sometimes there are disagreements between NAPIMS and operators with regard to technical issues.
As long as we have an incorporated joint venture, the operators spend money and recover what they spend and it doesn't matter what it is. It doesn't matter whether it is reasonable or unreasonable. Now, if you tell me that you are going to produce an additional 20,000 barrels per day from some project that is going to cost much more than the 20,000 barrels per day you expect to produce, then that is a different scenario.
I think one has to look at a particular case on its merit. I would be surprised if it is just as simple as you've described it - you want to do something to enhance production and NAPIMS says no! Their job is to enhance production and ensure that the joint ventures are operating efficiently.
I recall you had also said there is ambiguity between the roles of the NNPC and your office which you inherited. Can you throw some light on this?
I will give you an example. Recently, there was an advert in the newspapers asking for contractors to submit bids for refinery contracts to refine crude oil. That advert was placed by the NNPC. Underlying that advert is a policy as to how Nigeria is going to treat the issue of refined products, whether we are going to build new refineries or whether we are going to acquire refineries abroad or whether we are going to refine our products elsewhere and bring it back.
I think that the role of the ministry and NNPC is blurred in terms of who is responsible for the policies - behind that advert for example. Is it NNPC that determines that 'okay this is what we should do?' Or is it the ministry that determines that 'okay this is what should be done?' NNPC is just the one implementing the policy. Clearly, policy should be driven by the ministry and NNPC should be an operator like any other operator and I think that is what the reforms is trying to do, separate regulation from policy, from operation.
Clearly, there should be other areas of ambiguity. Would you like to identify some others?
They come up in different ways and I think that the sooner those roles are clearly defined, the better. I don't want to get into specifics but I think in broad terms. I just gave an example of something that incorporates both policy and operation.
Now, it is not clear, but you hear statements from the corporation saying that government would build new refineries for example. That is a policy statement and it shouldn't come out from the operator, it should come from the government itself. I think some of that creates the kind of ambiguity I am talking about in terms of people who are playing in this market. Where do you go for what information? I think that is very important.
Last year, I understand that you gave your blessing to NNPC acquiring refineries outside the country. Is that the new position of the government?
We were, and we are, exploring various options. We have four refineries that have very limited capacity. One of the things we must do is to ensure that as long as we are importing petroleum products and we would be importing for sometime, is to try and do so as cost effective and efficiently as we can. One of the possibilities that we considered was that possibility. For me to give my blessing would mean government made a policy. We haven't got to that stage except now that we are looking at other possibilities.
We've got a lot of proposals from people who say 'look we can refine the oil for you, you just pay us a refining fee' and it's just the cost of freight as opposed to giving it out to third parties to bring in the products.
So we are looking at the most cost effective way of bridging that gap pending when the market is attractive to people who want to build refineries here. Because there is clearly a market - 30 million litres of refined products a day is no joke, not to talk about the West African sub-region. It is a huge market. But the basic framework to attract private investment into this sector is not in place for reasons that we have talked about before.
Would you say you are satisfied sir, with the way and manner NAPIMS has supervised the JV contracts?
I think NAPIMS has a difficult task in the sense that I don't think it has the capacity to deal with the volume of work that they have to do. When I look at the JV contracts that come to the board and look at the volume of work that NAPIMS has to do in terms of reviewing things to be able to make decisions, there is a tendency to blame NAPIMS but they would look at a proposal, raise certain queries and send it back to the company. I am told sometimes it takes three to four months for the company to respond.
But at the end of the day, people are just looking at the length of time it takes for NAPIMS to give its final approval, not the to and fro that has gone in between. I think we need to address this holistically. Look at this and look at how we can shorten the time to something reasonable.
Would you say the situation at NAPIMS is mostly a human capacity problem?
I think it is significantly that. I think NAPIMS can do with significant enhancement with capacity because of the volume of work it has to deal with.
The Nigerian content initiative was designed to get domicile jobs in-country and improve participation of local companies in the oil and gas industry. Now, when we have a 24-month waiting time for local companies to know whether or not they have secured jobs, considering that they have borrowed money from the banks to improve capacity, what does it say about government policy implementation machinery?
The local content issue is complicated by the fact that it is driven by policy that was enunciated by the NNPC. Again, this is another area where I highlight the distortion and the ambiguity between role and policy. Local content is a policy by definition and it should be driven by a policy maker. NNPC itself should be subject to the local content policy.
But they formulated the policy and they are implementing it through NAPIMS and that is why local content policy can only be implemented in the joint ventures. Because as a senior partner, you can use the leverage of being the senior partner to enforce certain things at the contracting stage' only at the contracting stage. And at this stage, you find that there is compliance.
But in the implementation stage, you find that there isn't. There is the policy and there is the implementation, then there is the regulation and ensuring an enforcement of the policy. That framework is not in place for local content. It is only at the contracting stage that you can talk about local content and only in the joint ventures.
At the contracting stage, you can say okay, for this job we want this percentage of local content in fabrication for example, that is, a particular volume must be done in the country. The guy signs off, if he is not prepared to sign off, he is not going to be pre-qualified. But at the point at which the job has been given to him, one or two things happens, he just doesn't bother with that undertaking and gives the job to some yard elsewhere or he gives it to a local company that sub-contracts the job outside. Both ways, that very desirable policy has not been fulfilled. And there is no consequence.
What is the consequence of his doing so? You blacklist him. We are in a contracting market, we don't have that many people who can do some of these jobs. So if you look at these awards, you find the same names recurring, it is the same people who come up. So what is the penalty? It is the law that provides the framework that gives teeth to the policy.
Considering the fact that funding is a major problem in the E&P projects and recently, there was this pronouncement that the oil companies were given till December to end gas flaring. How realistic do you think the deadline is?
I was appointed in July 2007 and there was a workshop sponsored by the World Bank in September 2007 which I attended and at that time, the deadline for end to gas flaring was December 2007. Everybody both in government and among the operators knew that that was an unrealistic target. The only way you could stop flaring at that time was to shut down production.
That reality remains today but I think between then and now, some progress has been made. Chevron, I know, has made some progress in terms of injection of gas. We have reduced our flares from 2 billion standard cubic feet to about 1.5 billion cubic feet. So we have made some progress. Can we get to zero by December 2008? I think the answer is obvious.
The only way you can do that is by shutting down production. And with the price of oil hovering around $50 per barrel and about going below, we want more oil rather than less oil at a lower price. I think as a government, we have to make a choice if that was our target and we are ready to make the sacrifice given a relatively high oil price. I think now we have to go back to the drawing board and say 'hey! should we not modify this target date in the light of our circumstances - where at the last OPEC meeting our quota was reduced by 113,000 barrels per day?'
There is another meeting coming up at the end this month at which like you know, Iran is seeking a further substantial cut. If the organisation decides to impose a further substantial cut on members, that would reduce our output even more at a price we can't predict. So do you want to shut-in production to stop flaring or do you try and find a balance to reduce flaring as much as you can by the end of 2008, while revising the time table in accordance with what is feasible?
Today, we are producing less than 2 million barrels per day and even at that, whatever we are producing is a function of decisions taken by those who superintended the industry in the past. However, today, we have a situation where Bonga SW which initial plans indicated would come on stream and contribute to Nigeria's crude oil output by 2009. Decision on this project has been put off till 2013, Bonga NW put off, Bosi, Bosi north, H block all put off. Local contractors had been urged to grow capacity to enable them take on the engineering jobs that would come out of these projects.
I recall that we were in South Africa in 2005 for the World Petroleum Congress and your predecessor made an impressive presentation urging foreign investors to come in and invest in anticipation of jobs which would come up owing to the projects all lined up in the industry. As a result of this, a lot of people took the hint and invested huge sums. From one of the photographs I noticed you had visited Dorman Long's premises to inspect their facilities, they have invested a lot.
I am certain that if you have not visited the Snake Island to see what the Jagal Group has put in place in the way of engineering facilities, you must have seen presentations from them on what they have on ground. With all of these projects put off, where does it leave the country's future production aspirations? Especially if this government wants to meet the 4 million barrels per day of oil production that was set by the previous administration for 2010? Where does it leave contractors who had been urged to grow capacity?
Well I think this question relates to your very first question on NAPIMS and the role of NAPIMS in the contracting system. Obviously, across the board there are funding issues and now with the price of oil where it is, other issues with regard to investment decisions. What you invest today is going to determine your production tomorrow and that is the point you have made.
I can't speak with any certainty with in terms of delay with regard to the projects you've mentioned. But with regard to Bonga SW and NW, there was a technical dispute between Shell the operator and NAPIMS which they could not resolve in time for it to come within Shell investment decision time frame. That is what happened with that. The others I can't speak to that because it hasn't come to my attention.
But I will say we are committed to growing production capacity for reasons that are obvious. We are still dependent on oil for 90 to 95% of our foreign exchange earnings and that is going to be the case at least for sometime to come. So it is in our own interest and especially with what is happening now where what you cannot control is production, what you can't control is price and right now we are suffering on both ends.
We don't know what the price is going to be and our production is declining. Indeed if we continued with this current level of funding in the upstream, in 5 years time our production would have declined significantly. It is in our interest as it is in our partners' interest for every effort to be made to enhance production rather than decrease it.
Now why a particular project is deferred has to do with a combination of factors. The funding primarily especially if it is for the JVs. Where it is for the PSCs we also have issues with our partners and you know with the modified carry arrangement trying to fund projects is all part of this administration's desire to ensure that we don't under invest. I am reasonably confident that looking at the projections of what is coming on_stream in 2009 and 2010 even if we don't reach 4 million barrels we should be a little close to it.
Pardon me if I continue to dwell on this issue but we have anywhere between 9 and 11 rigs operating in the Niger Delta today and at least anywhere between 21 and 23 is required to sustain oil production at optimal levels. I don't understand it sir, is there a complete breakdown in communication of government aspiration to NNPC/NAPIMS or what?
What we are doing now is meeting with our partners individually to see where this production is going to come from, also in the context of gas flaring because we are trying to do both. I will give an example.
Let's use the last OPEC cut; what we are trying to do is match the cut with flare down. In other words you are going to shut don some production, why don't you shut down production that is going to have a direct impact on flaring? In other words the smallest amount of oil that you will lose for the greatest amount of gas that you will stop flaring.
That sort of synergy and match is what we are trying to achieve - speak with the oil companies and find out what are the oil projects that are on now, what are the projects that need to be funded now to be able to ensure that this production at this time. We are taking it through that way rather than just making a policy.
It is like gas flaring again, it is one thing to just say flare down by 2008 December, it is not going to happen unless you identify the flare, identify the infrastructure that is going to reduce the flares, identify the projects that are going to utilise the gas and so on and so forth. That is really what we are trying do in a holistic framework, working together with our partners to ensure that we are achieve our objectives.
About 5 months ago you asked the DPR director to proceed on forced leave, a similar situation applies to the PPPRA executive secretary. What exactly is government's position on these officials especially given the reports so submitted by the investigative panels that you constituted?
I am actually in the process of doing my report. After the original investigative panels, there were complains about that, there was an audit panel that was set up to look at certain aspects because there was some disagreements.
They managed to resolve all the issues except one, so the auditor general was asked to set up an independent committee and he did that. In the meantime some of the people whose blocks were revoked wrote petition trying to justify why those blocks shouldn't be revoked and as part of due process we had to systematically go through them. They were given a fair hearing and they've started being processed, we are putting all that information together in a detailed report that would be submitted very shortly.
I understand that one of the panels, especially that set up to look into the petition by Sterling Global and Essar has since submitted its report and there are indications that the Ogunjana committee may have misled your humble self. What has been done about that or is this also going to be part of your report?
Yes I am making my report. Based on the findings of these committees, I am doing a final report to Mr. President.
Would this your report also cover HRM Dr. Edmund Daukoru's submission to the National Assembly? You are aware of his submissions aren't you?
I am aware but it doesn't directly impact on my mandate, which emanated from the investigative panel report and its aftermath. So I am limiting myself to those issues - which is where the subject of the 2007 bid round, the blocks that were awarded, were they done so fairly, etc.
Would this your report get to the presidency before the close of business this year?
Certainly, it is this month.
Can we look at the refineries? I am well aware that when the acting GMD of the NNPC came on board he made promises. As a matter of fact the first steps he took were to recover the refineries that were sold to Bluester and after recovering them, he assured Nigerians that those refineries would be made to work. Today those refineries are not working. Is there any justification for still keeping those refineries?
Let me start with the end of your question. The reason why the sale of the refineries was reversed had to do with an issue of transparency and due process. I think that was why that was reversed. The current administration has prided itself on following due process and I think that is very good for the country.
Everyday things come before me and it is not the amount of money involved that I concern myself with; rather, it is whether due process was followed. And I believe that if the process was followed, then the system that has been put in place will ensure that the result is acceptable by international norms and standards.
I think that is what happened in the case of the sale of refineries. Generally it is believed that government should stay out of business because we are not good at running it and I think we have proved that in many ways. There are a few examples around the world. Recently I went to the commemorative flight of Ethiopian Airlines to Abuja.
Ethiopian Airlines is 100% owned by government but it is run like a private company and they make a profit. So it is not to say that the refineries cannot run, I have visited them and I have talked to the staff and I have talked to the people who have run them before. Part of the reason why they have not run is systemic - if you would need N5 million you have to get some approval from the head office. Comparing that refinery to a privately run refinery, it is just not efficient. Having said that, I think it is also not fair to say that the refineries have not run since the GMD came on board, they have. At one time, I think Warri was operating at close to 100% capacity in the course of this year. Unfortunately, we have the same vandalism of the Chanomi Creek pipeline after having been repaired and so we can't get crude to the Kaduna and Warri refineries.
They are down again. There are several problems and one of them I had talked about is the way the management structure and the autonomy that is required for any business to be able to make decisions that are needed to be made quickly and get results.
The other problems relate to security, which is the one we are dealing with right now - the process of engagement to bring that line back on. But it remains vulnerable to the same sort of attack. If your question is should we not privatise, I think that is something that we are still taking on board as to whether that is the best way to go forward. But that doesn't remove from what we did before. By saying that we are considering privatisation doesn't mean that the previous administration was wrong in privatising. What we said was that the process wasn't in accordance with due process.
Isn't that subjective? Because you may go ahead and privatise and your successor may come in and say yours too wasn't transparent and that due process was not followed. And when you say that privatisation did not follow due process, can you share your observations with us?
I think due process is by itself an objective and not a subjective thing that is the whole point. If you set up a process, for example you have the Bureau of Public Procurement who would benchmark cost against the international benchmark or whatever. I think that in the case of the refineries for example, there were independent consultants who withdrew on the grounds that due process was not being followed. The process that was set up for the privatisation was being circumvented. The international consultants who withdrew I think highlights what I am saying that due process especially for this transaction - is a standard that is not determined by one administration or another. I mean if due process was followed, it is followed.
In the 2007 bid round that we are talking about, some of the complaints related to a process not being followed. Now the other side of that is that the law gave the minister discretion and then he exercised that discretion. Can you say that he didn't follow due process? This is one of the issues that I was asked about at the hearing in the National Assembly, that the new Petroleum Bill seeks to remove the minister's discretion in the award of blocks and I am against that. I am against that because I think it is an exercise of sovereignty when you gave out this acreage, the minister representing the sovereign president should retain the right to make decision in the interest of the nation and not be hampered by rules that he makes. Now the issues are the abuse of those powers rather than the exercise of them.
In other words you can exercise powers in the interest of the country, you can also exercise powers in a way that is abusive of your authority and I think that it is the fear of abuse that makes us throw the baby and the bath water out. I think that there may be good reason why the minister may not wish to give acreage to a particular company who has won a bid and it should be in the national interest. If you say that this is the rule and you are not going to follow the rule and this is the outcome whatever it is, I am not sure that that is really in the national interest.
Please let's go back to the refineries. We are all aware that a particular government agency supposedly superintended that process. The leadership of that agency is still there on ground today, the officer who participated in the process are still there at the NNPC. If we say due process wasn't followed, I don't recall any indictments having been made, I don't recall anybody having been called to question or sanctioned. The whole saga beats me hollow. If we claim we want to run a transparent system, it presupposes that government would have handed down some indictments or some persons called to question for not following due process. Can you throw more light on why this hasn't happened?
Unfortunately, I wasn't part of that process; I wasn't in government at the time. I think it would be presumptuous of me to stand as judge and jury in a process I didn't participate in. All I can say is this was what I inherited when I came on board - this process was reversed on account it was seen as not being actually transparent and there were question marks about the price that was paid and how it was arrived at and so on. That's really what I can comment on. In terms of what level of investigation led to those findings, I wasn't privy to that.
On two occasions we have discussed the issue of reforms and you had said very soon it would be implemented. Are we going to witness the implementation of the reforms before the end of this year?
I don't recall saying it would be implemented very soon. I did say that Mr. President had made it very clear that this is a very important aspect of his agenda. The oil industry would continue to play a dominant role in the economy and as long as it is operating in a sub optimal manner that is not good for the country. We've passed the stage of review of the policy, it is now going to go to the National Assembly for the passage of the Petroleum Industry Bill, which is the basic fulcrum if you like on which everything else is going to rest.
To some extent the executive loses control of the process once it goes to the National Assembly. Once they pass the Bill into law, we are ready to proceed. It would be presumptuous of us to assume that the bill would be passed and start setting up institutions that the prospective law is to create. We must follow process and all we can do for now is to appeal to the National Assembly to please treat this with the urgency it deserves.
In recent times, however, some operators have raised questions regarding the state of affairs in the sector.
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