Nigeria's slow economic development revolves around policy issues, says NGA president
CHARLES Osezua is the chairman/chief executive of Owel-Linkso Group. A seasoned Gas Engineer (Texas), he championed the development of the Nigerian Gas Master Plan in the late 1980s, resulting in the national gas pricing policy of 1991. He is a member of the Technical Advisory Committee of the Nigerian LNG, 1990 to 1993.In this interview with TAIWO HASSAN, he bares his mind on salient issues facing the Nigerian oil and gas sector. Excerpts:
WHAT'S your assessment of Nigeria's oil and gas industry in the last two years?
I think it's a broad subject. We are talking about upstream, mid-stream and downstream sectors. When you go into the segments one after the other, it becomes a whole subject of its own.
On a broad level, I would say very fair. We have had more acreages, which have not really affected the consumers positively.
But for the downstream sector, the consequences have been a significance issues for the consumers in the sector. Of course, we have some oil wells, which are significant to our economic growth.
I know that it is not just this year that we have been experiencing challenges in the industry. This has become a continuous thing. Last year, Gaslink alone suffered about 54 days of non-gas availability.
From the national perspective, you would see that there is problem of power supply in terms of electricity which you and I are experiencing because of the inefficiency of Power Holding Company of Nigeria (PHCN). So these are some of the effects of the Niger Delta crisis.
In addition, the crisis also affected the upstream sector, because if the oil producers could not have assess to their operating system in their place of work, if facilities are being sabotaged by the militants and there is no way to repair them because of the security issue in the region, so they can't have gas to supply abroad.
So, from the supply part, that is, the production point of view, the mid-stream sector and the upstream sector have been affected by the Niger Delta crisis. There are other aspects of these such as the credit crunch in the world market. I think Mr. President himself in one of his meetings some few months ago with his cabinet gave an indication on the performance of our national budget. So, the whole economy is affected by global meltdown, and consequently of course, we can also talk about the oil price.
You and I know the effect of the meltdown, that is, the price of crude at the international market dropped significantly from $150 to a little below $40 per barrel, but now, it's climbing up gradually. So, what I would say is that the Nigerian oil and gas industry has gone through a lot of experiment.
Indeed, presently, we have a systemic approach, because there is a set of new projects, new investments, and consequently, on the development of the projects.
You would see that a number of companies have also retrenched some of their staff in the industry because of the global meltdown. And again, this is not news. They are real.
But, in a short form, I can say it is fair, given the reality of the global economy, and peculiar to the security situation in the Niger Delta, which I would say has affected obviously investments in the sector.
It has affected gas availability, infrastructural amenities, and has significantly affected delay on new projects.
As a major player in the industry and the president, Nigerian Gas Association (NGA), what would you say are the challenges facing the development and growth of the gas sector today?
Nigerian Gas Association (NGA) is one of the major stakeholders in the Nigerian gas sector. The association is made up of professionals who are keenly looking at options to develop the gas industry.
As an association, the challenges we are experiencing in the industry today are multi-dimensional. It includes: Security, funding, pricing and so forth.
As an investor, every gas project you want to do, you want to do it as a long-term project, and you want to be sure of the guiding parameter, that is, the legislation. It enables you to measure it, and it leads you to your final investment decision.
But, in today's environment, I can tell you, its not investment friendly.
For instance, we had a gas project with one of the multinational company in the South East. We wanted to capture gas that was being flared from the source by processing it for the domestic market and supply it to power plants in the region. But now, we have no gas availability for domestic market, which means we are going to export it. We got various approvals from government agencies to construct the project, but the project was frustrated because of the insecurity in the Niger Delta region.
The risk assessor (oil firm) said the project was not insurable because it was a war zone. You have to transport the gas from Imo State via Cross River and through Rivers to Bayelsa before you can export the gas.
Consequently, the oil firm called-off the project, citing insecurity in the area, so, we decided to discontinue the construction of the storage facility and other logistic plans. So, what I am saying in essence is that, the industry had witnessed a number of challenges in the past, like security, capital, policies and regulation instability. So, all these factors affected what you do when setting up a project.
In a dynamic environment, a number of these decisions become a bit tricky, because you need someone to give you confidence to secure your future for you to be successful in this petroleum industry.
Recently, government has been talking about the Gas Master Plan. What are the major thrusts of this policy, and would you say it is sufficient to address the concern of gas producers in the country?
For the gas master plan, we in NGA are in support of it. However, we have some queries on it also, pending the time we have a good master plan for the industry, because the master plan takes you to some destination.
At least from what we have seen at the global perspective, there is an effort to put in place some structure that would lead to an orderly gas development, but we observed that there are a lot of gaps in it.
The gas master plan supposed to be a road map that would open up opportunities for all stakeholders in the industry, but I must say this wasn't the first attempt in this country, we have had 'the Nigerian LNG' map in the '80s.
The key elements that are needed to guide the plan for its realisation are policy, price, and fiscal terms that would govern investment if the policy environment is well defined.
We understand that price of gas has been the major reason for the low investment drive in the sub-sector. How can this be tackled?
Well, price is one of the key elements for policy. If you articulate the policy environment, then you have your economic model that would lead to investment decision.
Like I said, your price is an element of policy. It comes out of computation, working through the identified model, which is based on a policy framework. So, price is significant. Pricing mechanism is very important, but there is a lot that goes into pricing, when making decision. Nigeria has a pricing formula, which is tied to the competing energy. Countries like Algeria, Trinand and Tobago, which started at the same time with Nigeria, have gone far in terms of gas development in the oil and gas industry. So, you must have an aggregator who will be able to effectively create a balance for people to encourage them to continue investing in the gas sector. So, the pricing formula is clear, but it is the consistency in administration of the policy that is the challenge we have at the moment which has been given the industry a set back.
Knowing that Nigeria is of more gas proven than oil. What is our current reserve level and to what extent has the crisis in the Niger Delta affected the country's ability to effectively reap the benefit of gas resources to our national development goals?
I think Nigeria's gas reserve is being quoted in several seminars. We have gas reserve in excess of 180 trillion standard cubic feet of gas. I used that deliberately. But as proven, we were told of course, that it is about 50/50 associated and non-associated gas. But this is gas that you discover without looking for it. Geologists tell us our reserve is in the region of 300 trillion, based on geological indications. But that would be subject to exploration activities.
Nigeria is a gas proven state, because nobody has given us much for oil, and even today they are almost at par. This is part of the findings by geologists. So, the next question is: how would the Niger Delta issues affect the effective and optimal development of the developmental goal? I think the issues in the Niger Delta region are challenging the national developmental goal. We have a major security issue. I mean you know it and I know it. You can't go into such place of war to invest. It is a high-risk area.
Fortunately, the amnesty that was granted to the Niger Delta militants, as reciprocated by this ceasefire by MEND, has given us hope that people can now go in again and carry out their business activities. Shell shut down its western operations. A number of contractors have been forbidden by their countries from going to the Niger Delta because they believe the area is a war zone.
I indicated that even on a personal level, one of my projects had to be cancelled because the participating multinational oil firm said the risk was too high and they cannot guarantee security. So, it has affected the development of gas resources in the region. That is why I said one is very much encouraged that government took action as a policy through amnesty to address the problem. We also know that there are issues still being raised as you saw in the press some few months ago by the South-South governors that they would backed out of the amnesty programme if the Petroleum Institute is relocated to the North.
On the issue of infrastructure going bad. That is not an issue for me, but I think there is need to address the Niger Delta issue along with the developmental need of the industry so that they can bring peace to us. Because they (militants) are stakeholders in this industry also, and by anyway, if they feel impacted negatively by the developmental effort they would react, and other states can emulate this. I don't know whether you have watched the movie, "The bloody Diamond"- the story of Liberia. I am worried for my country, because if this crisis is not managed properly, it becomes an issue, because there are others who can take advantage of it because there is economic value like money involved. People make money in crisis and they perpetuate it. And therefore, let's hope that the decision of the government will give a lot of hope.
Yes, there is impact and it's going to affect it unless it is managed properly so that we can have peace, stability or stable environment to do our work as investors and developers of gas resources in the Niger Delta.
When you said that we could manage it, does the onus fall on the government or it is the collective effort of the stakeholders?
You know everybody has its role and responsibility. The government has the responsibility to define the terms, that is, the policy. Since the end of the amnesty, over one and the half months ago, we have not heard of somebody being kidnapped for oil-related activities or a pipeline being blown up by militants. So, there is relative calmness in the area now. So, the Federal Government took the initiative to grant amnesty to the militant youth in the region because it believed that there was need to engage in dialogue.
You can never lose when you engage in talk; and if you don't agree, at least you understand what the views are. So, we need to engage in dialogue.
Besides that, I think there is a committee that was set up and a lot of people were appointed to facilitate that process. Nobody would come up with solution that would be long lasting. If you ask me who is to be blamed or responsible for this crisis, whether it was caused by the industry operators or the government, my answer would be, everybody, because if government had created an enabling environment for everybody to participate, we won't have the crisis. Besides, the industry is only contributing through the Niger Delta Development Commission (NNDC) to the development of the Niger Delta region. So everybody is involved and need to share in the blame that brought about the Niger Delta crisis.
Sometimes, these things need to be managed in a manner that you can have maximum impact to the benefit of the stakeholders. May be, I would leave it like that. But with the government, the state, local government, multinational oil companies, and all of us as Nigerians have roles to play.
There are lots of concerns about gas incentives, do you think this concerns are justified and how best do you think it could be resolved?
I don't know what you mean by incentive. You know we have been talking about policies. Policies are meant to enable government achieve certain objectives. That is to say, do the policies achieved their objectives? Government has in its book, policy initiative that allowed investor who lifted gas for five years to enjoy tax exemption.
But, I think the question should be: Is government policy objectives being achieved? Policies are not made forever they are subject to review from time to time. But, we must do it in a manner that it doesn't create instability in the investing environment.
I think these are what you mean when you say controversy. May be that is what you mean, unless there was a specific question, it's a bit difficult to go on hypothesis. So, if I was to take a situation that I can talk about it, the downstream sector, that is an area where I have invested and developed project.
We are the pioneers of gas distribution in Nigeria. If there were no incentives I mean the tax holiday, it would have not being possible for me to invest. But the simple reason is that investing was not economical without the duty exemption at the port or the tax holiday because the energy market in Nigeria is not subsidised.
If the alternative to gas is subsidised, the investment in gas needs to be subsidising for it to compete in a subsidy market. The same thing affects the upstream sector.
Because of the level of subsidy in the market it is not viable for anybody to drill a well and build a transmission line and take it to the consumers. Government is subsidising PHCN. PHCN is not charging much in terms of their billings. Again, it reflects our economic reality as at the time those policies were made.
On the basis of you trying to develop a pipeline that would supply gas to those markets, then you have established a cost. So you also need to determine how much gas you need to develop from the upstream sector. So you would have the knowledge of the cost for the field development, you have the cost of pipeline infrastructure and you schedule this. As a global best practice, there is a minimal rent if you are looking at the return on investment that is acceptable. Then, you do your analysis, and you then compare based on the parameters. In looking at those results, you want to adjust to a level you think it should be economical because, remember, money has no fixed address. It moves to the area where it would earn the best profit or the most profit. The essence of what I am trying to say is this: if our policy administrators are managing those policies, then those incentives are subject to administrative changes.
It's a question of how are we managing our policies? You have a policy that showed defined objective.
The reason for doing it is clear. As the dynamic of economic changes, the administrators of those policies should monitor them. That is why all contracts must be well defined.
Government made policies to enable investment and development of infrastructure of the gas industry.
But elsewhere in the world, you have administrators that are equipped to manage these policies when you introduced a policy, and you have no administrator, and you belief the taxman would do it. The taxman charges tax based on the profit declared. It is not his business to come and find out whether you are making a windfall profit. That is left to your policy administrator. And one should appreciate that gas by nature is utility. There are a lot of countries where you do not have administrators of utility industries.
