MR. Austin Avuru is the Managing Director of Platform Petroleum,
former President of the National Association of Petroleum Explorationists
(NAPE) and well respected oil and gas industry analyst and commentator.
In this interview with Hector Igbikiowubo, editor of Sweet crude,
he addresses concerns surrounding the Petroleum Industry Bill, the Nigerian
Content Bill and how these affect stranded oil field development. He spoke on
the deregulation of the downstream sector of the oil and gas industry.
Excerpts:
Can you please address concerns surrounding the Petroleum Industry Bill
especially against the backdrop of allegations leveled by Senator Lee Maeba,
chairman of the joint national assembly committee working on the PIB to the
effect that the NNPC was circulating a fake bill?
First on the so called claims that NNPC is trying to foist its
own idea of that bill; the Petroleum Industry Bill is not a bill initiated by
the National assembly, it is a bill initiated by the executive and if what the
NNPC is doing has the backing of the minister of petroleum who is the initiator
of the bill, then you cannot accuse the NNPC of foisting a bill on them because
the bill is theirs’ in the first place.
What happened is that after submitting what you call the draft
bill, which is really the only one that was submitted to the national assembly,
the minister and the NNPC put together a professional team, an inter agency
team of key professionals with a consultant working with them to take a closer
look at the bill, because really as we are going to see very shortly, the key
areas of the bill as we are going to see very shortly are the fiscal terms and
lease administration those are the key areas and they require a team of
professionals who understand fiscal regulations and fiscal modeling to take a
closer look at what has been submitted.
Now having done that work with all the interaction going on
within the committee and segment of the industry, what would eventually come
out of that committee work if you submit it as the bill, the same national assembly
would start its work all over again. So to avoid that process, the result of
their work is just a memorandum with which the national assembly would now work
to change sections of the bill they are now considering.
Like I said it is an executive bill and so if the executive say
after submitting the bill to you, we are taking a closer look, I think it will
only make sense that the memorandum they submit to you, you look at it and work
with it. Of course it is within the discretion of the national assembly to work
with it or reject it or portions of it. But to talk about trying to muscle
them, I think that is carrying it too far because it is their bill in the first
place, it is not as if it is a national assembly bill. I think that addresses
this issue of whether there are several versions of the bill out there.
There is one bill with the national assembly and there is going
to be amendment to even that bill from the people who submitted it, and that is
where the memorandum comes in. Having cleared that, as I said there are two key
areas that are contentious and that is lease administration, how do you treat
ownership of blocks? Those that are already being held, how do you convert
prospecting licenses into commercial leases? How do you relinquish the powers?
What frame of time do you have to do all of that? That is what I mean by lease
administration. Now all of this can reduce to dollars and cents because the
value of any company lies in the leases that the company has.
So anything that imposes on any company the responsibility to
relinquish part of what it is holding is usually looked at very critically, it
is like giving away money, that is why lease administration is key. The next
critical part of it is the fiscal terms. There are major if not dramatic
changes in the fiscal regime.
The most critical one being that royalty rate will substantially
go up. Apart from the standard royalty which can be as high as 25 per cent, you
have royalty attached to the value of crude oil. Unlike in the past when you can
have substantial windfall profit when oil prices goes very high, here
government has modeled a situation where they cream off any substantial
increase in oil price.
So if oil prices go above $70 per barrel, there is additional
royalty put on the producer and then the taxes have now been segregated into
normal companies’ income tax and I think that must have been instituted by the
board of internal revenue. Of course even if you are in oil and gas, you are a
company doing business and therefore you must pay companies income tax. So over
and above the company’s income tax which everyone pays, producers are now
required to pay the hydrocarbon tax. Now when you add both of them together,
the addition of both taxes now replaces the petroleum profit tax.
Again there are minor adjustments to those two taxes, such that
depending on the terrain you are operating, the taxes can be much higher than
what it used to be especially when you apply the MoU. So you would naturally
therefore expect that once you are talking about a situation where there would
be substantial changes to what the fiscal regime used to be and substantial
changes to how the leases are now administered, there would be controversy
because there are major interests involved.
If the PIB is passed as it is, there is this concern by the
multinationals that since acreage management is going to change and at the same
time the joint ventures are to be incorporated, what then will make the JVs
bankable since acreage is to be taken away from them under the guise of
attracting new entrants?
Can you speak to this concern?
There are two issues there, let’s try and segregate them, first the IJVs and
how they would operate is in itself contentious. I believe really that a closer
look should be taken at the incorporation of the JVs and the shareholders
agreement that will be executed by the parties that will make up the IJVs. I do
not think that the formation of the IJVs should lead us from moving the
industry from private sector to the government sector. Why do I say this? I am
afraid of an IJV where the majority shareholding is government. Where the
majority of the board is government and where the majority of the management
staff is government.
If you do that then we are actually moving away from
government private sector participation policy because the upstream has
always been run by the private sector and it has been done quite efficiently,
at least compared to the downstream. If you move it away by the incorporation
of JVs to a situation where in fact NNPC is taking over control of the oil
industry (upstream), I don’t think that is very good for the Nigerian industry
or this country. I am not arguing for the operating companies, I am arguing for
this country.
That is the area I think they should take a closer look at the
incorporation of the JVs. Now the argument about taking away leases, right from
the petroleum Act of 1969, there was never an intention for anybody to keep a
lease ad infinitum. You are given an area to go and prospect, when you find
something commercial, you are supposed to ring fence that area and now concert
it to a mining lease and give up the balance. If it is not good enough for you,
some other person would take a look at it. That is all that the PIB is now
re-emphasizing, there is nothing new about it. You have the right to look at
the prospectivity of the acreage you are holding, determine the area you think
is commercial for you, keep that area and give up the rest. That is standard
practice and anybody arguing against that is actually being unfair to
government.
We understand that the situation with the PIB has resulted in
upstream projects development being delayed indefinitely. Indeed, most upstream
PSC and Joint venture projects have been put off till 2014. How do you think
the issue of the PIB can be divorced from commitment to development of
outstanding projects?
It will be difficult to divorce projects development from the PIB because if
you are taking a major investment decision and the rules of engagement are
changing, you will naturally delay that investment decision until the risks
becomes clearer. So all that government needs to do is to fast track the PIB
and shorten the period of uncertainty.
If it is passed quickly and the incorporation of the JVs and all
associated issues are trashed out as quickly as possible, then it becomes clear
to all parties what the investment climate is and then people can go back to
the drawing board and make investment decisions. I can tell you as long as the
IJV issues are dragging, people will not make major investment decisions
because they would not do so in an uncertain investment environment.
Can you also address the issues surrounding the Nigerian Content
Bill (NCB)? I see some nexus between this and the PIB. We have investors who
have invested in the expansion of capacity and the complaint is that they are
not getting jobs. How do you see the NCB impacting contracts award assuming it
is passed expeditiously and the President assents to it?
The politics of those two bills is that the PIB is an executive
bill, the NCB is actually a bill sponsored by people in the national assembly
even though they have the support of the national content division of the NNPC
in terms of input. Having said that I really don’t know how fast the bill can
be passed although I know one of the chambers in the national assembly has
passed that bill.
I don’t know how fast it will go because the national content
division of the NNPC has been trying by the powers they have over the partners
being majority share holders in the joint ventures, to be able to enforce
national content aspirations of the nation. I believe that national content
development is more a regulatory affair that a legislative affair. I believe
quite frankly that what needs to be done is to prepare a general framework for
national content development including milestones and targets. But the actual
implementation should be a matter of regulation which we can adjust as we make
progress.
But isn’t that open to abuse?
Even if you make it a law somebody is going to implement it, it is the same
agency that aught to do it by regulation that will still implement the law
anyway. So if you are afraid of abuse there will be abuse whether it is a law
or regulation.
The beauty of regulation is that it is much more flexible. It
will be difficult in 2009 to sit down here and predict quite accurately what
the state of the industry will be in 10 years from now. You might make
projections. But if you make a law as rigid as a law is and you put in place
certain things that must be done, if it turns out that the capacity to do it is
not available, you may end up shutting down sections of the economy without
knowing and that is where regulation makes itself much more susceptible because
the regulation can then adjust to realities on the ground and then shift the
timetable but that is my own personal opinion.
I don’t know if the national content policy should be the
subject of a rigid law, excerpt in so far as the law prescribes the general
framework and specifies the national aspirations.
But its actual implementation I think should be the subject of
regulation. As for those who complain about low capacity utilisation, I think
it is being unfair to the NNPC. The corporation has in the last five years has
really been forcing every operator including us the indigenous operators to
give work to indigenous companies that have capacity. And I think that is
ongoing, it is all a matter of keeping up that effort keep updating the
target and make sure they are working towards that target.
Talking about the indigenous operators, how have your operations
been impacted by the delay in the passage of the PIB?
The main area of anxiety for us of course you know almost all the
indigenous operators are the operators of the tiny fields, fields that
ordinarily other people would not touch because it is either they are too small
or one thing or the other. Like I said the main area of anxiety for us are in
tow areas how will the bill make sufficient provisions for us to have
access to acreage because all the fields have been taken over by the
multinationals and locked up for years. Yes there are sections of the bill that
is attractive and is going to free up some fields, it is better than not having
anything to look at. But also the fiscal regime should not just be targeted at
helping the development of small fields; it should be targeted at growing
capacity in the upstream so that we can see Nigerian companies that can grow
from the 1000, 2000 barrels per day capacity producers they are into mid size independents
that can easily do 20,000, 30,000, 50,000 barrels per day capacity. It is only
when you have a few, 4, 5 6 Nigerian companies at that level of capacity that
you can talk of indigenous production being able to account for 10 or 20 per
cent of national production in any foreseeable future. If you have to rely on
our kind of production we will never grow above the 3 per cent margin. We are
looking to see aspects of the fiscal regime that can actually encourage and
stimulate sustainable growth.
From what I have read in the bill at my disposal, I think there are some
enablers in place. Aren’t those enough to stimulate this growth you talk about?
The enablers you are talking about are enablers for developing small fields.
Those enablers would help to bring fields that otherwise would have been
stranded under the standard fiscal regime. They would have been stranded
because they are too small but they can be developed. If you just stop there,
yes those small fields can be developed and then you see a plethora of small
Nigerian companies that will remain small, it becomes an incentive to remain
small and I am saying that is not what will take you to the kind of capacity in
production that we are aspiring to as a nation.
Let’s look at the downstream sector. There has been this hue and
cry over deregulation or no deregulation. From what we understand, even the
date earmarked for implementation of full blown deregulation may have been set
aside owing to the stand of organised Labour. Can you address this issue?
My take on deregulation might be a little bit harsh that is why
I am reluctant to discuss it because there is too much sentiment and I believe
the sentimental arguments about deregulation are driven by and unfortunately
with all due apologies are driven by the press and Labour.
Now I believe that deregulation should have happened more than
10 years ago in the interest of this nation’s economy.
When you talk about subsidy and regulation I believe you are not
protecting the interest of any Nigerian in the true sense of it or the interest
of the masses as people try to propagate and the example I give is thisÂ
for the past three or four years, the prices of AGO (diesel) has been
deregulated. Everybody buys diesel at market driven prices. So while you are buying
PMS (petrol) at N65 per litre, diesel is N125 per litre.
And yet the main mode of transport of the masses, the big busses
(Molue) all drive on diesel. So if all you are struggling to protect with the
argument against deregulation is just those who buy PMS at N65 per litre only
in Lagos and Abuja whereas the rest of the country buys PMS at market price and
the entire country including Lagos and Abuja buys diesel at market price just
for that little protection for people in Lagos and Abuja to buy petrol at
regulated prices, this country is spending N700 billion per year to pay those
who import PMS for them – N700 billion as subsidy for a country that spends
less than N700 billion on its entire capital budget. I don’t think the numbers
add up, I don’t think it makes any sense whatsoever.
Whoever will argue that such a scheme should continue, I don’t
think is arguing in the interest of the people and that is with respect to the
bare Naira and Kobo economics of subsidy and regulated price of PMS. Now let’s
go to the bigger multiplier effect for 15 years our refineries have not
worked and it does not matter the diatribe government should do this,
government should do that.
The basic fact is that for 15 years in spite of every thing NNPC
has said they would do, in spite of anything NNPC has pretended to do, the
refineries have not worked and we have had a situation where we export our
crude through one of these marketers, I don’t know whether it is Trafigura or
Glencore and then use the proceeds to import products. If you check the
addition of that logistics cost of taking the crude out and bringing the
products in, the products we would be buying there would be additional
N5Â N10 on those logistics.
That is to say it would have been N5Â N10 cheaper if our
refineries had been working efficiently. Now why am I talking about refineries?
The refineries can only work if you get the private sector to take them over
and work them and that is a basic empirical fact, it is not something we would
argue about whether it is true or not – how does that happen? It is also true
of what we have seen in other sectors.
Government machinery cannot operate major technology sectors
like refineries and upstream. It is a basic fact. Now if it is the private
sector that is required to inject monies into these refineries and make them
work, why are we still speaking of deregulation? The fact is in a situation
where the price of the major product you are getting out of your big billion
dollar investment in refineries is regulated by government, you cannot
guarantee that you will recoup your money. That is to say you cannot expect an
investor to put in $2 billion (about N296 billion) in the refinery where he is
unsure of the market for his product.
The market for his product must be predictable, the price must
be market driven for him to make such a huge investment. It is easy for you to
say these are foreign companies. Look at Nigerian companies like Oando; they’ve
genuinely been planning to build a refinery for years.
It’s been on the drawing board. But as long as the prices of
petroleum products are regulated and unpredictable, it’s been unable to attract
the funding to do it. Apart from just the economics of deregulation that
affects us as we just discussed I am saying that as long as you clamp down on
the price of the products and of the refinery, you will not get foreign capital
injection into building and taking over the refineries that exist.
And as long as you don’t do that, we would be paying lip service
to the functioning of the refineries, they will remain comatose and we will
keep importing and keep injecting so much money into trying to regulate the
price. So, from whichever way you look at it, regulation does a lot of
disservice to this economy and as I said when you really look at the cost of
regulation versus what you are trying to protect, I am not even sure you are
doing the masses you are talking about any good.
I agree with you sir. But the concern here on Labour’s side and
the rest of the skeptics out there is that government has over the years
exhibited a knack for not keeping to whatever it says it is going to do. What
is the guarantee, if any at all to hang onto, that the monies so saved from
stoppage of payment of subsidy will be injected into development of
infrastructure?
That is begging the question Hector. That is addressing
everything about leadership in Nigeria you cannot. That is like the
chicken and egg thing. Nobody can give that guarantee.
The only one who can give that guarantee is the President
himself. What I am saying is that it is not just about the money you save from
deregulation, the money you saved from private sector taking over and running
electricity very well, is there any guarantee that they will plough it back
into anything? Indeed when we had quantum revenues from high oil prices in 2007
and 2008, where was it ploughed into? Nobody can ply any of the federal roads
today. What I am saying is that if you are waiting for that guarantee before
you take a purely economic decision, then you would be plunging deeper and
deeper into the pit because that guarantee will not come.
So first solve the problems you can solve and hope that good
leadership in combination with problems you are solving will then give rise to
the things you are asking for better roads, better infrastructure and
better security. but if you are waiting for that guarantee before you solve
your basic problems, you wont go anywhere. That’s not true about deregulation
of petroleum products alone; it is true of everything else.
If you are saying what is the guarantee that all the roads will
be fixed before we put toll gate on the road between Lagos and Ibadan ? Then
you will never do it. So, solve the basic problems and from what we have said,
the deregulation issue is a very basic problem we have to solve one to
save some money, whether they use the money wisely or not but at least save
some money and it is a large sum of money, then more importantly, to get that
sector, the downstream to function, you need to deregulate.
What do you propose government does now regarding deregulation?
Unfortunately as usual they’ve got their timing wrong. A year ago, when the
price was $42 per barrel of crude if they had deregulated, the immediate effect
would have been a sharp drop in petroleum products prices. And gradually it
would have been rising with crude oil price.
It would have been much easier to manage at that time. Now they
are caught at the upswing of crude oil prices heading towards $80 per barrel.
But either way my advise is that we must bite the bullet now, deregulate, if
they want to cushion the prices some way but I don’t even advocate that, we had
tried to do that in the past and it didn’t lead us anywhere. We should just
bite the bullet and deregulate there might be a N10 to N15 increase in
petroleum products prices, there might be a semblance of crises for a couple of
weeks but at the end we would get used to it. But like I said nobody remembers
that even Molue drivers had been buying diesel at N120 per litre for the past
three years, carrying the so called masses and the economy has not ground to a
halt. We should just bite the bullet.
