Avuru dissects PIB, NCB, insists on deregulation

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 this  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 N5  N10 on those logistics.

That is to say it would have been N5  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.

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