The Group Managing Director of the Nigerian National Petroleum Corporation, Mallam Mele Kyari, in this interview on Arise News Channel, THISDAY’s broadcast arm, spoke about on topical issues, including why the national oil company is taking a 20 per cent stake in Dangote refinery. Emmanuel Addeh presents the excerpts.
Tell us why the NNPC is acquiring 20 per cent in Dangote refinery
The question is: Why would we even build a refinery in the first place? First of all, there are a number of realities like transportation, power and other things that petroleum adds to nations and populations. These are real and you can’t avoid it and of course for a resource-dependent country, we are very blessed with over 37 billion barrels reserves of crude oil and over 203TCF of gas.
One key issue about oil is that it must be close to source of supply in terms of security and every resource-dependent country makes sure they add value to what they produce. That means capturing all the value upfront and getting energy security in-country. Today, we import 100 per cent of what we use for the very reason that we were unable to maintain our refineries over the years. We don’t want to lament, but of course, we haven’t done well in the last 20 to 25 years. But the fact remains that we are a net importer of petrol and that throws in enormous energy supply security issues for the country, so three years ago we decided to expand our portfolio. It’s not today. We didn’t start thinking about Dangote refinery yesterday. We decided that we cannot depend on the refineries that’s owned solely by us. We needed to spread the ownership of the refineries in such a way that at any point in time , we will guarantee supply of for our country and have multiple sources of supply.
We decided that we were going to take equity in other assets. Today, NNPC has equity in ammonia plants, methanol plants, fertiliser plants so that we can spread our risks and portfolio. We believe that taking equity in any refinery that is producing more than 50,000 barrels is the right thing to do. The reason is that you do not allow entities of this nature in a country like ours that relies on revenues and resources from petroleum for its wellbeing to allow the private sector only to have that control. No country does that. So, we have decided that we will invest anywhere, including that one owned by Mr. Aliko Dangote’s. He didn’t ask for it. It’s our decision to take equity. We made this decision three years ago much earlier. It’s not what he wants, but they are also aware that they operate in a resource-dependent country. We made a request and it’s the policy of government that we take interest in this refinery. So, overall, what will happen is that the NNPC will have a seat on the board of this refinery with 20 per cent equity. It’s not a closed deal but we are very hopeful that this will happen. There are some things that are lingering, including getting the consent of the federal executive council for the very obvious reason that we are buying these shares on behalf of the federation.
Are they (Dangote) in agreement with you on the 20 per cent?
What they want is for us to take less, but because we are very experienced in the NNPC about what refineries do and what returns come from refinery operations, we have seen that these refineries, whenever we invest in, we are very sure we can cash out on our investments in five years, maximum. So, it’s a very valuable investment that we have seen. In terms of scale, we have a huge refinery that can produce up to 50 million litres of petroleum alone. That means that if you don’t have a say and don’t have an instrument that will guarantee some level of supply that will come out from the refinery, you could run into trouble. Therefore, we insisted that it has to be 20 per cent of the equity. Obviously, that’s not what they want. Negotiations are on and in any case, you can’t force yourself into a private business, but they asked for something less. We didn’t start negotiations today. We started more around December last year. It’s an elaborate process we are going through.
If you have got all the experience, why are you not running your own refineries effectively?
That is what I said. I admitted that we haven’t managed our refineries well, but now we have a different perspective. As you rightly pointed out, we have issued the EPC contract for Port Harcourt refinery. We have changed the entire model. The best practice is to get and O&M contractor. Obviously, we will use some of our staff to run it. Having that kind of structure will work and that’s why we have seen the structure in many refineries. It’s best practice.
Where are you going to get the money from?
We are borrowing $1 billion from a syndicate being coordinated by Afreximbank and no one will give you $1 billion if they don’t see a pathway to recovery. What we are going to do is to pay back from the cash flows from these refineries. It means that the banks will see that these refineries will make money. It will also pay dividends. We don’t see any trouble. Mind you that it’s a very special refinery in the sense that you will see massive volume all the way to the West Africa countries, even to Europe. Today, most of the products are from Europe and the Middle East. So, we can reverse that. Once we get this done, there are a number of other initiatives that we are doing, like the condensate refineries.
We are following up the process to pull back the Warri refinery. The combination of all these is that you are going to be a net exporter of petroleum product in a very short time , probably in less than three years. If that happens, then we have to start looking for a market. Looking for a market means seeing the flow of product in Africa. In South Africa, for instance, they cannot meet their local requirements, so they import from Europe and East Africa. As soon as you have it available in Nigeria, distance is shorter and you will see Nigeria dominate the entire market, particularly the south coast and this is something we should have done 20 years ago.
What’s the update on the government-owned refineries?
We have made a very deliberate decision that what we are dealing with is not turnaround maintenance and there’s a difference. In your car, you change your engine oil and a few other things and that’s what turnaround means in the sense of a refinery. You do some basic things. But when it is a refinery that has undergone clear absence of doing the right thing for a long period of time, over 20 years, it simply means you have to overhaul or rehabilitate. The plants have serious issues. We have taken an assessment of what they look like and definitely we are going to have a refinery that will come back, not necessarily to its original form, but obviously will work more than 90 per cent of installed capacity. What we did was to follow the process to award the EPC and on the back of that, we are pulling through the process of awarding the contract for both the Kaduna and Warri to reputable international companies.
In the past, we weren’t this efficient and transparent. Obviously, we are going to have the best of class of contractors to do this. Overall, the Warri and Kaduna (refineries) will catch up with the Port Harcourt process because we have learnt from the Port Harcourt mistakes we made. So that we are hastening the process so that they can run concurrently. In the end, we will deliver all of them about the same time. We also have a different strategy. We don’t have to wait for everything to be completed before we start refining. Very soon, we will do the same for Warri. Completion may be 40 months away, but production will start much earlier than that.
When can Nigerians expect to see production begin?
This is on multiple platforms. The Dangote refinery from all intents, because we are potential shareholders, by 2022 will come on stream. Secondly, the plan is to have full rehabilitation of our own refineries, which means, both the plants and facilities around it, though for 40 months, production can start in 18 months from the day the contractors mobilise to site.
So, it will happen in the life of this administration?
It’s not a political date, it’s a technical date. This can be done. It will make much political sense to deliver it in the life of this administration and there has never been this level of commitment from previous administrations. I have worked for this company for 30 years and we have seen how things were done in the past. We have a number of other initiatives like the condensate refineries initiative. They are much smaller, quicker, cheaper plants and overall, we are looking at about 200,000 barrels per day for all the condensate refineries. We will take the FID. There are a number of modular refineries private initiatives. Two, three of them are already running. A number of them have been issued licence.
There are over 18-20 refineries lying although licences have been issued, yet only a few are running. The reason is simple. We need to connect it to the fiscal environment we face. Refineries owners should know how much they will sell their petrol. If there’s a reason to sell below market price, you must tell them who’s going to pay the difference. This has kept people from coming in because banks will not lend you money if you can’t tell them how you can recoup your cost. But I am aware that the petroleum industry bill will ensure that there will be a framework that will enable refinery owners recover their monies and costs. We are running out of time because the whole world is transiting. So, we must make these decisions now, monetise the resources because if we don’t, we will get into huge trouble.
What is the update on the alleged zero remittance to FAAC for June?
There’s a lot of miscommunications around this. What we communicated to the accountant general was a simple process issue. We have an obligation to give a forecast of what the revenue flow will look like in the next three months. So, when you look at costs and revenues, you can easily say whether you will meet up. But getting money to the FAAC is far more complex than what you see NNPC return every month. So, overall, we account for over 80 per cent of oil produced in this country. Our first job is to make sure production activities take place in the country. Once you do this, our partners are able to pay taxes and we are able to recover our taxes and royalties from government production. Our remittance comes from our own operations, not what our partners do. The meaning of this is that we are paying for cost of production which is taken from our gross revenue. The big elephant in the room is that today we are selling petrol at N162 per litre and the market price is N256. So, if we decide to sell at market price, it will be N256. We understand the issues why we can’t do the N256. Today, there are engagements that are going on between organised labour, civil society, the governors’ forum and several other organisations to make sure we have a fully deregulated market.
We understand the realities and we can see that it is the personal conviction of the president that we should not put pain on the ordinary people if we can avoid it. We have to have the best framework and when that happens, you will see some of the revenue. For instance, we are supposed to deliver N120 billion into the federation account. We have not been able to do this in the last four months because the net cash flow is impacted by the very reality of the subsidy regime we are operating on behalf of all of us. Until you take that out, you’re not going to see the full revenue stream but we will make sure that we continue to produce which will give us the continuous petroleum tax and all the royalties. Every other thing is secondary. We also need to ensure delivery of gas to gas-based industries. All of them is to ensure that value comes to the federation. People won’t see this, but what is obvious is the remittance to FAAC. Zero allocation doesn’t mean zero. It wasn’t zero in June and won’t be zero in July. It was about N38 billion in June.
Doesn’t it look like the NNPC is overwhelmed?
I am not sure that is correct because when you say overwhelmed, it means we cannot get things done the way they should be done. I don’t think that’s the picture today. Today, this company is much more open and transparent with shareholders than it ever was. We have published our audited financial statements for 2018 and 2019 and we will do the one for 2020. Our shareholders will know what we are doing. We are delivering on everything that we should do, including delivery of gas projects into the domestic market on schedule and on cost. We are making sure that our refineries are rehabilitated and it is on cost and on schedule. We are not on negative revenue status, meaning that this year I’m very confident that other things being equal, our accounts will show that for the first time in our history, this company will deliver dividends to its shareholders.
This is not a picture of a company that is overwhelmed but the one that is transiting, making progress on behalf of its shareholders and I think we will say, with all humility, that this company is doing great today. There are challenges but we are surmounting them and those challenges are very obvious in the energy industry. We are learning and we are making all the changes and today, nearly 70 per cent to 80 per cent of all our processes are automated. I do not have to deal with any hard copy documents and this is history and is very abnormal. So, it’s not a picture of a company that is overwhelmed. Today, when you go to our website, for every transaction that we we do on behalf of this country, it is completely published on our website, including our working documents.
Given the OPEC cut, is there any hope that Nigeria may be able to ramp up production very soon?
During the Covid-19 pandemic, it was a very conscious and considered decision for the oil producing community to come together to cut production. This may never come back because people’s choices have changed and a number of things have happened. The net effect is that you lose transportation for taking out some volume out of the market.
Getting back to the pre-Covid levels is still far away, and that will be by at least 2022. There are engagements that are going on at the OPEC level because even producing countries don’t like prices that are too high. When you cross $80 to the barrel, it constrains your consumers who will make choices because they don’t want to go out of the budget. Producers are aware that when prices are too high, they will lose their customers and for you to do that, you have to bring it to a level that your customers can afford. To curtail this, we need to increase production or increase supply and that’s what will happen. Even right now, we are unable to produce maximally for several reasons which are also technical because when you shut down an oil well, it doesn’t mean that it is going to come back. That is the reality of this business and even where you have a reason to come back to this well, it will cost you more money. There are many cost implications to that, but obviously as the production environment is changed by the OPEC arrangement, we will benefit from it.
The other issue is the cost of producing a barrel of oil in this country relative to other places like Saudi Arabia?
We realised during the heat of covid-19 that we couldn’t continue to produce at that cost and still be effective or profitable, so we told our contractors that it will no longer work, so that we needed to renegotiate. We were able to get up to 30 per cent terms from our contractors. It is possible to optimise. We have set a target for this and we are sure that it is possible to bring it to about $10 per barrel. The end result is that we have substantially brought down cost and though I can’t put a number to it, but I’m sure that we have been able to bring down our operating revenue by at least 30 per cent of what it used to be one year ago. We are working on three legs to make sure production is optimised so that value will come , in the international space, price is optimised by this arrangement, but we want to have price range of between $50 to $60, which we are very comfortable with.
We are seeing that the numbers are changing and obviously we are proud that this is working.
Let’s talk about gas?
In the past, oil companies were looking for oil. So, gas was not the focus. And even the legislations that were on ground were actually focused on oil development and almost oblivious of the reality that we are a gas country. For instance, the inland basin act which guides the operations in the deep-water and the production sharing contract are simply an arrangement based on crude oil and very silent on what we do with the gas. We have declared 2020 as the year of gas and then the decade of gas, meaning that we are shifting attention from oil to gas as a transition fuel and as the vehicle that can deliver prosperity to our country. We are short of power in this country. Enormous work is going on, but there’s a space to be filled.
What is the latest data on vandalism and what is the NNPC doing, working in concert with the security agencies to put a lid on this?
There are still a number of infractions on our facilities in very many locations. But it is different now because today the level of vandalism that we see is far less than five years ago. So, there’s massive improvement because of two things. One, because of the engagements that are now different and there are a number of clean and clear engagements to ensure a more clement environment and then the activities of the government security apparatus. The numbers are going down. Things have changed and obviously there are still challenges and part of the changes is the petroleum industry bill which has provision for the local communities. There is also the more technical issue which is sometimes mistaken for vandalism. Many of the pipelines were laid 30 years to 40 years ago and they have deteriorated and have undergone rust . But it is cheap excuses to say they are vandal actions.