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 Fuel Subsidy is a Misallocation of Resources, Benefitting the Rich

Fuel Subsidy is a Misallocation of Resources, Benefitting the Rich


Early this month, Mr. Mele Kolo Kyari,  geologist, crude oil marketer and the 19th Group Managing Director (GMD) of the Nigeria National Petroleum Corporation (NNPC) clocked one year in the saddle. Since his appointment in July 2019, Kyari has breathed some fresh air and transparency to the otherwise opaque operations of the national oil company. In the last several months, he has built a reputation of a plain talker and straight shooter,  who is blunt to the point on issues challenging his sector. He wants to fix all the problems he met on ground, and rewrite the story of the corporation. Will he succeed? Kyari sure has the passion, energy, drive and more importantly, the will to succeed. In this interview with THISDAY on Sunday, Kyari speaks on a wide range of issues

This month made it one year after your appointment as GMD. How has the experience been?

My gratitude goes to the Almighty God and the benevolence of Mr. President for finding me worthy of this noble assignment. The role of the GMD is like that of captain of football team; you need everyone to play at their best to achieve success and the support of the NNPC family has been quite immense. For the past one year, I have continued to learn and lead.

How is the oil price and crude sale impacting on NNPC JV Cash calls?

With the low oil price, every company including NNPC and partners have taken steps to review and optimise cost. The process of cost reduction or optimisation results in budget reviews where we have a desire to do more with less without touching any safety critical spend. So, the impact of crude oil on Cash Call is related to amount of budget and level of efficiency we can squeeze out of every dollar invested in the business. In terms of payment, we are able to meet our obligations to partners within the premise of agreed budgets.

What is the plan to fund more capital projects in the Upstream?

We have aggressive growth plan for the industry, which entails increasing both the reserve and production. More importantly, asset renewal for aging infrastructure and we recognise that without capital spend we can’t guarantee the barrels for tomorrow. Therefore, our outlook remains positive, keeping capex level at a consistent level, with NNPC contribution to industry expenditure $8-10 billion dollars per annum across all business over the next three years. To fund this, we would continue to deploy the optimal blend of both equity and debt. Also, focus would be to look at other funding solutions that have  the capability to deliver value to NNPC and partners.

When is the PIB going to be concluded to allow for more direct foreign investment for the upstream exploration?

First, the existing legislative framework is not anti-business. The support structure to attract foreign investment exists. The PIB is expected to enhance the attractiveness and promote both local and foreign investors engagement with the oil industry and Nigeria as a whole. The PIB is at an advanced stage; the legislative process involved is that the Executive sends the bill to National Assembly for passage. The National Assembly will have to consider it and subject the bill to rites involved in the passage of laws. I am optimistic within the next four weeks, we would be able to have clarity on the transmission to National Assembly and afterwards work closely with both houses to ensure an enactment into law.

With the current unstable oil price, is the NNPC planning to diversify by focusing on gas to industries development?

NNPC remains at the forefront of business expansion and creating new opportunities. Over the past decade, we have worked assiduously to expand the gas footprints particularly in the domestic market. The current domestic gas consumption has grown to 1.5bscf per day while with the NLNG train 7 would add another 8MMT to increase our capacity from 22MMT per annum to 30MMT.  We value the resilience and flexibility that comes from playing in both the oil and gas space and every segment of the value-chain. The pivot towards gas should be seen as a deliberate business decision to expand the pie, build a more robust and resilient company and additionally, act as catalyst for industrial development and power generation in country. So, considering the gas play as diversification is a narrow prism, our goal and aim is much broader and wider, and no part of the business will suffer from less or no attention.

There are complaints by IOCs that NNPC is not complying with due processes. What do you have to say to these complaints?

First, the corporation cherishes the cooperation and professionalism of its partners be it local or international. For the international oil companies (IOCs), there is always an additional layer of scrutiny as public listed firms with strong corporate governance and a reputation value to protect. The cost of non-compliance can be damaging to them in terms of their stock value and devaluation of the corporate brand. Additionally, NNPC takes compliance seriously and we work in close alliance with partners to ensure that we carry out all operations in a manner that conforms with the extant rules and regulations. However, if any IOC is found to have behaved in a manner not consistent with the laid down rules and regulations, NNPC will work with the regulators to ensure compliance and adherence to the rules. It is important that we also focus on incentives that promote good behavior without shying away from sanctions when necessary.

What is the plan to increase daily production capacities from the local refineries?

Ensuring energy security is one of the cardinal agenda of the President Buhari administration. Closely related to energy security is the rehabilitation and expansion of the local refining capacity. NNPC has continued to support initiatives towards the actualisation of zero import of refined products by 2024. The corporation has adopted a three-pronged strategy; revamp, restructure and encourage. The revamp of the existing 445,000 barrels of oil capacity of NNPC refineries is ongoing with the engagement of world class EPC contractors; to avoid a process gap, we are  concurrently undertaking a review and restructuring of the business model for these existing refineries. To further show our commitment, we are partnering our existing partners and other interested stakeholders. This support and encouragement is expressed in our support of the Dangote refinery, Waltersmith and the promotion of NNPC condensate refinery project. The NNPC condensate refining project expected to add additional 250,000 barrels of oil refining capacity to the NNPC portfolio. We have a number of interested partners and hope to make announcement on the Final Investment decision and project delivery timeline soon.

Is NNPC planning to form a joint venture in the refinery management to increase performance efficiency?

NNPC is looking at different options that will deliver value for stakeholders and improve the performance or efficiency of the refineries. The options include 3rd party Operational and Maintenance model, long term lease or like you pointed a Joint venture model similar to the structure obtainable today at the Nigeria LNG. Irrespective of the form model adopted, the overriding interest would be to assure autonomy for refinery, emplace world class management and management practices and ensure value delivery to our shareholders. We are determined to move away from any process or structure that does not deliver value or leads to an outcome not significantly different from the current state. I am determined to ensure that the refineries are brought back to their nameplate capacities.

How do you plan to turn around NPDC performance efficiency to monetize the various assets under their portfolio?

Since the new management team came on board, NPDC became a focal point. Similar to our peers, we intend to create a strong, vibrant and agile upstream E&P company. We have made it our focus to turn NPDC into a centre of global excellence. Some of the challenges around what I consider as bad or sub-optimal commercial contracts, above ground risk particularly security and vandalism, delay in project  delivery and portfolio optimisation are taken on board and fully addressed. We have revamped the security architecture around the major production artery of the company guaranteeing us better uptime in terms of both the assets and associated crude delivery pipeline, contractual processes have been streamlined to ensure speedy execution at competitive cost compared to industry peers. Also, the capital management framework optimisation is on-going. We continue to utilise a combination of the company’s internally generated revenue, debt from capital market and any other available novel development solution such as contractor financing to aggressively develop identified assets. For any fallow asset, we are willing to look at the best-fit option to ensure the reserve is developed timely and in a cost-effective manner. So, to summarise, the turnaround plan of NPDC is in full gear involving the deployment of not only human and monetary capital, but social capital. Social capital because we want to keep our licence to operate; without which we cannot develop the assets while deepening and strengthening the harmonious working relationship with our host communities.

Do you have a funding alternative for the upstream projects to JV cash  calls considering NNPC’s dwindling revenue?

The simple answer is yes. We have a number of alternative funding options in the  industry. In the JV particularly, we have different carry arrangement, banks and other financial institution debt instruments and variants in addition to the equity finance through cash call. I must, however, point out that the deployment of capital goes beyond dwindling revenues, it is mostly a strategic decision based on the profile of the assets, outlook or expectations over the lifetime.  The low oil prices and dwindling revenues have activated a paradigm shift in the way we look at funding for the entire basket of opportunities within our portfolio and this is not limited to the JV. We are looking at utilising bonds, as you know bond investors are separate class of investors in the debt market, which provide steadier and long-term financing to match fully the underlying nature of the industry.

What is your plan to rebalance the federal character quota in the NNPC management staff?

The corporation prides itself as the home to the most educated, competent and well-trained Nigerians. The ability to attract the best talent required to deliver on the mandate remains a unique proposition of the organisation. The corporation under my watch will ensure that we put our best human resources anywhere we need them and effectively utilise the talent embedded within the organisation irrespective of which segment of the country they come from. But let me emphasise that as a law-abiding organisation, we follow the laws of the land and comply with federal character at the recruitment stage-making placement easy as career progresses. Today at the management level, every geographical zone is represented and same applies across every stratum in the organisation. NNPC is the only truly Nigerian company.

What do you have to say to the on-going marginal fields bidding round? What impacts do you expect from the outcomes?

The marginal field programme is a good initiative and I must commend Government particularly, the Ministry of Petroleum Resources, led by the Honourable Minister, Timipre Sylva, and the Department of Petroleum resources (DPR) for the effort. The marginal field programme speaks to need to expand the frontier of opportunities within the industry, optimise the usage of assets and ensure all fallow fields are developed. Today, the marginal field contribute only three per cent of the national production so the expectation post the bid round would be an increase in production through timely development of the assets. I am very confident the process would turn out with the right players and NNPC will provide the necessary support required to make that happen.

One of the feats that has been recorded by the country since your assumption of office is the signing of the NLNG Train 7 FID contract, what is the update on that project?

We are moving beyond Train 7; the goal is to quickly get back to the table with partners and develop additional trains within the shortest possible time. We don’t plan to go on another investment hiatus. The position of Nigeria in the global LNG market is threatened, we  continue to drop in global ranking, currently 5th largest LNG exporter contributing six per cent of the global LNG Trade. So, the goal is to develop the huge natural gas deposit and rival other players in the international market. Specifically, for Train 7, the project is experiencing appreciable progress in terms of early works, all preparatory works for full EPC are on course and we have tied all loose ends in terms of funding. The NNPC and partners are fully committed to the project completion within the defined timeline despite the new challenges faced as result of COVID pandemic.

In your inaugural speech you talked about the TAPE agenda (Transparency, Accountability and Performance Excellence), being a five-step strategic roadmap for NNPC’s attainment of efficiency and global excellence. Can you outline some of efforts that have been made to achieve the target?

The TAPE agenda is the bedrock of all our actions while five strategic initiatives provide the yardstick for performance measurement. The need for transparency cannot be overemphasised. Transparency creates opportunity for engagement and trust is easy to achieve. We recognise our responsibility to all stakeholders particularly the 200million Nigerians, who we work for and serve. This means we must be accountable to them and we do not take assets and resources that are entrusted in our care as managers with levity. We cannot also deliver on this trust and expectations without performance and excellence. TAPE is therefore a vehicle or process towards achieving greater outcomes. My team and the entire corporation have kept faith and I am immensely grateful for that. We have continued to publish the monthly financial report, so our report card is available to everyone. You know our successes and the strides we are making to address our struggles in  “real time”. Just to highlight a few success points, we have fully automated the process for procuring products from our downstream subsidiary, PPMC via our Customer Express Portal. This translates into savings in terms of man hours, reduced stress and gives every eligible customer irrespective of location and creed the same level of access and opportunity. We have cut waste in our contracts; our openness with contractors and partners has secured their buy in and we have seen a cost reduction across all segment of businesses. Also, we published the first audited financial statement of the corporation in 43 years. This is no mean feat and we appreciate the support of Mr. President in making this a reality. The streamlining of our processes through full digitisation and automation is on-going. We have been able to onboard the new hires and future leaders of the corporation effective through the digital platform.

What did release of maiden NNPC audited accounts signpost? And when are the audited account of subsidiaries  going to be released?

Thank you for the question, first let’s state that we released the results of all the subsidiaries, and they are accessible to public through the corporation’s website. Back to the questions of signpost, it shows commitment to the values we espouse in terms of TAPE. It shows respect for our shareholders and stakeholders that we will not shy away from rendering account of our performance. It shows we are willing to ask for help since we are not hiding. More importantly, it has helped us in our transactions and dealings with international partners and financial institutions. We can now be measured and gauged against global standards. It also means more work and demands on myself and on my team. We have the task of improving and turning around the fortunes of the organisation. We must deliver value to our shareholders. So, the published financial statements put more pressure  and spotlight on us, and we would not shy away from this commitment.

What is your medium-term projection for crude oil price?

At the fundamental level, oil price determination is an interplay of demand and supply dynamics. However, sentiment or speculative behaviour also influences prices. Since COVID19 began, we have seen crude demand drop from 100million per day to below 80million per day, while supply exceeded this threshold hence the collapse in prices. As activities return, demand returns, however given that supply has been extinguished in some of the production centers particularly shale in the US and curtailment by OPEC. The expectation going into the next quarter with easing of lockdown across the globe is that supply would lag demand, and this would generally support price recovery. The recovery would be strong barring any 3rd or 4th wave of infection. So, within the medium term, I expect that crude oil prices would trade between $50-70/bbl.

What are your thoughts on OPEC’s production cut on the country?

OPEC’s goal is to ensure price stability in the world oil market and to obtain a stable revenue for oil-producing nations while ensuring steady and stable supply to consumers. Within this premise, the maximisation of revenue is the most important factor, a reduction in volume with a commensurate upward swing in price will deliver a better value than high volume at a low price. The health of the national finances is the most important consideration. One often overlooked impact of the cut is the conservation effect. Oil is a non-renewable and depleting resource, therefore the cut serves to implicitly delay depletion rate. So, our goal is to work with OPEC to achieve price level that support the national budget and aspirations.

What are your expectations from the AKK Gas pipeline project, whose deal was signed recently?

NNPC is an enabler organisation. Our goal is to deliver energy to the domestic economy to spur industrialisation and provide viable means for power generation. The AKK project has been on the drawing board for over 20years, to kick-start the project means we are providing springboard for industrial revolution and restoration within the northern axis of the country. The reality not mere expectation is that the AKK route would turn into an energy and industrial corridor, providing opportunity to power businesses and homes, restoration of moribund industries while promoting the creation of new one, particularly gas-based industries like fertiliser plants, methanol plants and enhance agricultural storage.

You were recently quoted to have said the NNPC would be investing in the healthcare sector by building hospitals, which drew some criticisms. What informed that decision?

The decision to investment in healthcare was taken from an informed and enlightened position. In the oil industry, safety is considered paramount because it is cheaper to make good revenues when plants are up running and personnel are safe. To take the same corollary for a nation, the COVID19 exposed the weakness in our healthcare system, we cannot have a vibrant and healthy populace without making the necessary investment in the sector. The pandemic further raises the bar and scope for care. NNPC as a caring organisation sees a call to demonstrate it. Also, the amount of energy and funds expended on healthcare tourism not only by the industry I superintend, but the entire nation is humongous. It is estimated that Nigeria spends an average of $1billion on healthcare tourism focus mainly on oncology, orthopedics, nephrology, cardiology and other infectious diseases. This raises questions and need for intervention by all stakeholders. Remember, that based on our three-pronged thematic approach towards the industry-wide COVID19 intervention, we are ultimately going to bequeath medical infrastructure that will outlive us all. So, the intervention is targeted, well thought out and I deeply appreciate the support of our partners and other stakeholders in this regard.

Finally, what is the fate of fuel subsidy? Do we foresee a situation where it would be returned once crude oil prices rebound?

As you aware, the Minister of State for Petroleum Resources has made policy statement based on presidential directives on the issue of fuel subsidy. Also, the PPPRA has issued guidelines on the process for monitoring the pricing of petroleum products in the domestic market going forward. My personal view is that subsidy should be removed, and the funds deployed to areas of the economy particularly road infrastructure and education that need funds. Fuel subsidy is a misallocation of resources and it benefits mainly people who don’t need it; the rich. What we need is investment that upgrades the general good of the society and provide access and opportunity for social mobility for the poor.  I do not foresee the return of subsidy when oil price rebounds. Just by removing subsidy in the 2020 budget, the nation is able to save over $400million. The savings would be better deployed to education or upgrade of the critical infrastructure in the country.

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