The divestment of foreign companies from the oil industry is raising question about the capacity of indigenous operators to take their place. Asst. Editor Chikodi Okereocha examines the implication of the International Oil Companies (IOCs) divestment
The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr. Andrew Yakubu, came across as an incurable optimist when he addressed participants at the Nigeria Oil & Gas Conference tagged “NOG 2014.” Waxing patriotic, he spoke of an oil & gas industry where indigenous operators, having acquired enough capacity, are in the position to run things following the divestment of some International Oil Companies (IOCs).
Yakubu said when the Petroleum Industry Bill (PIB) takes off, the level of participation and investments by local oil firms would increase.
He told participants at the premier annual oil and gas gathering in sub-Saharan Africa, held in Abuja, that with the Local Content Law, Nigeria would become the most viable investment destination, galvanised by indigenous capacity.
While Yakubu’s optimism sounds good to local firms, which have been operating in their foreign counterparts’ shadow, many experts and stakeholders are not convinced. Some of them say Yakubu and others may be putting up a bold face to the fact that local operators don’t have the capacity, expertise and financial muscle to drive the industry.
An oil and gas expert, Oliver Mordi, insisted that lack of capacity remains the bane of local content development in the industry. He argued that though the divestments of the IOCs should be a shot in the arm for indigenous operators, they are yet to acquire the capacity to stand on their own. He noted that local operators do not have the competence to handle highly technical aspects of oil & gas operations, saying that at the moment, most of the technical aspects are handled by expatriates. Only a few Nigerians, he said, are into oil & gas exploration.
IOCs have since been reviewing and reducing their commitment to onshore and shallow assets in the country. The development, which is gradually changing the oil & gas landscape, started around 2010 when Shell Petroleum Development Company (SPDC) divested some of its assets from Nigeria. The Anglo-Dutch oil company and its partners, French oil group Total and Agip Oil, sold 45 per cent interest in the onshore block, oil mining lease (OML) 40 to Elcrest Nigeria Limited. The company also sold its 30 per cent interest in OML 30 with share production of 11,000 barrels per day (bpd) to Shoreline Natural Resources Limited.
After operating in Nigeria for 46 years, United States (U.S.) oil giant, Conoco Phillips, offered its entire business interest in Nigeria to Oando Plc, an indigenous oil producing company in a deal valued at about $1.75 billion. Brazilian oil company Petrobras has also indicated plans to auction eight per cent stake of its Agbami oil block and 20 per cent of its offshore Akpo project for about N175 billion. In November 2012, Total divested its 20 per cent offshore stake in the Usan Field to Sinopec, a Chinese petroleum and chemical company, for $2.5 billion. Chevron is also in the process of selling three onshore oil blocks.
An estimated $6.5 billion worth of assets have so far been sold by IOCs. The figure is projected to rise in the coming months, as more assets are said to have been lined up for auction, a development, sources linked to the operational and security difficulties in the Niger Delta and the uncertainties caused by the non-passage of the PIB. For instance, the incessant crises between the host communities and the oil companies are said to have prompted the divestment for deep water prospect where there are fewer crises and less financial expenses on conflict resolution.
But the companies are offering a different explanation. Mutiu Sunmonu, Managing Director of SPDC, said the divestment of his company’s assets was a deliberate measure to encourage indigenous participation in the upstream oil and gas industry.
His words: “We want to create a new set of indigenous players in Nigeria’s oil and gas industry within the next 10 to 20 years from now, while the IOCs concentrate on more difficult issues and also allow us focus on material oil and gas fields.”
The divestments are seen by some industry watchers as representing the single largest opportunity for Nigerian operators with the requisite expertise and capital to emerge as major upstream players. Already, local oil companies own more than 100 blocks across Nigeria’s oil-producing regions, and the figures are expected to double over the next few years, indicating perhaps, that the future is bright for indigenous operators.
But Mordi thinks otherwise. He said lack of capacity by local operators might throw spanner in the works. Although he aligned with the position that divestment by IOCs is capable of encouraging indigenous participation, he noted that at the moment Nigerians lack the capacity and expertise to leverage the opportunity created by the exit of the IOCs. He however, attributed the development to “the political economy of the operating environment, which is no longer conducive for IOCs.”
Mr Obiora Akabogu, a Lagos based lawyer, describes oil business as “capital intensive,” saying: “Nigerian operators do not have the resources and the manpower to run it efficiently considering the fact that local banks are not in the position to advance long-term loans without going into alliance with foreign banks. Besides, the prevailing high interest rate by banks poses serious hurdle for local operators particularly those without access to offshore fund.”
Akabogu added: “Local content in the oil industry is supposed to be a long term thing; it is supposed to be implemented in a gradual manner because the enabling environment is not there. The ideal thing would have been to retain the IOCs by addressing the issues that necessitated their divestment.” He said the IOCs were merely shifting their risks to the local operators who would now deal with issues of oil bunkering and theft.
The Executive Secretary of the Nigerian Content Development and Monitoring Board (NCDMB), Mr. Ernest Nwapa, drove the point home when he disclosed that Nigeria has lost an estimated $380 billion to foreign companies and contractors because of lack of capacity in manufacturing, fabrication and engineering design of production platforms, marine vessels, drilling rigs and other equipment used in the oil and gas industry.
Mr. Nwapa said virtually all categories of contracts in the oil and gas sector were executed by foreign firms before the coming of the Nigerian Content Act in 2010. He said for instance, Nigeria is still chasing the original builders of the four refineries to come and assist in rehabilitating them because the country lacks capacity to do the job. He said before the Nigerian Content Act was enacted the engineering designs of production platforms were neither done in Nigeria nor manufactured locally.
Between 2010 when the law came into being and now, experts say that it is doubtful if local operators have acquired enough capacity to run the industry. For instance, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), called to question the capacity of local operators by raising the alarm that the take over of the industry by local operators would lead to massive job losses. According to the National Public Relations Officer (PRO) of PENGASSAN, Mr. Seyi Gambo, over 20, 000 local jobs in the oil and gas industry are under threat following the rapid divestments of upstream assets by IOCs. He said since the IOCs began the exercise, many of its members have been laid off.
Akabogu says there is sufficient reason for PENGASSAN and indeed, other labour unions in the industry to fret. He said: “Their fears are justified because in a capitalist system, he who pays the piper dictates the tune. The driving principle in capitalism is profit maximisation, and one of the strategies to achieve that is downsizing or rightsizing of workers.” The legal practitioner wondered why countries like Ghana and Sao Tome & Principe could provide enabling environment for their oil industry to thrive whereas Nigeria could not.
To renowned environmental expert and coordinator of Oil Watch International, Mr. Nnimmo Bassey, the development is hardly surprising. According to him, divestment is a business strategy by the IOCs to cut losses and maximize profits. “You will notice that they are divesting mostly from onshore and swamp fields that intersect with communities that they have massively polluted and abused. Their aged facilities in those locations will certainly bring on more resource ownership and social conflicts. So, if local companies are happy to step in and take the flak that means ‘good’ business for the IOCs,” he observed incomplete sentence.
Bassey also said that on the other hand, the IOCs mostly divested to the extent of their equity holdings in such fields and production also activities. “They still own the pipelines and related facilities. What that means is that they are renovating their image, collecting rents from their facilities and generally smiling to the bank while the local companies will eventually take the beating for the pollutions, conflicts and other social disruptions. We see the divestment as a business strategy that benefits the IOCs and leaves the oil field communities and the environment at risk,” he told The Nation.
Dismissing the divestment as a veiled threat to the Federal Government against erection of policies that dig into the incredible profits the IOCs have been making in the country, the environmental expert alleged that: “The IOCs do not want Nigeria to have a properly regulated oil and gas sector. They do not want a strong PIB. The spate of divestment can be seen as a statement in this direction.”
The Nigeria Union of Petroleum and Natural Gas Workers, NUPENG, thinks so, too. Its President, Comrade Igwe Achese accused the IOCs of stalling the passage of the PIB.
“We call for the quick passage of the PIB that is before the National Assembly, as it would go a long way to reforming and ensuring transparency in the oil and gas sector. The multi-nationals are running helter-skelter to halt the passage but this must be rebuffed by the National Assembly because the multinationals are doing it for their selfish interests,” Achese said.
The National Assembly, through the Chairman, Senate Committee on Gas Resources, Senator Nkechi Nwaogu, and Chairman, House of Representatives Committee on Petroleum Upstream, Hon. Muriana Ajibola, raised hopes when they announced at ‘NOG 2014’ that the PIB would be passed later this year.
Senator Nwaogu said the bill, which consists of 16 legislations, was brought together to promote efficiency. She said the bill, which establishes the legal and regulatory framework, institutions and regulatory authorities for the Nigerian petroleum industry while also stipulating guidelines for operations in the upstream and downstream sectors, has just passed the second reading and at present, is at the technical stage.
But some stakeholders including Bassey are not impressed. Bassey noted, for instance, that although the PIB is a good first step, the document as packaged, is not as strong as it ought to be. According to him, the PIB does not have stringent pro-people and pro-environment provisions, as the country, despite the PIB, will still be having illegal routine gas flaring. He blamed the delay in passing the bill on what he described as ‘toxic politics’ and pressure from the IOCs who have openly said they would not accept laws that curb their excessive profits as well as wrong perception by some legislators that provision of funds for communities mean more money to the oil-bearing states.
Indeed, the 10 per cent additional revenue sought for the oil-producing communities is one of the contentious provisions in the PIB that divided legislators in both chambers of the National Assembly. While legislators from the South support the provision, those from the North argue that the Niger Delta already has enough money coming to it from the Niger Delta Development Commission (NDDC), Niger Delta Ministry, and the 13 per cent derivation.
Nnimmo argued that although, the PIB makes the offer of money to oil-bearing communities on one hand, it takes it away on the other. “The PIB criminalises communities when it says that if oil facilities are tampered with then the communities, local government areas, and states would pay. Communities are not the policemen of oil facilities. The PIB speaks the old language of subsisting laws that free IOCs of responsibility where facilities are interfered with by third parties. That has made the claim of sabotage the favourite refrain of the oil companies even before incidents are investigated. The PIB fell into the same anti-people trap,” he explained.
The non-passage of the PIB is blamed for creating an air of uncertainty in the industry, forcing IOCs to either divest or hold back on their investments. Because of the high-wire politicking that has characterised the PIB in the past 10 years, investors are said to be wary of putting their money in the industry. Senator Nworgu acknowledged this much at the conference when she said “Nigeria is currently on a standstill because investment in oil and gas has been delayed due to the delay in the passage of the bill.” She added that when passed into law by the seventh Senate, the bill would open up doors for investments and improve Nigeria’s revenue generation.
Indeed, many IOCs in Nigeria are holding back on investment. For instance, a whopping $109 billion, about N16.8 trillion proposed investments are said to have been put on hold by oil majors who said planned projects were no longer economical due to the fiscal terms of the PIB. Some of the IOCs are also reportedly diverting their investments to other countries where oil has been found and where a transparent system is in place for the benefit of all stakeholders.
The Nation reliably gathered that Shell alone had planned an investment of $30 billion in two offshore deepwater projects, but because of the current investment climate in the country, “SPDC would rather wait for stable and right conditions before committing finances,” Sunmonu said. The situation, which is not peculiar to Shell, but applies to all the IOCs perhaps, explains why there has been widespread apprehension and fear by stakeholders over the implications of the exit of the IOCs on investment especially at a time the Federal Government said it is encouraging more investment inflow into the industry.
However, Bassey does not see the need for fresh investment in the oil industry. “When government seeks more investment in the sector, the expectation is that this would bring in more revenue and positively impact the economy, but up to 90 per cent of the expenditure in oil and gas production efforts are made abroad and not in Nigeria. The equipment is manufactured abroad and is merely assembled here. The sector is not a massive employer of labour and many locals working in the sector are mere contract staff,” he explained.
Bassey insisted that what Nigeria needs to do right now is to “massively increase oil revenues by halting oil theft. We are not talking about poor villagers scooping crude oil in buckets and jerry cans. Those also need to be stopped. We are talking about the industrial-scale oil theft going on in the oil sector. The official figure bandied by the Ministry of Finance as well as the National Assembly is that 400,000 barrels of crude oil are stolen everyday,” he said
As for local operators, Bassey and other experts and stakeholders said the ability of local operators to hold their own would depend, to a very large extent, on better collaboration, better host community management, proper valuation and raising smart financing. They also require huge investment in knowledge, research and development (R&D).
