Issues with the oil & gas industry?

The Nigerian oil and gas industry has been reported to have lost quite a large amount of revenue, we have been able to collate some of the causes of the loss in oil revenue within the country.

The Nigerian National Petroleum Corporation (NNPC), an entity through which the federal government regulates and manages its financial interests in the petroleum industry, has been plagued with a myriad of problems since its establishment in 1977. These challenges have limited the effectiveness with which the NNPC is able to manage the country’s financial interests in the petroleum industry. The reality is that as the national oil company, the NNPC itself is gradually earning a reputation for being a loss-making entity, raking in nearly half a trillion Naira in losses in the last three years. These losses came to N82.0bn in 2017, with a loss of N197.4bn and N205.2bn recorded in 2016 and 2015 respectively. This is in sharp contrast to the performance of its peers, including Saudi Aramco, Saudi Arabia’s state-owned oil corporation, which raked in a net income of $33bn in the first quarter of 2017.

Why do the growth prospects of Nigeria’s national oil company remain stunted? Does the challenge lie in the operational model of the NNPC? Is our country’s oil industry innately unprofitable? Or are there vested interests perpetuating a bleeding-out of the nation’s much-needed revenue?

Opacity in subsidy payments remains a debilitating challenge in Nigeria’s petroleum industry. Like many other yawning gaps in the sector historically exploited by vested interests. A telling example is that rather than tangibly correct the underlying consequences of a skewed subsidy system (erratic pricing exacerbated by spontaneous industrial actions), instead, the term fuel ‘subsidy’ has now been replaced by “underecovery.” This has created the illusion that Nigeria’s fuel subsidy problem has been eradicated, but the reality is that the NNPC recorded N306bn and N144bn for subsidy payments to oil marketers in 2015 and 2017 respectively, in its financial and operational reports. In addition, the N144bn paid out as subsidy obligations in 2017 was not approved by the National Assembly in the 2017 Appropriation Act. This is a clear breach of Chapter V, Part 1 (E), Section 80(1 to 4) of the Constitution of the Federal Republic of Nigeria - which says revenue from the federation must be paid into the Consolidated Revenue Fund, and funds must be authorised by an Appropriation Act before being disbursed.

The refineries have been a tiny, bright spot for the NNPC; their combined capacity utilization rose from an abysmal 4.84% in 2015 to 18.15% in 2017. The Port Harcourt Refinery (PHRC) emerged from a N4.3bn losing streak in 2015 to record N29.5bn and N20.6bn in profits in 2016 and 2017 respectively. But its peers in Kaduna (KPRC) and Warri (WRPC) had a less than stellar record, losing a total of N69.7bn and N36.bn respectively between 2015 and 2017. In terms of operational performance, of the 8.8m metric tonnes of crude processed in Nigeria’s three refineries, 220,048 metric tonnes of crude oil (representing an average of 2.7%), were recorded as losses. According to experts at global consulting firm Triple EEE: “an accurate refinery mass balance will usually show a loss percentage that might be as low as 0.1 or as high as 1.0 % by weight”. Unfortunately, in Nigeria, this is not the case; WRPC reported losses as high as 30.29% of all crude processed in March 2016, and a far lower 6.4% in October 2017.

Why are our refinery loss rates so high? Why is WRPC in particular the most affected, in this regard? Is there a need for experts to independently verify each refinery’s quoted loss rates and make targeted, location-specific recommendations on improving refinery efficiency? Can CSOs train more metering and instrumentation experts? If increasing our capacity utilization to 80% can drop fuel subsidy payments, what is the 10-year cost-benefit analysis of doing so?
Due to the relatively dismal performance of refineries in 2017 (which ranged between 5.81% to 36.37%), Nigeria depended on fuel imports, which were either consummated via Direct Sales Direct Purchase (DSDP) and Offshore Processing Arrangements. About 94% of finished fuel imports were received in October 2017, amid the worsening state of the country’s refineries. Data provided by the NNPC showed that Dual Purpose Kerosene was mostly supplied by refineries.

There is a discrepancy between actual production and product evacuated by the PPMC, with no additional records published for each product’s closing stock. For instance, PMS produced in 2016 at KRPC was 120,209 metric tonnes, while that evacuated was 111,839 metric tonnes. This left a difference of 8,345 metric tonnes, which was not published or recorded. In the interests of democracy, there is a need to publish records of what stock is left after evacuation on a daily, monthly and yearly basis. This is because what is not published cannot be monitored and what is not monitored is more often than not, a loophole for corruption, and wanton wastage of our commonwealth.

A wide gulf also exists between the amount recorded by the NNPC as PMS supplied and the PPMC’s domestic PMS sales. Worth noting is that in 2017, the figure of 14.47billion litres was recorded as PMS supplied by the NNPC, but the PPMC recorded domestic PMS sales of only 13.31 billion, with no additional records published on what happened to 1.16billion liters of PMS supplied.

Why are there persistent gaps in this aspect of the production chain? Why do vast quantities of PMS produced remain unevacuated by the PPMC? Why does the NNPC not have additional columns in its report for ‘Closing Stock’ and ‘Opening Stock’ entries, so that analysts have a true picture of surpluses after evacuation? Do these 1.16billion liters represent product losses? PMS stored? Or both? If it represents both, what proportion is product losses and what proportion is PMS stored?

Nigeria owns the ninth largest gas reserves globally, but operational figures continually reinforce the standpoint that the country does not possess the required framework to fully exploit these resources. Nigeria’s gas production grew slightly by 7.3% from 2016 to 2017, with the largest monthly production numbers recorded in October 2017. Gas production grew from 85,866mmscfd in 2016 to 92,203mmscfd in 2017. In comparative terms, Nigeria produces 79.44 billion cubic meters (bcf), compared to Qatar’s production of 175.7 bcf.

According to data released by the NNPC in 2017, 8.35% of entire gas production is used for domestic gas power, and 4.77% was supplied to the industry. Furthermore, while 48.3% was exported, 28.2% of the gas produced was re-injected, with 9.77% of the gas ending up flared. It is a cause of alarm that Nigeria flares more gas than it supplies for power. The Nigerian Liquified Natural Gas Limited (NLNG) is the largest offtaker for gas production, as it receives 91% of Nigeria’s export gas. This calls into the question other gas projects such as the West Africa Gas Pipeline Project, considering they have a low uptake of gas production; about 1.11% of export gas.

Between 2015 and 2017, the NNPC lifted a total of 2.13 billion barrels of crude oil, with 2015 being the winning year that brought in 780.69 million barrels. These figures fell to 668.58 million barrels in 2016 but picked up by the end of 2017, with 686.67 million barrels of crude recorded. This put average production at 1.88mbpd, coming short of the 2.2mbpd as budgeted.

According to the “7 Big Wins,” an initiative commenced by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu for the sector, crude oil production was predicted to increase to 2.2 mmbbls/d at the end of 2017; however, 1.89 mmbbls/d was recorded at the end of 2017. These figures from an entire country are in stark contrast when compared with Texas, a southern state in the United States which produces an average of 4.01 mmbbls/day of crude.

In 2017, the NNPC made total payments of N1.16tn to the Federation Account. These include N857.4bn for Naira payments from Domestic Crude and $942.2mn from USD payments. However, we observe a rise in the trend of deductions made for product losses (N5.94bn), crude oil losses (N19bn), pipeline repairs (N129.87bn) and under-recovery (N144.5bn). This shows that across different categories, Nigeria’s treasury has witnessed a shortfall totalling N299. 4bn. Despite the widespread reports that Nigeria was exiting the Joint-Venture structure, we found that $4.75bn was spent on Joint Venture cash calls; this calls for more fidelity to already laid out plans to exit from cash call payments.