RAINOIL Ltd, an industry giant in the Nigerian Oil and Gas sector celebrated its 20th anniversary on the 17th of May, 2017, with a lecture on “The Nigerian Oil And Gas Industry: Opportunities, Challenges, And Prospects Of The Downstream Sector”.
In a welcoming speech, DR. GABRIEL IFEANYI OGBECHIE, GROUP MANAGING DIRECTOR, RAINOIL LIMITED, gave a brief history of how the company commenced operations in May 1997. From a humble beginning of one leased petrol service station in Ipetu Ijesha, Osun State, the company’s investments currently includes;
1) A 50-million-liter capacity petroleum storage facility in Oghara, Delta State
2) A 50-million-liter capacity petroleum storage facility in Calabar, Cross River State
3) 51 Retail Petrol Service Stations spread across the country.
4) A fleet of 6 ships with which petroleum products are imported into Nigeria
5) A fleet of over 90 tank trucks with which petroleum products are distributed across Nigeria.
Without resting on their considerable laurels, RAINOIL Ltd. however is keen on bullishly identifying and tackling the challenges bedeviling the downstream sector in which they are a notable player. According to Dr. Ogbechie, ” Despite being Africa’s top crude oil producer, Nigeria still imports more than 80 percent of her refined petroleum product needs. This need for importation exposes the downstream players to attendant foreign exchange exposures and its attendant risks.” He also lamented the sub-optimal operations level of Nigeria’s four refineries.
He noted that ” In these past twenty years, we have also observed the industry go through a lot of policy changes. We have transited from NNPC being the sole importer of petrol – to the government allowing private marketers to import petrol under the subsidy regime – to the current practice where the government has removed subsidy while placing a price cap on the price of petrol.”
Some of these issues and challenges according to the group managing director of RAINOIL Ltd. were the catalyst that necessitated the convention of this lecture to elicit insights and strategies towards surmounting the challenges within the fast-evolving Downstream sector of our Oil and Gas industry.
An erudite panel of the best minds in the industry came together to lead the discussions and proffer solutions for some of the most pressing challenges. These include; The Honorable Minister of State for Petroleum Resources Dr. Emmanuel Ibe Kachikwu who was very ably represented by the Group Executive Director / Chief Operating Officer Downstream of NNPC, Mr. Henry IKEM Obih. Mr. IKEM Obih in his own Capacity as the COO Downstream of NNPC, is virtually responsible for the petrol we have in Nigeria today, The Managing Director of Forte Oil, The Executive Vice Chairman, Techno Oil Limited and Dr. Demola Sogunle the Managing Director of STANBIC IBTC Bank to proffer a finance perspective to the topic at hand.
The honorable minister in his address commended RAINOIL Ltd for their significant contributions in the past 20 years towards the development of the downstream Oil and Gas sector in Nigeria.
He identified some challenges that the current administration has been grappling with since they took over power in 2015. Some of these include:
- The increasing gaps in products supply, which resulted in long queues at retail outlets across the country in the 1st and 2nd quarter of 2016.
- The unavailability of Forex and the inability to open letters of credit, which forced marketers to stop product imports and this imposed over 90% burden on NNPC in contrast to historical levels when NNPC supplied about 48% of the national requirements.
- NNPC consequently was stretched as it was not designed to meet this increase in supply and there was no provision for subsidy in 2016 Appropriation.
- Insurgency and pipeline vandalism in the Niger Delta drastically reduced national crude oil production to less than 1.4 million barrels per day, further reducing income to Federation account and also affecting crude volumes for PMS conversion and impacting FG forex earnings.
- The Resultant Fuel scarcity created an abnormal increase in price resulting in Nigerians paying N150 – N300 per liter at the pump as prevalent hoarding, smuggling, and diversion of products reduced volumes available to Citizens.
- it became clear that unless immediate action was taken to liberalize the petroleum supply and distribution, the queues will persist, diversion will worsen and the prices will spiral out of control.
- So, the government took the giant stride of eliminating petroleum product subsidies and partially liberalizing the market.
According to the Minister, “the environment has changed since the government took these steps. Back then, pricing for crude ranged between $25 and $30 a barrel. Today, it is over $50 per barrel. This means that our revenue stream is improving.
But whenever the price of crude goes up, as a fuels import-dependent country, we see the prices of refined products go up and this comes with systemic challenges. So, that gap has begun to return as crude oil prices increase.
Today NNPC has gone back to importing about 90-95% of products to ensure stability. This means that it is obviously absorbing some of the cost implications resulting from the increase in crude oil prices. ”
He pointed out that Infrastructure continues to be a major issue. While addressing the steps the government is taking to surmount these challenges, the Honorable Minister said that ” Our refineries continue to struggle with frequent downtime from years of sub-optimal maintenance and little or no investments in them. Hence we have embarked on massive efforts to get investments into the refineries and supporting infrastructure.
We plan to get investments into the refineries, repair them, and inject best practices and transparency into their management. Hopefully, we will make them stand alone as commercial entities making and sustaining profits. Our aim is to get to a point where we can reduce product importation by 60% in 2018 and in fact eliminate the importation of petroleum products by 2019/2020. Apart from the NNPC refineries, we are looking at co-locating refineries where NNPC is not a joint venture partner. This entails identifying individuals who can come in, build refineries within the premises of the existing refineries and share infrastructure for efficiencies In addition, we are working with the private sector, State governments in the Niger Delta and other stakeholders in emplacing a modular refinery of ~20,000 barrels a day in each of the states and growing capacity over time, creating jobs and contributing to government revenues.
We are working on all fronts. Refining is key, any country that continues to export its entire crude oil production without local processing is no different from a country that exports it’s agricultural products with no local processing. You get very little margins and no value-added.
So, like every part of the world especially the Gulf States, we need to begin to have a business model that transmutes away from the export of raw crude into export of refined crude. Taking advantage of the West African market and the larger African market Incentives must be created, physical conditions must be improved. One of the key elements to those investments that have to be addressed is pricing. ”
He also went on to say that,” A lot of times we control pricing because it is convenient which creates insecurities and distortions in the market, and ultimately turmoil when we address it. But we must find a way in which a modulation policy allows consumers to enjoy windfalls when the prices are down and limited exposure when the prices are up. What this does is to create market stability, create the ability to generate returns on investment as incentives for investors. Then, we can have a massive inflow of investments which creates employment, creates sustainable stability, creates business opportunities and activity spectrum all through the downstream value chain.
Therefore, modulation as a pricing methodology will need to be looked at again. You will remember that at some point last year, we went down on the pricing of petroleum products. If we had continued the modulation policy as structured, we would have created stability in the industry by now. Investments in infrastructure will have to be prioritized and our refineries will have to be put on an emergency program to get those assets and the refining capacity back into the system. On a short-term basis, before the refineries come, before the financing is fully put in place, before the funding or the pricing mechanisms can be fully developed, we have to look at our existing retail price template, among others. These would include the removal of multi-layered charges on importation by working with the Federal Ministry of Transportation and other agencies. Last month we addressed the issue of Freighting & Trucking for the members of NARTO and we are going to continue working with CBN on issues of Forex to make sure that while we are going through a two-year emergency process of getting refineries back, we can count on stability of the Fx system to be able to support marketers fuel imports. ”
In an obviously well researched address, the Minister reiterated that ” We are also working hard with NNPC to reduce some of the other charges on products – such as the usual 5% provision on NNPC proforma invoices as allowance for ship-to-ship operations per cargo requirement to a onetime 1% charge which will substantially reduce the burden on marketers’ finances. NNPC has recorded commendable performance in service delivery and product supply and distribution. It has done what it is supposed to do as the supplier of the last resort, at great cost in terms of absorbing the shocks of significant deviations in the cost elements that make up the build-up of the PMS pump price from the basis of the approved N145/litre pricing.
But, the reality is that NNPC needs to be run as a business. Ultimately, it needs to transform itself to looking at market dynamics, managing them and creating shareholder value to survive while enabling a fair market that encourages participants to compete in the sector. When marketers were bringing in 50% of products, everybody was busy, jobs were created, businesses were expanding, and taxation was good. We must begin to move the market profile to a point where we go back to the 50% so that everybody naturally is able to compete and have a long-term view of the market from an investment standpoint.
We also need to begin to move away from white products to LPG based products. The reality is that all over the world everybody is moving to cleaner fuels.
Over the next few months, we are going to put in our hands around this work and drive in all the agencies from PPPRA to NNPC to PEF and even Nigeria Content Board to bring it to fruition. ” He concluded by recognizing the role of the private marketers, distributors, civil society, unions and the media as essential in this collaboration. Success according to him will not be achieved without stakeholders getting involved. He thanked shareholders for working with NNPC to achieve a queue-free end to 2016 and promised that the work and collaboration will continue through 2017.
The Ministry’s goal he said “remains to make products available at an affordable price that is stable, that is predictable and that provides enough resource incentive for people to invest long-term in infrastructure, secure the nation’s energy requirements and open the marketplace for Nigerians to be able to set up businesses. Like I said at last year’s OTL Downstream Week, Reforms are often not easy because they cause change, sometimes dislocation and inconvenience, but for our industry, I am encouraged that we have the determination to see through the structural changes that are needed to create the conditions for prosperity in the near future.”