He assured that NNPC was doing all it could to come up with alternative and sustainable financing that will return the refineries to full scale operation
Adewale Sanyaolu
The inability of the country’s refineries to operate at their nameplate capacity has been a source of concern to Nigerians even as it continues to depend on imported petroleum products to meet domestic demand.
But in this interview on the sidelines of the 2018 edition of Offshore Technology Conference (OTC) in Houston, Texas, the Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), Dr. Maikanti Kacalla Baru, explained that financing remained a major constraint towards the complete rehabilitation of the refineries.
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He assured that NNPC was doing all it could to come up with alternative and sustainable financing model that will return the refineries to full scale operation and profitability.
He also spoke on the nation’s upstream, midstream and downstream segments of the petroleum industry, what NNPC is doing on its transformation agenda to remain efficient in the face of the imminent unbundling, among other industry issues.
Excerpts:
Way forward for refineries
There are four refineries owned by NNPC. Two of them are in Port Harcourt. One of them has 65,000 barrels per day capacity and was built as far back as 1965 by Shell. Subsequently, it was bought over by NNPC and was expanded to 80,000 barrels per day. The new refinery in Port Harcourt is 150,000 barrels capacity. We have the Warri Refinery that has 125,000 barrels per day and Kaduna Refinery with 110,000 barrels per day capacity. These are the refineries, I believe, we call ours. These refineries had suffered a lot of neglect due to bureaucratic issues. Most of them had their last turnaround maintenance, which is supposed to be done every two years, in the late 1990s, some in 1998. I think Port Harcourt Refinery had its turnaround in 2004 but because of the fiduciary powers and other limitations, the maintenance of the refineries and to ensure that they do turnaround maintenance as should be done every two years, could not be achieved.
And obviously when you have continuous neglect in terms of not doing a full rehabilitation job through turnaround maintenance, you only carry out palliatives, you get the dilapidation corrected to keep going. That is really what affected our refineries.
Way out
Now, we have got to do proper turnaround of the refineries with the empowerment of President Muhammadu Buhari. The President said look, go and fix the refineries. Whatever you need to do, just do, and fix the refineries.
Unfortunately, of course, there is no funding attached to that. So, if there is any funding that is sourced, it is internal to NNPC through our other operations to be able to fund some of the activities. So, we had to think out of the box and see how best we could carry out this total rehabilitation and it is not a matter of turnaround maintenance. We then came up with the procedure to say we will first of all do detailed scoping of what needs to be done in each of the refineries and we got Kellog Brown and Root to participate with our own company, Nigerian Engineering and Technical Company (NETCO).
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The two carried out a thorough assessment of the set of the refineries, what needs to be done to the last bolt and subsequently cost this activity. We then approached the original refinery builders, these are the companies that designed the refineries and also supervised the construction. For Port Harcourt Refinery, we had the JGC Corporation of Japan together with Saipem. We also approached the Tecnimont and Snamprogetti that has now been bought over by Saipem for Warri Refinery. We approached the Chiyoda Corporation, which together with Saipem did the construction of the Kaduna Refinery.
We engaged them. There was an initial reluctance but after discussing with them, they knew we were serious about it this time around and they now said they were ready to revalidate the scoping we have done as well as bring some modern technology into some of the process units that are already installed to bring them to operate like modern refineries.
Financing the refineries TAM
Of course, the next challenge we have is financing since the government does not have money to do it. On that, we went through a bidding process whereby we advertised and sought expression of interest and worked out a model in which the refineries, once they are up and running, will be able to finance or pay and service the debts we used in funding their rehabilitation programme.
The NNPC Board met in London with some of the shortlisted groupings we had for all the refineries to be able to go the last lap on clearing their fears and addressing whatever anxieties they may have towards sustainable funding and debt service process. Based on that, once that is done, we expect that we will sign the agreement whereby these financiers will bring the funding and the original refinery builders will come in and rehabilitate or refurbish the refineries to guarantee us 90 percent production.
The financiers also have technical arms working with them. So, they will also participate in ensuring that the operation of the refineries after the rehabilitation is in a sustainable manner. That process,
we have also agreed with them, so that once the refineries come back, we will be able to operate them
at that high capacity level, fairly steady and guaranteeing that the payments are assured and the cash flow is guaranteed.
We have worked out all those and because of the nature of the agreement, we have the involvement of other arms of government, including the Infrastructure Concession Regulatory Commission (ICRC) working with us on the best way to carry out this rehabilitation and what I expect is that at the time we are ready to go, we will shut down the refineries, fully refurbish them and bring them back on stream. The opportunities they will have for contracting will be there in terms of getting Nigerian companies to be sub-contractors to be able to give services, so it will also create jobs in the process for Nigerian service providers.
Cash call exit/plans to repay arrears
The cash call exit problem is quite elaborate whereby initially some of the debts that have been claimed by the various Joint Venture (JV) partners were in the region of $6.8 billion and through mutual agreement they agreed to what we take a haircut by a special discount to bring it down to $5.1 billion. That is the amount we agreed with them and we agreed on payment plan for the various JV partners and they range between two and five years when the payments will be done.
The intention on how to pay that is to come up with projects that will develop certain assets that will be able to generate the appropriate cash flow that will be used in servicing those debts. The government will still receive its royalties and taxes from those productions. The aspect that will be used in repaying the debts will be the equity and profit oil that will emanate from there will be retained by the operators to service those debts. For each one, we have seen the level and have identified some of the projects that will go into that basket that will produce to pay the debt. The intent, of course, is that ultimately when we exit this state, we will in the process also emplace and embed NNPC staff into those operations so that they will put closer look on the activities of the operators and be able to ultimately transform these JVs into Incorporated Joint Ventures (IJVs).
What happens after the IJVs?
When they become incorporated, all the benefits of incorporation will come through so that we connect them with government. It will not be issue of taking profits or equity oil, but to cement the relationship on royalties and taxes while the funding and growth will come from the oil they would have retained for cost-recovery, especially the cash call, and any profit that might have come into that. Of course, any profit that will not be utilised will be transferred to the
government because the arrangement is to have a cash flow so that you have a waterfall arrangement so whatever goes over and above the cash flow or cost-recovery requirement will now fall into government’s account. Those will be sustainable so that you don’t have recourse to cash flow.
We have a few push backs with the excellences the governors. Once in a while you hear that NNPC has not remitted certain amount to Federation Account Allocation Committee (FAAC) and as such, FAAC will not meet its stuff and all that. It all has to do with the activities surrounding the exit of cash call. Initially, before we had the engagement of these, we will still be appropriating or distributing some of this to cash call, cost-recovery activities as well as payment of excess crude to the federation account. During the festive period, the governors want to have a lot more money as against what we agreed in the medium time programme. They understand the situation; they also don’t want us to go back to the situation of cash call problem. So, we are working on it and it is moving successfully.
Efforts to grow oil production
To develop our resource, aggressive exploration is ongoing in NPDC, followed by aggressive development. And knowing that financing could be a challenge that we will face along the line,
we looked at various means of ensuring that financing does not become a problem. We looked at issues surrounding raising finance to make sure that NPDC operates as an entrepreneur and optimally. Some of these require some tough decisions because you first sell your crude oil, for example, which is
not something you can do easily because you cannot get the benefits now, but you make sure the projects you are investing in will definitely yield the sufficient volumes that you need to repay these debts you have incurred and loans you have taken. So, there are things you have to do structurally to ensure that such things take place. You look at where your strengths are in terms of staffing and ensure that such costs are focused on covering the group as much as possible. This is because we know very well that the skill sets that are required for various activities will be disseminated across the various areas of the group, so you have to prioritise which ones require greater focus.
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So, the transformation agenda is something we can go on and on to discuss but we have limited time and I can only talk about one sector, which is our exploration and production. But we have the gas companies, the products distribution sector that supplies and distributes petroleum products and, of course, the whole value chain and the ones with challenges, such as the regulated products; we focus on them.
