Baru’s Triumphant Return: Be Afraid! Be Very Afraid!

Guest Columnist: Toyin Akinosho

Four months after he was shunted to a position that was far less influential than his previous post, Maikanti Baru emerged, July 4, 2016, to take the top job at the Nigeria National Petroleum Corporation (NNPC), the state hydrocarbon company. His appointment as Group Managing Director (GMD) spelt victory for the old guard at the corporation, who considered the appointment of Ibe Kachikwu as an imposition from outside. This group of NNPC apparatchiks, who’ve spent between 25 and 30 years at the company, generally saw Kachikwu’s sweeping March 2016 re-organisation as largely a plot to oust Baru, until then the Group Executive Director of Exploration and Production, arguably the most powerful position after the GMD.

Mr. Kachikwu was vice-president of the local subsidiary of ExxonMobil when he was appointed GMD of NNPC in August 2015, to wide public acclaim. He became the Minister of State for Petroleum Resources three months after. In those two roles, he performed regulatory, policy making and commercial duties, a situation which was clearly untenable. The removal of one of the two portfolios from his office has been hailed as an important step in the separation of regulatory functions from commercial duties. There are reasons to believe that Kachikwu could have done a much better job than he did in his year long position as NNPC GMD. He tended to over promise and under deliver. He began too many experiments with little or no planning. He talked too much. He had a re-organisation that changed a few titles and increased NNPC’s already unacceptable opex by creating a number of pointless and expensive senior positions. And he could not perfume away the “smell” of corruption around him: he seemed enthusiastic about every “lucrative” transaction, one of them reportedly blocked by the Presidency.

But is Baru a better choice? Seriously?

None of the leaders of the Nigerian companies who have invested more than $500 million in upstream asset acquisition in the last five years would opt for Mr. Baru as GMD. They wouldn’t say this openly for fear of retribution. Baru, a Ph.D holder in Mechanical Engineering from Ahmadu Bello University, is a career long NNPC employee, who joined the corporation as a Deputy Manager 27 years ago. And that is the problem. He is too steeped in the intrigues of the NNPC and the corporation’s predilection for stalling investment. NNPC is a political party, with a profusion of ranking managers who consider first, their personal interests when there is an investment pie on the table, then the selfish interests of their political benefactors, and in poor last place, the national interest.

To understand why Baru is clearly a wrong choice at this time you need to review Kachikwu’s tenure and situate it in the context of the “NNPC tendency”. When Kachikwu arrived the NNPC Towers last August, he met all the problems that had dogged the corporation for 20 years and which, largely, were created by a combination of corruption, high-handedness, bureaucratic incompetence and deliberate disregard for solutions which lead to stasis. The key ones on the GMD’s table were Joint Venture Cash call arrears, PSC disagreements, NPDC operatorship stalemate, refinery downtime, and the opacity around NNPC’s retention of monies earned from crude oil sales, especially the revenues accrued from the 445,000 barrels of oil per day “allocated” to the corporation’s refineries.

As a minister, he inherited the subsidy challenges and the stonewalling of the Petroleum Industry Bill. He faced the problems headlong. He didn’t shy away from them. And what we see, largely as his faults, were created in the process of his trying to solve the problems.
He tried to address the refinery issue, setting up two clear programmes. One is to get partners to invest in these ailing processing plants and nurse them back to health. The other is to bring in companies to set up modules within the refinery complexes and share infrastructure. That way, it is hoped, the inefficiencies of the old superstructure would wither away, as new modules, run by the private sector, bloom in these plants. Some observers have miffed at these two programmes, a group wondering who is going to invest in any refurbishment of the old refineries, others questioning the idea of installing modules in existing refineries: “Where is the space”? But tenders are out for both and the programmes are going on.

The complaint about JV cash call arrears was patently ignored by the Goodluck Jonathan administration, encouraged by NNPC managers who had also badly managed the PSC debacle. JV cash call arrears refer to monies owed by the NNPC for capital and operating expenses made by the six operating companies, who deliver most of the hydrocarbons that Nigeria exports. The PSC issue speaks to trigger clauses in the contract between Nigeria and operating companies, many of them signed at the onset of deepwater exploration in the early 1990s.

Kachikwu wrote to all the JV operators to come around the negotiating table and discuss a way out of the cash call challenge. This was a problem that the NNPC before him, didn’t even consider urgent, even though its lack of resolution had helped depress the rig count, a key index of the health of a petroleum economy. Prior to his removal from the position of GMD, negotiations had been going on between the NNPC and the majors since April 2016. An industry wide agreement that solves the JV cash call arrears, if achieved, may possibly be the signal achievement of the NNPC in the last 10 years.

Kachikwu had also set up negotiations to amicably resolve the PSC disputes between NNPC and some of its PSC contractors. These contractors had commenced arbitration against the NNPC after all their attempts to resolve the disputes had failed and had defeated NNPC in all the five arbitration proceedings that have been concluded. One can understand why NNPC is angry about the attitude of their PSC contractors to the good faith showed by the Nigerian state in this case.These contracts were very generous agreements, signed around 1993, at a time of poor knowledge of the working of the deepwater petroleum system, and against a backdrop of oil prices of less than $20 per barrel.

A layman’s example of how sweet these contracts were goes thus: If a hydrocarbon charged reservoir holding a billion barrels of oil was found in excess of 800-metre water depth, the royalty to government accruing from the development of the field would be less than 5% (as opposed to up to 20% royalty which is payable for production from onshore fields). And if it was in excess of 1,000-metre water depth, the contractor company would pay nothing at all as royalty.

The law also prescribed an investment tax credit (ITC) as of 50% of the qualifying expenditure, in accordance with the production sharing contract term for the applicable accounting period. This is set off against tax liabilities. In layman’s terms, this means that if a PSC contractor spends $1 billion on the asset, when production commences, the tax it would have paid on the crude oil produced is reduced by a whopping 50% of its $1billion investment i.e. $500Million. And it would in the meantime also be entitled to receive a quantity of the crude oil produced as cost oil to compensate it fully for the $1 billion it has invested. In other words, for every dollar spent on a field that reaches production, the contractor in effect receives crude oil worth $1.50. The government, however, included three re-opener clauses which could have given the Nigerian state far more take than was granted in the contract, if the deepwater projects ever turned more profitable than envisaged.

The clauses were:

• A re-examination of the fiscal terms, if oil prices reach $20, as the profitability of the licencees would be greater and the need to equitably have more government revenue would be established.

• A re-examination and re-negotiation of the fiscal terms, for more equity in favour of government, should there be discoveries above 500 million barrels.

• An overall review of the contract, after 15 years.

By 1997, the Bonga and Erha oil fields, each with reserves exceeding 500 million barrels, had been discovered by Shell and ExxonMobil respectively. By 2001, oil prices had surged far ahead of $20 per barrel. Oil prices have hovered around $100 and more for the past six years, up until late 2014 when they began to decline sharply. Bonga and Erha were both in production by 2006. In 2007, each of them was producing in excess of 150,000BOPD. NNPC called for a review of the agreements and the PSC contractors responded. Several meetings were held between the parties but NNPC showed no seriousness to resolve the issues through negotiation. Instead it went ahead to unilaterally enforce its own interpretation of the PSCs. NNPC’s argument was that PSC contractors were not entitled to ITCs because their costs were fully paid back to them through the allocation of cost oil. Though a clearly logical argument, the problem was that it went against the express provisions of the PSCs and the law which governs the PSCs.

As noted above, NNPC has a right to be upset about the lopsided nature of the PSC agreements entered in the early 1990s in a very different price environment. However, given that the relevant provisions were clearly in support of the PSC contractors, NNPC’s best option was to trigger the reopener clauses and enter into negotiation with the PSC contractors to adjust the terms of the PSCs. The PSC contractors are Nigeria’s partners after all, not our enemies. But after the half-hearted discussions held before the PSC contractors resorted to arbitration and until Kachikwu was appointed GMD, this option was not taken. Mr. Baru has been part of the kind of leadership which allows problems to accumulate while pursuing selfish interests.

It has been said times without number that the same majors, the world’s largest oil companies, who operate here are also present in Angola, a much smaller country than Nigeria. The Angolans get what they want, whereas Nigerians simply fumble, because of NNC’s carelessness, and such carelessness is as much the fault of government as it is the making of those who run the Nigerian state hydrocarbon company. This is the smithy in which Maikanti Baru was forged.

It is clear, with the benefit of hindsight, that the NPDC takeover of operatorship of the five Oil Mining Leases (OMLs) divested by Shell, TOTAL and ENI and sold to Nigerian private companies between 2011 and 2012 was not altruistic. It was not meant to be. Investors who had paid between $300 million and $850 million for the combined equity of Shell, TOTAL and ENI were crying that they needed to operate those assets. Some of us responded that it was just as much in the interest of the nation for a state-owned company to build capacity on the back of these assets, as it was for Nigerian private owners to run them. But now that we know that the NPDC operatorship was just an avenue for slush funds, people like Baru are still blocking moves by these companies to take over operatorship.

Companies, who “escaped” the NPDC operatorship of the assets they bought, have gone ahead to fare much better with their investment than those who have been stuck with NPDC operatorship. For those months of 2015 and 2016 when there was no force majeure, Seplat has produced over 70,000 barrels of oil per day in OMLs 4, 38 and 41, the three acreages it bought from the Shell consortium in 2011, over fourfold increase from the less than 20,000BOPD the assets were delivering at the time of the sale. Eroton and Aiteo, two Nigerian independents that took over OMLs 18 and 29 in September 2015, have topped up their production significantly, producing 77,000BOD and 50,000BOPD as of April 2016, from less than 50,000BOPD and 30,000BOPD respectively at the time of takeover in September 2015. Whereas Seplat had concluded its negotiations for its three acreages before Diezani Alison-Madueke settled down as the Minister of Petroleum, Eroton and Aiteo came in at a time when public outcry about the failure of the NPDC operatorship had made it difficult for the ministry and the NNPC to insist on it as they had before, so government opted for asking those investors to pay some money for the right to operatorship.

Conversely, those Nigerian companies who bought Shell & Co’s assets between 2012 and 2013, and find themselves stuck with NPDC operatorship, have been dragged down. They are struggling between 6,000BOPD (First Hydrocarbon Nigeria, OML 26) and 30,000BOPD at the best of times. Shoreline’s OML 30, reputed to be one of the most prospective of the assets that Shell divested, has performed poorly. The best evidence to prove that NPDC operatorship is value-destroying is Neconde, another Nigerian company which was among those that forfeited the chances at operatorship in 2012/2013.

Neconde negotiated its way out of this graveyard of dreams at the twilight period of the Alison-Madueke era and by August 2015, after a titanic struggle with NNPC, it had won a greater say in the operation of the asset, as joint operator with NPDC. The company’s operated production in OML 42 soared from around 15,000BOPD in June 2015 to 40,000BOPD at the time of the Niger Delta Avengers’ blast of the Forcados facility in February 2016. Baru has been a signal part of the pushback against operatorship. And even though he cites “capacity building” of the NPDC as the reason for his position, we now know that this is a ruse.

At the time he was shunted aside in the March 2016 re-organisation, Baru was still insisting –in spite of the evidence to the contrary-that the takeover of operatorship by Neconde was a bad idea. He clearly preferred the losses the NPDC was making to the gains that Neconde was delivering.

To succeed in this job, Dr. Baru needs to convince us he is not that typical NNPC bureaucrat who does not solve problems but finds clever ways of leaving them so they play to his advantage. The petroleum industry will be watching closely.

• Akinosho is publisher of Africa Oil+Gas Report