CHIKEZIE NWOSU: Full Deregulation of Downstream Oil Sector is the Way to Go

THE EXECUTIVE

Waltersmith Petroman Oil Limited, an indigenous oil and gas company, has practically exhibited the spirit of ruggedness and resilience, rarely associated with many operators in the sector. Navigating the murky waters of the Nigerian oil and gas industry, it established a modular refinery in May 2020, not even deterred by the debilitating COVID-19 pandemic, which peaked in the country in March of that year. The Watersmith Petroman Chief Executive Officer, Mr Chikezie Nwosu, apprises Kunle Aderinokun of how the firm was able to achieve that feat while giving a testament to the Nigeria Content Development Act. Besides, Nwosu expresses his views on the Petroleum Industry Act, fuel subsidy and deregulation of the downstream oil sector

What is your assessment of the Nigerian oil and gas industry?

The oil and gas industry in Nigeria has quite many challenges. Depending on where you are, there are some generic challenges around the unit cost of operations. Services are quite expensive in Nigeria because contractors build a lot of costs because of the security situation. That’s general; it is suffered by everybody.

The NNPC and NUPRC have been working to see that that unit operating cost can be brought under $10 a barrel, but it is still a challenge.

There are a couple of major challenges in the oil and gas industry. Some of them are general across the board, while others are specific to the areas of operation. The ones that are across the board include things like the unit cost of operations. The unit operating expenditure, which is very high compared to other climes, simply because a lot of contractors build in some additional costs due to the security situation, and the time spent in contracting especially when it involves the government agencies. The government agencies have done quite well in bringing down that time, which use to be upwards of 12 months, sometimes 18 months, some people even talk about six years. So bringing it down to about, six months has helped. But the security situation is still a challenge.

Therefore, if you compound these issues, it will be difficult to get quickly under $10 a barrel. But with the industry collaborating with the regulators and government agencies like NNPC, we hope we are going to be able to achieve that.

The second generic challenge is the ability to attract funding, especially for independents, but even the IOC’s are suffering that as well. The energy transition is picking up pace. If you take a look at the cost of energy, it can be demonstrated that some of the renewables, like solar, are cheaper on a lifecycle basis than fossil fuels.

Therefore, there is a lot of attention. Of course, they are cleaner, there is a climate change part of it apart from the commercial part. Therefore, there is pressure for that transition to happen in Africa as well, even though we are not one of the major polluters.

But these international companies, with a lot of their headquarters in the western world, have their investors putting pressure on them; that’s why you hear all these things about divestments. So funding is drying up for upstream oil and gas, for fossil fuel investment, and it’s a challenge the independents are facing as well.

Although the Nigerian independents are interested in picking up the assets that are being divested by the IOCs, the issue about funding is one that we also face because of the energy transition.

The third one is around the security of crude for export. This is particularly concerning the eastern axis of operations, where people export to the Bonny Terminal through the Trans-Niger pipeline. That Trans-Niger pipeline, the TNP, has a lot of points where crude is stolen from. The TNP is down several days in a month, and some of the operators, who put their crude through there, suffer as much as over 80 per cent of crude losses. So you can imagine if you put 100 barrels inside, you get less than 20 barrels at the Bonny Terminal. That’s a major loss. And of course, when you calculate your unit cost based on that loss, it further compounds the problem.

So for us in Waltersmith, we suffer the same thing because our production from our Ibigwe field goes through the TNP, but we are fortunate that we have large units, which means that the impact on us is less when the allocation is done, but it’s still significant. We still suffer between 30 and 50 per cent of crude losses from what we expect.

But since we have a modular refinery, to which we take about half of those volumes, the overall impact is lessened. So in a month, its 30 per cent, the half of our production is going to our modular refinery, the impact of our losses comes down to about 15 per cent.

These are some of the major challenges, but there are many ongoing efforts to address them. The GMD NNPC is on top of this, so is the CEO of NUPRC.

After many years, the PIA was signed into law by President Muhammadu Buhari in August 2021. What’s your take on the new law?

Let me just put some background to it. Before I came to Waltersmith, I was in Addax Petroleum. I was leading the efforts together with people in the office of the minister of state for petroleum resources at that time, to put together a PIA. I was looking from the point of view of the operators. So the government required some people who could give them some input into this. And it was important that we got a balanced bill that could reflect the concerns of the operators especially around projects that have already been sanctioned, and were either in execution or operation so that these were not affected, because, the commerciality of the project, where funding comes from, is dependent on such stability.

So we talked about issues around grandfathering those contracts. For the others, to get terms that allowed a balance of investment, a little bit favouring the onshore and shallow offshore, and not particularly disfavour the deep water.

So we worked out quite what I thought were good commercial terms, and I’m very happy to say, I have seen those once transited into the new PIB and the PIB that was signed on the back of that.

So what I advise operators to do is to start implementation because it is good enough, of course, no bill or act is perfect. Where the rubber hits the road is in the implementation. I think it is a very solid and robust bill that will help drive investment in the oil and gas industry.

But implementation has to be from the point of view of the partnership between the government agencies that are involved in regulations, and the operators. It cannot be where they treat it as a means of the hammer to penalise people for not abiding by every single line in the PIA. So collaborative efforts during implementation are going to be what makes the PIA will succeed.

Of course, there would be a request for revision as time goes along, and I know that the current government has a listening ear to take up all these revisions.

All in all, it’s very good that we now have a PIA that is workable.

As an industry operator, what does the new policy regime portend for Waltersmith?

Waltersmith currently operates only onshore. And the fiscal terms in the PIA are quite favourable, they are much better than the previous terms that we operated under.

You can see our drive currently, we are now drilling. We have a drilling campaign of roughly about six wells, and that is actually on the back of the PIB because you can see that the terms encourage further development and funding of the assets. In addition, we are in the process of acquiring some additional fields around that area. So for our upstream business, the fiscals are very good.

There is another part of the PIA itself that allows us to convert to a production mining lease or PML, which is also very positive so that we don’t stay as a marginal field operator, to take over full ownership of the mining lease. So those are very positive aspects.

For the downstream business, there is also quite a lot that is very positive. The section of domestic refinery encourages investment in the domestic refinery. Especially when you link it to the current note that we received from FIRS, removing VAT from certain petroleum products. So you can see that that is very encouraging.

Some of these petroleum products are now excluded from the application of VAT. So in principle, the fiscals, the ability to convert to PML, and the FIRS note on the removal of VAT from some petroleum products are very positive for an operator such as Waltersmith. And therefore it encourages us both to continue to invest in the upstream business like I just mentioned with drilling, and in the downstream business by expanding our refining capacity.

Right now we are doing 5,000 barrels of oil per day. But with some of these new policies and directives from the government, we intend to expand our refining capacity to 50,000 barrels of oil per day.

With FG’s plan to remove fuel subsidy, following the advice of Bretton Woods institutions (IMF and The World Bank), what are the implications of such policy on Nigerians and the economy?

You can already see that those subsidies, to some extent, were thoughtful for Nigerians to be able to afford these petroleum products. But they were misused by those that were given the ability to import these products, that’s my view on this.

Now, there is a huge burden on the federal government by this subsidy. In addition to that, it in a sense discourages investment in domestic refining for the products that are still regulated, basically because of the subsidy itself.

PMS for example, we started our modular refining journey, removing PMS from the product slate for that reason. But with the deregulation of PMS and the removal of the subsidy itself, in the expansion stage of our refinery, we expect to be able to include PMS and start delivering it to the market, and a lot of other people interested in domestic refining will come into the market.

The expectation is that we flood the market with these products that are domestically refined in the not too distant future, including what is going to come from the Dangote Refinery.

If this happens, over the long term, I believe that it becomes even much better for the citizens of Nigeria, because market forces would then drive the prices of these products like the PMS. And if market forces are driving that, just like you see with mobile telephoning, it will over time become affordable. But it needs to be watched very carefully so that it doesn’t get out of hand.

The other aspect is that the money saved from the removal of the subsidy has to be applied for infrastructural development in Nigeria, especially making the ease of being able to distribute these petroleum products, those logistics cost add-on to the cost to the end-users.

And if those huge subsidy funds are applied here, it will also have a positive effect in making sure that the prices to the end-users do not get out of hand.

It’s something that I believe that overall it’s a positive move, but it must be watched carefully, such that the impact on the already long-suffering masses in Nigeria. There is a lot Nigerians are going through on a day-to-day basis, which that impact is managed. But to continue with the subsidy is not the way to go.

Do you think full deregulation of the downstream sector of the oil and gas industry is the way to go?

Absolutely! We have to keep an eye on what this full deregulation means. The players in the place that is deregulated simply can’t play any kind of cowboy tactics, cartels, to just arbitrarily increase the prices of these products to the detriment of the average Nigerians.

So why it is deregulated, the players in this deregulated market must business from an ethical perspective. They will still make money, but we cannot just allow them to do things as they like in the Nigerian economy in that area.

The crisis in Nigeria’s foreign exchange market has been persistent. As an operator that has its activities and transactions dollar-denominated, especially with the crude oil, the base product, traded in the greenback, how has Waltersmith fared?

The impact on us is slightly different from other people, who simply export this commodity and earn dollars. That is not what is in Waltersmith’s mission.

Our mission is to provide energy for the benefit of humanity. And humanity in the sense of where we operate currently is for Nigerians.

That is why we started the journey on domestic refining. And it has to be clear, what the burden that we are bearing on this is.

Because we take a significant portion of our crude to the domestic refinery that we have, and the products are sold in Naira, you can then understand that we expose ourselves significantly to this exchange rate dynamics between the Naira and the US Dollar.

So it’s a burden that we have taken on because we do believe that as we continue to consume these resources, with the attendant impact on the GDP in Nigeria, we also want to go into building an industrial and innovation park, where manufacturing will be attracted and will deliver energy and other utilities at attractive prices so that Nigeria gets to a position where we can redress both diversifying the economy and the import/export imbalance that causes the continuous downfall of the Naira.

So we are not playing the same game as a lot of other independents by just exporting crude to earn foreign exchange, we are trying to turn these God-given resources into impacting the economy, even though in the short-medium term it might impact us, because of the foreign exchange volatility, but we expect that as we expand into this region of domestic consumption, things will get better, and we will have a more stable Naira.

Has there been any challenge in Waltersmith that has significantly affected operations? How did you deal with that?

The two major ones I can recollect in the last two years are: first, the COVID-19 pandemic. We had to learn new ways of working, relying on virtual tools to do most of the work that is done from the head office.

Meetings, even having technical evaluations, recruitment processes etc. We transferred all that to the virtual platform. We rely on, for example, Microsoft Teams, Skype and Zoom.

In the field operations, we have started the journey towards automation so that manual interventions are limited. I can sit in my office here in Lagos and be able to monitor what is going on in the operational areas. The deployment of drones for security and also for surveillance of our facilities, operations surveillance. We are going to get into that space as well.

So there is quite a lot in terms of the ways we have changed how we work. Cool changes are handled differently. There is an additional cost burden on constantly taking antigen or PCR tests, to ensure that we are safe in our head office and areas of operations, and also keep the people that interact with us safely.

The second major impact for us particularly is the security situation in the Southeastern parts of the country where our operations are. There are constant disruptions. The sit-at-home orders. Sometimes, not even an order, but we just have to obey them; so you can imagine that when we are doing certain projects, where we expect to be able to take the full components of the number of days or week we can work, but we are limited to maybe three or four days in a week. That, therefore, leads to a lot of slippage on our schedule for the delivery of those projects.

We hope that those security situations will gradually get resolved so that we can go back to the more efficient ways that we deliver projects.

So those are the two major challenges we faced in the recent two years.

Just like other countries of the world, COVID-19 has had its debilitating effects on every sector of the Nigerian economy and it’s still taking its toll, with the oil and gas sector reported being the worst hit. What has kept Waltersmith going? What has been the staying power?

I’ll start from our ability to learn and adapt very quickly. We were executing our refinery project at the time the COVID-19 hit us badly in Nigeria. This was about March 2020. And we expected to deliver the refinery project by May. With all the restrictions of travelling, because we had some expatriates who were working with us preparing for commissioning, we had to find ways of leveraging more on the indigenous capacities that we have been building to complete the execution of the refinery, and we did that.

So even amid the COVID-19 pandemic, Waltersmith commissioned the refinery and put it in operations by the first quarter of 2020, when the pandemic was still ravaging the world including Nigeria.

So we can adapt. We are very nibbling in how we can make changes to the way we operate. That is one of the strengths that Waltersmith has.

The second part has to do with how we have managed the pandemic. This will come a little strange to a lot of people, we mandated vaccination.

So all the stories you hear now around the world or companies, or governments trying to mandate vaccination, we mandated vaccination in our company. And therefore, 100 per cent of the people who work with Waltersmith are vaccinated. Taking that steps means that they do not put themselves and their family at risk, and they also don’t put their colleagues at risk.

So we can buckle up. We have been running our offices now since October 2021. Fully opened, but with a few rotations. People are allowed to come to work, but we still maintain some of the virtual tools.

But we have taken the challenge of the COVID-19 pandemic by the horns by doing what I believe were the right things, that the rest of the world are now looking at, trying to achieve.

So we are resilient and we adapt very quickly. Those have been our strengths.

Waltersmith Modular Refinery was reported to have started operations last year. Could you bring us to speed on the operations?

We have been running the refinery very smoothly. We initially had some expatriates who are end personnel, quite a number of them, but we have been training some Nigerians, and basically, we are moving towards a situation, where we can start releasing those expatriates. Because the Nigerians have demonstrated that we are competent in running the refinery.

So we have no issue concerning the efficiency of running the refinery. We have had no downtime in the refinery. We have achieved and already surpassed our target of being able to refine about a million barrels of products. That is over 158 million litres of products. Our annual target is 271 million litres, and we have managed to achieve significantly towards that target.

So overall, the refinery has been a very good and ‘promising’ addition to the Waltersmith portfolio. The word ‘promising’ is because I have already mentioned how it helps us concerning the security of exported crude because it limits our exposure to the crude losses of the TNP.

We also have some great third-party contracts that we have signed up with some parties that allow us to purchase crude oil in Naira. And not at the parallel market rate but the official I & E window rate. That of course helps because the products are sold in Naira, and if the crude supply is also paid for in Naira, it does help in commercials of the refining project

So, we are very happy with what we have embarked on, which is why we are now discussing the expansion project on the back of that.

The Nigerian Oil and Gas Industry Content Development (NOGICD) Act was enacted in 2010 to promote indigenous oil and gas companies. What has been Waltersmith’s testament?

It’s been very good. Let me point out first of all that the Nigerian Content Development and Monitoring Board (NCDMB) is a 30-per cent equity partner in the Waltersmith Refinery. That means that not only are they there to provide us guidance, to make sure that we align with the Nigerian content laws, they are also a business partner as an investor.

Kudos to the Executive Secretary, Engr. Simbi Wabote, who is a very good friend of mine, has not only made active the talks about supporting indigenous companies but acting on it as we by becoming equity partners with Waltersmith. We intend to continue to grow the partnership.

In addition, in our upstream business, we have a very close collaboration with NCDMB. We share the same blocks of offices with them on different floors, hence the daily interactions we have with them are just excellent.

On our own, it’s not just about what the content law says, Waltersmith at this time, the upstream business is 100 per cent Nigerian. That means we do not have any expatriates in our upstream business. Not a single one. And this is to demonstrate that Nigerian companies can do it.

So when people talk about, we have 70 per cent Nigerians, and 30 per cent expatriates in their own companies, we have 100 per cent Nigerians, and we are very comfortable with that.

We intend to achieve the same in our downstream refining business. But the problem we have initially was that the expertise in Nigeria did not exist, so we had to build it ourselves. And therefore, we are on that track, and we are slowly releasing the expatriates who are in the operations parts of the business.

We extend our Nigerian content compliance to our engagement with the communities as well. So apart from GMOs and those standard things, we have human capital developments with the community, where we have started. In 2021, we took 50 out of a pool of 200 graduates from Ohaji-Egbema LGA of Imo State and trained them in operations and maintenance of both the refinery and the upstream business for a period of about six to seven months. 10 of the best of that 50 were hired directly into our operations as senior staff. This is a programme that we expect to be running year on year, always tied to our capital project, as a requirement under the Nigerian Content Act.

In parallel to that for human capital development, we run a Graduate Trainee Programme. So while the Technical Skills Acquisition Programme (That’s what we can be the one in the community) are targeted and seriously reserved for only the communities, the graduate programme, which we call Accessed Graduate Internship, allows opportunities for other Nigerians.

At the moment, we have about 12 graduates taken from a large pool, that are currently undergoing a one-year internship programme with different departments of the company, legal finance, external government affairs, petroleum engineering, operations, commercials, human resources etc.

That is the second part of our applying the Nigerian Content Development Act towards human capital development in our operations.

In terms of our contracting, our contracts are almost very limited. When we have some consultancy work, we bring in expatriates, but a lot of our contracts in our operation areas, almost 100 per cent, are Nigerian companies. So in terms of companies that comply with the Nigerian Content Act, I’ll say that Waltersmith is at the top of that list.