Isa: OPTS Must Drive Ethical Process in IOCs’ Divestments

The Chairman of Independent Petroleum Producers Group (IPPG) and Waltersmith Petroman Limited, Mr. Abdulrazaq Isa, in this interview with THISDAY in commemoration of the 60th anniversary of the Oil Producers Trader Section, shared his thoughts on topical issues in the Nigerian oil and gas industry and the union’s contributions to the growth of the sector in the last six decades. Peter Uzoho presents the excerpts: 

What are the major achievements of the Oil Producers Trade Section (OPTS) over the past 60 years of its existence as an advocacy group in the Nigerian oil and gas industry? And how effective has the organisation been in tackling some of your greatest challenges in the industry?

OPTS and its member companies have been in the forefront of some of the greatest achievements in the Nigerian oil and gas sector, including supporting the growth of independents, championing fiscal reforms that have led to a better structured PIA. It ensures human capital development of Nigerians across all areas of the industry and country, setting high standards of Health, Safety, Security and Environment (HSSE), corporate governance, professionalism and probity in our industry. The body makes sure there is improvement in critical Human Development indices in host communities, including, but not limited to, partnering with the communities in artisanal skills acquisition, micro-, small and medium enterprises, schools, hospitals, health care delivery, pipe borne water, electrification, roads, agricultural schemes. Through its member companies, OPTS generates billions of dollars in revenue for the Nigerian government and people through royalties, taxes, profit share and other attendant secondary benefits through revenues generated through contracts and contractors and supporting Nigerian Content Development.  

Nigeria’s oil production cost is seen as being among the highest in the world. What kind of fiscal and regulatory incentives can help producers bring down cost and improve the operating environment? 

There are several areas of costs that are common to all producers in the Nigerian oil and gas industry. I would like to highlight some of these areas: the cost of security (and safety) is a significant part of the capital and operating costs in the Nigerian oil and gas industry. Security surveillance of wellheads, production facilities, pipelines etc., whether onshore, swamp or offshore, are cost prohibitive and make this environment uncompetitive for both operators and contractors. Government security agencies can help by understanding that this is part of their job (to ensure the security of assets and people in the country), without passing this on to operators. This will require a restructuring of the funding model for security in our industry.  Crude oil losses on pipeline through either theft, vandalism or aging infrastructure are a major component of high unit operating costs especially on onshore and swamp assets. Alternative evacuation routes are cost prohibitive, adding more than $20/bbl on direct unit operating costs. Again, the security agencies must rise to the task of securing these critical assets from vandalism and theft. The security architecture must also leverage on local knowledge through more effective surveillance and monitoring outside the pipeline Right of Ways. This clearly involves a partnership with the communities that harbor these criminals through a more effective, and incentives based -‘heart and minds’ approach. The immediate implementation of the Host Communities Development part of the PIA and a demonstrable impact of all HCDI for these communities will go a long way to address this. For the aging infrastructure, new pipeline networks must be built that enable sectional metering and monitoring, with in-built zonal redundancies (so crude oil gathering is as decentralized as possible). Modular refineries also provide a viable alternative evacuation route with a significant attendant impact on Gross Domestic Product (GDP).  General and Administrative costs (Personnel costs, travel costs, International Head office costs, where applicable etc.) are also quite high in Nigeria. This requires concerted engagements between OPTS, IPPG and the industry trade unions -the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) and the National Union of Petroleum and Natural Gas workers (NUPENG) and identifying a different structure of remuneration that both delivers value and reduces costs. There should be more leverage on technology to reduce physical travels for meetings, training and interactions with government and regulatory bodies must be encouraged. Other costs – there is continued pressure on operating companies to support several government agencies through additional taxes leading to multiple industry-imposed levies. Specifically, for operating companies with commercial partnerships involving the NNPC (Production Sharing Contracts, Joint Ventures, Asset Management Teams etc.) requiring their involvement in the Supply Chain Management (SCM) process, there is a significant cost for bureaucracy and long contracting cycles (built in by prospective contractors). With the launching of the independent NNPC Limited, OPTS and IPPG must push to see that they no longer behave as a regulatory body for the SCM process. By speeding up the SCM process to within six months for major contracts (and significantly less for others), raising the ceiling on contract values requiring NNPC Limited Board approval and eliminating all bureaucratic interference in the process, significant costs savings will be achieved. 

What is your assessment of the PIA and how do you think bodies such as the OPTS and its member firms can benefit from its implementation?

After over two decades, the signing into law of the PIA in August 2021 is a welcome development. It is rather unfortunate that this delay led to significant loss of investments across the industry which is now manifesting in the stagnant national crude production and reserve level. With the enactment of the PIA, focus should now be placed on the effective implementation to ensure benefits from the PIA are not eroded. The implementation of the PIA has taken off at a reasonable pace and I must commend the federal government for this implementation drive. The timely set-up of the two industry regulators has facilitated the implementation of critical aspects of the PIA and is addressing grey areas in the Act. It is noteworthy that since IPPG’s establishment in 2015, the group and OPTS have worked closely and collaborated on various aspects of the PIA prior to its enactment in 2021. Following the enactment, there is an ongoing collaboration between both organizations in engaging the regulators -the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) on the draft industry regulations issued to guide the implementation of the PIA. 

 What is your assessment of the relationship between the IOCs and independents? 

OPTS has been supportive of independent, indigenous companies and Waltersmith Petroman has benefitted from its membership and relationships built with the IOCs and other independents through this trade section. The body provides a forum where issues that independents have with acquisition of divested assets by the IOCs, fiscal terms to enable commercial successes for such acquisitions, collaborative supply chain platforms (that enable lowering of capital and operational costs through economics of scale), advocacy on government policies, security, and creating a conducive business environment for the industry’s issues are discussed and addressed. 

How would you assess the role of OPTS in promoting Local Content development in the Nigerian oil and gas Industry? Do you see improvement opportunities and in which areas? 

Again, Waltersmith Petroman is one of the few indigenous independents granted marginal field licenses that have progressed them to development and production. This has been achieved with the support of OPTS and its member companies through collaboration in our Area of Operation -Shell Petroleum Development Company (SPDC) and Seplat Energies. Waltersmith has furthered its prime position as a champion of government’s efforts and policies by building one of the first modular oil refineries in the country, delivering much needed petroleum products, helping to reduce subsidies on imported petroleum products and generating more skilled and unskilled jobs from this downstream business. One of the key improvement opportunities is for OPTS to support indigenous independents that are interested in making a similar impact in downstream refining, petrochemicals, and pharmaceutical through improved advocacy on fiscal terms, regulatory overload, access to international capital, HSSE etc. 

You chair the Independent Petroleum Producers Group (IPPG). In what ways do the two bodies- IPPG and OPTS – complement each other? 

The Independent Petroleum Producers Group has many members that are also member companies of OPTS (14 of our members are also members of OPTS) and IPPG uses its platform to ensure that the position of independents on all topical issues in the industry are well articulated and input into all policy and advocacy interventions by OPTS. On its side, OPTS has always carried IPPG along on all issues, with a clear understanding of the strength of advocacy of IPPG as an efficient vehicle of Nigerian entrepreneurs and technocrats in engagements with the Nigerian government. This partnership allows both international and local/ national perspectives to be brought to bear on all issues affecting the oil and gas industry for a more rounded and robust advocacy. The key difference is that while OPTS is a Trade section (and thus a member of the Lagos Chamber of Commerce and Industry (LCCI) and governed by all related acts to the operations of a trade section).  IPPG on the other hand, is more of an interest group of indigenous independent companies. Both IPPG and OPTS complement each other in areas of advocacy to ensure that government policies in the oil and gas industry create an enabling business environment for investors. 

Energy transition is the buzz word in the global energy industry today, with many saying it is an existential threat to the traditional oil and gas firms. What is your perspective on this development, especially as it applies to operators in your sub-sector of the industry? 

Firstly, we are fully aligned to the global decarbonisation initiatives and adoption of renewable energy and we commend the federal government on the recently launched Energy Transition Plan. However, it appears the energy transition has not been thought through properly as is clear from recent events occasioned by the conflict between Russia and Ukraine. Climate change advocates have driven the narrative on energy transition and ensured that government policies have been driven more by a strident minority without considering the advice of experts and technocrats that a more gradual transition is what needs to be achieved. Traditional funding parties initially started dropping fossil fuel investments from their portfolio but have come to the realization that excluding such fossil fuel investments is not possible in the short to medium term. Africa (and Nigeria) has a trilemma of issues to contend with, namely: 

we need to produce and consume more energy for our developmental needs. GDP growth is directly co-relatable to energy consumption. 

We need to ensure energy affordability and reliability before we can embark on a major transition. Even with the argument that the Levelised Cost of Energy (LCOE) for renewable energy is much lower than for fossil fuels, there is a huge capital hurdle to overcome in investing in renewable energy sources and the needed infrastructure. According to a recent United Nations Environmental Programme (UNEP) study, “while Africa has contributed negligibly to the changing climate, with just about two (2) to three (3) percent of global emissions, it stands out disproportionately as the most vulnerable region in the world. This vulnerability is driven by the prevailing low levels of socio-economic growth in the continent. While climate change is global, the poor are disproportionately vulnerable to its effects.” 

 Operators in the oil and gas industry in Nigeria are also battling with this trilemma of issues and are devising strategies to address this:  Gas as a ‘green’ transition fossil fuel has been strongly promoted by industry operators and governments in Africa and, notably, has now been accepted as part of the international narrative on the energy transition.  

Many operators are diversifying their portfolio to include renewable energy in the mix. Examples include TotalEnergies and Seplat Energy, which are promoting this through both a portfolio rationalization and a name change, and Waltersmith, through its active Sustainability projects and move towards gas as a transition fuel and solar energy as a renewable source (including early feasibility for manufacturing of Solar PV cells in a planned Eco Industrial and Innovation hub with UNIDO).  Many African operators have mooted the idea of an African Energy Bank, like the African Development Bank (AfDB) structure but focused on funding energy projects. This will hopefully address any funding gaps that will result from the expected different speeds with which the West and Africa will transition to an energy mix with more renewable sources. 

 We also applaud the federal government for the declaration of 2021 – 2030 as the ‘Decade of Gas’, to fully utilise and commercialise the nation’s abundant gas resources.  

Our members are also positioning to support the government in this effort of making gas a viable and scalable transition fuel for Nigeria. 

Looking forward, what priorities do you think, should shape OPTS’s future agenda? 

With the divestments of the onshore and shallow water assets by the IOC members of the OPTS, one key area of collaboration that the OPTS needs to drive is a transparent and ethical process for these divestments and acquisitions so as not to burden the independents with assets that are eventually found to be commercially unattractive. In addition, there is a need to support the independents to build world class Corporate Governance structures that ensure that these acquisitions are run at the same international standards as the IOCs have managed over the decades.