As the Nigerian National Petroleum Corporation (NNPC) recently announced a grand entry into power sector, it is obvious that the corporation’s business diversification into other sectors is an impetus to remain profitable and cushion the impact of crude oil volatility on the economy. Adeola Yusuf reports
Diversification, one of the talking points of the NNPC even before the outbreak of the novel Coronavirus, has been brought to the front burners now that the virus is ravaging the world and its economy more than ever before.
Managing Director of the NNPC, Mele Kyari, has not minced words in ensuring the delivery of this target. In all his recent public engagements, the NNPC boss has not ceased to use every opportunity to drive home his point on reasons the corporation now needs unprecedented determination to deliver on this mandate.
Behind Kyari’s strong words of commitment and optimism is an arm of business known as NNPC Ventures and Business Development, which, day and night, must ensure that what the chief executive officer says in public is carried out to the last word.
Mr. Roland Ewubare, the Chief Operating Officer, Ventures and Business Development, NNPC, is, like the department he heads, under focus now on the delivery of this mandate. He corroborated Kyari’s view and provided details of what the NNPC boss meant by diversification.
Target on money making, diversification
NNPC, for example, has a seismic company, IDSL, in Benin for example, it was a very small company six to seven years ago, but last year, the company posted revenue in excess of $100 million. That’s still not too much money, but in an environment where you are looking for every penny to run the national budget, it is critical.
“We have an engineering company in Lagos called NETCO, that’s the national engineering and technical company. NETCO historically couldn’t pay staff salaries, but because of the work we have done in revamping all these businesses, NETCO only last year did over $150 million in revenue.
“Now, they are totally independent and paying their own salaries and are able to contribute and stream dividends into the NNPC and to the federation. So, there are different ideas and plans we have in place to diversify the income base of the corporation for the greater good of the nation and over the next few months you will see these things rolling out.”
“Gas flaring is an issue. I am from the Niger Delta. My dad took us all over Nigeria, because he was an army officer. At least, once a year, he would take us back to the Niger Delta to see his parents. I was always fascinated by the flames of light that went up into the skies as a child. I turned 53 on Sunday. These flares were in existence before I was born, and they are still burning. In a country where we have major deficits in energy access, it makes absolutely no sense to be burning gas. Various governments have put in place a commercialisation programme to manage gas flaring.
“But I am happy to announce, like you have seen in the media today, that yesterday the Federal Government released guidelines for the commercialisation of gas flares. So, there are about 200 flare points in the country, but not all of them belong to us. There are those who own their own assets. But for the government, it’s about a little over 100 that are now going to be put up as part of this commercialisation programme.
“It’s run by the ministry of petroleum resources and Department of Petroleum Resources (DPR). So, NNPC doesn’t have a direct role in it, but to the extent that the gas flares points come from our joint venture partners, we will probably need to sit at the table when that conversation is had.
“But I do agree that the associated gas that we flare right now through an intelligent programme, we can sequester and capture those molecules and use it for the benefit of the broader economy.
“We can use it for the compressed natural gas to drive public transport vehicles, you can do LPG and quite a number of things. We haven’t done a good enough job, working with our IOC partners to see how to utilise that gas efficiently,” he said.
AKK gas pipeline project
Kyari said the $2.8 billion AKK gas pipeline project was scheduled for completion in 2022. On feasibility or environmental impact assessment for this, the NNPC, Ewubare said, is a serious corporation that won’t sanction a $2.8 billion without doing basic due diligence around environmental assessment and feasibility.
AKK is a massive project. It’s a 620 kilometre gas line that’s going to run from Ajaokuta to Kaduna and into Kano. When it is completed, it can transport a fully loaded two billion quantity of gas on a daily basis. It’s massive and the whole idea is to have that whole gas infrastructure in place. Wherever you have gas or energy, development follows.
That means that northern Nigeria corridor will now be open for significant expansion in terms of industrial capacity. The line is going to service various gas-based industries, but it’s primarily for three major power plants in Abuja, Kaduna and Kano.
The 3, 600 MW power project
Abuja is 1,350 megawatts, I believe, Kaduna the same size and then Kano is 900 megawatts or so. So 3,600 megawatts of electricity is projected to come from these and you add that to national grid and you begin to see the multiplier effect on industrialisation and impact on the lives of people.
“It’s a major investment and it should be up for commissioning in 2022 by our current aspiration,” the NNPC said.
The thermal units of the plants are going to be integrated into Siemens electrification plan and there has been significant and intelligent work around debottlenecking and unlocking all the problems we have with our electricity framework. Generation, through transmission and distribution.
“I am not directly involved in that process. But I am aware that the plans are on track and the investors are very much online. And again because it’s part of the Siemens initiative, we are very confident that it will be delivered on time,” he said.
A journey on collaboration
Are there any other organisations the NNPC is partnering with to develop and pursue initiatives that will grow its profitability? Or, is the corporation embarking on this journey all alone? Ewubare, who was put under a spotlight during Arise TV interview, provided answers to these posers.
Taking a historical timeline of oil and gas, one will know it’s a boom and bust cyclical waves. So, what most operators do is to create other streams of revenue that might help during downturns.
Noting that the NNPC is tolling this line, he said: “Fortunately, I worked for a service company in the US, Schlumberger, the largest service company in the world. Shclumberger is an oil service company but back then we had two other businesses, the one in silver valley, California that made testing equipment for silicon chips. The chips in your phone, pentium processor etc and they had a water measuring business as well.
“No linkage to oil and gas, but those businesses provided the cushion during difficult times. Halliburton, for the longest time, were the owners of KPR, so in the same vein, in NNPC what we want to do is to create an energy company, not just an oil and gas company. And that’s why we are moving into renewable energy.
“We have initiatives around solar that’s paying off. We have biofuel agreements with various state governments. We are trying to activate those programmes more rapidly. Within NNPC itself, we have a bunch of non-core businesses. NNPC is one of the biggest landlords in this country.”
The landlord, the hospital developer
In Lagos, just behind Chevron, the NNPC has 90,000 hectares of land in a country where there’s a housing deficit.
Ewubare is aware of this and he stated the ongoing works the corporation is doing around this area.
“We are happy to collaborate with private developers to develop these assets. We have land in Port Harcourt, Kaduna and everywhere. We have hospitals and clinics all across the country. In a country where many of our citizens fly out on a daily basis to go seek medical attention abroad, if we are able to create centres of medical excellence here, then all that foreign exchange will be saved for the country.
“And the ease of care will be better, since you do have your family here. So, we do have a bunch of non-core directorates. What we are trying to do now is to expand the businesses but primarily in collaboration with the private sector whose core business is around these areas. Because we are oil men, not running hospitals.
“So, if we have a medical type company that wants to collaborate with us, we will be happy to talk to them. Same for those in housing estate business, they are welcome. We talked about cost, about 30 per cent of our cost are on logistics. We are now having a conversation with some of the biggest logistics providing companies in Nigeria to have NNPC partner in their businesses.
“All kinds of initiatives we have that are currently at incubation level. When they mature fully, the Nigerian nation will see the benefit of it and you and I as shareholders of NNPC will also get the benefits of it.”
The $10 per barrel production cost
Fair enough, the head of NNPC’s Ventures and Business Development did not present the corporation as one with no challenge. In fact, he highlighted the challenges but delved more mechanism the Corporation lined up as wayouts of them.
Parts of this, he said, is that the NNPC is working on reducing its cost of production per barrel of oil to $10.
The $10 figure the GMD mentioned as production cost is an aspirational figure, he said: “We look at where we are coming from in terms of cost and what the larger cost drivers are for us in the industry. Against that backdrop, the conversation about cost becomes an imperative and urgent one.
“You have got to understand that at the macro-economic level which you focus on a lot on your programme, oil the backbone of our economy, in terms of contribution to GDP is not that much, between seven and 11 per cent depending on the year in question, but as a contributor to our foreign exchange earnings and contribution to national budget, it plays an important role in our nation. Whenever you have a price regime like we have right now, where commodity prices are low, the only way we are able to squeeze out some reasonable cushion in terms of cash and financial gains to the federation is by containing and constricting our costs.
“Our costs are driven by a multiplicity of factors, our staff cost. You and I know that the oil and gas industry in Nigeria probably pays the highest salaries, they even pay more than banks. That is a huge part of what we spend money on. The environment in which we operate, our primary production base in the Niger Delta, still have issues around security, militancy and all of that.
“So, all of those add an extra layer of cost to production. There are many countries in this world where their citizens don’t vandalise national infrastructure. So, they don’t have the added cost that we have.
“For us to move equipment to an offshore location, we need mobile policemen loaded with weapons and that comes with added cost. But to address that question, $10 is an aspiration. When are we getting there? We are looking very actively at hitting that threshold before the end of quarter four of 2021. It’s an aggressive target for sure,” he said.
Factors reaponsible for high production cost
For thos who may want to ask how did the production get so high compared to other countries, Ewubare has an answer.
The current cost structure we have, he said, is a fallback from the high commodity cost regime we had a few years back of about 100 to 110 dollars per barrel. Some of the projects that were sanctioned at that time used that price point based on certain assumptions. Now that prices have gone down, it will take a while for the industry to recalibrate and readjust to a more reasonable cost regime, he said.
“It’s a work in progress, but we are certain that at the end of next year, we will be able to get to $10 per barrel as our operating cost. For our technical costs, they are a separate matter,” he declared.
Impact of R&D
The Ventures and Business Development unit won’t achieve much without doing a lot in the area of research and development, cost saving and deployment of technology that can assist.
NPDC, the flagship Exploration and Production company of NNPC, has peers like shell, ExxonMobil, Chevron and such other indigenous companies.
“So, when we talk about reducing cost, if we tell the IOC’s to reduce cost and then our own in-house E and P company carries a cost profile that’s exaggerated, it’s not sustainable. So, the same tactics and pressures we apply to those major partners, we apply to NPDC as well. Technology and innovation is key and interesting, but for now we are not using research and innovation to try and cut down our cost. In my initial remarks, I said the costs we have are a relic of the days of high prices, a relic of the environment in which we operate.
“Yes, we can use technology to address some security issues in the Niger Delta, for example. But there is only so much technology you can use to reduce headcount and human beings in a country where we have high unemployment in terms of our critical workforce and our talent pool,” he said.
The NNPC, according to Ewubare, has very limited places where it can apply the hammer and trim some excess fat.
“We have ideas in place in NNPC to sort of diversify our income stream so that we are better able to manage this boom and burst circle which characterises the oil and gas sector. The oil and gas sector as you well know works in a boom and bust circle and many of our competitors and service companies set up other businesses to manage them. So, when you have low oil prices, you make some money from somewhere else,” he added.
The challenges before the NNPC are enormous but there is no better time to face them head on than now.