First of all, I will tell you upfront that I do not believe that the President has the A-team required to steer him through his ambition of reviving Nigeria’s oil and gas sector, especially upstream and midstream. While the NMDPRA and NUPRC have done a good job so far managing the transition of PIA, the ministry of petroleum resources, as the policy organ of the government, has done a poor job at executing on the strategic priorities of what should be the cash cow for changing the fiscal strategy direction of the government from debt to revenue. This article is therefore not an attempt to point blame at or attack anyone; it’s a poster to keep in perspective what really matters and what the weight of government should focus on.
I like the recent decision of the President that gives NMDPRA the green light to raise gas prices for on-grid and off-grid power because it raises the incentive of upstream gas companies, especially the IOCs who are responsible for trapping, gathering, treating, separating, and delivering gas across transmission pipes, as well as the incentive to keep high pressure for use in thermal power generation, off-grid power solutions, petrochemical feedstock, etc. However, it still falls short of the fact that for you to fully maximise the benefits of the value chain, the President needs to let NMDPRA float gas prices according to the bending moment formula in such a way that it tracks AGO (diesel) prices by at least 40 percent.
I hear a lot of chatter about the need for transmission infrastructure, both for internal dissemination (which still needs an additional 8,000 kilometres of network across the country), but not so much about the fact that there’s currently too much reliance on associated gas (AG) with little or no focus on non-associated gas (NAG). While the recent executive order to grant fiscal incentives in terms of pricing to companies that invest in development of NAG wells are a step in the right direction, the Presidency needs to realise that the real key to signalling institutional capital into the sector is to restructure NNPCL into an operator for Oil and Gas in the upstream and midstream sectors, in such a way that it can transform its current model from Joint Oil Agreements (JOA) and Production Sharing Contracts (PSC) to Independent Joint Oil Agreements where the NNPC is not paying cash calls based on a distorted unit production cost per barrel that ranks Nigeria as the country with the highest production cost in the world at between a range of $35-$48.71 per barrel.
In order to achieve this, the President needs to make difficult yet important structural changes, like:
Transfer the FGN’s equity in NNPCL to the Ministry of Finance Incorporated (MOFI) as an asset manager; who will keep a significant share of the entity with the FGN and transfer a fifth to the Public Investment Trust Fund or the Sovereign Wealth Fund of the Government in NSIA—this is especially important because in times of crises like we are experiencing today, it’s the role of a nation’s public investment trust like you have for Saudi Arabia, that owns 16 percent of Aramco and is on track to return $17bn in dividend payments for the 2023 Financial Year, to provide buffer from its stability fund to finance budget deficits, pay down interest on debt, provide liquidity for the FX market in place of using crude oil forwards through forward sales agreement to secure cash from multilateral development banks (like the NNPCL has done with Project Gazelle).
Conduct a thorough and comprehensive external forensic audit that will precede a business transformation exercise organisation-wide to shed off dead assets, business units, or lines and re-align the strategy of the company and its subsidiaries.
Engage investment banks to determine the best way to raise capital for projects, either through the debt capital markets in a corporate Eurobond programme (that will most likely attract a 15 percent coupon because of the issues around country risk premiums and inflation to the interest yield curve) or by doing book building for an initial public offering (IPO).
Capital raising, either through debt or equity, is crucial for the NNPCL to finance important capital projects in a restructured business environment that gives them ambit to become operators in shallow waters and deep inland, non-associated gas wells, the development of floating LNG vessels to reduce to the barest minimum the amount of gas flared from wellheads offshore, and maximise natural gas for LNG and LPG.
Invest in the development and completion of internal transmission pipes like the OB3, AKK, Aba-Owerri-Enugu-Nnewi-Onitsha gas pipelines, the extension of the Zamfara and Kano pressure and metering reduction stations (PMRS) into the Trans Sahara Gas Pipeline that was supposed to run through the deserts in the Niger Republic to Algeria, and the 50 percent counterparty contribution for the development of the Nigeria-Morocco Gas Pipeline either as an extension of WAGPCO or from a new pipeline export infrastructure from Nigeria.
It is good to know that the gas capacity utilisation for feedstock to NLNG has risen from 58 percent to 70 percent in Q1 of 2024, but it’s important to realise that the force majeure situation that has persisted for nearly two years means that dividends, corporate income tax, and withholding tax for the 2023–2024 financial year are going to come under $1.5 billion. This is an important reason why I will die on the hill that says the NNPCL should transfer FGN’s share of equity in NLNG and WAGPCO to a designated asset manager—the Ministry of Finance Incorporated. And it’s my view that in the annual review of the performance of cabinet members, the President needs to seriously look at his Oil & Gas team again.
The over-reliance on the Central Bank by the fiscal authorities in recent moves where the MPR has been raised by 600 basis points, while it is good as it seeks to align the yield curve differential, is not sustainable, especially considering that new open money operations issuance to mop up the M3 money supply is priced at around 25 percent. The fiscal authorities need to step up quickly to complement the commendable reforms that the apex bank has been spearheading.
Kelvin Ayebaefie Emmanuel is an Economist.
