BusinessDay CEO Interview with our MD/CEO.
In an interview with Frank Uzuegbunam, Editor, West Africa Energy, Prof. Joe Ezigbo, the Managing Director, Falcon Corporation spoke on the various draft policies released by the government recently, ease of doing business especially in the oil industry amongst other issues. Below are excerpts from the Interview.
‘Power remains the biggest factor in the ever increasing cost of doing business in Nigeria’
It is quite commendable that the government is now thinking of a gas-specific policy after decades of using laws and regulatory framework made for oil projects to run gas projects. It is right thinking and quite frankly long overdue. I am hopeful that with concerted will and single-minded strategic focus on the long-term developmental aspirations of the country, we will make significant progress in terms of being an attractive gas-based industrial nation.
It is also commendable that the draft National Gas Policy as put forward by the Federal Government is proposed to be private sector-led. If this will be seamlessly implemented as proposed then we can be assured that the policy would stimulate a competitive business environment for both present and prospective investors; particularly as the draft national gas policy also articulates a clear vision for the sector and sets realistic policy objectives, strategies and an execution plan for the medium to long term targets for gas market development.
It is time to move beyond the mantra of diversification. If the boom cycle returns soon, we should focus on leveraging the private sector for the massive investments required in infrastructure for gas development, processing and transportation, as well as infrastructure investment in other sectors that will ensure we are running full throttle on all the pillars that drive the economy.
As it is currently, the terrain proves to be particularly more challenging for small field producers because they have higher OPEX driven by low reserve and low production volumes of their field, contrasted against the fact that small field producers still compete in the same market with bigger producers for operations equipment and support services.
At the same time, based on their low reserves, the smaller fields struggle with a huge differential vis-à-vis timing for costs recovery and therefore timing to break-even. Thus, reducing government take for onshore and shallow waters will directly impact on the profitability profiles, and thereby stimulate development of small and marginal fields.
Granted, we have seen an uptick in the global crude oil prices as a result of the new OPEC production output cut deal; and granted that Nigeria had the good fortune to have been exempted to enable us ramp up production levels that were significantly depressed as a result of renewed insurgence in the Niger Delta. However, in my view, this period and these developments call for us as a nation to be even more circumspect and deliberate about the management of our production, reserves, and oil revenues.
From the new figures released recently, Nigerian output saw good signs of recovery with January 2017 average production profile of 1.65 million barrels per day. As Nigeria’s crude oil export revenues once again begin to grow and in the face of the extent of very real challenges we have experienced at the height of depressed oil prices and revenues; we would do better to plough the extra earnings to aggressively driving the nation’s diversification agenda. Indeed, a lot of focus still needs to be on the gas industry. We must recognize that if we do not have power, we cannot achieve our diversification agenda and without gas we will continue to have no power.
It is time to move beyond the mantra of diversification. If the boom cycle returns soon, we should focus on leveraging the private sector for the massive investments required in infrastructure for gas development, processing and transportation, as well as infrastructure investment in other sectors that will ensure we are running full throttle on all the pillars that drive the economy. Again, the days of profligacy are gone and Nigerians, government and citizens, should in unison stand up against decisions that move us back to constant erosion of our economy, people and potentials.
Nigeria has performed abysmally poor in the ease of doing business index. According to World Bank report, Nigeria moved up by one step from 170th position on the 2016 ranking to 169th position for the 2017 ranking out of 190 countries. But that is not good enough and does not give any cause for applause. We must get to the place as a nation where national pride and the conviction in ourselves and our abilities cause us to radically rethink the way we do government and its interface with business and the private sector.
Nigeria needs to do more in area of access to credit, improving ease of starting business, steam-lining inter-agency bureaucracies that create process bottlenecks for new and existing businesses, protecting minority investors, improving power supply which is at the core heart of doing business amongst other indicators.
For the oil and gas industry, it is good that the Executive arm of government and the National Assembly are working on a plethora of bills and regulatory frameworks aimed at reforms and making the sector investor-friendly, however there are notes of caution to sound. On one hand, we need to see concerted and timely action, and in this regard it is my expectation that the Petroleum Industry Bill (PIB) re-christened Petroleum Industry Reform Bill (PIRB) should be passed before this year runs out. On the other hand however, it is imperative that in its desire to be seen to act, the National Assembly must have an understanding of the industry direction and policy proposal and be mindful to ensure adequate stakeholder engagements, to avoid pushing forward bills that will complicate a landscape which the current draft policies are working to streamline and consolidate.
I see the resumed payment of cash stipends to former militants agreed under a 2009 amnesty in the country’s Niger Delta oil hub as a measure that addresses only one element of a broader systemic challenge. It was largely initiated based on the urgent need to end the wave of attacks on crude installations and pipelines which reduced Nigeria’s output, volume losses based on incidents having been as high as about 700,000 barrels even in 2016.
I believe however that a longer term resolution of restiveness in the area calls for more than these payments. It is critical that the government and all the stakeholders move in to commence progressively realizable aspects of the Niger Delta Masterplan while the window for peaceful negotiation is open. In this regard, the visits by the acting President Osinbajo is commendable and should really jump-start some tangible action on governments part in this regard. Granted, the challenges are extensive and compounded having persisted for several years, but small steps will count and add up over time.
We must be mindful of the fact that as much as we are looking to draw private investment into the sector, investors are keeping the restiveness and issues pertaining to security of lives and property at the front burner when making their investment considerations, so whatever can reasonably and practically be done in a progressive manner to address the region’s needs, must receive priority action from the government.
It is laudable that the Federal Government finally exited the crude oil Joint Venture (JV) cash-call policy which it had with about six major International Oil Companies (IOCs) operating in the country. The system had been perennially abused and created many inconsistencies in the sector.
The JV cash call exit arrangement would excuse the government of the cash call burden involved in funding JV operations, which had created a series of operational and investment bottlenecks over the past few years. We had lived with a scenario where the monies went directly to the federation purse and the IOC’s had to wait for cash calls that many times never came, while at the same time facing the demand pressure from government to ramp up their investments in gas and other areas of operations.
Going forward, the IOCs will be able to deduct their portions directly which would also then afford them an easier pathway to expanding their operations without the constraints of Federal Government’s controls or budgetary challenges. This in itself will ultimately reduce substantially the amount of time it takes to implement contracts in the industry.
According to the Honorable Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, the development would also result to the reduction in unit technical production costs of oil from $27.96 barrels to $18 in the country. This is a huge leap forward and Nigeria can only but benefit from the ripple effects of this.
The illiquidity situation along the gas-to-power value change poses quite the challenge. The huge and mounting debt owed by the power companies has made it completely unattractive and indeed unsustainable for gas suppliers and producers to continue to make gas available to the power sector.
As at today, the entire debt within the gas-to-power value chain is around N1 trillion and climbing, and this is more than enough to cripple any sector. That the power stations are still getting gas supplies today is a miracle, but we clearly cannot go on like this for much longer. It’s a ticking time bomb and if care is not taken, the entire country will soon be enveloped in total blackness. I do not mean to be a predictor of doom, but this is our very present reality and truth must be told.
It’s a gargantuan problem, yes, but it is still not insurmountable. Issues pertaining to the collection and returns constraints along the value chain must be looked at. Issues around costs and tariffs must be looked at. We cannot continue to play ostrich in the face of an imminent meltdown of the sector. As bad as our power situation is, we cannot as a nation comprehend the weight of a no-power situation. There is therefore an urgent need for government to inject some funds directly to the gas suppliers and producers immediately as way of putting them on a life-support machine while the long term solutions are being worked out. The outlook is really quite bleak without any quick intervention.
I have heard conversations in certain quarters saying that it will be unpatriotic for gas producers and suppliers to cut off gas supplies to the GENCOs. My question in return is whether it is patriotic to owe them such huge amount of debts that their very existence is being threatened?
Gas producers and suppliers are private business entities and deserve to be paid for their services, and make an appreciable level of returns on their investments, particularly in the face of their huge investment outlays and the associated risks and losses characteristic to the sector. I don’t want to imagine a scenario where the gas suppliers and producers will be pushed to the wall such that they resort to cutting off gas supplies to the GENCOs. That will cripple an already comatose economy. And don’t forget that 80 percent of Nigeria’s power generation is from gas-fired plant. So if this happens, the impact will be unimaginable. The economic cost cannot be measured. Like I said earlier, we do not want to have to grapple with the impact of a no-power situation.
Power remains the biggest factor in the ever increasing cost of doing business in Nigeria. Already, Nigerians spend billions of naira on a daily basis on self-generation, so you can imagine what will happen when all the gas-fired power stations in the country shut down as a result of zero gas supply. All our diversification, infrastructure, industrialization and economic growth aspiration hinge to a more significant degree on power. Yet we are neglecting the primary feeder of the value chain. This does not compute on any front.
I am not surprised in the sense that not much has been done to improve our infrastructure especially transmission infrastructure. As of today, even if the country generates more than 5,000MW, it cannot be utilized as our transmission infrastructure cannot wheel out more than that.
It is really a shame that in the year 2017, Nigeria is still battling to generate 4,000MW on a sustainable basis. It is a shame that Nigeria has been grappling with crippling power supply crisis for decades without an end in sight despite the multi-billion dollar investments in the sector, particularly over the past twenty years.
But instead of dwelling more on the failures, let’s focus on the solutions. To operate a gas power station effectively, there must be a gas gathering infrastructure complete with a gas supply pipeline system and since 80 percent of our power generation is from gas-fired turbines, there should be urgency in tackling the dearth of infrastructure in the gas sector. It is clear that the government does not have the resources to finance the infrastructure deficit along the gas-to-power value chain. It is also clear that the expediency that is demanded to greatly ramp up the level of our infrastructure, cannot be delivered by government agencies as currently constituted with its attendant bureaucracies. What needs to happen therefore is that the public sector needs to really create room for the private sector to lead this charge. The role of government should be one of facilitation, creating the enabling investment environment, and of course oversight to ensure reasonableness on the part of investors as it impacts on the welfare of the citizens.
Yes, there have been some changes in our business focus. As with other players in the industry, the EPC aspects of our business have been impacted by the downturn in prices and attendant deferred capex projects. We have however remained steadfast in developing our existing gas business, taking strategic steps towards developing new markets beyond our franchise zone and looking at replicating our gas distribution successes in other parts of the country where gas utilization would boost economic development.
Nigerians spend billions of naira on a daily basis on self-generation, so you can imagine what will happen when all the gas-fired power stations in the country shut down as a result of zero gas supply. All our diversification, infrastructure, industrialization and economic growth aspiration hinge to a more significant degree on power.
We have also been working steadily to progress our investments in the real estate space. Also on the gas front, we are currently making an investment in developing a Liquefied Petroleum Gas tank farm to address the infrastructure gap that has constrained the adoption and utilization of LPG in various sectors and across the country.
In a challenging operating environment such as the one we find ourselves in today, every business organization has the option to sink with the tides, or swim in it. For us swimming in it has been about doing a deep-dive to understand what pillars of our business models we need to re-jig to maintain a strong enough bottom line. At Falcon we have always been focused on optimizing available resources, through tactical cost discipline and strategic cost reduction initiatives that do not compromise value delivery and stakeholder benefits. This is working for us more so in the current clime than ever before.
These are times that call for a no-frills approach to operations, and the adjustments have been easy for us to adopt and internalize because already we are not tolerant of waste. A big part of our ability to do this has been our people who understand clearly how uneven the terrain is at this time, and work diligently to ensure we achieve these objectives. In this period we launched our OneFalcon-OneFocus initiative which is targeted at consolidating our existing lines of revenue while synergistically mobilizing to ensure our new initiatives take off. Our teams share a commitment to ensure the company continues as a strong brand even amidst the difficulties of the day and I must appreciate their drive..