oil and gas

Auwalu: Crude Oil Will Remain Relevant in Next 50 Years

April 12, 2021

The Director/Chief Executive Officer, Department of Petroleum Resources, Engr. Sarki Auwalu, in this interview spoke about the achievements and strategic business plans of the regulatory agency. Obinna Chima brings the excerpts:

We would like to know if you engaged Addax Petroleum to find out the challenge they were having before the decision to revoke their licences was taken and what condition did you give to the new company that is taking over the assets?

First, there is no company that we do not have constant interaction with. The DPR is the lifeline of every oil and gas company in Nigeria. We assess their performance, we give them visibility, when they produce, we give them extra parlay, and we manage their reserves. So, the issue of interaction is there.

In fact, it was the interaction that brought about all the issues that we found out in those assets when they were under Addax; issues such as none responsibility for maintaining the reserve, making sure that the reserves are discovered and utilised – because we need investment. So, when we observe that and we have evidences written during our usual interactions, it makes it necessary for us to know that company A or B is not doing well. There is a process in which we follow which is the Petroleum Act. And I can guarantee you that those processes were adequately followed and all our interactions did really confirm to that the company was not fully in compliance with the provisions of the Petroleum Act. Then, for companies that were re-awarded; the withdrawal of 123, 124, 126 and 137, a consortium was given – Kaztec and Salvic Consortium – and it is on same terms and conditions that were given to Addax. The condition needs to be met, if you don’t meet the conditions, the consequences are there. That is why Nigerian petroleum laws are in such a way that when you implement, you can see the result.

The issue smuggling, irregularities and frauds are challenges in the downstream sector, what is the DPR doing about that, and earlier you talked about acquiring Covid-19 vaccines for the industry, when are the vaccines expected?

Smuggling gives us a direction of the borders that are very vulnerable and we are working with the relevant government agencies and giving them that information. Because that information was not available, you just get volume from Lagos, Calabar or Port Harcourt and it just varnishes. But right now, you will know the volume, you will know the movement, you will know where that volume is going. So, we just advice the relevant security agencies and we have been doing that and there have been success from that. And for other irregularities, a lot of marketers are complaining. You see a marketer with 10 or 20 stations, but always when they come for our annual marketers’ meeting, they complain that they made this investment and there is no profit. Sometimes they sell at loss because most of the time, you see that they under-dispense.

When you catch them, you charge them, and ask why they are under-dispensing? They will tell you that, well, any time there is shrinkages. So, with our Downstream Remote Monitoring System (DRMS), what happens is that you know who is really shrinking you – the workers. So, that is why they are very happy. Because right now, that complain has really gone down, because a marketer has 10 stations in 10 states, he is looking at the operations daily. So he knows how much volume he receives, how much volume is sells, and if he under-reports or he did not report at all, when he goes to lift or obtain the product from the depot, he will not be allowed to do that. So, the loop is so complete and that is why we are so confident in what we have seen. Marketers have reduced complaints, and we know the vulnerable borders and all the smuggling areas in the country.

I am sure all the information we are passing to the relevant agencies, they are doing something with them. Then, as for the time we are expecting the vaccine, you know it is a window and after the politics of AstraZeneca in Europe has been cleared, the demand for the vaccine went up. Initially when we started, there was a window for Nigeria oil and gas to get two million doses, which we lost it. So, what we are pushing is for any window we see. We encourage the companies to work directly with the health management organisations (HMO) that is responsible and good enough it is the same HMO that is working with the Nigeria primary healthcare agency. We try to make it seamless in a way that the industry will have their own vaccine because they are the engine room of the economy. And we are getting support from all the agencies. So, whenever there is a window, the industry can pay or the company that is ready can pay so that we get the vaccine easily.

What is the DPR doing to address the issue of tank farms and oil depots in residential areas?
Some of these depots, the residents actually met them there. They start to build houses and they now occupy those facilities – that is the case with 80 per cent. And now people are occupying that area and they are now pushing back what really attracted them. The DPR does not issue approval without approval from the planning authority of the respective states. That is because what the state government has is the ground – the ground rate belongs to the state, and the DPR seldom give any approval of any infrastructure without having a no objection from the state. So, when you put these two together, you find out that the complaints largely coming from depots that are occupied by residence, it is somehow when you look at it. There was a committee set up by the National Assembly to really look into this and when they came, we gave them this information especially with respect to how these facilities were licenced before the residence came.

It is interesting to know that some realise it is actually the other way round because most of those residence you can hardly see certificate of occupancy on the land they occupy. And we even experience that not only for residence, but also for pipeline right of way. You will see that for pipeline right of way, schools are even built on them. I know it is hard, but this is the hard truth. The only thing we are seeing is that state governments are looking for revenue so they seldom want to push this, because when you push them, it reduces revenue for them and for safety point of view, we now compel each and every facility to develop what we call safety case. And that safety case is a case for safety and why that facility should remain in operation. And you the owner of the facility, you make a case that whatever happens, you are 100 per cent responsible for it and that case is reviewed and renewed every two years because things change.

So, from DPR that is what we hold on. Based on the history and based on the condition that we find ourselves, we request that they make a case for safety, identify all the risks, do a study to reduce it to a low and practicable level and in a way that their operations, emergency and interaction is being taken care of so that if something happens, you are 100 per cent responsible. So, we are working with all the stakeholders to see how we can relocate that. In fact, when the National assembly set up that committee, for us it was a good one because we helped them with a lot of data and they are in politics, they know how to manage that very well. What are we doing on the tanker incidences? Recently, we said every tanker must have a safety valve because if there is tanker incidence, the fuel will explode. So now it is compulsory for every tanker to have a safety valve.

It is a no return valve, when the tank is filled up, the product cannot really open, in fact you cannot even siphon the tank. And the discharge point also has no return valve. You can only use the lock of the valve to open it. For all the major marketers, their tankers are fitted with safety valve, in fact, 95 per cent of the major marketers, their tankers are fitted with safety valve. Now, the big issue is the independent marketers. We gave them final deadline of February 28th to comply but when we start implementing it, we found that there were queues everywhere, both in Lagos and Abuja. So, we realised they needed some time, and they needed to import the safety valve it from abroad. So, we now looked at it that it may create unnecessary scarcity.

So, we said if you have two trucks, you can only use one and you must put one away. And we give them moratorium and we identified the source of the safety the safety valve. And we said let their union, not individual, be the one to bring in the safety valve. That is, you must be a Petroleum Tanker Driver (PTD) member, for the safety of the drivers. And there is National Association of Road Transport Owners. So, we brought the two unions together and we all agreed three years ago that we will phase out every tanker that don’t have safety valve. The major markets have complied, now it is remaining the independent marketers. Some of them have complied, but the compliance level was about 20 per cent before February. But, right now, because of the measures we took in bringing them together, using their union to get the safety valve, on union basis.

I can tell you since March 1, we have recorded about 47 per cent compliance and that was because we said each and every office that manages depot in Nigeria should enforce it. And we have a template whereby we know the tanker, the product it took, whether it has safety valve or not, the number, the owner and everything. So, we are tracking them to ensure compliance and I believe that with time, tanker incidence will reduce drastically. With the safety valves, even if the tankers fall, the products would not spill because it is the spillage of the products that causes the major havoc on the roads. And all the major marketers have fixed all their tankers with safety valves three years ago.

What is the DPR doing to support the transition to renewable and clean energy, which is presently the global trend?

This is energy politics as you know. The developed nations used brown energy to develop. They are the highest consumers as we speak and oil would remain relevant for more than 50 years to come everybody knows that. And Africa in particular needs fossil fuel to develop. There is no industrialised nation that is developed with renewable energy and renewable energy will only be developed with non-renewable means. What it means is diversification of energy. You have to diversify the energy, use more of gas, use oil, which is crude oil, because we need to refine. If you want to build electric car, you only get polyethylene, polypropylene; and all the polymers from the refinery, you can’t get it from gas.

So, we the developing nations, we should not really take it that we need to join the race of getting renewable, ours is to use this brown energy like China, India and Brazil, all did. No one can say China or India should stop searching for crude oil because that is the ingredient of development and same thing for Nigeria. We know from World Energy Outlook that crude oil would remain very relevant in the next 50 years and it is an ingredient for developing economies. The matured economies can afford to use renewable, but the developing nations, we cannot. The energy security Nigeria is just around 25 per cent; 75 per cent do not have access to energy, let alone renewable. What we are emphasising on is responsible use of energy, which is to diversify energy use. And what are we doing on this? You see today we are saying we are migrating to gas. There is no refinery now without petro-chemical attached to it. Even the modular refinery, you see that they produce diesel, heavy fuel oil (HFO) and naphtha. Naphtha is the building block for petrochemical. So, we are engaging and pushing for hydrogen on one part because it is something that is gaining ground.

Before now, you granted a couple of licenses to modular refineries and most of them have remained largely unutilised?
Our License to Establish (LTE) are for two years and once you are issued LTEs for two years and you don’t use it, it is null and void; you have to reapply afresh. So, when we introduced this policy, it really encouraged a lot of them to start preparing the site. They come for our Approval-to-Construct (ATC), which is renewable, but you have to pay. With the ATC, you have already committed money and you have started building. So, that is the strategy we are using. So there is no LTE that is dormant now. After two years, you know, you lost the money, you lost everything, so you have to start afresh.

Can you speak to us about where we are in terms of reduction of oil production cost?
No two fields are same. To benchmark and say your cost of production is X per barrel is not appropriate. Every field has its attendant cost because you use different strategy to extract. But the average as it is now, we want to lower it, at least not to be more than optimal. Some you can produce at $10 per barrel, some at $15 per barrel, some even below $10, and some at maybe $18. But what we want is when you take costs, the average should be between $13 or $14 per barrel. But we know cost of producing in deep water is different from cost of producing in inland basin. It is different from cost of producing in swamp. So, we don’t have a single figure. What we do, which is why we have the National Oil and Gas Excellence Centre (NOGEC), we have a software here that helps to find out the optimal cost per barrel for each field. We have started, we have it there on the sixth floor.

So that we know the cost per barrel and get the aggregate cost for that particular company and we charge the company based on its terrain. That is because working offshore is different from working onshore, the costs are different. In offshore, maybe the security cost is less and offshore it is higher. There are so many parameters. So, that was why we said we need to optimise the cost. The cost of drilling need to be benchmarked, we already have a benchmark. All the basic costs in same terrain must be the same thing, but additional cost in terms of management and in terms of a handling can be different.

The marginal bid rounds would be concluded soon, can you give us an idea of how much the government is expecting to generate from the transaction?

When we started the marginal fields bid round, a lot of people expected that it would be the same as the previous one. But, actually it is not. This one government really want to maximise earnings from it. So, we expect nothing less than $500 million because when you look at the assets and you look at the contribution we expect marginal field to bring within the next two years. So, if we have 57 fields and we are looking for just $500 million, I think the government is fair. People don’t want government to make money, but the government needs to make money because the major revenue earner for Nigeria is oil and gas. A lot of people say the expectation is high, but how much do you pay for a field that is only 50 per cent of our lowest field in North Sea? You pay thrice or four times the same value you pay in Nigeria. So, what is preventing us from taking the same advantage? Same thing in the US, you pay taxes of over 85 per cent and yet you pay for other things, but here you pay taxes of only 55 per cent and you pay royalty of 2.5 per cent. But some think the government shouldn’t earn anything.

In fact, people are advocating that marginal fields should just be allocated, after all our country is not investable. Some Nigerians tell people not to invest in Nigeria. But right now, with the success we have recorded in marginal field, I think the whole world agree that you can come to Nigeria and invest and you will make money out of it. A lot of people that were given opportunity in 2003, then there wasn’t an SPV structure. But now, there is a Special Purpose Vehicle (SPV), which is the operator of the asset and you have equity in the SPV. That SPV is the asset that is awarded to you and the award letter is so clear on what you have. That is to ensure that we get more from these assets. This is to ensure that the country makes maximum revenue out of this commodity. Before, some operators would be working towards stripping the assets or to even be the ones dictating the contract. But, that is no longer obtainable. There is a unit at DPR responsible for marginal field which oversees everything.

What are the risks to your target of increasing the country’s daily crude oil production by 600,000 barrels by 2024 and don’t you think there is need for an increase in your personnel to improve efficiency at the DPR?

The only risk we have is for prices to crash. And to allay that risk is why we are pushing for refinery revolution because with that, the worst would be to consume it in Nigeria because we are importing product and we need jobs to be created. So, the risk within this for this $600,000 barrel is crash of price. In terms of human capital, if you look at it, all we do, we leverage a lot on technology, so that human interface is reduce, and we try to use artificial intelligence (AI). So, where necessary we employ, but we try as much as possible to take advantage of technology.

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