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Response to TV360 Podcast by the Hon Minister of Finance

Engr. Alex Ogedegbe,

P O Box 70301,

Victoria Island,

Lagos.

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20/10/2016.

 

The Hon. Minister of Finance,

Federal Ministry of Finance,

Abuja.

Attention: MRS KEMI ADEOSUN.

 

Dear Madam,

 

THE FEDERAL GOVERNMENT OF NIGERIA SHOULD DIVEST AT LEAST 75% OF ITS EQUITY IN NNPC REFINERIES TO COMPETENT PRIVATE SECTOR INVESTORS/OPERATOR AS SOON AS POSSIBLE.

 

I am writing this letter in response to your recent podcast on TV360 concerning the reasons you adduced for the current recession of the Nigerian economy and the solutions you proposed.

 

I agree with your general description and how the government should proceed, especially bearing in mind the need for structural changes and capital investment in productive projects. However, you did not elaborate on the meaning of the term concessioning, which you proposed for getting the NNPC refineries back to operate normally.

 

If by the term Concessioning, you mean the FGN’s will still retain its ownership (monopoly) or even majority shareholding in the refineries, while asking a different company to run them on its behalf, for a fee, that would be a GRIEVOUS MISTAKE, in my opinion. That would be ignoring the AUTHENTIC results of the most recent comprehensive and detailed FORENSIC STUDY of the Refineries by the FGN in 2012. (Copy attached).

 

The elephant in the room, as the saying goes, is the FGN MONOPOLY AND ITS BUREACRATIC CONTROL! All previous FGN Administrations have not allowed the NNPC Refineries to operate AUTONOMOUSLY as BUSINESSES.

I AM COUNTING ON THIS ADMINISTRATION TO BE DIFFERENT. That is the reason I still feel obliged to present this proposal. AFTER ALL, THIS ADMINISTRATION PROMISED THE NIGERIAN PUBLIC A CHANGE FROM PAST INEFFICIENCIES.

 

The following POTENTIAL BENEFITS will accrue to the Federal Government AND THE NIGERIAN PUBLIC, IF THE FGN IS ABLE TO SUCCESSFULY DIVEST A SUPER MAJORITY (75%) CONTROLLING SHARE of its current 100% ownership and control of the NNPC refineries to COMPETENT AND RESOURCEFUL INVESTORS IN THE PRIVATE SECTOR:

 

1.   THE FGN WILL NO LONGER BEAR THE HEAVY COSTS (TENS OF BILLIONS OFAIRA PER ANNUM) FOR RUNNING REFINERIES THAT HAVE FAILED TO PRODUCE ABOVE 20% CAPACITY PER ANNUM FOR THE LAST 15 YEARS.

2.   FGN WILL ACTUALLY EARN TENS OF BILLIONS OF NAIRA, AS DIVIDEND (INSTEAD OF LOSSES), FROM THE NEW MAJORITY PRIVATE SECTOR PARTNERS/OPERATORS OF THE REHABILITATED REFINERIES.

3.   FOREX SAVINGS FOR STOPPAGE OF IMPORTATION OF PRODUCTS - EQUIVALENT TO 30% OF CURRENT IMPORT BILL.

4.   NAIRA EXCHANGE RATE TO FOREIGN CURRENCIES WILL STRENGTHEN AS SOON AS LOCAL PRODUCTION STARTS AT APPRECIABLE QUANTITITES. IMPORTATION OF PRODUCTS WILL REDUCE AND EVENTUALLY STOP AS IT HAD DONE IN 1991.

5.   PETROLEUM PRODUCTS’ AVAILABILITY TO THE PUBLIC WILL BE THE RESPONSIBILITY OF THE PRIVATE SECTOR, WHOSE COMPANIES ARE BETTER MANAGED AND CAPABILITY TO PICK UP THE CHALLENGE; AND OVERALL SOLUTIONS WILL BE ACHIEVED FASTER.

6.   REFINERIES’ FUTURE EXPANSION/IMPROVEMENTS FOR INCREASES IN PRODUCTS’ SUPPLY WILL FOLLOW DEMAND AND WILL BE PROFIT DRIVEN.

7.   NATIONAL SELF SUFFICIENCY OF PRODUCTS’ SUPPLY CAN BE ACHIEVED WITHIN 24 MONTHS FROM TRANSFER OF OWNERSHIP TO THE COMPETENT COMPANY OR CONSORTIUM.

8.   SUBSIDY REMOVAL COULD ACTUALLY BE IMPLEMENTED PERMANENTLY. THIS CAN BE FOLLOWED WITH REMOVING ANY CAPS ON THE PETROLEUM PRICES, WITH THE ACHIEVEMENT OF ADEQUATE COMPETITION IN THE MARKET PLACE – REPLACING THE EXISTING BUREAUCRATIC & INEFFECIENT MONOPOLY.

 

 

 

 

 

HISTORICAL CONTEXT: PARTIAL PRIVATIZATION VERSUS CONTINUATION OF FGN MONOPOLY.

 

The first petroleum refinery in Nigeria, was incorporated as the NPRC (Nigerian Petroleum Refining Company Ltd.), sited at Alesa-Eleme near Port Harcourt. It was a 50/50 joint venture owned by SHELL and BP. The company was operated and managed by BP, as a commercially efficient and profitable business. The NPRC produced the five fuel products and sold to marketers in a seamless operational arrangement from 1965- 1978. The industry operated without shortages because the refinery was properly run and maintained as a viable business concern. The refinery capacity was expanded in a timely manner to meet increases in national demand for products, by the shareholders. It was first commissioned at 38,000 barrels per day and capacity was increased to 60,000 barrels per day immediately after the Nigerian civil in 1970. The FGN initially acquired 60% to comply with OPEC decision in 1974 and finally took 100% equity in 1978.

 

I should quickly add that the construction and ownership of the three grassroots refineries by the Federal Military Governments, in Warri, Kaduna and Port Harcourt, adjacent to the old refinery between 1975 and 1989 were JUSTIFIABLE AT THAT TIME because no private sector players were interested in such massive capital investment. Lack of interest at the time was due to the compulsory acquisition of the NPRC by the FGN.

 

Having worked in responsible positions in the NNPC refineries’ projects and operations from 1975 through 1995, I had the opportunity and privilege to participate in NNPC MANAGENTS’ several attempts, using various international consultants, from 1986 through 2002, both at the subsidiary company and corporate levels to make the refineries operate as commercial, efficient and semi-autonomous companies!  UNFORTUNATELY, ALL THESE ATTEMPTS FAILED. The main reasons for the failures have always been the same- A WRONG BUSINESS MODEL FOR THE REFINERIES- the direct result of FGN’s bureaucracy and INADEQUATE FUNDING. Eventually the necessary AUTONOMY of refinery management to make the CORRECT AND TIMELY decisions for efficient operations and profitable outcomes have been severely and permanently compromised. The current situation at the Refineries is very pathetic. The NNPC Refineries ORIGINALLY designed to run at full capacity, CONTINUOUSLY FOR DURATION OF 18-24 MONTH CYCLE, CANNOT PERFORM! They only run INTERMITTENTLY AT REDUCED CAPACITY. THE AGGREGATED ANNUAL CAPACITY ACHIEVED IN THIS WAY IS USUALLY NO MORE THAN 10% OF DESIGN.

 

In spite of the current situation, I know from my experience and the information available that the refineries can be fully rehabilitated and made operational again under private ownership that have the resources, competence, profit motivation and experience of running refineries efficiently and profitably as a business. That is another reason why I feel OBLIGED AND   CONFIDENT in writing this letter to you.

 

THERE IS HOWEVER AN IMPORTANT CAVEAT TO THIS PROPOSAL. The process for sale of the equity shareholding as suggested must STRICTLY follow an INTERNATIONAL AND TRANSPARENTLY COMPETITIVE TENDERING PROCEDURE. Fortunately the FGN has some experience in this respect. Adoption of the procedure used for the sale of shares in the Eleme Petrochemical Company in 2005 will be a good starting point.

 

 

 

THE NLNG MODEL

 

Several persons, notably the past NNPC GMDS’ have recently suggested that the FGN should adopt the NLNG Equity arrangement, called the NLNG MODEL. This supposedly would allow a technically qualified IOC WITH MAJORITY SHAREHOLDING to operate the NNPC REFINERIES.

However I WISH TO REMIND EVERY ONE that the NLNG model is very unique and was borne out of a HISTORIC compromise by the FGN and its existing JV Partners in the Upstream. The arrangement had enabled a particular project, which had suffered excessive delays of more than 10 years to take off. Conceding majority ownership and the technical and management control to SHELL, AGIP AND TOTAL was the only option that finally caused the approval of the project by the international lenders and the commencement of the project in 1995.

There are important differences and some unique conditions, which may not apply to the NNPC refineries’ situation and therefore not lend the NLNG model as an achievable solution, as follow:

 

1.The IOCS were the initiators of the NLNG PROJECT, as contributors and subsisting JV partners, who had been under immense pressure for flaring very large volumes of associated gas and had conceived a very profitable project, specifically to utilize the gas. They were also paying penalties for flaring gas.

2.IOCS’ interest was driven by additional incentives, such as favorable fiscal policy and excellent export market opportunities for LNG. The profit margins were very robust and had long-term prospects, including 22-year contracts for sale of products.

3. The IOCS constituted the primary driving force for the NLNG Model, the FGN was a MAJORITY partner, who had no other viable option and could not finance it alone, if it wanted the project to materialize;

4. FGN was carried financially UNDER THE MODEL, by the borrowing power and technical muscle of the IOCS.

These conditions stated above do not apply or exist in the current domestic refining industry situation. Moreover the IOCS have no similar OBLIGATIONS or incentives to invest in the local refining industry, in a petrol price controlled market. Therefore I do not believe the same model can be applied or imposed on them or others by the FGN.

 

Finally, I wish to state categorically that this letter has been sent in good faith. I MAKE NO DEMANDS OF ANY KIND AND DO NOT EXPECT AND WILL NOT ACCEPT ANY COMPENSATION OR REWARD. I DO NOT BELONG TO ANY POLITICAL PARTY AND DO NOT ENGAGE IN PARTISAN POLITICS. I wish only to contribute honestly, as a Nigerian and from my experience, having worked for NNPC, as one of the pioneers in this field. I will also be available to discuss or debate the issues, especially the positions I have taken on the subject, at any suitably organized meeting or public forum.

 

Yours truly,

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Engr Alex Ogedegbe, FNSChE, FNSE, FAEng.

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