ESIMONE, an engineer and president of the Crusteam Group, is not a new comer to the oil and gas industry. An insider, Esimone, has garnered experience in multi-disciplinary engineering practice and management for 25 years. He also has been in top management in the oil and gas industry in Nigeria for 10 years. His deep understanding of the industry shows in his analysis of the state of the economy, current fuel subsidy challenges and the corruption in the sector. He also provides a perspective on how the fuel subsidy quagmire could be resolved in the interview he has with Realnews magazine in May. During the session which lasted for more than an hour, Esimone explained how the rot in the economy started and how to fix it, especially the issue of fuel subsidy which has generated a lot of controversy in the country.
According to Esimone, who is very conversant with project management and delivery strategies in Niger Delta environment with its unique community management challenges, “if government rightly identify that there is a fraud in the subsidy programme. …that fraud must be done in collaboration with tank farmer owners. Because in a supply chain there are police check points. Those check points include the Navy, Department of Petroleum Resourses, DPR, the appointed auditors, depot owners – those are the checkpoints. If the policemen at the checkpoints fail to do their job fraud will go through. So for that fraud to go through all these police men must have failed or collaborated for that thing to happen. If they did their job it will never happen.
“So when they start chasing traders for perceived fraud in the industry, the set of people to be jailed should be those policemen who failed in their duty. A trader is a business man who will do everything to make money. It is the laws that check them and those who are supposed to implement these laws at the checkpoints I mentioned to you; if those people are compromised fraud will exist,” he said.
Part of the fraud in the oil and gas sector is that traders collude with the policemen (officials of the Department Petroleum Resources, the Navy, etc) to cook up documents about importation of fuel that never was to collect money from government. The country also pay demurrage for non-existent vessels that purportedly brought fuel to the country. Esimone thinks the fraud in the system can stop if government hold the policemen at the checkpoints responsible for this action which makes the country lose humongous amount.
On the allegation that the Lebanese, Chinese and Asians are involved in these fraudulent activities in oil and gas sector, Esimone said: “If you look deeply into their operations you might find one or two acts untoward. … It’s all Nigerian activities. What you can blame them for is that because of their nature, they don’t have strict integrity in doing business like I have mentioned about Mobil and so on who have integrity. They can decide to collaborate with people who have decided to circumvent the check points. They can co-operate with them and give them papers. That is what they can do for them. But they (Asians) themselves can’t initiate it.”
According to him, “it’s the locals who discuss with the policemen at the checkpoints. They can pass by and do this thing but you will need certain papers they will file. So they can’t initiate it. It is internally initiated. So how can you start chasing the man and holding him responsible when it is your policemen that failed”.
He also observed that the federal government stopped independents from participating in fuel importation to curb fraud in the downstream sector in 2012, saying: “Now that you have driven them away and allowed only tank farm owners, have they confirmed if that fraud still exist or not. If you take an action, you should measure whether it is working or not. With what is available now, are you sure that fraud is still not in the system?
He said: “none of those independents have the capacity to shortcut the process without active collaboration of the tank farm owners. You can’t do it. In order words, the tank farm owners are the custodians of the fraud base. So how can you send this other people out who could actually constitute some of your checks and balances. You sent them away so that these guys will settle down and use their power to manipulate the process. So, this is the major issue government didn’t see. Government was just reacting to the symptom without bothering to look at the cause. So, these are the issues.”
On the issue of subsidy, Esimone, said: “Because of these backlogs of subsidy unpaid, the marketers are not able to import anymore because the banks cannot give them credit anymore. So they can’t import. They would want to import, they are business men. It is only when they import that they make money. So when people think they are holding government to ransom, they are not able to import. They can’t because they can’t access credit. That was why people would have noticed from the end of last year, they cried about this their backlog. The queues emerged but people were getting by with long queues. Just like the shutdown now. You know while people were getting by with long queues, there became only one source of product into the society. The Independents were castrated. The major marketers can’t import.”
Is there a way out of this? Yes. “Government should float bond, do whatever it takes to pay the marketers to enable them import and immediately hand off fuel subsidy,” said Esimone who has developed a model for successful project management in labour sensitive environment and has experience in contaminant plume mapping for both DNAPL and LNAPL using MUDFLO software and the use of special probe for oil-water interface mapping. Co-founder and pioneer president and chief executive officer, LLoyds Energy Group, a petroleum products supply-chain-management company with interest in refinery development, he became the first executive director operations of NESTOIL and later senior vice president, Corporate Affairs. He is the founding chief executive of Crusteam Group, an integrated energy and infrastructure development company with expertise in greenfield projects development, brownfield projects appraisal and resuscitation, business development, planning and management. He is ardent at project viability analysis using compact and customised models.
Esimone has handled the upgrade of oil production facilities for Shell including platform and flowlines repairs; integrity survey of pipelines using non-intrusive techniques, DCVG; carried out API635 Inspection of ASTs for PPMC in MOSIMI and Shell in UQCC using TMI 150. OCTG Inspection services and organised and led the oil and gas industry team from Nigeria that comprised Shell, ELF, AGIP and NAPIMS to Russia for certification of OCTG and Linepipe products of TMK Mills. He has worked in several communities in Nigeria Delta: Tunu, Opokushi, Letugbene, Forcados, Ogoni, Warri, Bonny among others and created a large network pool of community leaders in these areas.
In the non-oil and gas sector, the chartered professional engineer registered by COREN, with a background in civil engineering and holder of post-graduate degree in Geotechnical Engineering, has carried out successfully, planning, field supervision and technical report writing for several engineering investigations for infrastructural development in water resources, geotechnics and environmental services. He has also represented Nigeria in the multi-national assignment on the integrity status of Lake Nyos natural dam in Cameroon; authored more than 30 technical reports, conference and seminar papers in engineering.
Other national assignments Esimone did include serving as a resource person to NUC in a private university development committee and member of the federal government visitation panel to Universities and Inter-Universities Centre. He is in good standing with several professional engineering bodies both locally and internationally as a fellow of Nigeria Society of Engineers, FNSE, member, Nigeria Institution of Civil Engineer, NICE, member, Nigeria Geotechnical Association, NGA, member, International Society for Soil Mechanics and Geotechnical Engineering, ISSMGE, and Member National Association of Corrosion Engineers, NACE, and member, American Society of Civil engineers
A specialist consultant in Geotechnics to WADSCO, a World Bank accredited water resources consulting company in Nigeria providing geotechnical services for most of their project, Esimone made time out of his busy schedule to give deep insight into the challenges facing the oil and gas sector in Nigeria and how the current fuel subsidy crisis can be resolved. He also painted a vivid picture of how fraudulent activities happen in the downstream sector of the economy, describing tank farm owners as the custodian base of fraud in the oil and gas sector.
Barry Esimone, an engineer and President of the Crusteam Group has varied experience in the oil and gas having worked there for more than a decade providing services and build infrastructure in the sector. He shares his deep understanding of the goings on in both the downstream and upstream of the industry as an insider in an interview with Maureen Chigbo, editor, Realnews on opical issues such as fraudulent activities in the sector, why they persists and who should be held responsible, describing tank farm owners and regulatory officials as the custody base for fraud. Excerpts
Realnews: Can you talk about the state of the economy in the Nigeria right now that we have a new government?
Esimone: The truth of the matter is that situation is pretty gloomy. The economic state of the nation is in a very bad shape. That’s facing the fact. It probably will not be the lowest we have dipped through our journey but we are in a bad state. And this state is a product of previous bad leadership. It is not the immediate regime’s problem only. It is not the immediate party’s problem only. It is not the immediate past political party that has ruled the country in the past 16 years. It is a culmination of events; of improper implementation of policies, lack of focus on how to get us developed. So, maybe we have been running from pillar to post all this while.
You recall we have always had national planning and all that. Rolling plans have all come and gone. The NEEDS were developed at a time. All those programmes as robust and as promising as they were never transformed anything. So, I think that what we are seeing now is a destination that we have known must come. I know that this destination will come. I have always known that. And I am always doing an analogy of where we are going to in Nigeria as a trailer loaded with very heavy load and ascending the hill and suddenly before it gets to the peak to level out it started developing engine problem. The natural thing the bodyguard or the motor boy will do is to jump out of the vehicle and take a wage and put so that the vehicle doesn’t role down. And so he will do that and they will manage to go up a little bit, he will put another wage. But after a while if the engine now packs up completely and you will find that you have gone so much and the retraction force is so heavy that it can tumble over and crash with everything in the trailer. So, the option is to repair the engine or replace the engine so that it can drive up to the top level. What is our best option in the repair of the vehicle in that instance? I have posited that the best option is to allow that trailer come down to the floor where it will not go down anymore. At the floor it’s cheaper to change the engine, cheaper to have mechanics work around it and fix it for good and you put the key and drive it up the hill again. Rather than trying those adhoc mid-way as it was coming down. If you even want to repair at that point how do you bring in the engine at that point? It is even more difficult to manage it there than to let it come down. I suspect that’s where we are going. We are coming down to the ravine. That’s where we are. And I think this is a beautiful opportunity for us to fix it. All the while the previous governments have been the boy dropping the wage to try to fix it; that’s what we have been doing and it has not worked. And so we have a situation now is that things have slipped down. When it has hit rock bottom, we can now begin to build. We can now get more hands to build. People will contribute and we will go up the hill. For that thing to happen you must be sure you have the right engine, worked on properly and fixed for good. So that you won’t have that same problem mid-way when we begin to climb, that’s my analogy of Nigeria.
The economy has been treated with such ad hoc measures, that they never really got it right. Now the immediate past regime unfortunately came towards the dying days of the vehicle; the last time they could fix the engine anymore that was when they came on board. My analysis is that rather than fix it at that location, they allowed it to start coming down so they can get it at rock bottom and then start to fix it. For me, it is positive as they realised that it cannot be fixed mid-stream, it has to come down. Coming down means the devaluation of the Naira you are seeing, the inflation, the restructuring they are doing, the insufficient fund coming from the crude, all these agric development programmes they are running, those are the programmes using to wind it down to rock bottom so that it can be fixed. So, their action cannot be seen as being totally negative to the economy. So, you can’t give that judgement because it is important that the thing comes down before we can go up. So, they have taken those actions. We should consider it positive.
Meanwhile, on the net effect of the destination is negative the destination is up and you are going down but you know that you want to gradually bring it down and when you fix it, it can drive up with speed to anywhere you are going to. So, that credit should go to them. And that’s what you see them talk about their achievement, we have done this. We have done this. They have done those things. But those things while not in the process of taking us up, it is in the process of managing our coming down so that when we are on ground level we can fix it. The fuel crisis which manifested just recently is just one of them. The absurdity of depending on imported petrol for fueling the nation cannot be put better. It is total absurdity. No nation does that. Nations that don’t have the feedstock – crude oil even build refineries because it is cheaper for them to buy crude oil and refine in their country for their own use first of all and if they have excess they will sell. It is a cheaper thing to do. While they are refining it they are creating job for their people. We could have done same with our refineries but rather our four refineries have been run down to ground zero. For how many months none of the refineries is functioning. None, as I speak to you now (in May) No refinery is refining anything. So, how are you going to cope so you now depend on importation for all your fuel need? Meanwhile, your source of revenue for importing is dwindling. It has crashed from above $100 per barrel down to $50, down to $60. And meanwhile you are continuously importing. You see the danger. That’s why we are in this position. Now because of the deep corruption in the system, there are some of the funds that would have gone into the developmental processes have been frittered away under corruption. You know those in the team, have not helped matters by their attitude, bloated bureaucracy and all kinds of thing that they do. So, we were pretending and living on borrowed time, thinking that we will sustain the action of using imports to fuel Nigeria. The same revenue from their sales of crude oil is needed for every other development of the nation and yet what you could do locally you throw that pressure to the same revenue we make abroad and so we ended up where we are now.
So, government is unable to meet their obligation under the subsidy and they will not be able to do that. All your revenue, truly speaking, may not be sufficient to pay the subsidy. It is very simply arithmetic. Maximum permissible sale by the OPEC is 2.5 million barrels of crude oil per day. That’s our OPEC quota. Meanwhile, we don’t meet this OPEC quota because of sabotage in the Niger Delta. We barely sell 2 million barrels, sometimes, a little above 1 million barrels. All the calculations are based on the OPEC quota to you which we don’t meet. If you don’t produce that much you won’t sell that much. You can only sell what you have produced. So, that is the major challenge they have. So, the only revenue source has so dwindled. Therefore, it is putting pressure on everything.
Now, the programme of importation didn’t help either. Now, the activity of the government in supplying the fuel, their programme or process of making fuel available are from three key sources. One, the Pipeline and Product Marketing Limited, PPMC, that belongs to government has responsibility to provide fuel. And they provide their fuel from two sources; one, from the local refinery output; two, they augment by importation because the local refinery output is not sufficient for local consumption. So, they are supposed to import the balance. That is the government strategy for getting fuel to us. The PPMC is responsible for that particular function. The pipeline side of their name is dead. So, it’s only product marketing that is there so the name should have been changed since there is no pipeline. But the product marketing is the statutory responsibility of the PPMC to take over all the refined products from the four refineries. Refineries don’t sell. Theirs is to refine and the do custody transfer to the PPMC. That’s why in every refinery you see the PPMC depot around. The refineries refine and push over to them to sell. So, when it is insufficient they are supposed to import to augment. So, nobody should get involved in import if they function efficiently. They are supposed to be responsible for all the importation and everything. Now because they have not functioned well, it has created a lot of problem in the past. There are queues everywhere and because of that government created another window, the PPPRA to support that process by inviting private marketers and allowing them to import part of the requirement of national consumption. That’s how private people got involved.
So, the PPPRA began to give private people allocation. They will collect the national need from national planning and subtract the one the PPMC said they would provide and give the balance to marketers to import. Initially, only the major marketers were providing that service. That was the standard. Due to political pressure they broke up that cartel and allowed others to be part of it and called them the independents. So, the independents joined the importation through allocation from the PPPRA. It means, therefore, we have the PPMC, major marketers and the independents. These are the three who bring fuel to the nation. Now, independents were given a condition precedent before they can participate they must own a tank farm. Naturally the major marketers own tank farms because they were the original distributors and have storage facilities where they store products the PPMC sell to them which they put in their tankers and start distributing. By this initial structure the Nigerian National Petroleum Corporation was not part of the trading group. They were not part of the distribution group. They don’t have filling station. So, these majors that have filling stations – Mobil, the Total, Oando, Forte oil – they had the filling stations. And then the independents began to own filling stations. So, these Independents were encouraged that if you are to participate you have to own tank farms. So, they started building tank farms so they can have the statutory requirement to participate in the trade. Somewhere along the line they dropped the condition for participation and said that if you have a thorough-put arrangement you don’t have to have the tank farm to participate which in my own opinion is a beautiful programme. But after the crisis of 2012, government reverted back to only tank farm owners to participate so those independents, those traders who didn’t have tank farms who were using peoples tank farms through thorough-put arrangement to import were thrown out of business. This people constitute major employers of labour. In my opinion, it wasn’t necessary to throw them out on the pretense that they were the ones who perpetrated the subsidy fraud. But I tell you this, none of those independents have the capacity to shortcut the process without active collaboration of the tank farm owners. You can’t do it. In order words, the tank farm owners are the custodians of the fraud base. So, how can you send this other people out who could actually constitute some of your checks and balances? You sent them away so that these guys will settle down and use their power to manipulate the process. So, this is the major issue government didn’t see. Government was just reacting to the symptom without bothering to look at the cause. So, these are the issues. I just want to give you this background to understand. Because of these backlogs of subsidy unpaid, the marketers are not able to import anymore because the banks cannot give them credit anymore. So, they can’t import. They would want to import, they are businessmen. It is only when they import that they make money. So, when people think they are holding government to ransom, they are not able to import. They can’t because they can’t access credit. That was why people would have noticed from the end of last year, they cried about this their backlog. The queues emerged but people were getting by with long queues. Just like the shutdown now. You know while people were getting by with long queues, there became only one source of product into the society. The independents were castrated. The major marketers can’t import. So, you are left with the PPMC. In other words, the PPMC can only take from the refineries if they are working or import to supplement. So, if the refineries are not working it means that they have to import everything. Now the PPMC do not import directly the import through contracting. They award contract to international traders to bring cargoes for them. That’s their process of importation. Of which by my own opinion the PPMC should be an international traders itself and should not rely on contracting. Yes, they should have grown to be international traders going to other countries to trade and supply products to them; go to other international market place and bid for products, have contracts with refinery owners across the globe. Because that’s what international traders do, have long term contract with refiners so they can pick off their cargo and distribute it around the world. The PPMC should have grown to that position. They never did and they relied on contract. You know what goes with contract. In the contracting process, all the systemic fraud will go into it, you understand, and so costing us more, much more. And they do not have the detail logistic capacity to manage the imports thereby accruing another heavy cost of demurrage. You see those big traders – they will not schedule their window so there will not be a waiting time. But they will all come and line up and by international best practice, you will keep paying them for the vessel until you take your cargo. So, proper scheduling would have avoided those expenses because the vessels carrying the cargoes would only come in when there is space to discharge. But this planning was never done. So, huge payments are made on demurrages that are not related to the prices of the product. It is a reflection of incompetence in the supply chain management. That’s how that comes.
The local refinery component they came up with a creative idea. This other import by international traders is a cash based transaction. You pay them, open letters of credit, LC, you pay them cash. If you don’t pay cash they don’t give you. They are not father Christmas so you need to have cash to do that one. The same way the majors marketers need cash, independents need cash and the PPMC needs cash to do that. If the refineries were working the PPMC will not need cash to take the products. They take it by statute. Now what they did, since the refineries are not working and the refineries are allocated 445,000 barrels per day by law, they decided to sell the products, get people to do basically trade by batter; carry this crude oil and give us refined products because the refineries are not working due to gross inefficient process; because it’s what they tell you, you take. Cost of crude oil is much more lower than cost of refined products. By this act it opens also opportunities for fraud. So, that’s the issue. Now because this particular arm doesn’t require cash they have been the ones bringing the fuel we are using. This fuel you are seeing now through that little pact out of the whole chain. Those people run what they call swap programme. You swap crude for refine products. Some companies were licensed, contracted to do that. And they are indigenous companies. So, meanwhile what everybody used to operate and bring to fuel the nation suddenly it is only one little tribe that brings it. That’s why typically you have queues because you have availability in trickles. Since January you have been seeing queues. They are the only sources of product in the economy through the swap pact of the PPMC programme because the international traders pact with the PPMC is so affect by cash flow.
Realnews: There is something you said about major marketers being custodians of fraud….
Esimone: That’s not what I said. Don’t misquote me. I said if government rightly identify that there is a fraud in the subsidy programme. And I am saying that fraud must be done in collaboration with tank farmer owners. Because in a supply chain there are police check points. Those check points include the navy, the DPR, the appointed auditors, depot owners – those are the checkpoints. If the policemen at the checkpoints fail to do their job fraud will go through. So, for that fraud to go through all these police men must have failed or collaborated for that thing to happen. If they did their job it will never happen. So, when they start chasing traders for perceived fraud in the industry, the set of people to be jailed should be those policemen who failed in their duty. A trader is a businessman who will do everything to make money. It is the laws that check them and those who are supposed to implement these laws at the checkpoints I mentioned to you; if those people are compromised fraud will exist.
Realnews: Part of this fraud is that traders collude with the policemen you have mentioned to cook up documents about importation for fuel that never was to collect money from government. The country will also be paying demurrage for non-existent vessels that purportedly brought fuel to the country. Does it happen in the industry?
Esimone: Yes, it is possible.
Realnews: How can the government stop this?
Esimone: I have said this, the checkpoints, hold them responsible for this action.
Realnews: How much do you think the country loses to these fraudulent acts?
Esimone: I can’t give you a number now but it is humongous. It is a major loss. Now, the question I asked is this: now that you have driven away and allowed only tank farm owners, have they confirmed if that fraud still exist or not? If you take an action, you should measure whether it is working or not. With what is available now, are you sure that fraud is still not in the system?
Realnews: Do you think the fraud is still there?
Esimone: I think so. The fraud is still in the system because they have never punished any of the policemen. So, they are safe. They can only refine their approach with their collaborators, because if they had sanctioned…
Realnews: The DPR officials are also there
Esimone: They are the police people. They are the police people
Realnews: When we are talking about this fraud it also not limited to the downstream. In the upstream too does the fraud in the downstream confirm the allegation then that nobody really knows the amount of crude oil being lifted in the country and that the police people also collude to short change the country?
Esimone: Let me say this. Ignorance abounds in this society and people fathom things. I don’t belong to people who say all kinds of things. The reason is this. One, there are policemen again in that line and some of them are diligent policemen because the exports are handled by the multi-nationals. And so, there is a limit to which they can collaborate in a fraud because the laws of their land hold them accountable if they are indicted and so they will not risk losing their license. They can be recalled out of Nigeria. For example if ExxonMobil is caught in that kind of fraud, their home country will shut down their operation in Nigeria and they will not want to risk that. So, they will do everything to protect that. People don’t understand this side to it about Shell, Mobil, Chevron and all that. And there only few export terminals in Nigeria. It’s is not that everybody put their trucks to carry crude oil. Bonny terminal is owned by Shell. Forcados terminal is owned by Shell. Excravos terminal is owned by Chevron, Quoa Iboe terminal is owned by Mobil. They are the people who invested and developed the export facilities from where the crude oil will go. And the places are manned by the DPR representatives and the representatives of these multinationals. I am saying in effect that such fraud may exist but not to the level of what obtains in the downstream because there are people who are involved whose integrity are important to them. The downstream is all Nigerians affair.
Realnews: There is also an allegation that the crude oil that is taken out to be refined abroad that nobody accounts for the by-products when they are refined. The idea is that all the by-products of crude oil are also sold and money accruing from that is stolen and not remitted to the coffers of the country.
Esimone: Again, professionally, it is not possible. It doesn’t make sense to us professionally. The reason is this. When you are negotiating a swap programme – crude oil for refined products – the terms of engagement is very clear. This is the crude oil and you give me this amount of PMS. What you are exchanging is crude for PMS and not the derivatives. Do you understand so whatever happens to the derivatives doesn’t concern you. You know when you talk about derivatives, it means that they are refining your crude oil for you. That is not what is going on. What is going on is trade by barter – I take your crude I give you refined oil. Which refinery are they taking it to for refining? The refineries cannot depend on your crude oil. Refineries feedstock are planned throughout the year. The owners of refinery can never depend on sporadic availability of crude oil. They plan ahead. They sign long term contract for the supply of crude oil. So, when you take this oil and you say refine for you for what? They take it and sell it in the market and then you buy PMS and the quantity you agreed is returned to the nation. There is no refinery anywhere they are taking it to.
Realnews: That means there is a lot of ignorance on the part of people making that argument, especially during the 2012 crisis, union officials talked so much about the derivatives and what the country is losing. From your explanation, it is like members of the labour who are making the allegation don’t understand what is happening? When they make this argument they make government look fraudulent.
Esimone: It is not. There is a lot of ignorance. It is a highly technical negotiation. Products trade is a sophisticated trade. That is the problem. Product trading is a sophisticated trade. It is a features trade. A trade that you make a gamble into the future just like stock exchange. Not exactly like that but close to that. Stock might go up tomorrow you want to buy today. It’s futures, it’s sophisticated, it’s a specialty. That’s what this brokers know how to play very well. It’s a specialisation. Product trading is a specialisation done internationally. Our people were allowed to come in to contribute to what they don’t know how it operates because government failed in giving them what they required. What they required is for them to go to the filling station and buy fuel and go. And so, they won’t be involved in the technicalities of the swap programme and other technicalities. They began to be involved because they were asked to pay more and there is no fuel and they begin to ask questions from point of ignorance. We need to separate those things, the facts from the ignorance.
Realnews: What is the way forward for the downstream sector right now?
Esimone: The way forward is this. Pay your debt to the traders. Remove subsidy and everything will flow. In the short run, it is an immediate measure. On the long term measure, they must plan to refine all our needs in this country, no matter how they do it, because one of the reasons this subsidy bill keep rising is because of the devaluation of the Naira. During that subsidy investigation of 2012, I kept seeking audience to explain to the public. They don’t understand what they are saying. They will brandish numbers. For the uninitiated, it will make sense that last year you spend N200 billion for subsidy and this year they are spending N1 trillion. It is possible and it can be legitimate.
Realnews: So, explain it now so people can understand
Esimone: The reason is this. Two factors determine the amount of subsidy. One is the international price of crude oil and international price of products because they go together. Two, exchange rate because it is an import based business. That year they referenced when in 2010, I imported cargoes the average price of per metric tonne of cargo was about $600. By that year, it jumped already the price per metric tonne which nobody has control over here was about a $1000 plus. So, only on international market price change, the subsidy automatically had already doubled in dollar terms. So, you will expect to pay double. Because they used buy it $600 now they are buying at $1200. So, automatically your subsidy payment will double. Number Two, at that time it was $600, exchange rate was $1 to N150 because it is a dollar based business. On the dollar component, the dollar need has doubled and the exchange rate had moved from $150 to about $168 as at the time I can remember. Just say $170 easy of analysis. That is N20 per dollar increase of which no trader has control over. It’s the CBN, government policy and lack of economic activity in the nation that dropped the value of your currency. So, if you take that extra N20 per dollar put it in a double dollar value. The dollar value at which you are used to import has doubled and you multiply it by this extra you see the subsidy you need to pay will jump high. So, that is why the number jumped not because of fraud. Yes, that can be part of the system. But the key issue why the subsidy figure moved is because of these two major reasons. The only component of fraud that will effect this change will be as a result of claiming for un-imported quantity, that is the third component. So, the country has no control over it but international market price. The exchange rate traders have no control over it except Central Bank of Nigeria. It has nothing to do with traders. The third component is where the public can participate in increasing the value. Now who could check that, those police men I mentioned to you, if they did their function nothing would have happen. Is that clear to you?
Realnews: There is allegation that the Lebanese, Chinese and Asians are involved in these fraudulent activities, especially in this paying for un-imported quantity. So many of them are involved in it and ripping the country off….
Esimone: No! On a serious note I can’t say that. I am not standing in for them, if you look deeply into their operations you might find one or two acts untoward. Ordinarily, if you recall the process I have gone through with you will realise that it’s all Nigerian activities. Where they come in is that they are the traders who sell to you. The Lebanese they bring their cargoes they keep it they know you will come. And they sell it at the proper price because the price is according to plat which they have no control over. What you can blame them for is that because of their nature, they don’t have strict integrity in doing business like I have mentioned about Mobil and so on who have integrity. They can decide to collaborate with people who have decided to circumvent the check points. They can co-operate with them and give them papers. That is what they can do for them. But they themselves can’t initiate it.
Realnews: So, who initiates it?
Esimone: I say the locals who discuss with the policemen. They can pass by and do this thing but you will need certain papers they will file. So, they can’t initiate it. It is internally initiated. So, how can you start chasing the man and holding him responsible when it is your policemen that failed.
Realnews: It is a very serious problem. Is it not?
Esimone: It is. I think we have done just to this.
Realnews: Let’s talk about the offshore business. Investment in the offshore oil and gas business is dwindling.
Esimone: Unfortunate. It’s very unfortunate but that’s what is going on. I think that politics and politicians took a stranglehold on the goose that lay the golden egg by policy summersault, unnecessary bureaucracy, making things difficult unnecessarily had made decisions for further investments on oil exploration difficult. That’s exactly what it is. So, if you don’t explore you don’t find. You know, that your OPEC quota is a function of your reserve and the population of your nation. And without exploration you can’t add to stock of your nation. And mind you, crude oil is an exhaustible resource, so, if you don’t replace it can finish. Some countries have used up the crude oil. They have used to have crude oil but don’t have anymore. The reality is takes billions of years to cook another crude oil. Yes, the one you are taking here takes billions of years to cook.
Esimone: (laughs). You don’t know how crude oil is formed. It is from the decay of vegetable and animals that’s it. So, the theory of crude oil is that the dinosaur era due to major event called the big bang not really the big bang there was a collision of an asteroid onto the earth that raised the dust cover and blocked the sun rays coming into the earth and all the animals died. These animals were dinosaurs, huge animals that covered the face of the earth. It is when they died that the decayed formed this oil. Oil is a hydrocarbon – hydrogen and carbon. They are the things that formed oil; they are only found in living things, in your body and in plant. It is carbon and hydrogen that formed you, formed plants so when the decay, they only come to the elements and they can exist in three states: solid state, liquid state or gaseous state. The solid state of the hydrocarbon is called coal. The coal is hydrocarbon, the liquid state is the crude oil and the gaseous state is the gas. It is in these three stares of matter they exist. That’s why you can cook with coal without smoke. Coal is the same thing as petroleum just on a solid form. That’s why some countries crack coal to get petroleum. South Africa cracks coal to get petroleum. It is just that it is more expensive to crack. They don’t have crude oil so what they have they extract fuel from it. They are converting gas to petroleum because they are the same material but in different state. It’s just like water – your ice cubes, if you like you chew it, or if it melts you drink it like water, and gas, the steam. If you are boiling water, the steam will be going off your kettle. So, those are same. If you remove the cover of your kettle you will see water droplets. You have converted steam into liquid. If you keep the ice cubes in the sun it will melt so you have converted it into water and vice versa.
Realnews; Thanks for the explanation. I am sure a lot of people don’t know this too. But we were talking about the future of the upstream where no investment is shrinking now…
Esimone: Yes, it is shrinking. It has an immediate effect in local content development. Some of the chaps who developed capacity in rig and ownership had their rigs laid off and they are owing debt. And once they are not drilling all their service support will lay off service. A serious country that is into oil production will have a plan of additional oil exploration they will do in a year in search of additional reserve to replace the depletion to constantly keep you in a position where you can get increase quota from the OPEC. Because if we drop our reserve value they will drop your quota value. If we can double our reserve value our quota can go from 2-5 to 3.3million barrels per day.
Realnews: The Petroleum Industry Bill, PIB, is not likely to be passed by June 5, when the tenure of the seventh National Assembly expires. How is this affecting the oil and gas sector?
Esimone: I don’t think that the seventh Assembly will pass the bill. From now to Friday, all attention will be focused on the handover ceremony. They won’t have time to pass what has not already been passed. The required legislative process is not a presidential fiat. The legislators are business doing courses, preparing, so this will not come up. We hope the new government regime will take it serious and expunge things that are contentious and pass the bill.
Realnews: What is really the problem?
Esimone: I have always recommended that if there are grey areas of the bill you can expunge that for further consideration and pass the ones that you accepted. You know, there are two key elements involved in the PIB. One is the fiscal structure in the oil and gas. The second is the unbundling of the NNPC group. Those are they too major elements. On the fiscal structure, the problem there is that the fiscal structure strives to increase the tax on profit apart from the royalties, etc. The target is to increase the tax on the profit for the nation. You should know that the international oil companies are here to do business and what drive the business globally is the tax regimes. If the tax regimes become very punitive, they will leave you. They are not father Christmas. They will also lobby to ensure that you don’t do that because they are having already in-country massive investments. So, it will be cheaper to take a bit of the pain here than to go to a new place where their tax is better to start another new investment. But there is a limit to what they can take.
Realnews: But in other countries’ such as Angola where the IOCs are the tax regimes there are higher than in Nigeria and they have not left those countries…
Esimone: They are higher. No. I say this, people have erroneous assumption that labour in the country is cheap. There is no cheap labour in Nigeria. You know why. The labour efficiency factor in Nigeria is very low. In some of these places, the labour efficiency factor is high. So, if you pay them high you get high output. So, if you pay low here you get very low output. So, labour efficiency factor is part of it. So, labour cost in Nigeria, therefore, is high. What that means is that the operating cost of bringing the product is high. And this profit you are taxing is sales minus expenses. So, if your expenses are so high that your margin here is so narrow, and you come to take higher tax from it you are leaving your partners with little or nothing.
Realnews: The impression is that the IOCs make a lot of money.
Esimone: I say that it is just an impression. It is something you can check. Perception is not necessarily a reality. They are all quoted companies in their homes. If you dig deeper, you will find out how they are performing. So, that is the point. So, why they are struggling is that government should, therefore, not focus on tax regime. In that chain, what they have to do is see if they can increase the size of the cake. So, that even if you increase the tax you take, what is left for them will be worth their time. And where can you touch and since it is sales minus expenses you can’t affect sales so much because they can’t determine the price. It is in your cost that you will touch. So, government should focus on how to reduce the cost of operation in Nigeria so that there will be more in that cake after you apply the percentage tax the left over is enough for them to make enough return on their investment. This is the fact.
Realnews: Interesting. So, what is your last word on how to improve the oil and gas sector and for the management of the economy which is what we have been talking about?
Esimone: You know why we dwell so much on oil and gas because that is the mainstay of our economy. It contributes about 90 percent of foreign exchange earnings and about 80 percent of our budgetary need comes from oil and gas. So, discussing it is discussing the economy literally. (laughter) So, the challenge with the new regime is that they have to have an integrated approach to oil and gas development. Number one, they should ensure that all we can get from the oil and gas for our local needs is gotten from there without importing it. In other words, there must be sufficient refining capacity in-country no matter how they do it. I don’t want to go into the details suggestion of how they do it but you must have that done. When you do that you will save the pressure on the dollar that you used to import and the exchange rate will naturally come down. And that will be the first step out. But like I said, when you asked me about the fuel subsidy I said pay the debt. Even if it is N1trillion, pay it. And remove your hand. If you want you can actually pay it and tax the society gradually to recover it. But by paying it, by any instrument within the system, borrowing or creating a bond to pay it. Then remove your hand so the people can have the capacity for credit rating to import so they can start importing and you can now plan the long term of internal capacity development. Good news, Dangote is building refinery with about 500,000 barrels per day refining capacity and that is marvelous. Many more should be encouraged. I will expect government to target 1.5 million barrels per day refining capacity so that our export will only be 1 million barrels per day. Set it as a target that we would want to refine in-country 1.5 million barrels per day. Dangote has taken 500,000 barrels. There are 1 million to go. The four refineries all together are already taking 445,000 barrels per day. So, we have about 500,000 barrels balance of that to go. So, you can allow independents to build. Encourage them with incentives. So, that is my suggestion on way forward.
— Jul 13, 2015 @ 01:00 GMT