Building a new NNPC: The journey thus far

Jan 08, 2005 01:00 AM

by Engr. Kupolokun

In NNPC is a subset of Government Economic transformation agenda which we have christened project PACE began in the 2nd quarter of 2004. It is a comprehensive multi-dimensional program of change over a period of two and a half years and is geared towards achieving high performance standards comparable to what obtains in any National Oil Company.
It aims at developing world class capabilities in business performance solving processes in subsector for efficient operations. It is therefore expected to lead to improvement in financial management, technology systems and human resources as well as transforming NPEC into a medium size company and the restructuring of NAPIMS.

Key Achievements to date in this regard include:
-- Reawakening of NNPC to the realities of its current position through a comprehensive study resulting in a new vision and journey of change being vigorously pursued The commencement of transformation of the workforce with the expected recruitment of younger and experienced talent and the recent demographic adjustment. The empowerment of NPDC to emerge as a competitive owner and operator of oil assets The restructuring of NAPIMS to enable it become more effective The completion of the design of a new digital Petroleum Market Place soon to emerge as the vehicle to manage commercial processes and local content drive.
-- Emplacement of a new culture of discipline and performance

In January 2005, NNPC is set to launch the implementation of several improvement efforts in the following areas:
(a) Refinery/Downstream operations
(b) NPDC upstream transformation
(c) Implementation of the new petroleum market place (local content enabler)
(d) Information technology enablement
(e) Human capital-improving competences and processes
(f) Finance/Financial management processes
(g) Corporate performance management/decision processes
(h) Corporate/Head Office organization and services

Let me now address our achievements in the various sectors of the petroleum industry.

Upstream sector
In 1999, Nigeria's crude oil reserve was only 25 bn barrels and producibility 2.2 mm bpd. President Olusegun Obasanjo's Administration directed that between 2003-2007, the Country's crude oil reserves should be substantially increased through vigorous exploration.
In concrete terms, the mandate given to NNPC can be summarized as follows:
(a) Growing crude oil reserves to 36 mm barrels and daily production to 4 mm bpd by 2007.
(b) Increasing crude oil reserves to 40 bn barrels and producibility to 4.5 mm bpd by year 2010
(c) Maximizing the sector's value and
(d) Improving Nigerian capacity and local content.

Already, significant discoveries have been made since appraisal drilling began in Nigeria's deep offshore in 2003. These include Shell's Bonga field, with recoverable reserves of about 1 bn barrels and Texaco's Agbami field with a potential reserve of about 1 bn barrels. Other fields classified as world class discoveries include Erha, Ngolo, Chota, Ukot, Ngele, Akpo Bolia, Bonga S.W fields with a total reserve of about 5.7 bn barrels.
I am happy to report that the Nations crude oil reserves now stand at about 33.5 bn barrels and producibility is about 3.3 mm bpd. In this respect, the target of 40 bn barrels reserve and 4.5 mm bpd production are achievable by 2010.

In order to achieve the Presidential mandate of increasing indigenous participation and local content input in the upstream sector, twenty four marginal fields were awarded to competent local entrepreneurs
The objective of the marginal field development include:
-- Engaging the pool of high level technically competent Nigerians in the oil and gas business that now exists;
-- Providing a spring board for development of indigenous companies which can over time venture into operations in the less conventional terrains;
-- Providing greater opportunities for technological transfer;
-- Increasing employment generation

In this regard, the President directed that we must attain 45 % local content input by 2006 and 70 % by 2010. In order to achieve this, major projects are now being broken into small manageable packages to accommodate local contractors through open competitive bidding. Partnering and strategic alliances are also being encouraged so also is in-country fabrication of equipment. Adequate plans are now in place to ensure that competent Nigerians are involved in all the facets of the industry while training is being enhanced.
Funding is however very crucial to the attainment of the target set by the Government. Joint venture oil investment needs about $ 5 bn annually of which NNPC is expected to contribute about $ 2.85 bn for its 57 % equity. This is apart from funds needed for gas development. In view of the quantum and the various sectoral demands for Government funds, the issue of funding becomes very crucial.

By 2006, if nothing is done, joint venture production is likely to decline to about 0.92 mm bpd while the JV companies may have to fund a production gap of 2.2 mm bpd to attain Government's aspiration.
Apart from this constraint, other mitigating factors are:
-- Major projects that are in progress are suffering from delays including budgeting constrains, social interference, and bureaucracy.
-- Low level of local content and linkages to the broader economy as industry is an enclave economy. There is lack of institutional depth on the part of local companies while there are no rational quantifiable targets and/ or measurable performance indicators for local content.
-- Inadequacy of institutional capability as only few indigenous companies can absorb the relevant technology.
-- Community issues arising largely from perceived social inequity and marginalisation of the past;

-- Nigeria's rate of growth in production capacity in percentage terms far outstrips OPEC average. Consequently, OPEC needs to shift in favour of a capacity reflective formula.

Alternative funding options
A funding workshop organized on March 27 2004 identified 4 broad funding alternatives. These include:
(a) restructuring of Upstream Assets to make for self funding e.g. commercialising NNPC
(b) reducing government cash commitment e.g. selling down government stake in JVs partially,
(c) optimising business processes and procedure for example through aggressively leveraging best practices across the country and
(d) tapping non-traditional fund sources such as multilateral lending agencies.

Already, NNPC has concluded third party financing arrangement for the OSO/NGL 2 with ExxonMobil. The total project cost is $ 1.28 bn and the Agreement has been signed and all the various EPC contracts have been awarded. This is the first time that NNPC has utilized 3rd party funding to finance 100 % of its share of project cost and this arrangement could be a solution to the Federal Government's shortfall in its contribution to the JV budgets. In addition, Alternative Funding arrangements of three key projects are under consideration. These are: Meren X platform ($ 41 mm), Meji (87.6 mm), and Delta South ($ 35.6 mm) Development projects.
Furthermore, the Corporation carried out a comprehensive review of on going projects and applied mitigating actions where necessary. Such actions include reviewing of project status and identification of root causes of delays, identifying projects with schedule slippage and cost overruns resulting in the gap between projected and current crude oil production profile.

Local content development
The objectives of the Local content policy are:
(1) to promote a framework that guarantees active local participation without compromising standards,
(2) to promote value adding in Nigeria through utilization of local raw materials and human resources and
(3) to promote steady, measurable and sustainable growth of Nigerian content.

The road map for local content initiatives include:
-- Initiation of plans to achieve target of 45 % Nigerian content by 2006 and 70 % by 2010;
-- Development of legal framework to ensure compliance with local content i.e. policy guidelines, local content bill, regulations;
-- Promotion of increased participation of Nigerian companies in Engineering, Procurement, Fabrication and other services;
-- Drawing up of new initiatives in respect of local content including JQS, Petroleum marketers place;
-- Drawing up of program for accelerated use of local raw materials;
-- Firming up of modalities for refining 50 % of Nigeria's daily crude production by 2006;
-- Establishment of guidelines for improving local staffing of multinational oil companies;
-- Development of strategic plans for technology transfer.

Already, all front engineering projects are done in Nigeria as major engineering services are done in the country. The share of contracts to local contractor has increased and strategic alliances and partnering are being promoted. Furthermore in country fabrication has increased. In addition open bid process is being adopted for the award of all major contracts.
The effect of all these include:
-- Creation of new jobs for engineers, welders, fitters, and technicians;
-- Improvement in the quality of life for the local communities;
-- Creation of opportunities for training, acquisition of new skills and technology by the local community;
-- Increase in communal confidence and empowerment of the youth to develop;
-- Transfer of Operator ship and capacity building in NPDC.

NNPC is developing strategies for improving the technical capability of staff through JV arrangements with major operators and an in increase NPDC production to about 150,000 bpd by 2007. We also intend to develop criteria for the selection of transferable assets. Already, two operators presented 6 fields which met selection criteria with reserves totalling 457 mm barrels and production potential of between 125,000-130,000 bpd.
Also drafting of legal and insurance Agreement for the transfer is on going between lawyers of NNPC and operators of the 6 fields.

Development and facilitation of capacity building and technology transfer in NAPIMS & NPDC
This is being done through training and development of each target population, secondment of staff to JV companies, development and implementation of Technology Master Plan for various work-flows where NAPIMS lack skills. Others include outsourcing some activities requiring technical expertise to consultants, promoting cross posting partnership and identifying skills/disciplines and gaps that should be addressed through cross posting are being resolved through the process of:
(1) engagement i.e. listening and responding. For instance NNPC organized a stakeholders' workshop in Port Harcourt in the 3rd quarter of 2004.
(2) Participation through the involvement of communities in plans and projects
(3) Capacity building through empowerment of inhabitants of communities,
(4) partnership by pooling expertise and resources,
(5) ownership by identifying with a project and its purpose and
(6) sustainability by ensuring long term satisfaction.

Natural gas sector
With a reserve of about 187.5 tcf, Nigeria ranks seventh in terms of global gas reserves and first in Africa. However, prior to the advent of the Obasanjo Administration, natural gas development did not receive focused attention to the extent that as much as 70 % of natural gas produced was being flared (the highest in the world) resulting in economic waste and environmental problems. Nevertheless, within 4 years the flaring was reduced to 42.6 %.
Our aspirations in the natural gas sector include:
-- Attainment of zero gas flare by 2008;
-- Capturing economic value of gas in both domestic and export market;
-- Levelling the playing field between oil producers and other parties involved in the domestic gas business;
-- Ensuring increased private sector participation.
Already, total gas utilized in the country increased from about 197 mm cfpd in 1999 to about 573 mm cfpd in 2004. By 2010 domestic demand for natural gas will increase to about 1,700 mm cf while gas export is expected to reach over 7 bn cfpd.

Opportunities for gas monetisation
A lot of opportunities have been identified for monetising gas. They include expansion of domestic utilization as well as gas export.
Export opportunities for monetising gas include the NLNG, the Brass LNG, the West African Gas Pipeline, the Gas to Liquid project (GTL) the Natural Gas Liquids (NGLs), as well as, Liquefied Petroleum Gas (LPG).
The NLNG has been one of the fastest growing in the world since Trains 1 and 2 were commissioned in 1999. Train 3 was commissioned in November 2002, while Trains 4 and 5 are expected to be on stream in the second quarter in 2005. When Train 6 is added in 2007, LNG output will total 22 tpy.
The Final Investment Decision of the West Africa Gas Pipeline was signed on 16th December 2004. This project which is of strategic importance is expected to fostercooperation and economic development to countries in the sub region. Furthermore, it is estimated to provide… local goods and services within the region during construction.

Identified barriers to achieving natural gas sector objectives include natural gas pricing, finance, fiscal reforms, institutional arrangements and legal/regulatory framework. Efforts are however being made to address these issues. For instance, work on the Nigerian Gas Strategy has just been concluded following a series of stakeholders' workshops and consultation.
In addition, three major documents have been rolled out following conclusion of the Gas strategy assignment. They include a draft Gas Policy Document, a draft bill on downstream gas utilization and a draft bill on a new fiscal regime for natural gas. These documents are meant to present a roadmap on the future of gas investment in the country and promote rapid development to reactivate the gas industry. A timetable for implementation of the Natural Gas Strategy has now been drawn up. It begins by the end of December of 2004 and terminates in March 2007.

Downstream sector
Our aspirations in the downstream sector include:
-- Maintaining self sufficiency in refining;
-- Ensuring regular and uninterrupted domestic supply of petroleum products;
-- Establishing facilities and infrastructure for the production of refined products targeted at the export market and support to domestic petrochemical industry. Creating value added from these activities;

-- Providing gainful employment and enabling Nigerians to acquire technical know-how in refining and distribution business;

The issues which necessitated liberalizing the downstream sector include:
-- Non cost recovery in all the downstream chain;
-- Monopoly of NNPC in products supply which created inefficiency scarcity of products;
Strategic stock levels not sufficient to cope with supply disruptions;
Failures in pipeline and depot systems caused by sabotage and low level of maintenance/investment;
Poor import reception facilities

The downstream intervention is therefore expected to:
-- Improve the supply and distribution performance to eliminate fuel shortages;
-- Address ownership and management structure of refineries and depots;
-- Complete the process of price and market liberalization in the downstream sector.

Recent downstream interventions
Recent downstream interventions in PHRC include the rehabilitation of Cooling tower, re-tubing of water cooled heat exchangers and condensers, repair of turbo generators, repair of boilers, procurement of UPS for both power plant and utilities building and process control rooms.
In KRPC, the repair of the FCC Unit has been completed and pre-commissioning is in progress. Also, the raw water facilities rehabilitation was completed so was the construction of a new de mineralisation plant. In addition, air compressor was installed while the fuels plant instrumentation revamp was carried out. Furthermore,the TAM for the WRPC fuels plants was completed while that of the Petrochemicals plant is in progress and is expected to be completed in the first quarter of 2005.

The intervention has resulted in improving the refining capacities of the three refineries. While PIARC is currently operating at 75 % capacity (112,500 bpd), KRPC is operating at 76 % (45,600 bpd) and WRPC at 70 % (87,500 bpd). Furthermore, while FCC repair in PHRC is 85 % completed, those of KRPC and WRPC are already completed and undergoing pre-commissioning.
In addition, while 3 out of 4 boilers and 3 out of 4 turbine generators are now in service in PIARC, two gas turbines are in service in WRPC.

The following interventions were carried out in the S&D Chain:
-- Emphasis is now placed on reliable suppliers for import (category 1). Petroleum products import award are now done on the basis of credible bids;
-- Pump prices converge on import parity NNPC's allocation are linked to marketers direct import NNPC developed an open access model for distribution;
-- Credit days to marketers have been reduced from 30 to 15 days;
-- Improved operational procedures is now in place for products import;
-- Stiff penalties are now imposed to discourage products diversion. Bill of lading manipulation is now eliminated;
-- Good partnership with security forces along ROW;
-- Imposition of interest charges on overdue payments; High on stream availability of Atlas cove resulting in abundance of fuel in the West and throughout the country.

In addition to the above, the Chanomi Creek which was vandalized about 18 months ago has been rehabilitated and testing and commissioning are on going while crude oil pumping to WRPC commenced on 25th November 2004. The restart of WRPC and enhanced production from KRPC will improve products availability in Mosimi-Warri axis and the North respectively.
Additionally, NNPC is building retail outlets country wide. Contracts for additional 8 have been awarded to Julius Berger and work has commenced in Abeokuta, Akure, Gusau, and Yola. Furthermore, contract has been awarded for the rehabilitation of Ore-Mosimi pipeline which was vandalized and shut for about 6 years. Other on going revamp work includes the Atlas Cove tankage expansion and the Mosimi tank rehabilitation. The resultant effect of all these is a significant increase in stock levels which stands at about 32 days sufficiency as on the 29th of December 2004.

Distinguished Ladies and Gentlemen, you are all witnesses to the gains recorded in the last one year since liberalization commenced in the downstream sector. They include among others:
-- Products availability throughout the country;
-- Competition among the marketers has commenced. Many marketers now invest more than ever before in expansion of retail outlets, product reception facilities. IPMAN constructing large import storage facilities at APAPA. Same for DAPPMAN.
-- Private refinery programme beginning to take off. Of the 18 licenses granted for new refineries,five obtained approval to commence construction;
-- New entrants are now coming into the sector as against divestment which was rampart in the past;
-- NNPC is now fully into retail business with five operating mega stations and the construction of additional 8 in different parts of the country; deregulation has led to job creation and vibrancy in the sector.

The Current Management of the Corporation with the support and encouragement of Mr President has revitalized the oil and gas industry after a period of decline. This has led to rapid growth of oil and gas reserves as well as increase in the number of gas projects.
In addition, the opening up of both the upstream and downstream sectors has led to increasing participation of Nigerians as well as building indigenous capacity in the industry.

Furthermore, new industries have been created, boosting industrial growth and creating employment opportunities, avenues for acquisition of modern technology, and increasing business opportunities.
NNPC is being repositioned to achieve its mandate of being a world class oil and gas company comparable to any of its peers in the world. This is the right path and with the support of all Nigerians, the petroleum industry will continue to be a catalyst to national development.

Engr. Kupolokun, is the Group Managing Director of NNPC.

Source: This Day
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