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Transcorp advocates further integration across Nigeria’s petroleum value chain

Interview - March 13, 2013
Dr. Anthony Chukwueke, Director of Transcorp Energy Ltd., the oil, gas and power subsidiary of the Transnational Corporation of Nigeria Plc., highlights the ongoing advances in the country’s oil and gas sector in an interview with World Report. From stimulating growth in other sectors of the economy to seeking out technological advances in petroleum extraction and processing, Dr. Chukwueke also covers the key importance of the involvement of the private sector and international players in the industry for its continued development.
TRANSCORP ENERGY LTD. FOCUSES ON UPSTREAM PETROLEUM EXPLORATION AND " IS BEING RUN BY PEOPLE WHO ARE REALISTIC" ABOUT THE INDUSTRY.
DR. ANTHONY CHUKWUEKE | DIRECTOR OF TRANSCORP ENERGY LTD
Where do you see the oil and gas sector heading in the next five to 10 years?

I believe that the oil and gas sector will continue to play a very significant role in Nigeria; particularly when you talk about the amount of oil revenues that we expect to get from all these activities. We need to make sure that we reinvest these oil revenues to stimulate the rest of the sectors. Strong state policies will ensure that we reinvest and reinvigorate the other sectors. This includes the associated activities that come out of oil. For example, rather than simply selling crude oil, we can augment downstream activities by setting up refineries, which will increase employment four-fold (compared to the upstream sector). Not only do we create jobs, but we also get to grow GDP and the economy. We just need to utilize our resources to develop these kinds of projects. 
 
In the area of power, Nigeria has been flaring gas for a long time, and trying to compel oil companies to find gas outlet projects. When we did start a compressed natural gas (CNG) project, the oil companies went for LNG, which involves a process of cooling gas and taking it out as export. However, you can find huge value by converting the gas to power, which serves as a huge multiplier (in the same manner as refineries are for oil). If we can find policy cohesion that allows for these types of linked projects, we will be utilizing oil revenues not just as a resource, but also as a fuel for the rest of the economy.
 
For instance, if we were to take the money from oil and put it into infrastructure, and derive revenues from the oil-linked projects, we will be killing two birds with one stone. This is the only way that the country’s economy can grow quickly. My hope is for the oil industry to become the fuel that galvanizes our local industries.    
 
Given the nature of resources, what are your thoughts on the limitations of oil? Do you see this being depleted in the next 43 years as previously reported?

The technologies that we apply in Nigeria is only able to recover about 30% of the oil that we find. This means we have an average of 70% still in the ground. Of course, technology is continuously improving to enable us to recover more oil. We now have horizontal wells, which in many cases is combined with co-mingling oil from different reservoirs. In the next two to three years, we can now recover as much as 40% to 50% to maintain the same sort of production. That still leaves a lot in the ground. It will not be depleted. 
 
We should also continue to open up new areas for exploration, so that we can add to our current set of reserves. 
 
When I was the Director of the Department of Petroleum Resources (DPR) in 2005, we started to open up the inland basins. We intensified exploration activities in such areas as in the Chad Basin and a number of other basins. What is critical about this is that while the reserve base may not be as high as the Niger Delta, they are located inland, close to the population centers of Nigeria. This means that the small amount found there can play a very significant role in the industrialization of these areas. We had started this already when I was in government, and I think the current administration would do well to continue to pursue that option. 
 
We have started to once again look into deep offshore activities. As you know, in the late 1980s, when I was still with Shell, we had an industry group that looked at the prospectivity of deep offshore projects. That had led to the Production Sharing Contracts (PSCs) that we entered into with international oil companies from 1990 to 1993. The prospects are concentrated in the tertiary levels. Below them are the cretaceous levels, which are equally prospective. Exploration could go deeper in these areas, where the new oil and gas would come from. We need to set up such industry think tanks as we did in the 80s to begin to set up the right commercial structures to encourage exploration of deeper offshore. 
 
If you look at the government of the former President Olusegun Obasanjo (which I belonged to), they were going to grow the reserves of Nigeria by 2010 to 40 billion barrels. These 40 billion barrels will come from exploration activities in the inland basins and deeper exploration prospects. As the current government puts the necessary policies in place and drives them, we can begin to see these targets being met.        
 
How vital is foreign collaboration and investment in achieving these goals?

As you know, there are certain peculiarities in our deeper offshore basins. They are characterized by large sand bodies. Only a few other hydrocarbon regions (e.g., the Gulf of Mexico and the Caspian) are similar. When you find them, they can be filled to the top with hydrocarbons. That is what makes them attractive. However, because the water is deep (and is getting even deeper), we need to have the appropriate technology. There is no way to accomplish this without bringing the experts on board. These experts are normally international players. Not only do they have the know-how, but they also have the funds to make it happen. That is how crucial foreign collaboration and investment are in this aspect. Creating the ideal investment environment is therefore paramount. 
 
There are those who say that the 1992/93 PSCs were very favorable for international companies. They are quick to forget that at that time, there was nothing discovered. We had to give the right incentives to encourage people to invest.  
 
How would you comment on the Petroleum Industry Bill (PIB), do you feel it will create better incentives and a more attractive investment environment?

The PIB is not what we anticipated it to be. It has gone through the ‘democratic’ process. Now, I have spent 33 years in this sector, and from experience, changes happen in measured steps. You do not do too much at a time because of the required amount of money and risks involved. For example, to drill a well in the deep offshore would cost as much as US$100 million, and the success rate only goes as high as only 20%. We need an arrangement that allows for this type of investment to take place. That is one aspect of what the PIB attempts to accomplish. 
 
It is a fact, after all, that to do something successfully, we have to take it one step at a time. We need to organize ourselves first. That is what the PIB was initially intended for. That way, the investor knows who he or she is dealing with in terms of the regulators in the different parts of government. Normally, these regulators attempt to achieve the same thing using highly varied processes. This disconnect makes it hard to meet the set objectives. That is what the government is working on improving. As it is, when an oil company comes to get approval, they can go to Nigerian National Petroleum Corporation (NNPC). DPR and the rest would not know of this approval. There lies the problem. We need to sort this out and get a coherent policy. All that is part of what the PIB hoped to accomplish initially – to organize government in such a way that there is clarity and transparency in the way that the industry is regulated. This allows us to take fiscal issues one step at a time. We get one thing done first then settle it. That is the way it is because it is a high-risk business. Negotiations are then made until an agreement is reached. It is not possible to impose on the sector; otherwise, they take the money away.

These negotiations can take a while. At the end of it, at least you have anchored that part. 
 
Now, we have to tackle the very old 1992/93 PSCs to allow the government to earn a little bit more, now that the province has been proven, and production has been going on for more than six years. Once we have accomplished that, we can proceed to the next step, then the one following that. We cannot do everything at once; otherwise, nothing gets done. 
 
The PIB has been having both supporters and critics. Do you support the 13% derivative clause for the communities where oil is located or prefer a holistic distribution of this wealth across the state?

The way things are done is that there should be a consensus of industry. We have to sensitize the industry about where it needs to be. What has always happened is that there is flexibility. Of course, whether you give a community 13% participation or not, depends on the reality of what that 13% is.  
 
For example, we introduced the whole indigenization process in the early part of 2000. When I became the Director of DPR in 2005, one of the first things we did was to introduce the local content vehicle. When we allocated blocks to international companies, we said that they could bid for 90% and we would reserve the 10% for indigenous players. Of course, we needed to have the flexibility to keep refining that process. There is nothing cast in stone. It is not a matter of legislating 10%.    
 
The PIB bill places a huge emphasis on local content both in ownership and in technical manpower. Can the labor workforce be sourced to meet these stipulations?

You’ve been to Nigeria for quite some time and you can see that there are a lot of skilled, intelligent and well-educated Nigerians. However, we do not have the sufficient experience to match the level of education that is being imparted. The oil and gas sector is a business where the know-how is embedded in the companies. When you enter the industry, then you begin to really learn. A lot of the techniques, know-how and technology are proprietary to the industry. We have to give Nigerians coming out of the universities the opportunity to learn and grow. 
 
I believe in an even playing field. One cannot put a person in a position in a way that jeopardizes the business just because of some misplaced national loyalty. That would be taking it too far. However, I do think that opportunities must be given.

Nigerians are educated and intelligent people who need more exposure. Of course, when you talk about filling positions, we have to do it the best we can. I could tell you now that the Nigerians would be among the best. If you take into account what is going on around you, you will find that Nigerians who know what they are doing can match any other person in the same capacity from any part of the world.   
 
Besides your current position here at Transcorp, you have also been appointed Chairman for the Imo Petroleum and Refinery project. What can you tell us about the project?

I left the government at a time that I did not expect. People like me knew what we had to do, and we were too comfortable working that we did not recognize the importance and influence of politics in what we did. When I left government, I decided to just leave oil and gas completely and set up a rice mill. Of course, I could only do that for so long. Eventually, people did try to pull me back. The Imo State Government wanted me to implement the Imo Refinery Project at the center of southeastern Nigeria. I tried to put things together. You see, I believe that a lot of important things need to be applied in setting up a refinery project; particularly, PPPs. The federal government is the resource owner. The states may want to set up a refinery, but they need the approval of the federal government because the federal government owns all the oil. The fundamental manner of getting the government involved is to get NNPC as a partner; it is the custodian of our oil and gas resources. Then we need to make sure that we are able to sell without subsidy. After we had sorted out the fundamentals, we began to encourage private sector participation. We got quite a few people interested. Incidentally, the way things are in Nigeria is that there is no continuity when you talk about changing state governments from one governor to another. It is not uncommon for the new governor to refuse to support what the old governor started. That is why the Imo Refinery Project is quiet at this time. We are trying to educate the new government, and make them see just how important this project is. We need to formulate a strategy that is irrespective of who the politicians are; a strategy that should go across from administration to administration. Until we get that sorted out, we cannot tell you when the project will be completed.          

You were brought back to revive Transcorp’s oil & gas division. Kindly share a brief overview of Transcorp. What are its latest projects?

Transcorp, as you can see, is being run by people who are realistic. It is a modest organization focused on what it needs to do. Since I joined the company, I have been promoting principles that I feel are right. For example, you cannot operate effectively in the oil and gas industry without being integrated across the value chain. Otherwise, you will end up in one segment. If you do upstream, you need to support it with downstream. Likewise, you cannot do gas-fueled power effectively without being a gas producer. Getting into the power business without producing your own gas means you are relying on somebody else for gas. In this system, gas is not a free flowing market. That is why we are trying to put the right strategy in place. We established Transcorp in the upstream. Today, Transcorp is linked to two oil blocks, which we are trying to put into production (hopefully, during the first part of next year). In anticipation of that production and the associated gas from that operation, Transcorp is now thinking of going into power. We decided, rather than build a new power station, as a gas outlet, we should go into brownfield areas. It is a quicker way to get into the industry and enter the market. Successfully, we have the 972MW Ughelli gas-powered station. Hopefully, our gas would go through the exchange or directly to that plant, and that we have power that we could sell. That is how we can get ourselves across the chain. 
 
We are also thinking about putting the surplus gas into a fertilizer project. As for the refinery, we are trying to figure out whether a brownfield opportunity is better than a greenfield opportunity. 
 
A lot of things are happening. Perhaps in two to three years, there will be a Transcorp tower in Lagos, where you see the various energy arms sitting. That is what I am aspiring to do. 

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