Kachikwu: How Nigeria Weathered Pressure to Cut Daily Oil Output

At the November meetings of the OPEC and non-OPEC ministers in Vienna, Austria, where a decision to extend an oil production cap agreement they reached in 2016, was extended by one year, Nigeria’s oil minister, Dr. Ibe Kachikwu, entertained questions from Chineme Okafor, before and after the meetings on issues relating to Nigeria’s stance with the output cap, as well as pressures from member countries to have her join. Excerpts.

We’ve seen oil prices rise, and volumes cut back on the back of OPEC, non-OPEC cooperation, but what can go wrong at this moment? 

What can go wrong is that suddenly we hit a plateau of number that will really again incentivise shale producers. I get very edgy once we begin to approach the $65 per barrel mark. Sweet crude right now is about $65/b, so, it gets very edgy, but then the only thing that is keeping it calm is how predictable and long lasting are these numbers, there is a bit of uncertainty. 

Those who are investing, the shale producers will say ‘well, if we throw our money in again and three months down these people hit down again, what is going to happen, are we going to lose billions again,’ so, that is keeping a bit of the emotions. 

What other thing can go wrong (is that) technology can move so fast that the demand for oil may basically deep faster than before. Already, inventories are going down, demand curves are reasonably okay but you have seen a lot of technology race, and that is usually what happens when there is price uncertainty. People begin to look at other alternatives – the solar, and electric vehicles. Countries that do not move fast enough to sell off hydrocarbon stocks laying in their backyards very soon – best predictions between 10 to 15 or maybe 20 years, and certainly for Nigeria, we need to begin to run this race and I’m not exactly sure we’ve gotten the momentum and how this race is being run. 

 

How do you mean, could you explain better? 

We believe that every year, we are going to have budgets and oil planted in it and we are going to have oil fund it and life just continues but the bad news here is that this is not going to last for too long. 

 

What’s Nigeria’s position going into the OPEC meeting?

The language for Nigeria has changed, it is not so much exemption anymore, it is more of cap in the sense that whenever we say they exempt us, people don’t like it, and they think you have an unlimited window to produce. Luckily, natural and unnatural factors have helped us to show discipline but the moment you begin to hit 2 million barrels of pure crude, people begin to panic that it is 200,000 barrels added into the market every day. My position right now is that Nigeria is already in it and we are part of those delivering those positives. 

 

How is this going to play out for Nigeria in 2018 – an election year?

2018 for Nigeria is a very critical year, there are a lot of things we started but we haven’t driven as fast as we should. We need to drive these policies as fast as we should, we need to have cost of production hit its bottoms because we are still massaging it but we need to force it down otherwise if prices hit again below $40 per barrel, we are going to have major problems. 

We need to look at efficient producers and incentivise them. Contracting can no longer be based on one year thing, we are going to have to tie up long term sales. We need to move into refining and get the best value added. 

We need to cut through the chase of modernising our refineries and move on, sometimes I think people in the industry don’t get it or maybe those of us in the policy space don’t get it. In my times in these meetings, I realise how much the Gulfs are doing to move themselves away from the dependence on the traditional models of production and sales and Nigeria has got to up its ante.  

What do you think is really stopping you, who is not talking or listening now?

I think it is policy layering. Policies have to be cascaded through different agencies before it gets an effect, but the reality is that the more privatised an environment is, the more you cut the chase. The more private sector begins to drive these things, the faster we are. The work we are doing in the NNPC and DPR, trying to get them to the commercial side has to be fast. The assembly needs to work faster in terms of what it does with the PIB, and we need to have a conscious policy of rewarding performance in the sector so that those who are least producers are incentivised.

Anybody in the OPEC platform who is quite frankly still importing refined petroleum products in the next one or two years is going to be in some difficulties. 

 

Are the realities hitting your 2019 ambition?

Every day it gets more worrisome, decisions have been made faster. We need to work together and I need to work more collaboratively with the NNPC in terms of delivering those. We need to find those investors and luckily they are very excited but you know excitement money is money on the table for few days and then it finds another willing market.

There is a lot of competition for international investment money and we need to begin to make sure that we capture some of ours before the interest in Nigeria lapses. 2018 is going to be very serious work time to deliver on refineries. 

The Niger Delta issues aren’t resolved yet, why is this taking so long?

The security issue, it is big elephant in the room, but so far we have managed to hold. The Vice President has helped, a lot of engagements have helped, and I have gone back to begin to have these engagements again and begin to craft the MoUs.

The problem is always in the shifting of goal posts, we have to make sure we define roles in the MoUs we are going to craft now. What is important is crafting firm MoUs. The critical missing gap is that there is always a misunderstanding between those out there and those of us who are in the Niger Delta, in terms of where is the beef, because I keep saying that at the heart of every militancy is money. 

If investments continue to roll in and people get jobs, the place becomes calm, but when those disappear and the place is bland, people look to the federal government for the promises but the promises disappear with the investors.

 

What is your position on the outcome of the meetings?

At the time we joined this, we were producing about 1.2 million barrels per day, and my case was that there was absolutely no way any one was going to keep me down to those 2016 numbers. They said what we were producing at that time, stay with it and give us a cut, and I said no, what I was producing at that time was nowhere near my capacity of 2.5mbd, we stopped producing 2.5mbd some seven years ago due to all kinds of problems, so they then gave us a freeway in the expectation that somehow when we are recovering we wouldn’t impact so much in the market, but we’ve recovered fairly dramatically.

We are doing about 1.75mbd of pure crude, 350,000bd of condensate. Largely, we have done recovery in excess of 2mbd including condensates.

 

So, what’s the deal for Nigeria, does she still have her exemption?

Exemption means you are not participating in the cut, remember OPEC agreed to cut 1.2 million barrels when all of these started in 2016. The whole idea was to tighten the market and improve price. Two countries were exempted and even with that exemption there were some responsibilities tied to it, it wasn’t an open carte blanche to just flood the market.

The exemption technically stays because no number has been fixed. If you look at the agreement that was signed, it is still a blank for Nigeria and Libya. It took a lot of fight over the last few weeks.

The obligation to be responsible still continues, and they will like to project that unlike what happened in 2017 when we were audacious to move from 1.2mbd to 1.7mbd, that they will not expect that kind of volume of movements in 2018, that they will like to see 2018 predicated on the marks of 2017. They however understand there might be fluctuations here and there, but the hope is that you are not throwing too much. So, there is no obligation, there is an explanation, there is an information but you are still enjoying the exemption.”

How did you get through the pressure?

Representing Nigeria and Libya, I was able to say that it was until March, that we’ve a signed commitment, we have not recovered enough, militancy was still hanging on us and that Nigeria has paid its price over the seven years when we moved from 2.5mbd to about 2.2mbd, and worse still when we did 1.2mbd, we donated more than 1mbd to everybody to help stabilise the market.

My point was that you cannot take away an exemption before the time runs, and now you’re rolling over for one year, roll us over for one year. We have not behaved irresponsibly, you knew we always had capacity for 2.5mbd and that our last production was 2.2mbd before we started having problems and we have not done anything to show we are taking advantage of the market, and those arguments were bought thankfully.

Will this have any impact on Nigeria’s budget?

Local budget was predicated on 2.3mbd. We could rightly say that in swing production, the highest we ever did this year was 1.85mbd, even if we assume to take that as existing capacity, we also did about 350,000bd in terms of condensates, so taking it together, it is about 2.2mbd.

I think that you could have some swings in terms of condensates and oil in that parameters to keep it at 2.3mbd, but more importantly is that even if you don’t, the prices have swung from the budget figure of $45 to $63 per barrel for Nigeria, so, we have 30 per cent increase in pricing which should be able to compensate adequately for this.”

A review is up in June, would you push for more for Nigeria?

You live to fight another day, let me celebrate what I have gotten over the last one year, and then continue to fight. But, it is a possibility, which is why understanding the dynamics of oil politics is key to doing this. 

Over the last two weeks, I paced from here to Saudi Arabia, UAE, and Iran, just to build in consensus, getting my African members to understand why it is important that we are stable, and all that played out.

If you don’t understand the oil dynamics, you will fail, and so it is going to be a continuous battle, but I think so far, we’ve done it three times and succeeded, hopefully, we are getting better at doing it. And the key thing is also being able to forward-forecast.

I knew when these was happening at the 1.2mbd stage, that the issue would come down to condensates, and unlike what Nigeria had never done before, we separated it from oil and went round in six months to get secondary sources to accept this. Had this not happened, it would have been a different ball game.