Wumi Iledare, a Professor of Energy Economics, who spent 21 years at the Centre for Energy Studies, Louisiana State University, USA, is currently the President of Nigerian Association of Energy Economists and Director, Emerald Energy Institute, University of Port Harcourt. In this interview with OBAS ESIEDESA, he spoke on why Nigeria must use its petroleum resources as a source of energy to grow the industrial sector rather than as a source of income to the federation. Excerpt:
Some people have argued that both the power and petroleum ministries should be merged to become energy ministry. With the new government pondering on how to reduce the cost of governance, do you think the ministries should be merged?
One of the problems of having petroleum and power combined into one unit is the domination of petroleum on that particular unit. I remember when we were talking about the centre for petroleum economics and law, and petroleum was removed from it, it created a lot of hullabaloo.
In Nigeria petroleum is the engine that drives energy and you have to look at petroleum from the point of view that this is a source of energy and not energy in itself because if you do not process petroleum and natural gas it is useless excerpt to make money.
So the management of energy resource component and the management of energy components are two different things. Even in the US, the department of energy is not in charge of the management of oil. The only thing they do is to do the policy that affects oil. The department of interior is responsible for the management of oil and gas in the US. They are the one in charge of licencing, mining and others.
You have to treat the energy components of energy resources different from the management of energy resource in itself. Where Nigeria missed the road in my opinion is that they look at energy resources as a source of income not as a source of power to drive the economy.
Petroleum cannot drive the economy if it is not processed and that is why this economy is stagnant. The raw material must be converted to use in form of power generation or in form of driving cars.
Petroleum has to be converted and if do not pay attention to the entire value chain and just pay attention to E&P then all you are going to do and have done over the years is creating elite. And the elite actually captured the political process. That is why for example you saw what happened at the National Assembly. It was money that was driving it and then coupled with religion and ethnicity. And if we do not move those things away it does not matter whether you combine petroleum and power and put them under one ministry. You are only going to make that person more powerful.
A lot have been said about the lack of investments in exploration to boost proven crude reserves. At a time of low revenue why should government invest in exploration?
I understand the thinking that right now the government has shortfall in revenue because the price oil is low and production is also a challenge because where to sell Nigerian oil is problem. But you have to ask, why government is giving discounts to sell its oil.
I am in need of money yet I am giving discounts to sell; and so, If I am concerned in respect to the future and I see that my investments in respect to the future is being jeopardized because I am not growing my reserve, even though I am not collecting all the money now 5-8 years down the road, my reserve would have come so low that I cannot produce.
Reserve addition is not something you can just wake one morning and get. So it is a pragmatic strategy for you to grow that reserve and one of the easiest ways to grow it is to create incentives. They did it in the Gulf of Mexico. In 1992 I wrote the paper on the exodus of the majors from the Gulf of Mexico and if the government of the United States did not surrender royalty to attract those majors back, what do think would have happened to the US? By the time we came to late 1990s when the shallow offshore and the on-shore have depleted? You create incentives to sustain your growth.
We did it in 1986 when the price oil collapsed, we guaranteed what is called the national margins through the MoU that we had. Assuming we did not do that, what do think our reserve level would be today? Go and look at the history.
OPEC countries in the 1980s were creating incentives to grow their reserves even though then they were calling it political reserves. But today they are still be able to sustain their production based on those supposedly termed political reserves.
When the price oil is low, then you make people do what normally they will not do and that is why I am advocating that government should go back and look at the type of incentives they can create for the expansion of the reserves. Otherwise when the future comes there will be no oil to produce because it is now you grow the reserves.
There is also the issue of whether the government should divest its Joint Venture assets in favour of Production Sharing Contracts (PSC), is this a good way to go?
I believe that divestment of JVs is what examining. But even if government is thinking of divestment who is it going to divest to? It requires strategic thinking. Two, moving from JVs to PSC requires what I call competent workforce because the difference between PSC and JV with respect to governance is clear. The government controls the PSC because they remain the owners of the resources. The oil companies are contractors to the government under PSC and they bring their money and the government pays them back in a payment mechanism to guarantee the recovery of costs and profit oil.
The JV is different. The JV we have in Nigeria is a form of concessionary arrangement where actually the ownership of resources is transferred to the international oil companies not minding the fact that government then backing and became a partner just for profit sake. If you give $10 and get $25, are going to just surrender the $10 to somebody else? Unless that person is willing to pay premium for your share. Those are some of the complicated things because if government takes their money out of the JVs and sell it, then you ask the question whom does you sell it to. Remember it is about maximising national interest. I saw that Seplat is calling for government to sell it. To me there are so many things that are involved in the selling of Nigerian share of the JV.
My perspective is that if by divesting in JVs it is going to maximize the overall interest of the nation so be it but be afraid who is going to buy government share. Are they the people who took government money or they will be investors who have their genuine money. Look at all the divestments of the government; do people really use their money? That is did they borrow money to invest? Would they generate adequate return on investment? Because if the company fails they will just back their bags and go.
The EEI has just concluded a forum on oil, gas and power with special focus on what strategic options are for Nigeria, what has been the link between energy economists, energy sector operators and the government?
This is the first time we have actually tried to involve journalists in the activities of the institute. Initially this particular programme was dedicated to media people but I have to change it a bit to bring energy technocrats to interact with you and give you the intellectual base to educate the public.
However, I consider this not have been very successful at the higher level because the government representative at the higher level were not involved.
In Nigeria, people are more into what I will call flamboyant meetings than this type of forum and that was why it was by invitation only. At the end we are going to prepare a policy paper on energy issues.
What we are going to do in the nearest future is to convince not necessarily politically appointed officers of energy agencies but deputy directors, directors and managers of the institutions for this type of meetings. It is going to take a lot while. That is why we think the solution to country’s challenges is attitudinal change. What is in the national interest and not personal interest.
What is the link between the centre and the operators?
This institute has dedicated itself to empowering and engaging and equipping those that are already in the industry to do their job better. And I think we are succeeding. If look most of the buildings in the University, they are industry sponsored. What this institute is founded upon is not to limit the linkage between the industry and academia. We want a situation in which the government is part and parcel because that is the tri-pod. The academic linking the government to the industry and the academic can be trusted by both the industry and the government.
Unfortunately the academias have no money and so it is going to be a combination of the government and the industry to provide the funding.
Look at me, when I was in the US, in my 20 years there, I attracted significant amount of money from the department of interior. If you go China nearly every university is attached to an industry.
I was funded to research the implication of deep water activities on global oil and gas industry. I was funded to look at the impact of oil and gas industry on states that are producing oil and gas. The government cannot allow the academia not to be used to link them to the industry because the industry trusts the academics more than they trust the government.
With all the experts in the petroleum industry, progress in the sector seems sluggish. Is it that the government officials or policy makers do not listen to the experts?
Again if you look at the decay in the Nigerian policy process it is as a result of the shutting out of the academia for consultants. Even when you have an academia that emphasizes on consultancy more than academic work, it is the same. You should deal directly with the university. For me anything I do is in the name of the university because I am protected.
I am not saying you should not be a consultant. Any policy that is not based on intellectual debate is flawed.
Go to the Central Bank of Nigeria (CBN) and look at their executive board. I think it is written there that there is no time you will have a board of the CBN that you do not have either a professor of economics or a professor of finance who is a member of that board. They remain non executive member. If you look at all the institutions in Nigeria there is non that can match the performance of the CBN because all the debate in the CBN has intellectual basis for decision making process.
A nation cannot develop beyond the growth of its intellectual capacity. Cast your mind to the 60s even under the military regimes, you had the Asiodu’s. The government depended on the Department of Economic, University of Ibadan where they graduated. When I was younger, if you present a budget almost immediately the intellectuals are tearing it into pieces before it is passed. Yes understand the limitation, but it left for the media to let them know what they are missing by not having an intellectual basis for the policies that they formulate.
That is why the President can just wake one day and dismantle the toll gates without any cost to benefit analysis. That is why the minister of petroleum can wake one day and say the price of petrol should reduce from N97 to N87/litre. No basis for the analysis. It should be what is in the national interest. What are the economic losses for the regulations and policies compared to the economic benefits? All things are lawful but not all things are expedient. It must have a benefit for the nation when you make your policies.