In what experts have described as the most fragmented downstream petroleum market in the world, endless opportunities lie in the recesses of an untapped value chain. In this article, Managing Director, OVH Energy, Huub Stokman warns of building industry expectations on unrealistic margins while proffering an integrated approach to deliver the building blocks for downstream sustainability.
With over 30 years’ experience in the oil and gas industry, Huub Stokman has seen it all; and when he says something is not right with Nigeria’s downstream petroleum industry, it would be foolhardy to disregard his observations.
Speaking to M&P Nigeria on the side lines of the recently concluded Nigeria International Petroleum Summit (NIPS) in Abuja, Stokman conducted a post-mortem on existing industry processes and emphasized the need to sustain industry momentum using new strategies and innovative partnerships.
Supply, Storage, Distribution, Sales & Marketing
In the areas of supply and storage Stokman acknowledged with regret that Nigeria basically imports close to 100% of all its fuel needs and it is mainly done by the NNPC; not just for PMS, which is a regulated product, but also for AGO, ATK and HSK- effectively shutting out private operators from the space.
He also noted that “There is a jetty and terminal infrastructure which at the moment is underutilized and is poorly maintained due to the low returns. Meanwhile, in distribution, with the deterioration of the rail network and incidents of pipeline vandalism, the industry is largely reliant on trucking the product to the end user.”
With about 27,000 Retail Stations at the final mile, many of which are arguably dilapidated and unviable, Stockman noted that the Nigerian downstream petroleum market is completely fragmented with almost no marketer having more than 10% market share.
“Of all the countries that I have worked over a 30-year career in the industry, Nigeria has the lowest margins on Premium Motor Spirit (PMS) and it is the most segmented market I have ever seen,” he confirmed.
Reiterating the customer’s immense significance in the downstream value chain, Huub posited that “I think it is important to understand what the customer wants. Sometimes we forget that the customer wants good service; he wants quality and quantity that he can trust; he wants constant availability- to be able to go for the product whenever he needs it; he wants a convenient location; he wants it at the right price- not necessarily the lowest price; he wants a safe experience – needs the product to be delivered in a safe way; and I think Nigeria is struggling with quantity &quality, safety and availability.”
He called for continuous investments in Technology to achieve some of those objectives and satisfy evolving customer needs. This, however, will be very difficult to achieve without adequate returns. He also stressed the need to integrate automation in customer interaction to make it more seamless.
In a dynamic world and changing patterns of energy demand, Stokman supports Nigeria’s focus to harness its gas resources for industrialization. “It has been said that this is TheYearofGas- and froma downstream perspective, I think until Compressed Natural Gas (CNG) is available, LPG is a good intermediate solution for vehicles and other uses.”
He however warned that with global action on carbon emissions and climate change, consumers’ energy demand patterns were likely to change. “We need to realize that the consumer, in future, will want multiple offerings, not just PMS or diesel; he will want LPG, CNG and in some cases, even though it might take a while, he will want electric.”
Confirming that a huge percentage of capital is vested in downstream operations, the former BP Executive called for continuous investment in optimizing the existing terminals and pipelines with technology such as remote monitoring, flow metering etc. He advised total deployment of technology in forecourts, remote monitoring of tank farms and automatic tank gauging of storages for efficient quality and quantity control.
Addressing a festering issue in Nigeria’s downstream petroleum value chain, Stokman turned the spotlight on the state of tank trucks and petroleum haulage fleet for product delivery in Nigeria.
He said“We all know ours is an aging fleet and we need to start renewing the fleet of trucks in Nigeria to make the roads safer and the make delivery of the products more efficient. That has to be combined with investments in railways and pipelines because it needs to be plural.”
Risks and Challenges
There are a couple of risks and challenges plaguing the industry. In terms of regulations, Stockman’s key observations are “In the industry, there are over 50 agencies coming to us, often with conflicting demands and sometimes asking money for the same thing.
“We still have deregulation uncertainties. However, I hear that the Petroleum Industry Governance Bill will be signed in June, but let’s see what that means for the downstream in terms of deregulation of PMS.
“On governance, it is crucial that we run the industry on good governance and good compliance, while on HSE, we must devise strategies to end the plague of pipeline vandalism and truck accidents.
“On supply, maybe the big product supply disruption that we had in the past is no longer there, but we still have them in smaller scale, where pockets of the country are struggling to get the product.
“On trade, the margins haven’t changed for years. A cursory look at the macro environment will reveal that inflation keeps on growing, so does our cost of operating, meanwhile, our margins remain the same.
Finally, there is an industry skills shortage. For example, my IT manager just gave his notice and he is moving to Canada. Therefore, Nigeria has a brain drain if it is not careful.”
Key Levers to Drive Nigeria’s Downstream Industry
Free Market system- Stokman posits that the federal government needs to adopt a Free Market system both at the supply and consumer ends of the value chain. Nigeria needs to have the plurality of transport and an open access system- both for when the product comes in- so it’s important that jetties are upgraded- and also to improve the other infrastructure- rail and pipelines- looking closely at the Public Private Partnership (PPP) model.
Competition- He further recommended healthy and transparent competition- to drive efficiency and innovation and expressed hope that passage of the PIG Bill will help reduce the number of Agencies and Levies through a one-stop-shop solution for the downstream industry.
Consolidation- In addition, he warned against further fragmentation of the industry and urged players to consolidate for improved efficiency and profitability.
“As downstream players, I believe that consolidation is happening. It might not be seenthat much but as we know, Mobil was taken over by NIPCO and Forte Oil was taken over by Prudence. Industry consolidation is happening and will continue aided by technology”
Enhanced Refining Capacity– Stokman is certain that the enhanced refining capacity which is imminent, both with the traditional and modular refineries will change the paradigm from an import-dependent country to self-sufficiency- and as a key catalyst for the rest of the industry.
According to him, “There are some benefits of refining as a catalyst- product quality will improve, which will aid the environment and reduce consumption. Skills- a good refinery and petrochemical industry will enhance skills which are needed further down the chain. Finally, refineries have ancillary industries, so I think it has big benefits for building an industrial base”
Stokman’s parting shot was grim- “If Nigeria wants to capture the full benefits of the downstream value chain after the enhanced refining capacity comes on stream, the other downstream sectors –Supply, Storage, Distribution, Sales and Marketing- need to use a short-term window before all the projections come into play- to make improvements to Customer Experience, Safety and Operational standards, and use Technology to do this. But this can only be possible with investments and to be honest, at the current margins that will not happen.”