Quality infrastructure, accountability necessary for oil industry growth, says Avuru

Without the Petroleum Industry Bill (PIB), there are things the presidency could do to address some gaps in the oil sector, especially upstream; how would you say the passage of the bill would affect or better your lot as an industry player?

Four years ago, this company had said that its internal business model is to run a business in spite of and not because of the PIB. And for that matter, it is always in spite of and not because of any anticipated changes in regulation. If there is a change in regulation, we key into it and react just as quickly as we did with oil price and key into what comes out of it. We don’t go to sleep bothering whether PIB is passed or not. Whenever it is passed, we would key into it. As a person — not this company — I am passionate against the PIB. I never thought it would solve any problem. First time I wrote against the PIB was ten years ago, with the title “Complicating a simple problem.” We are still here; I wrote the article before I came to Seplat.

From the body language of this government, at the end of the day, we would have an industry where discipline and lack of corruption would prevail. And as a company, those are the things that would brighten our day.

It has been argued that the development model in the oil industry is faulty and government has been asked to stop the exclusive use of

FPSOs for offshore development so that we can provide infrastructure for stranded assets; as a seasoned geologist, what is your take on this matter?

I think that one of the urgent tasks of this government is to take oil and gas industry infrastructure development as a separate problem that must be solved not just adequately but quickly. By the end of 2018, minus heavy industries, just to power alone, domestic demand for gas would be about three billion cubic feet (bcf). Even if all of us can produce three bcf, there must be infrastructure to deliver the last molecule to whoever needs it.

NNPC keeps talking about gas master plan. Even if they manage to award all the contracts and build pipelines, we are talking about a network where someone can put in gas in Eket and another is using it in Papalanto. That is the meaning of gas infrastructure; it is a grid in the United Kingdom, properly run and computerised. It is a situation, where it doesn’t matter where oil is found, if the capacity is 200 bpd, it should be able to hook up to some pipeline and get to an export pipeline. In the past 50 years, this was left at the discretion of those who were developing their assets and one doesn’t expect them to develop a national infrastructure network. They developed infrastructure that was good for their own business.

Typically, it was a situation where Shell could find a field here and put a pipeline five times the cost to their nearest infrastructure, whereas Chevron is 5km away. Part of the solution to Niger Delta problem is to take away the infrastructure of gas and oil as a separate business and government has to facilitate it. It should guarantee ease of access for all players, big and small as well as availability. Those who run those infrastructures should have a programme for the community so that they don’t become a nuisance.

We have seen this work with our infrastructure network. For the last three years, we have not seen any vandalisation of our network. If that is the business one does and knows that 98 per cent availability means the same as revenue, he would do what is required to make it open to everyone who needs it. And it has to be done urgently. We have passed the stage where infrastructure in Nigeria was done at the whims and caprices of individual producers. It now has to be a national infrastructure network that has to be safe, easy and efficient delivery of natural gas to users.

Your half-year results indicate a downward trend; to what would you attribute this trend?

Though our results show a part that is disappointing, it has a positive side. Recall that as at December last year, we were hit with three buckets of headwinds. So, we started seeing oil prices that was half of what it used to be. For instance, if you look at our gross revenue, it is about $248 billion as against what it was last year. This is due to the oil difference.

The second big headwind was the Nigerian Petroleum Development Company (NPDC). It was an industry wide problem. The Nigerian National Petroleum Corporation (NNPC) and its subsidiaries owe the industry about $7bn and that is largely why overall work programme across the industry has been very low. Because of deep-water production, Nigeria is able to do 2.2 to 2.4 million barrels. People don’t realise that if we take away deep water, the country would be doing about 1.2 million barrels. That is a reflection of consistent cutback over the last five years. We are not seeing increase in capacity in traditional terrain — onshore and shallow water. I am giving a background to the fact that the cash-cut problem has been a major hindrance for development. It finally hit us. So we have receivables from NPDC that is twice our total debt. That is as huge as it is. It would affect the ability for growth in the industry.

We also had the Trans forcados problem between November and April this year. It was huge. As a matter of fact, there was 40 per cent outage for the first half. We were not producing because of the outage for 77 days out of one-half of the year. Combine these three buckets of very terrible headwinds and quite frankly, anybody who does not have the capacity to react properly would probably be struggling. Maybe not today, but by this time next year, anybody who hasn’t had the capacity in the last six months to adjust, would run into crisis in the next one year.

The good thing about this result is that we made a profit at all, in spite of these headwinds; it is a clear reflection of how quickly we were able to react. For instance, within two months, that is, between December and January, once we were hit with the fall in oil prices, we were able to completely reorder our work programme, by almost 40 per cent and cut down Capex, and budget for 2015. That is how quickly we could adjust. It took a few months into the year for key reductions to start taking effect, but by the end of the year, there would be more effects in all our cost elements. This says a lot about our capacity to plan and execute. Within a short period, we made adjustments that were necessary to weather these headwinds to come up with some modest profit.

There are the key promises we made in the past three years. We had always said that our gas business would account for 20 to 30 per cent of our bottom-line by 2017. Today, we have a processing capacity of 300 million standard cubic feet (scuf) per day. We are averaging from 220 to 260 million scuf as against the previous three years, where our annualised average was about 70 million scuf. This is because we have commissioned our 150 million scuf gas plant in addition to the capacity we have before to reach even the 90 million scuf capacity. We have delivered on that promise. I don’t know any other company that has delivered on doubling its capacity to deliver gas into the domestic market. It is looking like we would reach our target before 2017.

For our existing assets, in spite of the work programme reductions, our average production exceeds expectation despite the downturn on Trans forcados. Our core business is doing well in line with our projections. Another headwind we encountered was that we made deposit for an investment that has dragged for a long time. In addition, we have not been able to extract the full value of OMS 53 and 55 because there are still on-going litigations. So we have two areas of investment that have dragged on our balance sheet because they have not brought in revenues at the time they should have. In spite of all of these, we made adjustments to the way we run business to still be able to return a profit.

We think we have turned the corner. In fact, I have seen a report by RenCap that said the next six months would be key to businesses. And I think so, too. Barring any unforeseen circumstances, all the indices should be looking up in the second half. We now have worked very hard with NPDC to put certain measures in place. It is still work in progress, but we think that we have reached a point, where the receivables would not keep growing anymore; we have reached a plateau. We should start dragging receivables downwards, going forward.

We think that the Trans forcados is now a national problem. Barring any unforeseen circumstances, if the outage on Trans forcados is not in the disastrous level that it was in the first half, we think that all the indices should start looking up, gradually. But more importantly, the question is what kind of company we would be at the end of 2017 even if oil prices do $36 per barrel. That is the kind of company we are building today: a sustainable business that would be here in spite of and not because of oil prices. And I think we are on course to deliver that. If one digs deeply into this result, that is what it tells.

You recently withdrew a deposit in an escrow account. Can this attributed to the gaps in your revenue?

The investment for which we deposited the money had dragged on for too long and there were certain hindrances to realising it. We decided that we should have a bulk of the money back in our balance sheet. We have not withdrawn from the process of that investment. What we have done is to pull back most of the money into our balance sheet while there are further discussions going on as regards the investment. We are hoping that in the next weeks, not months, we would be in a position to decide whether we would go on or not. But it won’t be the case that we would leave our money in escrow and the prospects was becoming indeterminate. The value of the investment is $408 million and we took back $387 million.
Given the activities of vandals and the downturn in oil prices, are you looking at focusing on downstream investments or going modular or mobile in your operations?
Given the appropriate time and opportunity, Seplat Petroleum could invest in the midstream and downstream, which means refining. But I would caution that when one is producing 75,000 barrels per day (bpd), there is no talk about topping plants. Marginal fields do 2,000 to 3,000 bpd and can spend $2 million to bring in a topping plant to process 1,000 bpd and deliver a 100,000 litres a day. But when we talk of 75,000 a day, there is no talk about topping plants. It is either one is into refining or not; there shouldn’t be talk about topping plants or modular.

To go a step further into refining has to be a big leap. It is not about the talk; in fact, everybody talks about it, but in the last seven years, we have only seen a 1000 bpd topping plant. Talk is cheap, you know. We could stretch from crude oil and natural gas production, but the emphasis now is on natural gas processing and delivering of the product into the local market. One more logical step would be refining and that would be something we would look at in the future.

A regulator recently said indigenous independents managing divested assets have increased production pressure without corresponding expansion of reserves. What is your take of this scenario?

Our working interest is 2p reserves. In 2010, when we took over these assets, it was 71 million barrels. Since then, we have produced 25 million barrels. We added 10 million barrels with our acquisition of 40 per cent of pillar marginal fields. Through our drilling and development activities, we added an additional 83 million barrels. At the end of 2014, our working interest 2p reserve is 139 million barrels. So we cannot be one of those talked about. We don’t need regulators to tell us about reserves; we are a listed company.

We like to operate at a reserve production ratio of between 15 and 20 years. If our reserve production ratio falls below 15 years, we worry; we don’t need a regulator to tell us. We would have to look for reserves. And it can only come organically, that is, by exploration, appraisal and development activities; or acquisitions. And we have been active on both sides. I have spoken of the assets we acquired; I have said anything about those added due to acquisition. For us, reserves addition is the heart of our business. We keep our eyes on reserves when we produce.

Has Seplat in anyway considered cutting down on human capital cost as is the trend with oil companies globally; and are low oil prices affecting your drive to acquire more assets?

Yes, one cannot reduce G&A without cutting down on human capital. Our core staff has not been affected and they would not be affected. There were none core, contract staff that were. That is why, at any point in time, there are core and contract staff, who are related to aspects of growth. If I am building a gas plant and it would take two years, I can hire people dedicated to that project and when it finishes they go. There were people who were working with us as drilling consultants when we were running seven rigs, but if I am now running one, they won’t be there. In that respect, again, it was part of our prudent planning that even during our growth, we knew the staff we would retain that even in bad times. Those who have had to go are those who would go because we have scaled down projects.

The other way it has affected our staffing is that we have cut down almost to zero on hiring. Even when internal vacancies occur, we first see how we use internal movements to fill the space. Directly or indirectly, it has affected it. We are mindful that we are building a company for tomorrow, so our core staff has remained.

Whether oil prices were high or low, our acquisition strategy is based on filling certain critical gaps. So as a company, we have projections on how our oil and condensate production should be at the end of 2018. We have a growth profile that we are working towards. We have a projection for what our gas production should be at the end of the same period. If we achieve both optimum production of both natural gas and oil, do we have the reserves that would sustain that production for 20 years? That is reserve to production ratio. Those are the three critical questions we must answer internally as a management team.