‘Clear, coherent PIGB will attract investment in petroleum sector’
Ado Oseragbaje is the Chief Executive Officer, sub-Sahara Africa, Baker Hughes, a GE company (BHGE). In this interview with journalists in Lagos, he emphasised the need for clarity in the Petroleum Industry Governance Bill to attract the required investment. Roseline Okere was there.
The Petroleum Industry Governance Bill (PIGB) has only been passed in part, and that is stalling quite a number of things in the industry. What advice would you give to the Federal Government regarding the Nigerian hydrocarbon industry?
I think there are three things that are important for anyone, not just the oil and gas industry, but any industry that has long term implications. If you take a small oil and gas company for instance, their investments are going to be between the tens and the lower hundreds of millions of dollars and relative to them, if our capitalisation is $30million, then $5million could be like a billion dollars to somebody else. It’s all about your relative size. But for everybody that is going to make long-term investments, you have to have clarity as to the long term policy. If not, it is very difficult for you to invest and you say ‘okay, I’m investing now: royalty today is five per cent but then in 2020, royalty is going to be 17 per cent or what? I don’t know. It is then very difficult for me to make a 10-year or 15-year investment, if I don’t have clarity of policy.
Whatever the policy is, however strict it is, it needs to be clear such that my economic model takes it into account, and then I can decide whether I invest or not. So the clarity of the policy is important. The consistency of it is also important in that you can’t be working in one way and then two years later; we are working a different way. Once we lay out a policy that is clear, there has to be a time horizon that I can use to plan and when change is coming, I get decent notice for my business planning.
The third piece that I think is important for the country to recognise is that the competitive landscape is actually changing. What do I mean by that? If you drew the hydrocarbon map of Africa 15 years ago, it would be very different from what you have today. Fifteen years ago, there wasn’t OCTP; there wasn’t Jubilee; Mozambique wasn’t there; Senegal hadn’t been discovered, and even some of these discoveries or extensions in Central Africa didn’t exist. The African competitive landscape in terms of resource availability has actually changed in the past 15 years.
Additional to that, the Nigerian oil companies, I’m not talking about the IOCs, have also been successful both in Nigeria and outside Nigeria. What this then means is that if they don’t see the first two things that I talked about policy clarity and policy consistency – they will start to look elsewhere where there will be more suitable investment climate.
In the past, by being one of the most resource rich countries in the world, particularly in Africa, the government could dictate terms that makes sense solely for government. Now that the competitive landscape has changed the government needs to look at itself within this regional dynamic, and say: “how do we have policies that protect interest of government and that of the populace, which is the primary responsibility of government and also make my environment conducive for new investments, particularly in exploration?” In the past five years, or even seven years, how many exploration wells have we drilled on average a year? This, for me, is critical for the industry. So really, the three things are clarity of policy, consistency of policy and terms that make sense for both the government and the industry as a whole. I think nowhere is this going to be clearer than this time when in the next few years a lot of licence renegotiations for different players, the super majors and the smaller players, are expected to happen. This gives the government a fantastic opportunity to say: “Yes, we are open for business,” based on how those negotiations are conducted.
We’ve seen some oil and gas companies divest from Nigeria, going to some other countries in Africa, partly due to lack of policy clarity and consistency. Why is GE Oil and Gas increasing its footprint in Nigeria instead? What is GE is seeing that other companies are not seeing?
Different companies have their investment criteria and investment decisions. I think if you look at the investments GE has made in Nigeria in the past five years, and continues to make through things like supplier development; through things like facilities and equipment we’ve brought into the country within that time period, and what we call Project Emerald, our flagship facility that we are constructing in Calabar, it speaks to our corporate commitment to the country.
What is important is the fact that it is a tremendous resource base. There are challenges, but if you look at the main challenges the country, as well as the entire continent faces, it speaks very well to the portfolio of GE. You have issues around healthcare, transportation, power and electricity. GE is a market leader in each of those spheres. If we look at BHGE in particular, the hydrocarbon industry is an enabler for a lot of that, which also then fits into our portfolio. When you have a large population, a talented population, and needs that match your portfolio doesn’t it makes sense you double down?
informed the merger between GE and Baker Hughes?
The idea behind BHGE was borne out of a long-term strategy of GE, looking at how technology can make an impact on the industrial sector. GE Oil and Gas started 22 years ago through a series of acquisitions, and the whole idea from that was: how do we use technology to improve productivity in the industrial space? As GE, we initially came from that standpoint; looking at technology and its application in the industry. As things progressed, we got a better understanding of the industry, and we realised that our portfolio was incomplete. We didn’t have as big a footprint in the upstream services.
That was the backdrop from the GE standpoint.
The industry is based on three big silos: you have the upstream sector; you have the midstream sector; and then you have the downstream sector. Most of the major companies operate in all three silos. But then there are a lot of inefficiencies that come with those complete blocks and silos. So when we looked at these, we figured that we are already quite strong in certain elements of the upstream; we are very strong in the midstream, and we are quite an important player in the downstream. But when you looked at that well, construction, E&P space, we didn’t have a meaningful footprint, and we felt that our processes and technologies could be applicable to that space.
Thinking about how to do this, we tried to find a company that has similar values with GE Oil and Gas. If you look at Baker Hughes, its core values are very similar to those of GE Oil and Gas. What do I mean by that? There is a tremendous commitment to health and safety; there is a commitment to integrity and there is a passion for technology and the application of technology. The two names Baker and Hughes are actually revolutionary technology introducers into the oil and gas industry. Rotary drilling and the tripod bits come from Hughes and they are still applicable 100 years later. When you look at the compatibility of the two organisations, not just in terms of technology, but actually the cultural compatibility, it was a natural fit.
Now what are we trying to do? We are creating something that is completely unique. There is no other company on the planet, from services and technological standpoint that actually has a footprint in these three big silos. What we’ll like to do is to break those silos and change the industry paradigm, and move us into a completely different era and space where we have what we call the full stream, where we are able to go from the reservoir, in a very coordinated fashion, all the way to the end point: the refinery or the petrochemical part. We believe that as BHGE, we are the only company on the planet that can do this. And if we are successful, there is a tremendous efficiency benefit to our customers; there is also a cost benefit to our customers. It is a competitive game changer as well.
The price of crude oil is very low and companies around the world are looking for ways to reduce the cost of production. How will this new technology assist to lower the cost of production?
That is the name of the game. Absolutely! That is why if you talk to our customers; if you talk to the regulators; and if you talk to our partners, there is tremendous excitement right from the moment that we announced this merger in October last year. There has been a tremendous excitement about it all the way. This is simply because the industry can see a lot of the benefits, complementarities, and can also see how those efficiencies can translate directly to cost benefits.
To reduce your cost, there are two ways to do it: it’s either you cut the cost itself, or you become more efficient with the same cost. If you then look at it in terms of an oil and gas company, it means you produce more for the same cost. There are several ways they can do that: either their equipment is more reliable, or the predictability and the usability of their reservoir improve. This is what will happen when you start to then look at some of the things that we would launch into the market, particularly around the digital offerings.
One of the things that is again unique to GE is our offering around the digital thread. It started in GE on the equipment side where we looked at how to make machines more efficient, more predictable, and more intelligent. What we are going to do is to move that across the entire chain right up to the reservoir. When you are able to then have a machine that functions or can change its parameters based on a measured reservoir response, the whole system is a lot more efficient. Like I said before, for you to reduce cost, you have to do it in either of these two ways – reduce the cost itself or increase productivity. With this kind of closed loop, you are actually going to be able to do both.
For example, if you can do predictive maintenance, which means today in the industry, if you take a gas turbine or a compressor or whatever it is, we go based on at 40,000 hours, you have to shut down. Who is to say that actually it shouldn’t be shut down at 38,000 or 47,000 hours based on the actual conditions? Nobody really looks at that today. If all of a sudden I’m able to tell you that based on these conditions; the fluid temperature, the fluid composition, even though the manufacturer’s recommendation is 40,000 hours, for this particular one, you can push it to 57,000 hours. Guess what? Between the 40,000th and 57,000th hour is an additional productivity gain that you’ve made. And you can then say because I’m moving this out, what else can I do such that my overall planned shutdown within that period is reduced. I might do this one at 40,000 hours and there might be another one I need to do at 10,000 and such and such. I can have a certain number of shutdowns in a year. If I’m looking at it predictively then I’m reducing all of that and so I’m actually reducing cost. At the same time, because I’m triangulating back to a particular reservoir or field response, I can optimise the setting of the different machines such that I can boost eventually the actual production from the reservoir response that I’m getting, thus also increasing the volume of liquids. So if we are going to be able to downright, using our digital thread, all the way through the value chain, then we are going to be able to eventually impact productivity and cost.
How does this apply to the Nigerian situation with all its peculiarities and constraints?
Everything I’ve talked about is even more important in Nigeria. When you look at some of our equipment, you have to ask; what can I apply within these constraints based on availability of budget, etc. When you don’t have that much money to spend, technology is actually your friend. This is because technology used right actually reduces your total capital expenditure (CAPEX). So in a place like Nigeria, everything I’m describing is particularly important and critical, and then when you even look at some of the issues we’ve had in the past, I think we have the right kind of failsafe to protect the environment; to protect people and our pipelines in our plants is absolutely critical. The other thing is that half of our production comes from the offshore. As we all know, with the current oil price, the offshore is taking a particular hammering. So being able to reduce operating cost in the offshore environment is critical for us as a nation. There are several projects that are currently in development today that are in the offshore, and if those projects are not able to meet the different economic hurdles the operators have placed on them, then you look five to 10 years out, for the country, it’s not going to be a good thing.
When I think of Baker Hughes, I think about drilling and data on oil rigs, which the company releases weekly. In this merger, what is GE providing?
I’m glad that you know Baker Hughes’ rig count. It is actually a rig count, not just for the US, but worldwide. It is the gold standard or reference for rig counts worldwide for most industry watchers. If you look at what the BHGE suite of services is going to be like, you will see that within the upstream, we provide drilling services; everything from the bits, directional drilling, the telemetry and measurement while drilling. We provide the completion equipment. In the case of, let’s say, when a well needs what we in the industry call ‘artificial lift’ to help the well flow, we provide pumps; we provide gas lift valves and rods. We also then provide wire line tools, equipment and services to be able to evaluate the reservoir quality, whether static or while drilling.
As you go up to surface, we also then provide the well heads, the liner hangers and the Christmas trees both offshore and onshore. As you progress through, you have what we call the rotating equipment, and the rotating equipment is everything within your production facility that enables you to produce and handle the reservoir fluids: that is compressors, gas generation, power generation turbines, steam turbines and all of that. It includes everything in your production facility that enables you to produce and then different valves and other things you have there. As you then move further downstream, you then start to go into the actual refinery. Some of the equipment in the production infrastructure also applies in the refinery, particularly in the turbines and things like that. A lot of that equipment is also provided by us.
The other piece that is very important here is equipment and services around the gas processing. So, gas processing and liquids handling are provided by us. Then finally, when you go into some of your petrochemical plants, there are equipment that we provide. Some of the things I just mentioned came historically from GE Oil and Gas, and some came historically from Baker Hughes. Now combined, all of what I just described to you come together to form what we call the full stream. Even if our three closest competitors came together to form a company, they probably wouldn’t be able to offer the range of products we offer, which then makes us unique and have a very unique value proposition to the industry. The thing that then goes underneath all of these, tying it all together, is what I mentioned before around the digital thread.
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