‘Beyond regulation, Nigeria has too many oil, gas assets locked up’
How would you assess Nigeria’s oil and gas industry?
My assessment is that we are making progress but still operating below capacity; we can do much better than we are doing. If you look at the resource base that we have and compare it to the production, you will see we are producing below capacity.
However, there are a lot of positives. This is one area in the world where you have been able to develop and train people, we can operate at any level whether it is legal, financial, technical, we have had the skill set over many decades in Nigeria.
It is considered one of the main staples so any international oil company that is truly global, has operations in Nigeria. But if you look at where we are, compared to where we should be, we have quite a long way to go.
Would you say the country is delivering on its potential vis-à-vis the current production capacity?
Right now, we are below 2 million barrels per day (mbpd). We are probably about 1.7 mbpd but we should be at 4 mbpd given our base. Let’s even say the investments required to get us to 4 mbpd is quite substantial. At the very least, we should be at 2.5 million barrels per day.
In my opinion, the reason is that we have a lot of assets that are locked up. I used to be an investor in Wall Street and I put a lot of money in Nigeria at that time and this is one place that I know you have a lot of assets that have been proven but for one reason or the other, they are not available to local and international companies.
But if these assets are opened, do you think we really have the capacity to take them to production?
When you talk about capacity, you are looking at the industry broadly, so it is not only Nigerians that will do the work. There will be people from outside the country. It is always good to have a balance. As indigenous companies, we like the idea of the Nigerian Content Development and Monitoring Board (NCDMB) driving Nigerian ownership but at the end of the day, there’s also a value in diversity.
In an organisation, if we were all from the same background, our thought processes are the same, then we can miss things. We all grew up from what I like to call an unstructured background; it is also good to have people that grew up in a different background, where everything is structured. They may not necessarily be good entrepreneurs as we are, but they may be good at getting things done consistently. So, you need to mix those two to get the best.
Is hydrocarbons discovery in other African countries really eroding Nigeria’s competitive advantage?
I will say yes and no. Yes, in competition for capital, to the extent that some of these African countries have better fiscal terms, they may actually be able to attract better capital than we do. Our fiscal terms are not that attract.
In the grand scheme of the world, you will understand that we are a well-known petroleum basin, the resource is big but you have to pay taxes, royalties etc. however, oil itself is a global industry and I know a lot of people are talking about renewables but I believe the demand for oil will be there.
In a previous life, part of my job was oil price forecast, I studied demand and supply, and one thing I remember clearly is that the per capita consumption then in America was about 25 barrels per person, per year.
For many developed countries in the world, it was always between 14 and 15 barrels per person. China then was about 2 barrels per person per year. To move China to the world average, you needed to find about 7 million barrels per day or another Saudi Arabia, which you wouldn’t. This means that we were always going to have energy shortage. So, this created a situation where you need the alternatives such as renewable and gas.
As long as we are in a situation where the economic growth will continue with that level of demand, frankly, it is better for other companies to bring their production as well.
A concern most investors have is the slow pace of regulatory approvals, how has that impacted your business?
It has been the single biggest challenge that I faced since I returned to Nigeria to start Lekoil. The single biggest challenge we have faced as a company has not been technical, it has not been money, it has been regulatory approvals.
We have the consent for one our interests in OPL 310 which has been pending for three years and this is an asset we have that spent over $100million of our money and the other entity we bought has spent $100million so between us there is over $200 million spent but still there is no regulatory approvals so we can’t move forward.
We need to have a system that allows these things to move quickly because to the extent we do that then you can bring more money into the system into the country and then everybody benefits.
Right now, we have a very central system, I talk to the guys in government and you will find out that many of them are sometimes overwhelmed. Everybody all over the country comes to that central system and the people there are dealing with so many things.
If you go the NNPC GMD’s office, the number of people waiting to see him on a whole variety of issues is huge. We need to decentralise the system. Why can’t we have folks that will give approvals in Bayelsa state have an office there or in Rivers or Edo and break it down in such a way that you have more input in the system.
Recently, the Minister of state for Petroleum Resources, Ibe Kachikwu said the government has reduced contracting cycle and cost of production has reduced. How has this helped your activities?
The government has done a lot to improve the industry no doubt but we are in a global industry we need to be comparing what we are doing with the rest of the world and when we make that comparison we are simply not there yet. Cost of production is a function of asset, size of asset, there is always a cost curve in the entire industry.
There is a lot of talk about gas monetization, what initiatives are you looking at in that space?
We have a company called LEKGAS that primarily focuses on gas. For example, in the Otakipo field, we are actually flaring some gas probably around 8 mscf but we commenced plans towards bringing it down. We have brought in some generators that supply around 6 megawatts of power generation and we are waiting for the system that will clean up the gas so to speak before we can put the gas into the generators and with that, we will have LPGs.
For Ogo field, obviously we need to get the ministerial consent sorted out first. This is an asset with 3 tcf of gas, 20 km offshore Lagos. Our focus is bringing in the gas to Lagos first so that it can have a key multiplier effect for the economy and make a huge difference. We are quite keen on gas. For each asset, we look at the optimum gas driving system and we are ready to invest in it.
Recently a group conducted a survey and found that co-location could help to drive investment in gas midstream sector, what’s your take on this?
It could, but before we get to that, we have a lot of gas being flared right now in Nigeria, we know the numbers. At different points in time, the federal government has said this is the fine you would have to pay. We have some commercial guys crunching the numbers, which led to a conclusion that it is still cheaper for them to pay the fine than to build the infrastructure needed to monetize the gas so they continue to flare.
Now the issue for me is that, there needs to be a disaggregation between the upstream, midstream and downstream sector. For a lot of upstream players, the kind of capital they attract is for upstream projects. It is a different kind of investment for midstream players. if you have a situation where you are forcing the investors who only want to do upstream to come over to midstream, it might not go down well with them. But it is easier for midstream investors to attract the kind of investment it wants.
So, it is different but we are putting all of them together. It’s the same thing with infrastructure. In Otakipo for example, we re-entered the wells and also built our 6km pipeline but the money we invested in building the pipelines, if there was a midstream company whose job it is to build pipelines all over the place, they will build pipelines, and because they are experts if one pipeline breaks, they reroute it to another one.
In other parts of the world there are strictly pipelines companies who are certain of the dividend they collect so we need to realize that we are becoming a mature basin and start to restructure things and disaggregate.
What are your thoughts on gas pricing in Nigeria?
While oil is a global market, gas is a local one. Gas is a local market because the pricing of gas depends on what you can do with gas in that particular area. If the government can give the right incentive in terms of taxes, it will drive investments.
If the right incentives are given to develop then there will be a willing buyer and willing seller. Part of the problems we have is that power companies cannot pay. We know there are lots of things that have happened in the sector especially with privatization but I don’t think the power companies have got to the point where they are strong enough to pay even with the Nigerian Bulk Electricity Trading Company operating as buffer.
How much are you considering to invest to develop the infrastructure you need for that Gas space?
For example, let’s talk about Lagos, because we are so fortunate that our gas is offshore Lagos, which is huge market. We are getting a lot of interest in it, as much as possible we will be looking for captive solutions so if it’s a free trade zone for example, and we know that in the zone we are supplying the gas and this is the price and anybody can come put their industry and power with it, that’s the kind of solution we are looking at for now but if we wait for everything to be fixed then we won’t do it. We have to find ways in the system to get things going.
How long do we expect Ogo field to reach production?
First, we need to sort out the approvals, we need to drill some appraisal wells which will lead to some flow tests so we are looking at three to four years before full production. In the meantime, we want to move quickly to start drilling the appraisal wells.
While your marginal field is a success story, the same cannot be said for many other fields. what has been the challenge in getting them to production?
Some of the fields are truly marginal; they are quite small. It may not be as easy to develop them on their own unless they are part of a cluster. It means people have to collaborate more, but in Nigeria, we haven’t proven to be so good at working together.
The other challenge is there are folks that have been awarded these fields but you see a mismatch between expectation and reality. We talked to a few people and for many of them, we found that expectation did not match the reality of what is on the ground. Given our background, we model everything just to ensure it is profitable.
Overtime, we are starting to see many marginal field operators figure out ways to make it work, some find partners, others partner with service companies, one way or the other it is starting to work out.
That speaks to what I said earlier about assets being locked up. We have not had a licensing round in many years and we are talking of increasing production and problems in the economy, why not just do a simple licensing round? You can even prepack it and say put your money in the bank and you get the field… just make it open, do it on the internet and let everybody bid. It is not complicated.
From your interactions with government officials at senior level, what has been their response to your concerns about lack of licensing round?
Their response has been that it will come soon but the sense we are getting is that there is always going to be an issue with what is going to be done from a discretionary manner and what is going to be bid for and I think it just gets complicated that way.
But from my perspective, even if you want to keep some as discretionary and worry about those later, the ones that people want to pay for, let’s do it. People are looking for assets all over the place.
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