A Review of the Nigerian Energy Industry

Seplat broke no laws in acquisition of Chevron’s blocks – Avuru

24 February 2015, Lagos – Chief Executive Officer and Managing Director of SEPLAT Petroleum Development Company Plc, Mr. Austin Avuru spoke with Ejiofor Alike on his company’s acquisitions of assets, its growth and dual listing, as well as recent developments in the global energy market. Excerpts:

Austin Avuru 1Before SEPLAT acquired OMLs 4, 38 and 41 from Shell and its partners, Nigerian independents had operated only marginal assets because of lack of technical and financial capacity. How did you manage to break these funding and technical barriers to emerge as the largest Nigerian independent and the first to successfully operate very large acreages to the extent that you raised production to above 70,000 barrels per day from just three assets?

To be fair to government, the whole purpose of the marginal field programme in the first place was to create the kind of thing we are seeing now. If you recall, government had tried the indigenous programme by giving out blocks to several Nigerians. Most of these Nigerians found technical partners and a lot of them became just economic rent collectors. Some of us had been in the vanguard of promoting local participation in the industry. So, when the then technical assistance to former President Olusegun Obasanjo, Mr. Funsho Kupolokun came up with this idea of the marginal field programme, the idea was to give the crop of professionals, mostly retired professionals in the industry an opportunity to come into the industry and contribute. Knowing as you said that the biggest problems were finance and technical expertise, the marginal field programme was to give them fields with limited financial requirements for their development. And since they had the technical expertise and well-trained in the industry, they were expected to make a success of it.
So, I think really, as I said, to be fair to that programme, that is what you are seeing. We were in Platform Petroleum, for instance; as you would see, there was Niger Delta Petroleum, Waltersmith and a few others, who made a success of the marginal field and then took the extra step to increase both their foothold and their size by moving from the marginal field space into what you are now calling independents. In our own case, Platform then partnered another marginal field producer, even though it was not part of the marginal field, and that is Shebbah Petroleum. Platform partnered with Shebbah to from SEPLAT. Now, to answer your question specifically, about funding; it was in a bid to solve the funding problem that we brought in Maurel and Prom to set up the company. Maurel and Prom took up a 45 per cent interest and we combined (Platform and Shebbah) kept the 55 per cent interest. We then rolled on the back of the cash that Maurel and Prom had on the table and we are able to access bank debt for our 55 per cent. So, that is how we came up with the cash to pay for the assets. After paying for the assets and taking control of the assets, the rest was then on how prudent we were in managing the assets – deploying capital, increasing production and finally, being able to build the asset base that we have now built for the company. So, our history is that of took the first step successfully managing the marginal field company and then took the next step, moving from a marginal field company to a fairly-sized independent. Really, as I said to be fair to government, it is the success of their marginal story that we are seeing.

You got listed in both the Nigerian Stock Exchange and the London Stock Exchange last year. What motivated you not only to be a publicly quoted company but to be listed both in Nigeria and the UK?
There are two main factors that drove our decision to list and that decision was taken very early in the life of the company. One of the factors was that we set out to create a company that will operate to international standards and we feel that to do so, we are better off operating out of the platform that we impose those minimum international standards on us. So, we decided to do an international listing and also list in Nigeria to emphasise that this is a Nigerian company. That was what informed the dual listing. So, listing in London was to impose on us minimum operating standards and minimum standards of corporate governance and of course, we listed in Nigerian because we are a Nigerian company. The second reason was that we also realised every early in the day that if we were going to go into a rapid growth phase, access to funding, whether it was equity funding or debt funding, access to funding would always be very critical in your growth phase in this business because it is capital intensive. Access to real funding – the kind of size of funding you were anticipating would be facilitated if you were a listed company, particularly on an international exchange like London. So, two key reasons – minimum standards of corporate governance that we wanted to impose on ourselves and access to funding and indeed, you can see that we have achieved both objectives. I think that on both counts, we are well-ahead of our competitors.

SEPLAT also went to the market to raise $500 million immediately after the dual listing. However, some people in the industry felt that as the largest Nigerian independent E & P with production capacity of over 70,000 barrels per day, you did not need to go public before you could raise such fund, especially at a time the crude oil price averaged $100. Could you please clarify us on why you went to the market, how much was raised and how you utilised this fund?

We would not have been able to list in London by introduction. So, we could only have listed through an Initial Public Offer (IPO), which means we have to raise money. But even at that, having said that, we also anticipated as I told you that we would get into a period of major financial requirements to fund the growth that we have ahead of us, particularly, growth by acquisition of additional assets. Listing on the London Stock Exchange is a very rigorous process; it took us two years of a lot of work to be able to list. So, we could not wait until the day we needed the money and then rushed and raised the money. We had to do our proper planning and as you can see, the timing was near perfect. We raised the money, which we now need and which we are now deploying into asset acquisition as we planned it. But even more importantly, we went in at a critical window in April 2014 to do the IPO. As you can now see, a combination of not-very-good news coming out from companies operating in Nigeria and the fall in price would have meant that if we didn’t take advantage of that window to do the IPO, we probably would not have done it even in two years from now. So, the timing was perfect; the intention was to increase our war chest and be prepared for further participation in acquisition opportunities and at the same time, as I said, we needed to do an IPO to list in London.

We understand that while other E &P operators claim to be incurring as much as 20 per cent production losses due to vandalism and crude oil theft, SEPLAT’s assets are not known to have suffered direct attacks by vandals or oil thieves. What do you think accounts for the safety of your assets? Since you acquired the assets relinquished by Shell and others, what have you been doing in the area of Corporate Social Responsibility (CSR) for your host communities, which others are not probably doing?

In the area of CRS in the past four years, let me say that it is one area that we beat our chest about. In fact, the industry now has come to understand what is referred to by others as SEPLAT way. How did they come about this? We took over assets that were shut down for 18 months because of mostly community-related crisis, even though we know that it was a national crisis in 2008. Since we took over these assets, we have implemented not just community relations strategy that emphasizes shared vision, which means it is a win-win for both us and the communities. On top of that, we have also implemented CRS projects that complement our overall community relations strategy. The result is that we are happy that we have a very strong relationship with the communities where we operate and that has shown in incidences of disturbances in our operation. Since January 2013, we have essentially recorded zero incidence of disruption of our activities and whereas almost across the industry, everybody is still talking about pipeline vandalism. The vandalism associated with the pipelines under our control as SEPLAT is also minimal. Our relationship with the communities where we operate is very strong. That has come out of an entirely different version of community relations strategy that is now referred as SEPLAT way and a number of companies coming in here to study what we have done differently. It is not radically different except that instead of tokenism, instead of emphasising token as if we are struggling just to appease the government, we have actually taken the view that the communities are our partner and everything we do demonstrate that. We list stakeholders and stakeholders in our view are defined in four segments – government to whom we pay royalties, taxes and so on and who gives us license to operate; our shareholders, who provide the capital for us to operate; our staff, who generate all the value and the communities where we operate. Those are the four levels of our stakeholders. For us, stakeholders are the people, who are capable of stopping you from doing your business and the way we look at them is that if any of them is dissatisfied with what we are doing, then something is wrong. The government will encourage us because they earn revenue from the expansion of the business we do. They are happy with our gas supply to the domestic market; they are happy with the royalties that we pay on increased production. So, as a stakeholder, the government is happy with us. We also make sure that our staff are happy with us as a stakeholder because they generate the revenue and we make sure that we have adequate returns to our shareholders. In the case of the communities, it is the same thing; we ask ourselves: if the communities would rather wish that we are chased away, it means there is something wrong that we are doing. But if somebody goes there and say that SEPLAT is planning to leave, we think they will organise a demonstration. That is how we measure it and that has worked well. So, the summary of what I am saying is that our community relations strategy and our CRS performance, in my view has been exemplary and it shows in the satisfaction that the communities express with our presence in their place. As I said we partner very strongly with our communities, even in looking after our pipeline network; we have a huge pipeline network within the fields and our export pipeline. So, the portion of our pipeline network that is under our control, we have no headache with that as you pointed out. But the portion that is outside our control; the point of the Trans Forcados that we do not operate or maintain remains our headache. Others are complaining of 20 per cent loss; we still suffered 10 per cent loss, which we believe we shouldn’t be suffering because not only do we have a large unit, which means we measure what we deliver into the Trans Forcados pipeline very accurately, but also our portion of the pipeline seen no losses but because of the overall problem with the portion of the Trans Forcados pipeline, outside our control, we still suffer as much as 10 per cent loss lower than most of our competitors on Trans Forcados suffer. But it is lower only because we have a large unit and others do not have a large unit.

Domestic gas supply is a major challenge in Nigeria. What is SEPLAT doing to ensure that the Federal Government’s aspiration in gas-to-power is realised?

We are leading even by the admission of the government today; we are leading the expansion of domestic gas supply in Nigeria today. The assets that we purchased four years ago came with gas –processing facilities with maximum capacity of 120 million standard cubic feet per day. Most of these facilities had been badly maintained for good reason – gas was selling at 7 cents per thousand cubic feet. Nobody had any incentives to put in money to maintain those gas facilities. But since we took them over, we have not only revamped them and brought them to work well, we have also doubled our processing capacity from 120 million standard cubic feet per day. The processing capacity in Oben alone at the end of our current commissioning will go up to 240 million standard cubic feet per day. If you add the one in Sapele and Warri, it is close to 300 million SCF of gas per day. So, our investments in gas processing and delivery have been huge in the past three years. We took the decision very early in the day to participate in domestic gas supply in a very big way even at a time when the incentives were not there. Our projections have vindicated those investments that we made because even from a pricing point of view, gas prices have gone from the 7 cents that they were when we came in 2010 to $2. 50. So, it has reached the threshold where we think that the decisions we made three years ago have made commercial sense today. Again, to answer your question specifically, we are one of the largest investors in domestic gas supply expansion in today’s economy.

What is your current gas supply to the domestic market?
We just built additional 150 million SCF per day gas plant in Oben and commissioning is ongoing as we speak; we hope to finish that by the end of this quarter. Even while that is ongoing, we are delivering about 170 million SCF of gas into the domestic market. That is going to go up to between 240 million SCF and 275 million SCF of gas per day by the end of this year. Our target by the end of 2017 would be between 315 million and 400 million SCF per day.

Recently, last month to be precise, vandals damaged NPDC’s Trans Forcados Pipeline and SEPLAT was said to have lost over 30,000 barrels per day as a result of leak on the Kantu/Ofugbene/Yeye axis of the 50-kilometre stretch of the 28- inch Trans Forcados Pipleine network. Have you been able to ramp up production and what is your current production at the moment?

Once Trans Forcados is down, all of us suffer. In 2014 we budgeted 35 days of outage but we ended up suffering 75 days of outage. In the first 30 days of this year, we have already suffered 15 days of outage. So, the Trans Forcados remains a huge problem for all of us, producers in the western Niger Delta, who deliver crude to Forcados. When it is down, everybody suffers; we have production outage and therefore, for the period, there is no production for the country. There is no revenue that should have come out of that volume of production for the country and it is also a loss of revenue for us. So, it is a huge problem. I think all five of us now, including the Shell, the sixth one that deliver crude into the Trans Forcados are trying now to sit down together and see whether we can come up with a lasting solution because it is a huge problem. On our own, we have done a few additional things; we did a pipeline to the Warri Refinery. So, we are able to supply crude oil to the Wari Refinery if Trans Forcados is down and in fact, even when Trans Forcados is running we are able to satisfy the Warri Refinery with crude oil delivery. That is useful to the refinery because we are delivering crude to them at no transport cost. They probably pay more than $10 or $12 per barrel to transport crude from Escravos. So, that is good for them and it is good for us because we suffer no losses when we produce through that pipeline. So, that is the alternative pipeline we have and we are still working all the complex commercial elements in that arrangement with Warri Refinery. The intention is that when the delivery to Warri Refinery is working very smoothly, it should serve as a hedge against any vandalism of the Trans Forcados. That is why we made that investment so that it should benefit both us and the refinery.

Have you ramped up your production?
Well, we have our peak production; we can do up to 74,000 barrels per day now. But when Trans Forcados is down, we just shut down. Now, we are hoping as I said on a combination of two things. We are building our storage tanks that can take two or three days of production and then the alternative pipeline to Warri Refinery. So, when all these are working very smoothly, our intention is that even when Trans Forcados is down, at least, half of our production will still go on because we have alternative storage and Warri Refinery as alternative outlet. That is an investment we have made against that risk.

SEPLAT entered into preliminary discussions to explore the possibility of acquiring Afren Plc and we gathered that Afren at a point gave you January 30 deadline to demonstrate in concrete terms, whether or not, you are really interested in the acquisition. Are you really interested in acquiring Afren and what is the latest development on the deal?

Well, the January 30 deadline was further extended to February 13 and those preliminary discussions terminated officially on that day. So, that is the situation with Afren.

So, SEPLAT is no longer interested in acquiring the company?
We are no longer in discussions with any equity play; we are no longer in discussions for the acquisition of the equities of Afren. But if anything else develops, with respect to the acquisition of their assets, we will still be in the fray.

Are you optimistic that the current National Assembly will pass the Petroleum Industry Bill (PIB) and what are the consequences of its non-passage by the current lawmakers?

When we started negotiations for these assets with Shell in 2009, a lot of people advised us to wait until the PIB was passed before we would continue with such major investment. We took the view that we run our business model in spite of the PIB and as you can see, we have been justified. So, for us, we will continue to operate in Nigeria’s oil and gas space in spite of the non-passage of the PIB. Whenever it becomes law, we will make the adjustments that are necessary to operate under the new regime. Whether it is passed or not passed will not stop our investments just as it has never affected our investment decision since 2010.

In what ways has the drop in the price of crude oil from $115 in June 2014 to below $60 affect SEPLAT in particular and the entire industry in general in the areas of investment and staffing? Do you envisage layoffs?

Whenever you see a sharp fall in prices, a few things happen almost immediately, especially with companies that are properly run. Companies that are properly run will tend to take another look at their work programme and cut the work programme to a size that fits what their overall revenue will be in the light of diminished oil prices. So, that is why you have, across the world, companies, whether it is Total, Shell, Mobil – they are all cutting their capital expenditure (CAPEX) outlay. For us, we are doing exactly the same thing. So, we have slashed our capital spend considerably. We have been at growth phase since 2010. Our capital spend has been quite huge during these past four years. To put it in context, the total spend on these three blocks in the 10 years before we took over amounted to not more than $40 million each year. Our total spend as a joint venture for 2014 was in excess of $800 million; just to tell you the kind of investment we have been making in the four years get to where we are. So, now the current realities of the low oil price are such that we had to cut down on both our operational expenditure (OPEX) and then our CAPEX. As I said a little earlier in another forum, some companies are even cutting jobs; we are not cutting jobs; we are just a lot more prudent in our deployment of human resources. So, we have to task our staff a little more without having to cut jobs. But certainly we are cutting down on both our OPEX and CAPEX.

Do you see oil price recovering to $100 per barrel this year?

My personal view has always been that on a long term basis, if you make provision for slight inflation, oil prices will always almost settle in the $70 – $80 bracket. So, anytime you see the kind of sharp dip that we saw recently, just as we did in 2008/2009; it was exactly like this. There is a sharp dip from $147 in 2008 to $42 or $46. When you see a sharp slump like that the reaction such I have just explained, will follow – a rash of reductions in CAPEX spend and you know that future production will come from today’s CAPEX spend. So, when you see a rash of reductions in CAPEX spend today, it can only mean that production profile that is anticipated in the future will no longer be sustained, which means that at a certain point in the future, you are going to see an imbalance in production, which is supply and demand. So, in turn, that imbalance will lead to another rise in prices. This is no difference. The price went low, that is, it bottomed out and with all these rash of reductions in CAPEX spend, you are going to see a recovery of the price. How far up it will go, I cannot predict, okay. If you see a spike that goes too high as you saw in 2008 at $147, it is also going to self-correct. So, my view is that overall, in the next four years, for instance, between now and 2019, we will still be in that overall average of about $80 per barrel. The overall average will be in the region of $70 to $80 per barrel. It is my personal prediction.

Are you in support of the position of OPEC not to cut output so as not to lose its market share to non-OPEC but to allow the market to stablise itself?

I support the position of OPEC; I don’t think they refused to cut output in order not to reduce market share. I think it is a little more reasoned than that. I think they refused to cut output so that they will not end up subsidising high cost producers and losing market share at the same time. So, OPEC’s view was that oil prices going to $100 and above makes it possible for $60 cost oil to be profitable, then the $60 cost oil will flood the market and prices start dropping and then they expect OPEC to cut production to sustain the high price so that the high cost producers will continue in business and they said that it doesn’t make sense. That is why I support them. They said okay; let us all produce and let us flood the market and then oil prices will get to a point where those, who cannot sustain high cost production will leave the market so that the market will find its own equilibrium. I think that is what is going to happen. Eventually, the market will find equilibrium in that $60 to $80 range and then, only those who can play within that equilibrium will be the main producers. I think we are beginning to see the results. For the first time, instead of OPEC reacting knee-jerk as usual – just quickly cut production and maintain prices, they took a long term view that let us play out this game, so that we don’t end up subsidising high cost producers to our own detriment of losing market share. So, in the end, you are going to see an equilibrium price, where certain high cost producers can play in it and low cost producers will not be subsidising them. That is what I have generally explained in my view to be the $70 to $80 bracket and I think OPEC will achieve that.

Chevron had put on sale its 40 per cent stakes in OML 52, 53 and 55 but Brittania-U went to court to contest the bid process, seeking to be awarded the three OMLs or $10 billion. Didn’t you consider it to be what they call subjudice in the legal parlance for SEPLAT to go ahead to acquire some of these leases when the transaction is being challenged in the courts.

First of all, let me say that it is unthinkable that a corporate entity like SEPLAT that prides itself with corporate governance and due process will do anything that offends the laws of this country. It is unthinkable; we will not do that. We went through a process, a very rigorous process of bidding for an asset, almost two years ago from Chevron and as far back as November 2013, we signed an SPA (Sales and Purchase Agreement) with Chevron as part of that process and then, the court case came in where we were joined, and certain elements of the court case and certain injunction stopped the process from running its course. Running its court means after signing an SPA, you are supposed to seek ministerial approval and at the end of when you get ministerial approval, then the transaction is concluded. So, all that we have done recently is to run the full course of what we started by signing an SPA in November 2013. We ran the full course and got, you know, the ministerial approval, concluded the transaction with Chevron and I said earlier, we broke no laws, whatsoever. All we did was to conclude a normal commercial process that we started about two years ago. That was what we did; we broke no laws.

Since these assets are the subject of litigations in the various courts, including the apex court, are you not worried that you might lose your investments in these assets if Brittania-U wins the case against Chevron?

Let us be clear; I do not know the full details of the reliefs being sought by Brittania-U but what I am saying is that we went through a purely commercial arms’ length process of bidding for, winning and buying assets from Chevron. We have gone through that whole process to run its course and we have concluded the transaction and if Brittania-U is angry with Chevron for any reason, it could seek whatever reliefs it is seeking from Chevron and that really has not had any consequences of obstructing the legitimate transaction that we started two years ago and recently concluded with Chevron.

With all these assets in your portfolio, what are your targets in terms of production, say in the next two to three years?
Our overall target has not changed from how we envisioned it four years ago. This business is about production and reserves, okay. Production gives you today’s revenue in today’s balance sheet. Reserves will secure your tomorrow’s production. So, for us, we are targeting a certain plateau production next to us, both oil and natural gas, but even more importantly, we need to secure the reserves to underpin that plateau production in such a way that we can achieve a reserve production ratio of 20 years as our overall target that we hope to be there at the end of 2017. So, we have succeeded in the first phase of building this company; we are now in the phase of consolidation and production optimisation, so that by the end of 2017, we would have achieved what we consider our plateau production and also be able to secure the reserves and to secure those reserves will come either by exploration success in the assets we have or by acquisition of additional assets or both. But either way, we will be comfortable when we attain certain plateau production and a reserve production ratio of 20 years. That is our overall objective.

– This Day

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