A Review of the Nigerian Energy Industry

Reserve addition critical to our business – Avuru

11 August 2015, Lagos – Mr. Austin Avuru is the CEO of Nigeria’s fastest growing independent, Seplat Petroleum Development Company. In this interview with select journalists, he provided fresh highlights on his company’s half-year report, its gas commercialisation policy, and sundry issues in the oil and gas sector. Chika Amanze-Nwachuku presents the excerpts:

Austin Avuru 1How would you assess your company’s half year result?  Let’s take a look at fundamentals and key highlights?
So you see our half year results looks, on the surface of it, very disappointing. Profits after tax 79per cent lower than it was this time last year. I think that’s a big highlight that makes it look disappointing.

But the very positive side of it is that recall that at the end of last year, November/December last year, we were hit with what I would say three very critical buckets of headwinds if you will call it that way. So, we suddenly started seeing oil prices that was half of what it was. So, for instance you look at our gross revenue, it is a revenue of $248million as against $388million as it was last year again; that’s just purely due to oil price difference.

The second big headwind, the Nigerian Petroleum Development Company (NPDC) receivables, they were not abating. It is an industry wide problem. The Nigerian National Petroleum Corporation (NNPC) and its subsidiaries owed the industry about $7billion and that’s largely the reason you see overall work programme across the industry is very low because of deep water production, which makes us as a nation to be able to do 2.2/ 2.4 million barrels. People don’t realise that if you take away deep water, we are actually doing just 1.2 million barrels. That’s a reflection of the cutback in work programme consistently over the past five years. So we are not seeing increase in capacity in traditional terrain onshore and shallow water. I am just giving a background to the fact that the cash call 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’s as huge as it is. So it starts affecting your cash flow, starts affecting ability to grow. That was the second biggest headwind we had.

Then we had the second Trans-Forcados problem between November and April this year. As a matter of fact, it was 40per cent outage for the first half, so 77 days out of one half of the year, that’s 180 days. For 77 days, we were not producing because of the outage. So you combine these three buckets of very terrible headwinds, you would think, and quite frankly anybody who doesn’t have the capacity to react would probably be struggling , maybe not today, but anybody who hasn’t had the capacity in the next six months to adjust to these headwinds will run into serious problems in the next one year.

The good thing about these results, I was telling people in London, that we made a profit at all in spite of these headwinds is a clear reaction of how quickly we were able to react to these headwinds.  So, for instance, you saw that within two months, between December and January we were able to, once we were hit with these oil prices, we were able to completely re-order our work programme , cut down Capital Expenditure (CAPEX), cut down our overall work programme and budget for 2015 by almost 40per cent, that’s how quickly we could adjust.

Now it took a few months into the year for those key reductions to start taking effect, but by the end of the year, you’ll be also to see some effect of those reductions in all our cost elements. But it says a lot about our capacity to plan and execute that within such a short period we could make the adjustment that were necessary to weather these headwinds and still come out with some modest profits.

Your investment in gas seems to be paying off with a 117per cent rise in the first half of the year. Tell us about the investments, target and plan?

If you look at the key areas for promises we have made in the past three years, we had always said that our target was for our gas business to account for 20-30per cent of our bottom line by 2017.

Today as we speak we have a processing capacity of 300mmscf per day and we are averaging between 220 million and 260mmscf today as against the previous three years where our annualised average was probably about 70mmscf . And this is because we have commissioned now our 150mmscf gas plant in addition to the capacity we had before to retuning even the 19mmscf capacity we had. So we know we’ve delivered on that. I don’t know any other company that has delivered in terms of more than doubling its capacity to deliver gas into the domestic market. So we are on target for our gas business to be a key source of our bottom line. Like I said,  if we can achieve 20/25 per cent of our bottom line, it’s looking like we can achieve it before 2017, so you can tick that box; we made that promise a long time ago.

If you look at our existing assets, even in terms of production, in spite of the major work programme reductions, our average production, if you correct for the down time on Trans-Forcardos, we actually exceeded what our own expectation was. So you see, our core business is doing well in line with our projection, with our planning.
You released a statement earlier in the year about a deposit for an investment that seemed to have dragged. Has that been fully resolved and is that part of the headwinds you mentioned?

The other headwind we had is that we made a deposit for an investment that has dragged on for too long, plus also the fact that we’ve not been able to extract the full value out the investment we made on OML 53 and 55 because there’s still the ongoing litigation. So we have two key areas of investment that have dragged on our balance sheet because they’ve not brought the revenues at this time that they should have. They are there, they remain assets that we contribute to our balance sheet and our production but over this period they managed to just be a drag on our balance sheet. So, that’s what I mean by in spite of all these we made key adjustments to the way we run business, to still be able to return a profit. So we think we have turned the corner.

In fact I have seen a report by Rencap that says the next six months will be key and I think so; the next six months will be key. Barring any unforeseen circumstances all the indices should be looking up in the next half. We now have worked very hard with the NDPC to put certain measures in place, it is still work in progress but we think that we’ve reached a point where the receivables will not keep growing anymore. We think we’ve reached the plateau. We should start dragging the receivable downwards going forward.  We think that the Trans-Forcados is now a national problem. Barring any unforeseen circumstances, if the outage of Trans-Forcados is not at the disastrous level that it was in the first half, we then think that all the indices should start looking up gradually. Then more importantly, if you ask yourself what kind of company/business would we be by the end of 2017 even if oil price didn’t exist to turn us around? We will be a sustainable business that will be here in spite of and not because of oil prices and I think we have the cost to deliver that and that’s what the results tells  you when you dig deep into the result. So that’s the summary.

Given the business model that you have adopted so far you’ve made very good investment on infrastructure and it coincided with the period of downturn in oil prices and options are up now that actually most people are saying downstream investment could  be another window in terms of export price downturn so people are actually building turbine plants around their plants and given the problem of vandalism which has actually brought down your operations are you going modular and mobile?

My quick answer to that is; Seplat as a company , at the appropriate time and given the appropriate opportunity could, maybe even will, invest in the midstream to downstream, which means in refining. Could is the word I used; but let me caution that when you are producing 75,000 barrels per day you don’t talk about turbine plants. So, marginal fields are doing 2 to 3,000 barrels per day, you can spend $2million and bring in a turbine plant to process 1,000 barrels a day and deliver  100, 000 litres of diesel a day.
When you are doing 75,000 barrels a day it is either you are refining or you are not refining. It is not about turbine plants or modular. So, the smaller players can talk about that which is why I am saying could, because to go that step further into refining has to be a big leap.
Anybody can talk about modular refinery, whatever that means. So, the quick answer is yes we could. We could stretch not just from crude oil and natural gas production to natural gas processing and the delivery of natural gas into the domestic market. One more logical step would be refining and that could be something we could look at in the future.
We had a talk with some of the regulators and they said that the indigenous independents that have actually been managing the divested assets have brought production pressure on these assets without actually doing much to decrease the reserves.

I know you as one of the people who have actually spoken very elaborately on expanding reserve base, so may we know your performance on this mandate.

For us, as a listed company we can only quote figures that are certified by reserve auditors. So our working interest, 2p reserve, in 2010 when we took over these assets was 71m barrels and since then we have produced 25m barrels, working interest. We added just 10m barrels by our acquisition of 40per cent of pillar marginal field. And through our drilling and development activities we added an additional 83m barrels. Today at the end of 2014 our working interest and 2p reserve is 139m barrels. So, clearly we cannot be one of those, we don’t need regulators to tell us that we need to have reserves because that’s our life. We are a listed company, our life is reserve, we like to operate at a reserve production ratio within 15 and 20 years. Once our reserve production ratio falls below 15 years we worry. We don’t need a regulator to tell us. We will have to look for reserves and reserves can only come organically by exploration, appraisal development activities, that’s organic growth in reserves or by acquisition and we have been active on both sides and this one I gave you is just the asset we have acquired. We have not added any reserves addition due to acquisition. So, for us, reserves addition is the heart of our business. So, when we are increasing production we keep an eye on the reserves, that’s why I quoted these figures to you.
Sir, talking about cost cutting and mergers, have you in any way thought of cutting cost in the area of human capital for Seplat and is the new oil price in any way affecting your move to acquire more assets?

First, human capital. Yes, you cannot reduce G and A without affecting human capital. Our core-staff has not been affected and they will not be affected. There were non-core staff, contracts staff that were. And that’s why at any point in time you have core staff and contract staff that are related to aspects of your growth. So if I am building a gas plant and it is going to take me two years I can hire some people dedicated to that project and when the project finishes they go. So, there are people who were working for us as drilling consultants when we were running 7 rigs. We are now running one rig so they won’t be there.
So, 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 we must keep, and the staff we kept that could easily be shed when that extra fat was not there so those who have had to go are those who would go because we have scaled down projects but core staff remain. It has not affected them and it will not affect them.
Now the other way it has affected our staffing is that we cut down almost to zero in hiring so even when internal vacancies occur we first of all see how we can do internal movements to fill up the vacancies because we are not in a hurry to hire anymore and so yes directly and indirectly in has affected it, but we are mindful that we are building a company for tomorrow so our core staff remain and it hasn’t affected them.

Now whether oil prices were high or low our acquisition strategy is based on filing certain critical gaps, so today, as a company, we have a projection for what our oil and condensate production should be at the end of 2018. So 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 2018. If we achieve that optimum production of both natural gas and oil do we have the reserves that can sustain that production for 20 years? That’s reserve production ratio. Those are the three critical questions we must always answer internally as a management team. So, if the reserve will not sustain this production for 20 years then one or all of three things must happen. We must step up exploration appraisal for organic growth in reserves or we must look for critical acquisitions that fit both the production level aspiration and the reserves addition that’s what drives our acquisition so whether prices are high or low we must critically balance our growth in such a way that at any point in time we have reserves to sustain our production, that’s what drives our acquisition, it is not so much just about having so much money, therefore, you must acquire, that’s why we always tend to be quite prudent in our acquisition even in good times when we had $110 oil.
So at any point in time do you always have money to acquire assets or do you see the possibility of borrowing maybe in the next one to two years to acquire some assets?

In the next two years, if acquisition opportunities that fit this profile that I have carefully demonstrated to you appear up on the table, and we don’t have enough scope to participate in such an acquisition then yes.

Okay, I am wondering sir, maybe on a general note, there seems to be an administrative gap in the oil sector. I wonder how you think it affects operations right now for people just like you.

It’s in two ways, first of all is the fact that decision making processes  are now very slow in NPDC because of the gap you referred to, but for us, I think  what is more important to us, is the fact that at the end of this we should see a bright light , that’s what we hope. We believe or our internal projection is that we will see the restoration of discipline, the elimination of impunity and elimination of any form of large scale corruption, and for us as a company if those three things happen we are happier than anyone else. We run a public company, total public disclosure and so the greatest inhibition to our business is when the playing field is not level or if there are elements of those three things I mentioned.
So, we are the happiest persons if we come up with an industry where you have a level playing field and where all you need to do to succeed is proper planning, prudence in management and good technical skills. If we have an industry, where those are the measures for success, we would be the happier.

We see from what the current administration is doing, we see, that without the PIB, there are things that the presidency could do on their own to address some of the gaps we see in the oil sector especially upstream you know, how would you say passage or non passage of the PIB as it were could affect or better your lot?
You know four years ago, in 2011, we had said, this company had said that our internal business model is to run a business in spite of and not because of the PIB. Four years later we restate the same thing without mincing words. Our business model has always been in spite of not because of the PIB, and for that matter its always in spite of and not because of any anticipated changes in regulation. So we are running a business model in which if there are regulations we key into it, we react to just as quickly as we did with oil price and key into whatever comes from it. We don’t go to sleep bothering about PIB whether it is passed or not. Whenever it is passed we will key into it.
But you are passionate about the PIB?

I have been passionate as a person, not this company. As a person I have been passionately against the PIB from day one. I never thought it will solve any problem. I still don’t think it will solve any problem. I wrote against the PIB in The Guardian; ‘Complicating a simple problem’ was the title of my article. That was 10 ten years ago and we are still here. That’s my personal view

By implication, are you saying your company is a victim of corrupt scenarios in the past government?

I cannot make such a strong statement. I cannot even say there’s any corruption anywhere. I am just saying just so that you understand that as a company, in spite of what looks now like a slow process of decision making because of the transition period, from the body language of this government we see that at the end of the day we will end up with an industry where discipline and lack of corruption prevail and that as a company those are the things that will brighten our day

They say they’ll spilt NNPC, they haven’t given us the details but in case it happens, how do you think that’s going to work, what are your thoughts about the workability and then in what manner too?

We cannot pre-empt what they will do, all I can say is some of us have argued, that the less of NNPC footprint we have in the business, the better for this economy; that’s what we have always said and we’ve been consistent on that. We’ve seen in it LNG, people who know the history of the LNG will know that the day Bonny LNG took off was the day Etiebet as minister, gave up 2per cent out of NNPC’s 51per cent to IFC and reduced NNPC interest to 49per cent. That’s the day the Bonny LNG took off and till today they’ve not missed a cargo in 16 years
So, after that there was a minister and the minister dissolved the board of LNG. The board wrote back to the minister and said you don’t have the power, you can withdraw your members, but you can’t dissolve the board. So, there are examples. It’s been shown. If the footprint is not large enough to cause the instability we are seeing in the industry the economy will be better. That’s what we know, we have always said that but when we say so, people say Austin Avuru said we should scrap NNPC. I have never said so. The footprint is too ominous for our industry so whatever we do whether by splitting it, whether it’s be making them non-operator whether it’s by making them just investors the foot prints today of NNPC in the industry is a hindrance.
About four weeks ago, you said that fuel queues will return and it happened now that refineries are starting to work what do you think that portends for subsidy and fuel queues?

My view about subsidy is that it is unfair on this economy. It does not matter who is the president. It is unfair on every citizen of Nigeria to keep subsidy. It is unfair to spend $5billion a year on subsidy when you are spending less than $1billion on capital expenditure, that’s my view. It doesn’t matter the sentimental argument by either union or anybody.
The National Bureau of Statistics published a figure, I don’t know if you saw it, I read it online, average price that Nigerians are buying fuel is N113 per litre and you still want to spend $5billion and you say you are subsidiaing fuel in two cities, Lagos and Abuja and you can’t tar roads?
My view is it’s not about whether it is right or wrong. It is unfair on this economy, it is unfair on an average Nigerian to not have 1 billion to tar roads and you are paying some people $5billion a year and you call it subsidy. It’s unfair. It is as simple as that and they can keep it if they want to.

On Tuesday, DPR said we have 79 years reserve of gas in Nigeria and Seplat has always prioritised gas. What does this mean for the company?

So, if the country is doing 3bcf per day and you say we have 79 years of reserve maybe 4bcf, so 79 years of reserve means we are doing 2tcf a year essentially.
That’s what they are saying okay, and now the power people are telling us that we need to deliver 4bcf a day to power alone and that overall, without LNG, domestic demand by 2020 ought to be about 7bcf a day. So, if we triple production in the next five years that 79 years becomes….divide 79 by 3.
So, I don’t know the significance of having reserves for 79 years when in fact our production is 1/3 of what we demand . So not only do we need to produce more gas, we need to find more gas. I have always said it that this previous 187tcf national reserve has been the same figure for the past 15 years; I have always said it, as if we have not been producing

You also mentioned gas to power. In the annual report you talked about $3.50; the current price. Do you think the price should go up?

As a company we are modelling a price that we think is sustainable. Today, because of desperation, there are people who are telling us they will pay us $5. We are not signing any agreement with such people. We think that a price of $3 to $3.50 for the long term contract with the normal escalation clause of US inflation which is less than 1% is sustainable. That’s what we think. If it went to up to $4.50 in the next five to ten years that’s even better cause that’s what they pay in Egypt, in South Africa. But here, I think a price in that $3 to $3.50 in that range with necessary escalation and payment guarantee that enables you to plan, that is sustainable.
So even when we see desperate demand that is telling us they will pay $5 to $6 we don’t bother using those prices because we don’t think they are sustainable because if you kill the business that demands the gas then the business won’t be there.


– This Day

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