Mr. Austin Avuru is a geoscientist, petroleum economist, investor and operator in the Nigerian petroleum industry. As Managing Director of Nigeria’s biggest indigenous oil company, Seplat Petroleum Development Company Limited, Mr. Avuru also takes the challenge of industry leadership and regularly advances policy options that would leverage the country hydrocarbon capital in delivering desired socio-economic results. In this chat with journalists at the recent Offshore Technology Conference (OTC), in Houston, he adumbrates success strategies to include prudent investments, sound project economics, creative JV funding, inclusive host community relations and many more, which he testifies, had worked for Seplat.
SOPURUCHI ONWUKA presents the excerpt.
What are operators view of challenges that induce downturn in the domestic oil industry environment?
I think there are three key issues which have direct bearing on cost competitiveness, the gas business and joint venture (JV) funding. And I think if you summarize the message we are trying to pass, you will notice our concerns.
The first one is the discussions on the PIB. If you recall, we have spent over 10 years talking about the PIB and eventually it was not passed. Essentially the emphasis of issues around the PIB was on sharing: who gets what portion of the revenue. The intractive differences between the operators and government negotiators had to do with who gets the bigger chunk of the revenue. I have always thought that in the processes we actually missed the mark. Our common enemy is not sharing formula; not whether government take is 76 percent or 82 percent. That is not as relevant as that fact that cost has gone from 1985 level of $2 per barrel to $30 barrels per barrel today.
What we are saying is that the industry, in collaboration with government, should spend more time and energy to look at channels of reducing cost so that the country can be a lot more competitive. We saw it when prices dropped within a certain threshold and the Arab nations had a lot more headroom than we had. They were a lot more competitive. We were struggling against shale producers and deepwater producers in terms of cost whereas the bulk of our production comes from onshore.
Our overall average cost, if you add both the onshore and deepwater, should not be more than $12 per barrel. We shouldn’t be talking about $30 per barrel. So the focus should shift from quarrels over sharing formula to combined and concerted approach to addressing the cost issue.
What are the factors that build cost in the local environment?
There are some of the things that I have severally talked about; things that I have mentioned. I think if you take those headline areas you would probably reduce cost by about 40 percent. The Niger Delta has to be friendlier. The unfriendly nature of the Niger Delta adds probably more than 30 percent of the cost today.
People talk of the cost of security. It is not entirely cost security. The cost of security on per barrels’ basis is something else on its own. When you look at the multiplier effect, you realize the fact that the contractor mobilizing to do work in the Niger Delta will spend three times more than the cost in a more peaceful environment. And the point we are trying to make is that we can’t continue to think that the problem is with the Niger Delta itself because that has been the mindset for the entire industry, thinking that all you need to do is contain the nuisance value of the Niger Delta. And that hasn’t worked!
I have always used the NLNG example. There must be something NLNG is doing, if, for 16 years, they have been operating without disturbances from their host community. There must be something they are doing well. We must come with a structure that will enable communities that host us the feel sufficient sense of ownership of the business we do such that they will rather support us than disturb us. There must be something we must do better than we are doing now, and I think that is what NLNG has done. I don’t think the Bonny community will watch you disturb NLNG. They have too much at stake to allow that.
What cost builders challenge operators playing in the Niger Delta?
That is part of the cost reduction strategies. And I think we must evolve an operating culture that deemphasizes giving handouts to communities. We must develop an operating culture that will make the communities happy to host us and volunteer to work with us because they have some stake. And I don’t think we can drill deep to the bottom of it but on the whole we can take the NLNG example. There must be something they are doing well if they have been delivering cargoes upon cargoes without disturbances from their communities for 16 years.
The second element is the contracting cycle. Fortunately, government has come out on its own to demand a contracting cycle that is not more than six months because the cycle kept worsening until, at a point, it got to over 24 months. In some cases, it gets to some point where everybody forgets about the contracting process and the job never gets done. That has a way of adding to the cost: the uncertainty, so if you are the one bidding you will certainly build that into the premium. If you borrowed money to do that work and you keep waiting from the time you submitted your bid to the time you get the job, all of that add to the cost. And these are just two elements that could be addressed. And if you address these two elements you probably reduce cost by over 40 percent over the next five years.
About funding, I think we can evolve a structure that gives each joint venture sufficient operational and financial independence to be self-funding as a JV. And I am saying that luckily each Joint Venture today is a producing joint venture.
You have to ask yourself: if a minority party is able to fund itself from its revenue, why wouldn’t the majority party be able to? So it is just about evolving that structure that doesn’t require us to repeatedly go round the same issue. We talk of alternative funding; we talk about the SCAA; we talk about MCA. All of these have to do with one party submitting part of his revenue to the other party to fund him. And what that simply means is that the JV, as a unit, can be self-funding.
The structure of the JV and the Joint Operating Agreements (JOA), the way they exist today, allows that self-funding mechanism once you approve your budget for the year. It requires no new legislation; it requires nothing else to be done except that of the minister and the GMD having the courage to allow the JVs have that self-funding autonomy.
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| Avuru and VP, Osibanjo |
Could it be that the government is not aware of this over the years?
If you want me to give you a 30-year history of JV operations -I worked in what was called ventures department which is now NAPIMS back in 1985. And at that time, once the General Manager signed the cash call it went straight to Central Bank for payment. I am not saying anything that is new. That is how it used to be.
It was when the system gradually got elastic and everybody got involved in the JV operations to the point now that cost of operations has to be legislated for. Now you put in your budget and about 75 percent of it is approved after six months.
JV production has gone from 2.2 million barrels to 1.2 million barrels. The only reason we are still doing 2.2 million barrels is that deep water production made up for it. And deep water production is going be in decline in the next five years. The real impact of poor funding of JVs will start showing up in the next five years when as a nation, we will probably not be able to do more than 1.6 million barrels per day. So we must address it today by starting to do things right. It is almost too late to even just arrest the decline.
How would migrating from current cash call model of funding to PSC model address the existing NNPC debt overhang in the industry? What level of engagement do you currently have with government to halt the debt relay in the industry?
Everybody is taking individual approach in getting paid by NNPC. Individual companies are working on their own to the address cash call arrears with NPPC because it is a business thing. Eventually, for example, Chevron negotiated a $1.2 billion revolving facility. So you can see that right now activity is beginning to pick up for Chevron. So each operator is engaging with government and coming up with its own solutions.
But what I am offering is a universal solution that will apply to every JV in a simple manner. I don’t have to borrow on behalf of NNPC with interest, negotiate and all that. I am saying that the JOA between every operator and government has enough production revenue to fund the cost.
If you think that revenues are low, as it is now, it is within the ambit of the operating companies to reduce capital expenditure (capex) for the year. So it is a budgeting issue. So you draw up a budget that is in consonance with your expected revenue so that after funding the operations there is enough to pay royalty and taxes to government. You don’t draw up a budget that is a deficit budget. You draw up a deficit budget and borrow to make up the deficit. If it is a high impact project that is going to yield a lot of revenue, then you borrow to execute it. So the same way you run your operations you draw your budget in a prudent manner. There revenues coming out of your operations you apply funding that cost. It is very simple and I am not saying anything that is new. It is just that over the past 30 years we have drifted away such that every imaginable person is now involved in the process of appropriating money for the cost of operations. We lost it all.
Right now government is paying a lot more per dollar for their own money, far more than what they would have done if they had done what I am talking about. Whether you are talking about SSA of alternative funding, your partner is borrowing money to fund your equity at an interest rate. That is what it is.
How do you balance the challenge of government debt and expectations of your shareholders?
What we have up to this time is a problem that piled up. We are looking forward to what will provide the solution not just funding of future projects, but also to clear the backlogs. What it means is that if my partner gives a little bit more of his own equity crude towards meeting the cost, then he has just little more to clear the backlog over time.
To tell you the truth, from what we are owed today, if I know for certain that there is a certain monthly or quarterly payment, it will be defrayed over the next three or four years. It wouldn’t matter to me. I can book it as future revenue. It is the uncertainty that makes it an issue. So what I am proposing can clear the backlog over a period of time.
With the planned Zero JV funding by next year, what will be the role of government in the JVs?
NNPC is a son of somebody. It is an investing entity. It is classified under the MDAs. So NNPC as a partner in several JVs should be able to fund government’s equity in the JVs. So when there is zero funding, it doesn’t mean that NNPC will not meet its funding obligations to JVs. It means that you should not expect any annual appropriation from government to go and run your business. You should figure out how you are going to provide funding for your business and government will wait for you to pay what is due to them which are royalty and profit. And today, it is the same thing. Government doesn’t get more that that today.
If government gets $45 billion from NNPC as gross revenue, and gives NNPC $10 billion to go and run its business even after delaying us for 10 months before that is approved, its net revenue is $35 billion. That same $35 billion is what NNPC will pay government as tax, royalty and profit without going through all these intricacies of legislative interference. So, financial independence does not reduce government’s revenue by one dollar. In fact, it will enhance revenue to government because you will remove the cost of money that is appearing today.
Let me say this. We try not to beat our chest on our gas business at Seplat. You know that the entire gas gathering project that is funded by the Chinese in Ghana carry a cost profile of about $1.6 billion. What is the volume of gas they deliver from that project? Only 120 million standard cubic feet a day (120 Mscf/d). We are doing 300 Mscf/d. We only spent half a billion dollars to go from 50 Mscf/d to 300 Mscf/d.
You were once quoted as proposing meters for all oil wells in the country. What makes that necessary?
I don’t want to be accused of proposing a scheme that would be far too expensive. Providing meters for all the oil well heads in the country will be far too expensive. What I have always said is that every producer delivering crude oil into an export pipeline must meter what he is delivering. Wherever you meet an export pipeline, you must install a mechanism that measures the gross volume you produced and the net crude oil you produced after removing water.
That way, when you sum up the total input from all producers in any particular pipeline and you match that against the meter at the end at the export terminal, if there is any difference, then you can begin to say where the difference is coming from: whether it is theft, shrinkage or other factors. Until that is done, all theft factors we have been quoting in this country are arbitrary.
That is the proper thing to do. You won’t pay your electricity bill unless you meter what you are consuming. You can’t have a situation where different flow stations are delivering crude with different BS&W values. If you produce 10,000 barrels and you BS&W is 40 percent, this really 6000 barrels that is oil, 4000 barrels is water. If that BS&W goes up from 40 to 45 percent, your crude oil is no longer 6000 barrels, it comes down to 5,500 barrels. So you can’t have different fields and different flow stations delivering into the export pipeline and you will be assuming different BS&W and different volumes. You only fiscalize at the terminal; physically see what is there. And you tell me that you apply the difference to everybody as theft. It cannot be the case.
You must measure accurately what is water and what is crude that is entering the pipeline and what is entering the terminal.
On what we are doing to whether the storm, it has to do with your planning and execution capability. When you run an operation and face headwinds, you are going to take a step back and rearrange your operations to face the headwind. That is just the way.
So we came in at the end of 2014 and suddenly saw the crash. It took us two months to reverse our 2015 work programme that had already been approved and cut capex by 39 percent. We didn’t, and up till now, we did not let any staff go. We checked and when we looked at the cost saving by letting even 20 percent of the staff go that is not where the big headache is. So we didn’t cut staff. We went and looked at other areas where we could cut cost. We are not a 100-year-old company like Shell that has a large team of staff across the world. And if activity picks up they can always redeploy staff.
We are still in the growth mode. If you start throwing your staff away when you encounter a headwind, when you will need them most you may find that they are not there to be picked up. So we didn’t take that risk. We didn’t touch any staff. We looked at all the areas where we could cut cost to match the current realities and we realised that our gas production was a good hedge. That also helped.
Going forward, I am saying that the company we are building is the one that would be able to whether what storm will come next.
How are you balancing the local content requirement in the industry and cost effectiveness? How also are coping with the new foreign exchange realities in the Nigerian economy?
Really, exchange rate has very little effect in what we do in upstream oil and gas industry because our primary revenue is in dollars, except for those of us who produce gas and earn Naira. Even though the pricing of gas is in dollars’ customers physically pay Naira. So we are the only ones that have to worry about foreign exchange. Every other person in upstream business, no matter how small or big, the primary revenue is in dollars. So really, foreign exchange shouldn’t be an issue. A typical upstream oil and gas company typically goes to market to buy Naira to run its business in Naira. So exchange rate is not an issue in the upstream petroleum industry operations.
Again, if you borrowed in dollars it also shouldn’t be an issue. However, if you borrowed in dollars and earn Naira, as in the gas business, then you might start having some problems with the exchange rate. You have to get dollars at the official exchange rate if you borrowed in dollars and that is where you will encounter issues.
On the second point, my attitude to Nigerian Content has always been that, even among Nigerian companies, is that we give jobs to those who demonstrate competence to deliver on the job, and there is quite a bunch of them. So, we are not in that regime of pretense because I know how it happens in the industry where some big companies, to obey the local content bill, will give a job to a local company and still award the job somewhere else to get the real result.
For us, we work with a lot of Nigerian companies, we love to patronize them. We are not forced to do so. We give them a chance to tender and prove their worth; and they get the jobs and do the jobs. And if they can’t do it then next time they won’t get a job from us. So, that has always been our attitude. It is not just patronage for the sake of it. We find out those who can do the job and give them the job.
How do you cope with political risks of doing business in Nigeria, especially with unstable fiscal regimes that weigh on borrowing rates?
Political risks cut across Africa. And for us in Nigeria, it depends on the regime and the country rating and all that. When the business was booming it wasn’t that bad. But generally, dollar rates are 9-11 percent. It is 18-22 percent if you borrow Naira. Even these figures are far too high; but that is the reality. That is what we have here in Nigeria.
Even if you are borrowing from an international bank into Nigeria, it is probably one or two points lower than what Nigerian banks can give the same dollars, again, because of the political risks you talk about. For Naira it is a lot worse. Unless it is a short term loan, if you are taking a long term loan with that kind of interest rate you can’t survive.
Your company has put a lot of funds and emphasis on gas. How is the outlook in terms of returns and growth opportunities from that end?
Let me say this. We try not to beat our chest on our gas business at Seplat. You know that the entire gas gathering project that is funded by the Chinese in Ghana carry a cost profile of about $1.6 billion. What is the volume of gas they deliver from that project? Only 120 million standard cubic feet a day (120 Mscf/d). We are doing 300 Mscf/d. We only spent half a billion dollars to go from 50 Mscf/d to 300 Mscf/d.
What was the magic?
We are prudent. We don’t beat our chest about it. So we are doing 300 Mscf/d today and we are not making any noise about it. We built a 150 Mscf/d and commissioned it in 18 months. That same plant is going to go up to 275 Mscf/d at the end of this year. No other company can show you a newly built processing facility in the past three years.
We achieved all these at cost we can afford. I have always told people that until Dangote started manufacturing cement, we thought only a few multinationals can manufacture cement. You will soon find out that until a couple of more serious minded Nigerian companies come to the business, you will see a lot of cost efficiency and delivering projects in time and budget.
Every time I had the opportunity in the past three years to talk about domestic energy security; I have emphasized that only indigenous companies can deliver it. It is not just about shipping out LNG and remitting $4.0 billion a year when there is no electricity. It won’t take us anywhere. We must deliver the energy that will fire our economy. That is our job. It won’t be done for you by any foreign company.
modular refinery should ordinarily mean that you design a refinery in such a way that you can put in a unit, and if the need arises you can increase capacity by adding further units. So, you can design a 150, 000 barrels per day refinery in three modules of 50,000 barrels. What it means is that the ground, the tanks, power supply and all the support facilities are designed to take three modules. But you can start with one, then the additional cost of infrastructure and other two modules will be a lot smaller. It happens only on need basis. The way everybody keeps talking about modular refinery makes it look like modular refining makes it easier to building more refineries.
Any update in your partnership with Vitol for a private refinery? Also what strategies have you adopted in your community relations to achieve smooth operations?
First, I think that the industry now recognizes that the Seplat model of community engagement is working and people should ask us what we are doing.
Again, we are not doing anything supernatural. We simply believe that there must be a way to operate where you recognize the dignity of the members of the community that host you. Too many times people go into the communities thinking. ‘What do we do to pay them off? How do we buy their nuisance provided we can operate?’
So if you go to a community and you are doing business and you are making money; if you open your mind you will find out what those ordinary people in the community can do for you: what services they can render you, services that are valuable to you. It is not tokenism. And just by taking those services and paying them, you are expanding the economy of these communities. You are not doing them a favour. If they realize that a good part of their livelihood depends on the business you do, they are unlikely to destroy your facilities. So in our own small way, that has been our model from day one.
Everyone in Seplat knows that we are not going to the communities to give them tokens. We are going in there believing that there are things they can do for us. There are staff who can work for you. When we hire staff from the communities, it is not just because you are from the communities; it goes through the same process of recruitment for those who are qualified. So when they come in they see themselves not as community staff but staff of Seplat.
There are contractors from there who work for us. We give them a chance and they perfrom. So if you put all of that together you will find out that we are very close in communication and relationship with them. We nip whatever that would have been a problem in the bud, and it works! However, I try not to advertise it too much because it is still work in progress. We keep improving on it. We keep making sure that people don’t get lethargic. We need to make sure that the communities themselves don’t take these little things for granted and make unreasonable requests.
Overall, I believe that human beings ordinarily, when given an opportunity, have something to offer. And if you believe that in your relationship with your host community I think it will help.
On the refinery question, what has happened is that NNPC asked for expression of interest for anybody who wants to co-locate a refinery. The refinery business is not our core business but internally we considered that if there is an opportunity in a manner that we think aligns with our operating principles to run a refinery in the Western Niger Delta we will be interested. We have a production in the west; there a refinery that will be located in the west can fit in. You all know that we have a pipeline to the refinery.
If the Warri Refinery belonged to us, we would not even export our crude. We can deliver all our production to Warri Refinery if we wanted. To that extent we took an interest in possibly being considered for that co-location and teamed up with Vitol to put in an application. We are just waiting for the result. If we are pre-qualified, we move forward; if we are not we continue with our core business of production of oil and gas. We are going into refinery to the extent that it complements our upstream business.
What is your take on the modular refinery model?
When you people talk about modular refinery what do you think is the meaning? See, we built our gas plant in a modular
