Africapitalism in actionJune 2, 2021
Samuel Nwanze, CFO of Heirs Oil & Gas, talks to The Energy Year about the reasons behind the company’s acquisition of OML 17 and how it plans to bring the asset’s production up to its full potential. A joint venture of Heirs Holdings and Transcorp, Heirs Oil & Gas is a Nigerian-owned integrated energy company that operates OML 17 with a 45% stake.
What were the reasons behind your USD 1.1-billion acquisition of OML 17 in January 2021?
From its inception, Heirs Holdings has had a very clear vision: to ensure Africans have access to reliable power and that resource value creation occurs in Africa. The acquisition of OML 17 is a very important step in creating Africa’s first truly integrated energy company – one that will use African natural resources to power Africa and create African-based value chains.
Therefore, when identifying the correct asset to target, we wanted one that was rich in oil, which will drive short- to medium-term cashflow, but also provide us with access to the associated gas resources. We wanted an asset that will drive our strategic vision, so we can help meet Nigeria’s energy demand. OML 17 ticked all the boxes.
OML 17 has other advantages: it is onshore, which is less costly to manage; and it’s easier to run from a technical standpoint. We have access to a terrific Nigerian talent pool, bringing considerable experience of managing onshore assets, typically from IOCs that have trained and developed local talent, and this gives us a deep understanding of the terrain.
Secondly, the block is in the Niger Delta, a region we as investors consider our home. We have a strong affinity with the local communities and will bring a demonstrably different approach to community engagement.
Thirdly, this is an asset with huge potential, both subsurface and surface. We see considerable upsides. The subsurface holds 1.2 billion barrels of oil and 2.2 tcf [62.3 bcm] of gas, while the subsurface is home to an array of different facilities – six flow stations, two associated gas gathering facilities, a gas plant and an additional gas plant under construction.
OML 17 is very attractive, but critically it is ideal for our broader integrated energy strategy.
In November 2020, Transcorp announced the USD 300-million acquisition of Afam Power Plc and Afam Three Fast Power Limited. The partnership with Transcorp is significant. It is Nigeria’s largest listed conglomerate, with a public shareholder base of about 290,000 shareholders, and is one of the largest power producers in Nigeria, with 2,000 MW of installed capacity, through ownership of Transcorp Power Plant. OML 17 fits directly into our group strategy. We want the gas we produce to feed our power plants, to deliver robust power to schools, hospitals, businesses and consumers.
As a group, we are in this for the long term; this is the basis of our investment philosophy. At Heirs Holdings, we make investments that will bring long-lasting returns to Africa and contribute to the continent’s sustainable development. We are guided by the economic philosophy of Africapitalism. The acquisition of OML 17 is Africapitalism in action, as a foreign-held asset is transferred to the stewardship of a truly indigenous business, board and management team, which will work with communities for the common good.
What means and methods do you plan to implement to reach the asset’s true potential?
The block has produced 100,000 bopd in the past and has an installed capacity to provide up to 270,000 bopd. Importantly, it has a brand-new gas processing plant that can process up to 80 mcf [2.27 mcm]. Our focus now is to nurture its true potential.
Our plan has three phases. The first step for us is to pursue short-term oil and gas opportunities. This asset needs small pockets of capital allocation to unlock more barrels. From here, we have identified a list of short-term oil opportunities which we are currently validating – we call them “rigless interventions.” Some of these issues are basic, such as the resolution of community disputes blocking production from a certain well, the change of wellheads that can release say 2,000 bopd or the replacement of a flowline that would result in additional barrels. These approaches are simple, requiring low capex.
After approximately 18 months, the second phase will bring in workover rigs to do re-entry for existing wells, many of which need intervention. We can do some infield drilling using modern technology, as well as horizontal drilling. We plan to bring in about two rigs, that will continuously drill back-to-back. This will help us to achieve a second wave of production growth.
The third phase includes focusing on exploration opportunities. This asset not only has 1.2 billion barrels of 2P reserves, it also has an additional 1.1 billion barrels of exploration. We intend to focus on a lot of subsurface geological and geophysical analysis to expand our resource base, as we grow our production.
Finally, building excellent community relations is at the heart of the Heirs Oil & Gas strategy. As an indigenous business, chaired by a Niger Delta indigene, which already impacts people’s lives through the Tony Elumelu Foundation – our partner in philanthropy – we understand the importance of sustainable development at the grassroots level. Already, the Tony Elumelu Foundation has empowered nearly 900 young entrepreneurs in the Niger Delta region, with non-refundable seed funding for their business, mentorship and specialised business training, boosting the local economy and creating prosperity for all.
We believe that when you empower people to generate a means of living for themselves, you address the issue of poverty, which is inextricably linked to insecurity.
Our leadership team plays a critical role in delivering our business objectives. As mentioned, we have assembled a highly competent management team and board, with members who have regional and international experience in production, exploration and value creation in the resources sector, to lead this business. The expertise and experience of our team of professionals will directly contribute to capacity building and knowledge sharing to help develop the country’s local talent pool.
How has having a long-term vision positioned the company for opportunities in the post-Covid era?
Heirs Holdings is a long-term investor. Even though the market suffers from shorter-term volatility, we base our investment decisions on the fundamentals. Despite these unprecedented times, the market will bounce back. It might take a different form, which is what we are now witnessing with the energy transition.
We must also consider that the demand for energy will remain. The global rig count is increasing, and even within Nigeria, we are already seeing a lot more activity taking place in oil and gas.
In terms of investor sentiment, long-term investors like ourselves have identified very good opportunities when the market was low, knowing it would eventually pick up. Crises are cyclical and one has to keep an eye open for potential opportunities.
What holistic approach is the government taking to reduce the cost of production?
The Nigerian government is doing the right thing in terms of becoming more efficient when producing oil. Some of the regulators, namely DPR [Department of Petroleum Resources] and NNPC, are taking a very active approach to achieve those goals. Apart from sensitising the operators and the markets, they are getting involved in analysing what our major cost drivers are and looking at ways of bringing down those costs, even by taking collective action within the industry.
A good example are the tariffs for crude transportation. One of the largest costs for most operators is crude transportation and handling tariffs. As a result, DPR and NNPC upstream investment unit NAPIMS are engaging with crude transportation providers, pipeline operators and terminal operators to seek ways of running more efficiently and thus bringing down production costs.
The government is also trying to help operators think of better ways to ensure that we produce at optimum value. For instance, NAPIMS presented us their view on how we could operate assets more efficiently, which shows the government’s eagerness to optimise industry performance.
Furthermore, one of the things that will need to be addressed and fixed will be the issue of losses along transportation lines, improvements in terms of what we pump into the pipelines themselves, reduction of water and introduction of LACT units or autosamplers. These will help ensure that we run and operate more efficiently. Lastly, the Nigerian Upstream Cost Optimisation Programme is a clear example of this holistic drive.
What is the rationale behind Heirs Holding’s drive to form an integrated energy company?
One of the driving pillars of our group is to address the energy gap that is prevalent on the continent. For Africa to develop and meet its full potential, energy is critical. No country in the world has been able to economically advance and prosper without addressing the energy challenge. If you are unable to meet energy demands, you will be unable to realise economic growth.
Consequently, we took clear steps in this direction by acquiring the Transcorp Ughelli power plant, where we enhanced production from 160 MW to 500 MW. Due to the constrained availability of gas feedstock, we could not expand more, but we also realised that to implement large-scale power projects, we needed to control upstream resources. Only then could we fully address the energy gap in our country and the wider continent. From there we started to identify possible upstream resources we could use to build an integrated energy company. This is how the journey with OML 17 started.
Beyond this, we are also looking into refineries and petrochemicals to create supply that would help engender an industrialised economy. Fertilisers are also on our radar as we are looking to help ensure that we have sufficient fertilising capacity in Nigeria to grow our agricultural base.
How much emphasis will you give to gas monetisation, and how will gas drive the company in the future?
OML 17 was an attractive asset because of its gas resource base, as well as the existing gas processing capacity, which exceeds 200 mcf [5.66 mcm]. While some old facilities need work, there are others like a brand-new gas processing plant with a capacity of 80 mcf [2.27 mcm] that we aim to commission at the end of 2021.
Our gas strategy will follow our immediate focus, which is to get crude oil flowing. Parallel to this, there is plenty of associated gas, which means that as we increase oil production, we will be increasing gas output.
We are also looking at a non-associated gas strategy to feed the gas processing capabilities and facilities that we have today. Gas is going to be a major part of our plans in the medium term, playing a huge role in industrialising the nation and driving economic growth. We want to be key contributors to this.
In terms of financial arrangements, how complex has this deal turned out to be?
The financing structure we have is uniquely complex, designed to target the different pools of capital in such a way that we maintain the stability of the entire project. Of course, we faced challenges, mainly because when we started to raise capital, there was no liquidity in the local market for that kind of deal. Consequently, we had to pursue external funding.
That being said, the transaction illustrates Heirs Holdings’ ability to bring together a syndicate of leading global and African investors, demonstrating our position as the leading African investor in Africa and a role model for others. We have worked with a sophisticated group of international financiers to create an effective and efficient financing structure.
Raising capital for oil and gas in these times is not easy. Also, raising money for onshore oil and gas in Nigeria is even more difficult, but we are recognised as a good partner, with a reputation for strong governance and execution.
The deal demonstrates renewed confidence in the Nigerian and broader African economy when many were doubting our continent’s future. I am very proud that we are the catalyst for the transaction. It is a structure that shows that Nigeria is open for business, and there are great opportunities.
Being able to structure the financing in a way that we could get the lenders to buy into our projections was fundamental. The international community sees this deal as more than an oil and gas story. They see it as an energy story and that is why it has drawn so much interest. We look forward to keeping you updated.