In Nigeria, explore to attract

Nigeria

Bank-Anthony Okoroafor, managing director of CB Geophysical Solutions and Vhelbherg, talks to The Energy Year about why Nigeria must invest in exploration and how local private entities are creating a more viable refining scene. CB Geophysical Solutions is engaged in seismic acquisition, processing and interpretation services, while Vhelbherg provides oilfield early production facility services.

How important is it for Nigeria to invest in exploration?
The nature of the industry is changing and the volume of work is shrinking. Both NOCs and IOCs are now focusing more on production but they are not putting money into exploration. This is a fundamental problem because a country’s reserves could be seen as its balance sheet: They show its attractiveness. If you aren’t spending money to explore, you aren’t increasing your reserve pool.
The government ought to roll out a competitive exploration budget. NOCs and IOCs could simply take the easy and cheaper route and continue producing, but what will happen five or 10 years down the road if we are not replacing our reserves? Nigeria will become a less attractive investment destination and business will go to nations with more reserve volumes.

How are local private entities paving the way for a more viable refining landscape?
Instead of being an exporter of crude oil, we can use that crude oil, refine it and use it as an agent of economic transformation. The aggregate value from a barrel of crude oil is more than USD 2,000 if processed here instead of just selling the raw crude oil at, say, USD 40 per barrel. The value of refined oil is not only huge but also diverse, with jet fuel, diesel, gasoline and other derivative products as in ink, crayons, dishwashing liquid, deodorants, eyeglasses, heating oil, heavy fuel oil and liquefied petroleum gases. From one barrel of crude oil, you can get 19 gallons of gasoline, 11 gallons of diesel, four gallons of jet fuel and seven gallons of other products. Therefore, there is market potential and demand not only in Nigeria but in Africa as a whole.
The Dangote Refinery is one big step in this direction. However, the state-owned refineries we have in this country should be transferred to the private sector so they can be efficiently run as a business. With utilisation rates at below 20% the government is investing billions to keep them alive. This is outrageous. By contrast, we are witnessing a liberalisation of the downstream scenario. This will open up the doors for private-sector participation and we already see this through the proliferation of modular refineries across the country.
Niger Delta Petroleum pioneered the modular refinery model in Nigeria with their 1,000-bpd modular refinery which as of today has been upgraded to 11,000 bpd. Moreover, there is Waltersmith, which, with a small production, has built a 5,000-bpd refinery. Like them, many more such players will come as it makes economic sense. Local players are slowly but steadily creating the landscape for economic transformation.

What changes are required to incentivise gas development across the country?
To develop the required infrastructure requires the right fiscal conditions and market dynamics: on gas pricing we need a migration to achieve a willing seller and a willing buyer, and here, the PIB [Petroleum Industry Bill] should promote a very attractive fiscal environment for dry gas so that we can get investors into this space. To hit 10 bcf [283.2 mcm] per day requires several billions of dollars and the country, as of today, cannot afford it. This means that a proper supply-demand environment must be established. With that in place, investors will be eager to inject the required capital.
Also, the exchange rate issues arising from investing in dollars and being paid in naira at CBN’s rate creates negative FX exposures. This means that one is paid at CBN’s rate but to repay one’s loans or investors, one has to go to the parallel or black market to buy dollars. The country needs to stop operating this multiple exchange rate system. Another key area is sanctity of agreements. We need sanctity of agreements from government offtakers. They take your gas but payment becomes an issue.
So, what we need in Nigeria is a change in our gas-related fiscal conditions to incentivise the development of these assets. The future is gas but it will require heavy investment, friendly fiscal conditions and sanctity of agreements.

What financial hurdles are associated with the development of marginal fields?
The 56 marginal fields awarded will trigger a lot of activities in the sector. Nevertheless, fears remain around the ability of companies to get funding. Low and fluctuating oil prices, added to the numerous uncertainties we are living with, are major deterrents to investment.
Also, most of the fields have not yet entered a production stage. It is easier to get funding when you buy an already producing asset as financiers can rely on real production rates and projected cashflows. There is obviously more risk associated with non-producing marginal fields so financiers want to have a degree of certainty that you will actually produce oil.
In any case, these marginal fields can bring about immense opportunities as there are reserves nobody has properly explored. So, someone may get a field and struggle to pay for it, but after two or three years they might have a huge ROI.

What exploration work has CBGS recently carried out in Nigeria?
We assist our clients to find and produce hydrocarbons in a cost-effective manner. Before a company decides to drill, it needs to check whether there is oil and the depth it is found at. If one does not do that correctly, one may spend millions of dollars and end up with a dry well. Our business is built on state-of-the-art technology and good partnerships, providing 2D-, 3D- and 4D-seismic acquisition and processing. We and our partners have carried out several projects for IOCs and independents in Nigeria. We are looking at new opportunities for 2021 but the problem is that not much money is being spent on exploration.

What position and clients has your other company, Vhelbherg, harnessed in the market?
Vhelbherg’s raison d’être is to assist clients that do not have the capital to produce oil. We design, build and operate early production facilities. So that a company can avoid spending millions to build a flow station, we commit to installing and operating it. The cost of such a station exceeds millions of dollars, which is a major deterrent for a company to get to first oil.
Once we build and install the facilities, companies only have to hook up their line. We produce for them and treat the gas and the water. In turn, the company will pay a small amount per day to produce. For example, we have built several facilities of 10,000 bopd, 25,000 bopd and 22,000 bopd for an array of clients in Nigeria. We have the capacity to deploy more.

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