Independents’ day

Nigeria

Austin Avuru, CEO of independent Nigerian exploration and production firm Seplat Petroleum Development Company (Seplat), talks to TOGY about plans for further development and expansion into other sectors in the oil and gas value chain in spite of the low oil price environment.

How did Seplat perform in 2015, which was a difficult year for the oil and gas industry?
It was a challenging year for the industry, but I’m happy to say that we were able to again grow reserves and production at our core producing blocks and significantly expanded our inventory of growth opportunities with the addition of two new blocks.

What are your production numbers?
Our 2015 full year average working interest production of 43,372 boepd was 41% higher than in 2014 and ahead of our target guidance. Within this, liquids production was up 20% year-on-year and gas production up 119% year-on-year. This comes on the back of an incredibly active phase of development and drilling activity in prior years. In 2014 and 2015 we drilled 31 wells making us one of the most, if not the most, active driller in Nigeria over that period. We also undertook several facility and engineering projects above the ground, including the Phase I expansion of the Oben gas processing facility and the construction of additional liquids storage capacity at our fields. All of this enabled us to enter 2016 with net production in excess of 50,000 boepd. However, although we have the wellhead and infrastructure capacity to produce consistently at these levels, at present probably the biggest influencing factor on production rate in any given period is the level of downtime at third-party operated infrastructure that we and many other operators presently rely on.

How can security improvements continue to be made?
While security in itself is a key factor, we are also heavily focused and committed to our engagement with the local communities. The industry itself has to expand its footprint. It cannot just drill, produce and export crude oil. It has to expand its footprint to provide more employment and entrepreneurship opportunities for local stakeholders. Ultimately, if the locals are engaged and understand the shared value opportunity from the development of the oil and gas industry, you have much fewer problems in the area. Militarising the area will not resolve the problem alone. It can actually cause more problems.

One of the ways you can engage people and build industry is through developing your gas-to-power business. Is that part of your overall plan and broader view?
Our business strategy has focused on the development of brownfield oil assets and gas projects to increase supply to the domestic market. This expansion has enabled us to meet our commitment to develop host communities through capacity building, business opportunities and recruitment for employment. As an operator, creating positive partnerships has been central to the success of the business as it has allowed Seplat to invest in, develop and commercialise its assets with critical community support. In 2010, we entered into a global memorandum of understanding with the local communities that host our operations to provide a framework in which all parties can work together to support impactful social investment. Under this framework, representatives from each host community co-ordinate the implementation of the social investment programmes. The selection process for these programmes is designed to prioritise local development objectives whilst remaining aligned to Seplat’s business objectives.
In the oil patch, you can see we develop brownfield assets. We take assets, work them up, put in more resources as well as human capital and bump up production. That is what we did with our western assets post acquisition, going from around 14,000 bopd to a daily peak of around 84,000 bopd gross oil production.
We aren’t planning to enter the gas export business. That was never part of our business. We went into the gas business to fill a gap. We refurbished plants that were barely functioning, such as a plant processing 90 mcf [2.56 mcm] per day in Oben and added a new plant to process 150 mcf [4.25 mcm] per day. By the end of the year, we will have a daily processing capacity in excess of about 500 mcf [14.2 mcm] per day, purely for the domestic market.

What are your plans for OML 53 and 55?
We acquired the assets about two years ago. All the processes leading up to the asset acquisition were completed in February 2015, although we were not able to physically take possession of and work the assets until January 29, when the Supreme Court finally cleared the way for us to do so. We are now working with our partners to develop the work programme for the co-ordinated development of the substantial gas reserves at OML 53 and also on the adjacent OML 21.
Furthermore, there are quick-win opportunities on the oil side that we can go after to boost production in the very near term. OML 53 fits neatly within our strategy of securing, commercialising and monetising natural gas in the Niger Delta to supply the rapidly growing domestic market. To scale our gas business up and commit to more long-term gas sales agreements we need to ensure we have the reserves in the ground to match. To this end, the acquisition of an interest in OML 53, with its gross remaining 2P gas reserves of 1.33 tcf [37.7 bcm], provides us with exactly this and places Seplat at the helm of what will be one of Nigeria’s largest greenfield gas development projects.

Have you been looking into expanding into other areas of the value chain?
At present our expansion plans are very much focused on the development of the domestic gas business, which has seen us ramp-up our midstream gas processing capabilities. 2015 was a transformational year for our gas business as we commissioned the new Oben gas processing facility, allowing us to more than double gas supply to the domestic market, which means we now supply enough gas to underpin around one-third of current power generation in Nigeria. We think the opportunity represented by Nigeria’s domestic gas market is huge.
Nigeria has massive proven gas reserves but significantly falls behind its peers in electricity production per capita, with almost 50% of the population having no access to electricity. This not only has a debilitating effect on the social development of the country but also results in considerable lost economic growth.
The transition from a state monopoly in power generation to a private sector-led power industry has driven a significant increase in the domestic gas price over the past five years. Alongside this, the government has set ambitious targets for increasing power generating capacity with gas as the primary driver. For example, the IMF forecasts that by 2020 Nigeria has the potential to deliver 11,000 MW [11 GW] of gas-fired power generation, which in turn would require at least an additional 2 bcf per day [56.6 mcm] of gas production over and above 2015 levels.
Whether or not targets can be met, it is clear that there is going to be a significant increase in gas demand from the domestic market in the coming years and we at Seplat are in position to play a leading role in meeting this demand.

What globally competitive fiscal incentives can be provided by Nigeria in the PIB to attract investment?
Business has been stagnant for the past five years, but not so much because of the lack of a globally competitive fiscal regime. If you put forward a PIB that proposes to change the fiscal regime, everyone is going to step back and see what it looks like before they make investment decisions.
For the past five or six years, we have been waiting for the PIB and have not seen it. Investment has been kept away by the lack of clarity and anxiety surrounding this bill. You will recall that the fiscal regime we have had has been there since 1959; that is how old the PPT Act is.
The Petroleum Act has been in place since 1969, with some adjustments over time. When we went into deepwater back in 1990, we came up with PSAs specific to deepwater to attract investors. Way back in 1986 and again in 1991, we adjusted the fiscal regime to meet the specific needs of the time. The fiscal regime has always had that flexibility.
I think the point of putting all of them into one piece of legislation and not committing to that legislation is really what has confused investors. We need to come up with something and put that anxiety to rest.

Do you see any possibility for the Nigerian National Petroleum Company (NNPC) to pay back their joint venture-related arrears in the short to medium term?
They will eventually. Different JVs are coming up with different solutions. The Chevron JV seems to have solved its problem by securing USD 1.2 billion in funding. Part of this will clear some of the arrears, and the rest will fund future projects to generate new oil by bringing back rigs and moving back to the fields.
I think the JVs will come up with different funding options as opposed to just asking the NNPC to write a cheque. If you have projects that can deliver future value and, therefore, additional cash, I think you can bank on that to clear the arrears and provide funding going forward.
Some level of debt will have to come in to clear the arrears and fund projects going forward, and it proceeds from there. Ultimately, NNPC will pay, but they will have to sit down on a case-by-case basis and design solutions. If you do not remove that funding difficulty, we just cannot move forward.

Indigenous production has grown exponentially. What do you anticipate the trajectory of expansion will be in the coming years?
Before the low oil prices, my projection for indigenous production had always been 20-25% of total production, which would be in the range of 500,000 barrels of oil per day. It is more difficult to forecast at the moment, however, as the low oil price may create fluctuations in this trend.

How can the government help to stimulate the growth of the indigenous upstream sector?
This cannot be done by legislation or even by asking multinationals to help indigenous companies to grow. I think it will have to be a commercial decision. If it is not, it will not happen effectively.
Multinational companies can profitably reduce their footprint by cashing out and the indigenous companies can move to those areas to complement them. Then it will work. That is what has been happening since 2010.
Multinationals look at their portfolios and determine that they can reduce their footprint in a commercial manner by cashing out, a decision that makes sense for both sides. There comes a time when the independents move in to mop up the rest of the oil. That is how it is in the USA today. The only difference in Nigeria is that instead of foreign independents filling that gap, indigenous independents are filling this gap.

Exploration has been going down for a long time. Do low oil prices present any opportunities for exploration for companies with the capital to do so?
Exploration is always the first casualty in a situation like this. Even though costs have reduced in line with the oil price, at the moment everyone is racing for survival, which means there is minimal capital expenditure on exploration. We are going to see the impact in four years’ time. You will not find capacity in the market to increase production, because that production should have come from current exploration activities. That is a problem. The low oil price is also likely to throw up many opportunities to grow through acquisition and this may be where companies with spare capital will look before they start to focus on exploration again.

Do you have any plans for further expansion of your business?
Our business is development and production of natural gas and crude oil. On good days, oil can make up 70% of your total revenue. On bad days, when that oil revenue dips, what used to be 30% of your revenue from gas sales can become a larger proportion and in a way cushions the fall. Our gas business has therefore, to some extent, provided an in-built hedge against oil price weakness.
We continued to invest in the gas business through 2015, and this year our major focus is the Phase 2 expansion of the Oben gas processing facility. This will entail the installation of three more processing modules handling 75 mcf [2.12 mcm] per day, adding a further 225 mcf [6.37 mcm] per day gross capacity and taking our overall capacity to a minimum of 525 mcf [14.9 mcm] per day in 2017. The additional processing modules, together with booster compression stations, have been ordered, and delivery is anticipated towards the later parts of 2016 for installation and commissioning by year-end or in early 2017. Beyond this, OML 53 is set to be a core block that we will be able to underpin future growth.
Let me explain the numerous ways that we can benefit through greater diversification. Firstly, asset diversification. Having started out with a concentrated portfolio comprising only OMLs 4, 38 and 41 we have grown our portfolio to six blocks to date, five of which we operate, and all of which are in production, offering material future development upside opportunities to further grow and diversify output.
Not only this, but an enlarged portfolio allows us to more rigorously benchmark and high-grade the inventory of investment opportunities available to us, thereby improving decision making and how we allocate our capital.
Secondly, over-reliance on a particular third-party infrastructure system has been a long-standing issue for many producers onshore Nigeria in particular and we have been no different with a dependency on the Trans Forcados System. Portfolio expansion can help dilute such a reliance, as can the development of alternative export options.
Thirdly, exposure to a single commodity can leave the business overly susceptible to a prolonged downturn in its price. Through growing our domestic gas business, we are able to increasingly generate a revenue stream that is de-linked from oil price and achieve revenue continuity in the event of disruptions to third-party oil export infrastructure.
Fourthly, diversification into the offshore is something we have not yet built into the business but hold ambition to. Whilst we have a strong track record operating onshore the Niger Delta we possess the skills and experience to transpose this into the shallow-water offshore areas of the Niger Delta where, in general, high levels of uptime can be achieved with direct access to market and minimal losses, all of which would provide a high degree of complementarity to our onshore operations.

To what do you attribute your firm’s recent success?
Within three months of starting up the business in 2010, we had formulated a five-year plan that we have stuck to. The plan was to deliver rapid, organic growth plus acquisitions to plug our requirements for reserves. You do not just grow the production; you need to replace the reserves by exploration or by acquisition, or both. The factors that have contributed to our success were rapid production growth, reserves replacement and growing our gas business.
At the end of 2015 our working interest 2P reserves stood at 480 million boe, comprising 209 million barrels of oil and condensate and 1.57 tcf [44.5 bcm] of natural gas. This represents an increase in overall 2P reserves of 71% year-on-year and since 2010 a compound annual growth rate of 24% for oil and 31% for gas.
The lucky part of it was that we had a three-year period to grow before the low oil prices. I wish it had been two more years so we would have really been in a position to smile, even with the low oil price. However, we are in a strong position and will emerge from this period of low oil prices as one of the survivors.
With a consensus view that lower oil prices could persist for at least the near term, we remain focused on what is in our control and steps we can take to maximise profitability. Despite these headwinds we remained profitable in 2015 and did not book any material impairment charges, underlining the quality of our portfolio and our resilience to low oil prices.
We have generally maintained strong production and grown output, which has been built on the investment made during the period of high oil prices, and this also helps to offset lower oil prices. Our growing gas business also helps to cushion us from the low oil price. Otherwise, we are focused on protecting the business by driving further cost reductions, optimising operations and strengthening the balance sheet in preparation for opportunities that will inevitably follow this current downturn.

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