‘Our Joint Ventures need sufficient operational, financial independence to be self-financing.’ – Austin Avuru
Mr. Austin Avuru, co-founder of Seplat, was appointed Chief Executive Officer on 1 May 2010. He obtained a Geology degree from the University of Nigeria, Nsukka in 1980 and a post-graduate diploma in Petroleum Engineering from the University of Ibadan, Nigeria in 1992.
Prior to joining Seplat, Mr. Avuru spent twelve years at NNPC beginning in 1980, where he held various positions including wellsite geologist, production seismologist and reservoir engineer. In 1992, he joined Allied Energy Resources in Nigeria, a pioneer deepwater operator, where he worked for ten years as exploration manager and technical manager. In 2002, Mr. Avuru established Platform Petroleum Limited and held the role of managing director until 2010, when he left to take up the CEO position at Seplat. He is also a director at MPI, which is listed on NYSE, Euronext Paris.
Mr. Avuru has served the oil and gas industry in various capacities including technical coordinator for the review of the industry’s Memorandum of Understanding, MOU, membership of the ministerial committee on the restructuring of the DPR and consultant to the Senate committee on petroleum resources between 2000 and 2003. He also chaired the technical subcommittee that drafted the policy blueprint which then formed the basis of the Nigerian Content Act of 2010.
He spoke with OER Editor, MARGARET NONGO-OKOJOKWU at the Offshore Technology Conference 2016 in Houston, Texas, on the viability of the Nigerian Joint Ventures as a reliable source of funding in the oil and gas sector among other things. Excerpts!
The crisis in the Niger-Delta is affecting oil production, what is the way out in your opinion?
The point I’m trying to make is that we cannot continue to think that the problem is that of the Niger-Delta itself, because that has been the mindset in the thinking of the industry-that all you need to do is to curtail the violence in the Niger-Delta. That hasn’t worked and as I said using the Nigerian Liquefied Natural Gas, NLNG example, there must be something NLNG is doing right, if for 16 years they have been operating without disturbance from their host communities. I also think we must be able to come up with a structure that will enable the communities that host us feel a sufficient sense of ownership of the business we do, such that they will rather support us than disturb us. There must be something we can do better, like the NLNG is doing. I don’t think the Bonny community will watch you disturb NLNG. They have too much at stake to allow you do that.
With the declining oil prices, what should be a source of alternative funding for the industry?
You should first of all ask me what you can do about reduction of cost. You must evolve an operating structure. It is not about giving handouts to the communities, you must evolve an operating structure that makes the communities happy to host you and work with you because they have sufficient interest at stake. I just used the LNG example that there must be something they are doing well if they have been delivering cargoes of LNG without hindrance from their communities for 16 years, so that is one element. The second element which was discussed in details was about contracting circles. Fair enough, government itself has come out to say let’s work on the contracting circle of not less than 6 months because the circle kept worsening until at a point, it got to about 24 years and in some cases everybody forgot about the contracting process and the job never get done and that has a way of adding to the cost and the uncertainty. So if you were the one bidding, you are going to add that entire premium. If you borrow money to do that work, you just keep waiting from the time you submitted your bid to when they announce the winner. All these add to the cost of doing business. Those are just two elements that I say if you address, you would have addressed cost by 40 percent.
On funding, I think we can evolve a structure that gives each Joint Venture, sufficient operational and financial independence to be self-financing. Luckily, each Joint Venture today is a producing JV and you have to ask yourself if the minority party is able to fund its operations from its revenue. Why won’t the majority be able to do that? It is about evolving that structure that doesn’t enable us to go round in circles. You talked about alternative funding; all these have to do with one party submitting part of its revenue to the other to fund them. What that simply means is that the JV as a unit will be self funding and the structure of the JV and the JOA the way they exist today allows for that self funding mechanism. Once they approve the budget for the year, that requires no new legislature, it requires nothing else to be done other than the minister and the GMD having the courage to grant each JV, a self funding autonomy.
Are they not aware of this over the years?
If you want me to give you a 30 years history of JVs, I can. I worked in what is called Joint Venture Department which is now NAPIM back in 1985, and at that time once the GM JV signs cash call request, once we have treated it and he signed it, we go straight to the Central Bank for payment. It is when we gradually started that the system got elastic and everybody got involved that cost of operation had to be legislated. You have to go to the National Assembly to get your cost. You put it in the budget and 40 percent of the budget is approved 7 months into the year. You are wasting your time, go and check the production profile; JV production has gone from 2.2 million barrels to 1.2 million barrels and the only reason we are still doing 2 million barrels is that deep water production makes up for it, and deep water production is going to be on the decline in the next 5 years. So the real impact of poor funding of JVs will start showing up in the next 5 years when as a nation we start doing not 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 if only we can arrest the decline.
With what you are saying now, if you migrate from the PHC model, the JVs have to be financially and administratively autonomous. So what happens to the debts profile in the industry? What level of engagement in the industry do JV operators have on how to defraud the backlog of arrears?
Everybody is doing it, individual companies are engaging at individual levels to defraud the arrears because it is a business killer. Chevron eventually negotiated a $1.2 billion of facilities. Today, activities are picking up in Chevron because they have their funding in place. Each company is having individual engagement with government but what I’m offering is a universal solution that will apply to every JV in a very simple manner. I don’t have to go and borrow on behalf of NNPC with interest rates and all that; I’m saying that the Joint Operation partner between us and government, there is enough in that to fund the cost. If you think that revenues are low like they are now, it is within the ambit of the JV to reduce their CAPEX for the year. It is a budgeting issue, so you draw up a budget that is in tandem with expected revenue so that after funding the operation, you have enough to pay royalty and taxes to government. This is normally how it is drawn up; you don’t draw up a deficit budget. You draw up a deficit budget and borrow up to make up for the deficit if it is high impact budget that will yield a lot of revenue. So the same way you prepare your budget and execute it in a prudent manner, the revenue coming out of your operations should be applied towards funding that cost. It is very simple and I’m not saying anything that is new. It is just that over the past 30 years, we have moved away from it to the point where we are now. Every imaginable person is involved in the process of appropriating money for cost of operation and we have lost it all. Right now government is paying much more money to fund their own operations than they would have done if they had adopted the model I’m talking about. Whether you are talking about SA or Alternative funding, if your partner is borrowing money on your behalf to fund you, then that is what it is.
Given your exposure to the capital market and given the kind of impact this situation is having on your performance, how do you balance out between your expectations from your investors in the company and their partners in the public sector?
What we have up to this point is a problem that has piled up. We are looking forward to how to provide the solution not just for funding of future projects but we need to clear the back-log, because what it means is that if my partner does a little just more of his own equity crude towards meeting the cost, then he has that little more to clear the backlog over time. To tell you the truth, where we are in today, if I know for certain that there is a monthly or quarterly payment that comes in and I do it over the next 3 – 4 years, it won’t matter to me. I can book it as future revenue; it is the uncertainty that makes it difficult. Again, what I’m proposing can clear the backlog over time and going forward it won’t even rise at all.
With this planned zero funding; what will be the role of government in Joint Venture?
NNPC is a son of somebody; it is an investing entity under MDAs, so it is one of the agencies of government earning revenue for government. NNPC in partnership with several JVs should be able to fund them; it doesn’t means that the JVs will not be funded. It means that you do not expect any annual appropriation from government to give you to run your business. You should figure out how you are going to provide funding to run your business. So government will wait for you to pay what is due to them which are tax, royalties and profits. And today it is the same thing. Government doesn’t get more than that today. If government gets N45 billion from NNPC as gross revenue and gives back N10 billion to go and run its cost even after it has delay of 7 months before that is approved, then the revenue is N35 billion. That same N35 billion NNPC will pay to government as royalty, tax and profit without going through all these legislative hurdles. So what I’m proposing does not reduce government revenue by one dollar, it will enhance it because it will reduce the cost of money that we are bearing today in funding the operations.
In the case of price fall for the industry, I know that a lot of IOCs have come up with cost cutting strategies. Some were doing downsizing. How has your company been able to weather the storm? Secondly I was at a forum where you spoke about the call for all the oil wells in the country to be metered, I want to know if you still hold on to that view? If this is done, how do you think the country will benefit from it?
Let me start with the last one so that I won’t be accused of proposing a scheme that will be too expensive, providing meters for all the wells in the country will be too expensive. What I have always said is that every producer delivering crude oil into an export partner most meter what he is delivering. Wherever you joined the export pipeline you must put a large unit that measures the gross crude oil you produce and the net crude oil you produce after removing water. That way when you sum up the crude oil produced in any particular pipeline and you match that against the meter at the end of the export terminal; if there is any difference then you can begin to say where the difference is coming from, whether it is theft or shrinkage. Until that is done, the theft factor will remain.
Do you think that is the solution?
Yes, that is the proper thing to do. You won’t pay electricity bill unless you meter what you are consuming. That is the right thing to do. You cannot have a situation where different float stations are delivering crude with different BS and W value. If you produce 10,000 barrels and your BS and W is 40 percent, it means it is only 6000 barrels that is oil, 4000 barrel is water, if that BS and W goes up to 45 percent then your crude oil is no longer 6000 but 5500, so you cannot have different fields and different float stations delivering into the export pipeline and you will be assuming different BS and W value, and you only physically examined it at the terminal to physically see what is there and you tell me that it apply to everybody as theft. It cannot be the case, you must measure accurately what is water and what is crude at what is entering the export pipeline and what is at the terminal.
Now to your second question of what we are doing to weather the storm. Like every other company, it has to do a lot with the individual company. It has to do a lot with your planning and execution capability. As you run an operation and face head winds, you should be able to take a step back and rearrange your operations to face the head winds. So we came in at the end of 2014 and suddenly saw the crash. It took us 2 months to reverse our 2015 work programme that was already approved and cut Capex at 39 percent. Up till today, we have not downsized. When you look at the savings from even letting 20 percent of staff go, that is not where the big headache is, so we didn’t touch any staff but looked at other areas where we could cut cost. The worst thing for a company like us – we are not a 100 years company like Shell that has a team of staff across the world, and if activities peak up they can always redeploy staff, we are not. We are still in the growth mode and if you start throwing your staff away because of 2-3 years head wind when you need them most; you find out that you have thrown them away; we are not going to take that risk. But we looked at all the areas that we could cut cost to match the current realities and also our gas production was a good edge. So those are the key areas we were able to weather the storm and going forward, I think that the company we are building is one that should be able to weather any storm otherwise we will be out of business.
I was at a forum when some of your co-operators complained about Nigerians working for them. They also complained about Nigerian oil servicing companies creating gaps and payment for man hour lost. How have you been able to solve these issues because NCMB says you must employ Nigerians for certain services? Secondly, it was in the same forum that you declared that the fall of the naira affected loans taken before the naira lost its value to the dollar. How are you going to bridge the gap?
Let’s put the borrowing thing part of what I said this way. Exchange rate has little to do with operators in the oil and gas industry because our revenue is in dollars except for those of us producing gas that earns naira even though the pricing is in dollar we physically pay naira – they are the only ones that have to worry about the piles of naira; every other person no matter how small or big the primary revenue is in dollar. Really, exchange rate shouldn’t be an issue for typical oil and gas companies. They actually go to the market to buy naira to run their naira business; so exchange rate should be an issue. If you borrow in dollar and you are earning in naira like you are running a gas business, then you might start facing some problems if you don’t get official exchange rate to change the naira to dollar and that is the only point you might have problems.
My attitude to the Nigerian Content has always been that among Nigerian companies, we give jobs to those who show competence to do them and there are quite a bunch of them. So we are not in the regime of pretence because I know how it happens in the industry where some big companies in order to meet local content demand, give jobs to some Nigerian companies and still award the same jobs somewhere else to get the result. For us we work with a lot of Nigerian companies and we are not forced – there is nobody who has said you most give that job to a particular Nigerian company. We give them to tender and prove their worth and they will get the jobs, and if they cannot execute same; they won’t get a job from you again. That has always been our attitude. So for us, it is not patronage for the sake of it. It is to find out those who can do the job and give them the job.
Tell us about the impact of political risk on borrowing. You have just stated that ordinarily you don’t have problem with the dollar issue but then you find out that compared to other African countries, when you add the libel and the political risk you will be getting up to 20% while in places like Ghana, you will be getting just 8 percent. If dollar is not an issue, how then do you weigh the political risk?
I don’t know if you can get eight percent in Ghana. It depends on the regime because when our business was booming, it wasn’t this high but dollar debt is generally 9 – 11 percent. It is 18 – 22 percent if you borrow in naira. If you are borrowing from an international bank into Nigeria, it is probably 1 or 2 points what Nigerian banks will give you. Unless it is a short term loan, it is difficult to service a long term loan.
You have regularly in your annual report, emphasize your strength in gas as a major driver of your business growth; mapping out a lot of funding for that. What is the outlook of your returns on that and how has that strengthened your business in this kind of regime of falling oil prices?
Let me say what I haven’t said before. We try not to beat our chest on our gas business at Seplat. You know that the entire gas gathering project funded by the Chinese in Ghana – that project is about $1.6 billion but what is the volume of gas they are delivering? A 120 million per day, we are doing 300 million a day and we didn’t spend half a billion dollar to go from 15 million to 300 million.
What is the secret?
We are prudent but we don’t beat our chest about it. All of you went out to cover Total’s chest beating gas gathering, how much did you report? You said $3 billion for that whole project, right? How much are they delivering? 900 million! How much are they delivering to the domestic market? 300 million! So we are doing 300 million today and we are not making any noise about it. We built a $150 million plant in 18 months and commissioned it, that same plant is going to go up 275 at the end of this year. There is no any other person that will show you 300 million of new build processing facility in the past 3 years at cost that we can afford. I always say to people that until Dangote started manufacturing cement, we thought only white people could manufacture cement. You will soon find out that until a couple of serious minded Nigerian companies get into this business, you will see a lot of things about cost inefficiency. In the past 2 years I have been talking about domestic energy security. Only indigenous companies can deliver it, not just by shipping out LNG and pay us $4 billion a year. If there is no electricity, it won’t take us anywhere. We must deliver the energy needed to power our economy. That is our job; it won’t be done for us by any foreign company.
You said something about LNG that we need to learn a lesson from them in terms of their dealings with their community. What has Seplat been doing in terms of that and let me ask … and Splat’s partnership for the building of a refinery?
First I think the industry now recognize that the Seplat model of community engagement is working, and people should ask us what we are doing. We are not doing anything supernatural; we simply believe that there must be a way to operate where you recognize the dignity of members of the community that host you. For too many times, people go into a community thinking what do we do to pay them off, how do we buy their nuisance so we can start to operate. You know that is why a Professor in Harvard came up with the policy of Share Vision. 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 some services those in the community can render that are valuable to you. They are not beggars, and just by taking those services and paying them, you are expanding the economy of these communities. You are not doing them a favour, they largely depend on the business you do. As a result, they are unlikely to destroy your facilities.
That has been model, everyone at Seplat knows that, we are not going to communities to give them tokens and expect them to be happy with what we are doing. You are going in there believing that there are things they can do for you, there are staff that can work with you. We hire staff from the communities, when they come they see themselves not as part of the community but as Seplat staff. There are contractors from there who work for us and we give them a chance to perform. If you put all of that together plus the fact that we are close to communication we nip whatever would have been the problem in the bud. But I try not to hype it because it is still a work in progress.
On the refineries, what has happened is that NNPC asked for expression of interest for anybody who wants to co-locate a refinery and the refinery business is not our core area of focus. Internally, we have said that if there is an opportunity that aligns with our operating principles to run a refinery in the west, we would be interested because we have production activities in that region. If the Warri refinery belongs to us, we will not even export our crude; we’ll simply take all of our production activities to Warri refinery. Then we take an interest in possible co-location with a team. If they say we are pre-qualified, we move forward and if they say we are not; we continue with our core business which is the production of oil and gas.
What about the modular refinery?
We built our gas plant in a modular form- designed it with 5 modules, each modules being 75 million cubic. We were able to build the first 2 modules but putting enough infrastructures for additional modules, you just plough them in without any additional work. We commissioned the first two modules in 2015, and within this year; we were able to plough in 3 more modules and expand the plant within a year. It was designed such that it was possible to bring in modules in units and just plough in. Thus, modular refinery ordinarily means that you design a refinery in such a way that it is possible to put in a unit and if the need arises, you can increase your capacity by ploughing another unit. So you can design a 150, 000 barrel refinery in 3 modules of 50, 000 barrels each. What it means is that the tanks, power supply, etc are designed to take 3 modules but you can start with one then the additional cost and infrastructure to bring the other 2 will be smaller. But everyone keeps talking about modular refinery, I don’t get it. A Topping Plant like the one Niger-Delta has – only an upstream company can have a toping plant because it means you can extract one product and the residue you plough back into your crude; you don’t throw it away. So if you are not an upstream company, you cannot buy crude, process with a Topping Plant and 50 percent of it is wasted, you cannot make money that way. In the case of Niger-Delta, they put 1000 barrels, so if you are producing 2000 barrels, you put 1000 barrels into that and then you extra about 120 litres of diesel plus 500 barrels of heavier crude that is residue, you then put that 1000 barrel into your remaining crude and export so you don’t lose anything; you just extract an equivalent of 500 litres per day of diesel out of it. Again if you are not an upstream company and you build a Topping Plant then it is a disaster because if you throw half of your crude away as residue then you will never make money. Again people must understand what they represent, because in Nigeria we used the phrase, modular refinery as if it is the solution.