Austin Avuru is the CEO of Seplat Petroleum Development Co., Nigeria’s largest listed indigenous oil exploration and production firm. In this interview with PATRICK ATUANYA in Lagos, he speaks on the proposed Afren merger, problems confronting Nigerian E&P firms, Seplat’s corporate governance code, the firm’s earnings outlook, gas business and oil price volatility, among other issues. Excerpts:
Why did Seplat take an extension of the Afren deal after securing a billion dollar refinancing loan?
They are not related, okay. Those two events are not related and we cannot speak about Afren beyond what has been published by both Seplat and Afren, those are institutional requirements.
What we said earlier, which remains true, is that we made preliminary approaches between the two parties and that there is nothing, there is no guarantee that any thing will happen which remains true. And like I said, taking an extension simply means those approaches are deemed on, it really has absolutely no relationship with the debt re-scheduling.
What is the implication of the billion dollar refinancing deal? Does it give you more firepower for acquisitions?
You have to know; when we started back in 2009 we secured the $550 million five years line and threw down only half of it to do the acquisition we did.
That was how we were able to complete that acquisition back in 2010, and then eventually, fortunately we were able to prudently manage our business, oil prices helped so we grew our production and we were able to service the loan without any problem whatsoever, but when we started the second attempt at major acquisitions 2013-2014.
We drew down the balance of that $550 m so that we had cash to back the debts that were negotiated for that acquisition as u know we were not successful in what we did at that acquisition, even though we went to great length to get all the debt and then put it together and some of those debts we put aside we didn’t have to return it because fortunately we had enough head room; for that debt.
What we had done is to then put all debt together existing debts and some additional debt together because we had head room to do so, put all that together and re – finances so we just start a new tenure and it gives us fire power, it’s a statement of confidence in our business at this time, u can have support from your banker to keep money aside for you to do business so yes it gives us fire power and it’s a very clear statement of confidence of us as a company.
Even though that the talks with Afren is still ongoing, what is the range of the final acquisition cost; should it be a success?
I can’t say what I do not know. Honestly, the statement we put out and Afren put out to the Nigerian stock exchange clearly said that the approaches were preliminary which means each party will have to look at the other to see what their business is really, Because we don’t know from the outside and it is after looking at those things that people can actually say oh there is or there is no synergy.
That is why I say it is very preliminary; we are not even at a point to start talking about what it will cost. If we reach a point where we think something really has to happen we will come up with a statement saying this is what we think will happen and this is what it will cost.
Anything order than that which we published in a statement will be a misrepresentation of where we are.
Are there any other bidders for Afren which you did not include in your statement?
You see there are very strict rules we follow, am sure you read two or three days ago, I read a rumour of a company, the company CEO was said to have spoken to reporters and said oh, Afren is on their radar, the next day they themselves issued a specific denial that it wasn’t true and Afren was not on their radar and Afren issued a denial that they had no discussions with anybody.
Now, to tell you the way the stock exchange works, because that company has issued a denial in the next six month even if they wanted to, they cannot make an approach to Afren, so they are very strict rules to follow on these things. We are not in a position to know if there is anybody else talking to them because they will be confidentiality clauses that will stop them from letting us know.
Has there been any improvement or maybe benefit to the company since Seplat went to the capital market?
I think it’s easier to understand why we went to the market in the first place because every CEO will tell you that he will rather sit down and run a non listed company because of the headaches in listing.
But let me tell you we went to the stock exchange with full conviction that it was the right thing to do. I have always said and I have said it in public places if you look at Nigerian E and P companies they have not shown the consistency of both operational and financial discipline that you find in multinational companies.
I have said it before that if you take from the smallest, if you were in this industry in the early 80’s when Texaco was doing 23,000 for its Joint Venture (JV) production, when Elf which is now Total was doing 32,000bpd, when Texaco which is now chevron was doing 32,000bpd, Agip, Mobil and so on.
Every one of them in the past fifty years has grown production and has ensured that he has the reserve base that underpins that production you can plot the graph all from the smallest to the biggest.
Now flip to the other side and check the few indigenous Nigerian companies that has been successful, the most successful indigenous company by production oil remains Conoil, pick any single one you know and show me one that has stayed at plateau production for five years.
It’s always the case of early success and plateau and then no more and for me, I personally believed that one of the strongest reasons for that trend is corporate governance.
What does corporate governance do?
Corporate governance ensures that you have set up a structure and a culture within the institution that will drive the business in line with given rules.
That is what corporate governance does, corporate governance was forced on the banking system because of strong regulation that’s why all founders of GTBank are all part of GTBank now, and GTBank is carrying up perhaps even stronger than when Fola Adeola was there. In their own case, corporate governance was forced on them as strong regulation.
Regulation in our own industry doesn’t force corporate governance on you. If you are appointing me as CEO you don’t need department of petroleum resources (DPR) to approve it. If you are appointing CEO of a bank the central bank would have to approve it.
So, really if we are left alone we could do what we like in this industry, we go up and down, the regulation only ensures that we pay our taxes, so for us from day one we sought to operate at a level where corporate governance culture will compare favourably with international standards.
We sought to operate in such a way that even if we didn’t want to we were operating at a platform that will force that level of corporate governance on us.
That is why we went to London; we could have listed only here, as there was much in here for us, so we sought from day one to set up a company that will operate to international standard and that those standards be forced on us.
Number two is that once we now managed to achieve that, it also meant that there will be a reputation for the company that will make growth relatively easier for us.
The first example is what you are seeing, there is no indigenous company today that can get a $300 million loan from international banks, all the acquisitions have been going on by indigenous banks, and no international bank has given a dollar towards Nigerian E&P firms.
So, if we were not listed those re structuring you are seeing today, wouldn’t even have happened, just the point of listing put us at a point where the level of due diligence you have to do on us before extending a loan is not the same as you would do on a non – listed firm.
Listing put us at a level of credibility that makes access to funding both debt and equity easier provided we focus on doing good business and that is what we are saying, so to answer your question specifically we think that we will achieve those objectives that drove us to the market in the first place, which is to achieve a level of operating standards that is only comparable with international companies and also to achieve a level of corporate credibility that makes funding both debt and equity easier to access.
When do you see oil prices buttoning and what is the outlook for Seplats earnings as oil prices are falling, did you hedge any of your production?
We did not hedge, and whether that is an error or not you can debate that. But we did not hedge because, again as a company we take a long-term view on the business we do. Even if we hedged and some of our competitors are hedged, we will make some very hefty gains in the next year or two years, but if you take a long-term view and that view was, we will be able to build a balance-sheet to enable us operate at all climes low price or high price, and that is exactly our strategy in spite of the crises we are facing at this time. We are building a company that should be able to operate at all climes.
My personal view about the oil price and not that of seplat, my view is that a stable long term average in today’s money for oil price should be between $70 and $80 per barrel and I still believe that will remain true which means that this will bottom out where it is now no lower than $40 and eventually start the process of picking up and heading maybe to $70 to $80. How long it will take whether 3 months or 3 years nobody knows.
A few things will normally happen at $40 dollars a barrel a number of projects will be cancelled, every company in Nigeria today is reviewing its Capex spend, every company is reviewing its work programme, there are some big capital projects that will be cancelled, in the near term if this low price persists.
There are some more expensive developments outside of Nigeria whether it is shale oil, or deepwater or oil sands in Canada that will simply be cancelled and it is Capex that sustains production in the future.
So, when you cut Capex today you are inevitably cutting production in the future, so eventually we will get to a point where production capacity gets lower than what we are now because of the cuts that we are effecting today and once production capacity gets lower and demand doesn’t fall then you will see a pressure on price.
So, the question on your earnings outlook?
Our earnings outlook will naturally be lower than what was forecasted because if you plot a graph of our share price against oil price they track almost identically, which means that the market itself has discounted us to the extent of oil price drop. And I think what they have in mind is the question you are asking now, the impact on this on our earnings profile, they expect a large slash on our earnings profile.
So, really for us at this kind of oil price regime what is important is prudence and operational discipline to make sure you survive and as much as possible cash flow neutral at least if not positive, because once you can establish operational and financial discipline to stay alive during a period like this then it can only get better.
For us these are trying times but these are the kind of times you require from time to time to test your resilience in business and to always remind you that you need to remain disciplined and prudent because they will always be though times.
It was recently in the news that oil companies are laying off staff, will that apply to Nigerian companies?
To Nigerian industries I think yes I have also heard that some companies will lay off, now will that apply to seplat I can specifically say no, not because we are doing better than other companies but because fortunately we are still in the growth mode, so ordinarily we should still be growing even our human capital.
So, what will happen is that we will simply reduce our growth rate in terms of manpower, rather than fire the once we already have.
I know you are not an economist, but as an operator considering the fact that we Nigerians depend on oil so much, how much can this fall in price affect the economy and the implementation of the budget this year?
It’s a no brainer, if as a nation, I think the estimate of the federally generated budget is about 70 percent from oil, and even if you discount the portion of the revenue, it means that totally federally generated revenue will fall by a minimum of 30 percent. So, you will be looking at your total revenue dropping from $50 billion to maybe $30 billion, and that’s how drastic it is and when you now recognise that 70 to 80 percent of your budget was already recurrent.
If you’re total revenue drops to 70 percent of what it used to be that means you have almost eroded what your entire Capex provision was, and if you don’t go back and take another look at your recurrent, you will actually have difficulty just running along.
I think that the CME and her team are competent enough and just like the industry is cutting down their Capex and reviewing their work programme to accommodate current realities, I expect that the minister for economy would go back to work and do what needs to be done to re programme their entire federal work programme which is Capex and Opex, we talk Capex and Opex, they talk capital and recurrent expenditure.
Let us look back again to the industry, a lot of operators have been complaining about undue delay in contract process, the issue of vandalism, oil theft, etc. How has these been impacting on the operators both IOCs and indigenous?
The direct impact is on two levels – increase in cost and reduction in revenue to all parties (operators, government), actually everybody suffers it.
Give us update on your gas strategy. We know gas is a big part of your plans for growth, have you began to monetise some of your gas assets and how big can gas be as a percentage of your earnings and revenue?
One of the things we need to address about gas is that of indigenous participation, and part of the reason why as a government we need to encourage indigenous participation is that any excess revenues they make they have nowhere to plough it back to except here.
You can see what Dangote has done, and you can also see what these young boys who started banking 25 years ago have done.
At a time when we were earning 7 cents in 2010 the equity revenue for us from gas was 7 cents per thousand but we looked three years ahead and remembered that the asset we bought came with some gas facilities, it was a business that was sitting there yielding zero revenue in fact negative revenue.
Nobody was willing to touch it, but we saw a future in gas because if we were going to achieve the electricity generation we have been dreaming about, we knew we will be looking at up to 6 bcf from gas in the next ten years and somebody had to supply that.
We knew that because the currency of the domestic gas business is in naira, multinationals would not be encouraged to invest in it, so we decided as a company from the very beginning that gas was going to be one of our niche and we started investing in gas three years ago at a time when we almost couldn’t justify what was present.
The result is that by the end of this q1 we would have more than doubled our production for gas from 120 million scf to about 275 million scf of gas per day processing capacity.
We building the processing plant in a modular form, so we can stick two extra modules and 150 million scf within a short time and a short Capex spent.
What that means is that this same capacity we can build it up to 375 or 400 million scfs quickly that’s how much investment we have made in such a short time in our existence.
Specifically to your question our target at the end of 2017 is to be able to process and deliver between 300-400 million scf of gas per day and it’s all going into the domestic market none of it is targeted as export and by that time our target is to see that 25 – 30 percent of our bottom line are from our gas business.
It seems investors are not really looking at the upside from this part of your business?
No, when we did our roadshow for the IPO investors at best stayed neutral on our gas business and at worst actually discounted what we expected on gas. Even though they believed that there was a future in gas, they found it difficult to believe that if off-takers took delivery of the gas that they could pay and that’s the problem.
However we still see a future and we still think we are going through a transition and within another couple of years we will have a proper market driven gas business where off takers will pay.
What about the recent price increase for gas?
I said when we started this business we have seen gas price go from 7 cents to 70 cents, $1 now $2, and $2.50, and that’s the minimum. If we managed to supply heavy industries we could get even $4. So, for us we see beyond 2017 that prices are reaching about $3 to $4, and that’s good enough to justify the investments we have made.
The operators have not been meeting their gas supply obligation, what actually is responsible for this?
I cannot speak for other operators, but as a matter of fact Seplat doesn’t talk about domestic supply obligation (DSO), in fact we don’t even look at it because our gas delivery projections will probably be by three times our DSO by 2017 so we aren’t looking at DSO.
We already had a strategy of supplying into the domestic market because we thought we could do it efficiently and also commercially, but most importantly we don’t worry about the currency of the business, that is what multinationals would worry about so for us we have rightfully partnered with government to deliver volumes of gas that are critically needed in the domestic market and we are proud to do that and that partnership is working both between us and NNPC, between us and ministry of power, between us and the government generally, so for us we don’t look at DSO, those who are looking at DSO are those who are struggling and are also looking for reasons not to supply to the domestic market, we don’t belong in that category.
Even though the oil price is down and you may not employ till it rebounds, what has been your plan for capacity development?
Again that is another area where you must give credit to the success of indigenous participation in the business, whoever deserves that credit from the government agencies to participant.
It would have been difficult for you to see an operating company in Nigeria doing over 70,000 barrels operated production with 99 percent Nigerian staff.
We probably have maybe 5 or 6 expatriates in total. The rest of our staff are Nigerians from top to bottom, well trained, well equipped to deliver this values now cascade that down to the staff of contractors who work for us.
I don’t think also that any company of our size in Nigeria have the level of domestic spend that we have in terms of engaging contractors and consultant.
So, if there is any company that is an example of local content and capacity development, I think we are a shining example and that’s why our partnership with the government in terms of indigenous participation has worked very well and we are a good example of that.
What are your plans for increasing oil output above your current level of production?
Our plan from the beginning has always been not just oil and not just gas, our plan has been to continuously grow oil and gas production to a possible plateau at the end of 2017, but more importantly a sustainable plateau, which means we must also find the reserves to under pin that plateau production and to achieve a reserved production ratio of at least 20 years.
So, what I have summarised now will mean three things, we will grow oil production, grow gas production and grow our reserves to a level that can sustain that growth in oil and gas production so it’s a tripartite thing and we will stay focused on that, so for us this days we no longer talk about our oil production but our oil equity production.
Today, from a total production of about between 70,000 and 74,000 barrels a day, our equity is somewhere about 32,000 -33,000 barrels a day.
We hope to drive our own equity production on oil over the next three years closer to 50,000 barrels a day and drive our equity gas production between 200 million and 250 million scf a day in the next three years. That is where we want to be and our overall corporate plans are targeted at those objectives.
In the past there was this saying that Nigerian graduates were not employable, especially in the oil and gas sector, that they don’t have the background to work there. Are these sayings true?
Generally, Nigeria’s education system standards are fallen because when you look on the average the quality and number of lecturers available per student and the facilities available in these universities per capita per student for training are low.
For instance, if you are in engineering or sciences how much lab equipment do you have per student, when you look at those things you will say our institutions are not adequately equipped today both in materials and men to properly educate our tertiary undergraduate students to come out with the right quality.
Having said that it doesn’t discount the basic intellect of the Nigerian child, which is why you see a graduate with a first class or 2.1 he doesn’t find it difficult to do his masters abroad and it’s the same thing when we are hiring, unfortunately for the student and fortunately for us because you have a lot of them out there, you will have the luxury of picking the best among them, so you want to hire 20 of them and there are 1,000 you are picking from.
So, it is easy for you to go through a rigorous process of picking the best 20 among them, with just a little additional training you will find out that they can cope like any other graduate from anywhere in the world.
First of all, we don’t have those biases we believe that we have enough smart children in Nigeria to hire from and that’s what we do we hire the best and we have different programmes to train them so that they can become more competent in our business.
Talk to us about the issue of lack of exploration activity in Nigeria, and also Seplat’s corporate social responsibility philosophy?
But for us even in low oil prices, because if you recall what I said we are not just trying to achieve a certain plateau production but also to find a reserve to under pin that production. For us, exploration is critical because we must find new reserves, we can only find new reserves by two ways exploration success and acquisition, so we do a mixture of both, but we must find new reserves. For us, exploration is critical and we don’t have the luxury of the big oil companies with huge reserve base.
What do we give back to society, we give back a lot; go and ask our communities you can see the difference between our operational model and what was there before we got there.
We don’t beat our chest and publish that we have built health center and schools for communities we don’t because in our policy we have four levels of stake holders.
We have the share holders of the companies who provide the cash, we have government at three levels federal, state and local and each of those stake holders can stop you from the business and also derive benefits from the business, government derive their revenue from what we do.
We pay taxes to Edo State, Rivers State, Delta State, local governments, etc, they can quantify what they are getting from our success.
The third level of stakeholders are the communities where we operate, just like the government, if they don’t derive benefit from the value we are creating then we are doing something wrong.
We know they are deriving a benefit that’s why our relationship with our community is probably the best you can find in our industry, in fact one of our community groups actually put money together and invested in our shares and that is the kind of relationship we have with them.
The fourth level of stake holders we have are our staffs because you must be motivated, well trained, well equipped to deliver the value we want to achieve.
We give back to the community, government, grow our human capital and give back to shareholders so ours is the total package.
There is this issue that the NNPC be scrapped, can you clarify your view on that corporation?
No, I cannot advocate that the NNPC be scrapped because no country can run an oil gas business that accounts to 70 percent of its earnings and not have an efficient government agency that runs it on its behalf.
It is only somebody who doesn’t know what he is saying that would suggest scraping NNPC, what anybody would advocate is an NNPC that is efficient enough to ensure that it drives the business to the optimum benefit of government and that is what everybody has spoken about.
For instance, since we see the refineries and downstream have not worked we can introduce the private sector like we did in telecoms and in fact as we did from the beginning in the upstream.
So, we are talking about an NNPC that is efficient enough that will concentrate on the areas of supervising government interest and optimally collecting government revenue for the benefit of everybody. I certainly have never spoken about scrapping NNPC.
Tell us about your drive to improve local content in some of your projects that involves Nigerian contractors, and how that has gone so far?
We as a company are actually a local content champion and that is really what we represent.
As I said earlier in terms of the personnel that we employ, there is no company at our level of production that has this percentage of Nigerians. There is no company at our level of operation that has the local spend.
The contractors we use are Nigerians and that is what you will find with us being a Nigerian company. Our spending on community contractors and local contractors is probably the largest relative to production in the industry.
We do these things not because we want to impress anybody but that is our business model.
It is a model of shared value, which means that if a Nigerian or community contractors can do the job we have no reason to go elsewhere, we both derive benefits from each other.
So, in the upstream sector of this business we are the local content champion and that’s the living light that we are sharing to others.
People do not realise that we championed getting Nigerian banks to lend to the upstream. Reserve backed lending was unknown by most Nigerian banks until we raised raised $550 million in 2011 from Nigerian banks, it was not known till we did it.
Since then there has been over $5 billion in lending by Nigerian banks to the sector, but we championed it, they have gone into it learnt from it and extended it to the power sector so when we talk about local content it is a total package.