• Thursday, March 28, 2024
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‘Indigenous upstream operators need to also focus on finding new reserves’

‘Indigenous upstream operators need to also focus on finding new reserves’
After rising to the role of an Attending Physician/ Professor and Diplomate of the American Board of Oral and Maxillofacial Surgeons, CEO of Newcross Petroleum Limited, crossed over to the energy sector. He is a staunch believer in the ability of indigeno

What is your assessment of the global oil and gas industry in the last 5 years? Is Nigeria making progress?

Nigeria’s situation is very unique. When you produce a commodity that is a global product, you are competing against other countries producing the same product. You have to operate efficiently, keeping other countries as a yardstick in many areas including reducing your cost of operations. Nigeria, has a country has significantly benefited over the years from the OPEC strategy and the indirect, and mostly beneficial actions of the President of the United States of America, who have both helped us keep oil prices artificially high.

If global aspirations allowed every oil producing country develop at its own pace and produce at maximum capacity, we will most likely see oil prices fall below the point of 2014- 2016. What that means, as a country is that we need to reflect on what we need to do to become an efficient oil producing nation in other words, an efficient producer. The cost of Nigeria producing oil per barrel remains amongst the highest in the world. On average you won’t find any company producing oil today at less than $20 to $30 in Nigeria, which means that by the time royalty is paid to the government, the payable petroleum profit tax is negligible.

Ultimately, government has to help the oil producing companies become more cost- efficient at production by providing an ideal operating environment. If you ask most oil producing companies, they will tell you that the highest cost associated with their operation is security cost. Sadly, when we reduce our cost allocation to this budgetary area, it had an adverse effect on oil production. In order for us to compete, we need to create an enabling environment to ensure our operation is safe, as security is the major factor pushing production cost higher.

This is sadly a regular unchecked event, which has probably affected every oil producing company in the region. The unfortunate part to this is that, with the oil theft or bunkering comes spillage. This ultimately leads to environmental degradation and ultimately, significant environmental cleanup cost. The indirect cost of this on oil production cost is very significant with no tax breaks for the operating companies who literally are victims of a double jeopardy.

In all this, we need to reflect inward and ask ourselves: do we want to produce oil for ourselves i.e. process the crude internally or do we want to focus on the export market? To solve our problems, Nigeria needs to bear in mind that we are competing in a global economy, so we need to fix our refineries to solve our domestic challenges and build our economy inwards rather than outward.

What is your outlook for oil price?

The current United States and China economic sanctions might lead us faster into a global recession. When recession happens, it means the entire economy slows down, which means demand for goods and services will reduce.

We have a product whose price is governed by multiple factors such as embargo that are in place, either by the United States or China or self-impose production cuts from Organization of Petroleum Exporting Countries (OPEC). If we imagined Venezuela (with the largest world reserves) or Iran being able to produce into the global markets, we would be in dire straits.

Global economics with the economic contraction and inverted yield curves shows that we are heading towards a recession. Currently, neither the government nor most companies are preparing for this. In an ideal scenario, we should be building an economic war chest, reducing interest rates to encourage borrowing and spending and providing tax breaks or waivers to companies who are genuinely driving growth in the economy. Ultimately, a critical decision has to be made by the government, as

In order to stimulate the economy government needs to diversify the economy. What are those other things you think government can do?

Nigeria is naturally blessed with what other countries don’t have. Being a big believer in agriculture as a platform for food sustenance. I think the right incentive needs to be there to encourage people go towards agriculture. Making loans available on paper for farmers is a start but it has to be deployed via the right financial inclusion pathway to the farmers, small and medium size agricultural traders and

distributors. These are some of the people that would drive growth in our economy.

Nigeria also needs to invest in Information Technology infrastructure. I believe this hasn’t taken off as anticipated because we are trying to adapt products that work in different countries to Nigeria rather than develop products that the Nigerian growing population require. The amazon model for the United States wont necessarily work in Nigeria and if it does it isn’t scalable yet. Fintech is a big future for Nigeria and I think it is something we need to encourage our youths about. Lastly, tourism is undervalued in this country. Just like the Caribbean countries, we need to encourage Nigerians by creating a secure environment that will allow foreigners to patronise Nigeria’s beautiful God-given nature. It’s amazing to see Nigerian financial institutions provide loans for its citizens to visit another country on holidays but wont provide a loan for the same person to start a business.

For almost three decades, the Petroleum Industry Bill (PIB), which later became known as Petroleum Industry Governance Bill (PIGB), has been in the works. What reforms are still critical to the oil and gas industry at this point? Are we moving in the right direction in terms of legislation?

In the beginning, when the PIB draft came out it was bigger than the Bible, literally. I once said it can never be passed because when you want to make big changes you do them in little steps, which is why I like the steps taken by former Minister of State, Ibe Kachukwu, by attempting to breaking the PIB into many bills.

I believe there may be parties who do not want the current document to be passed as it is. I have always believed in passing the PIGB, whether everybody likes it or not, because it will bring clarity to investors on how to invest and implications of investment in Nigeria. Passing the bill does not mean investors will start trooping into Nigeria, but it means investors will have clarity. There will be clarity on investment mechanisms fiscal regimes, taxation and repatriation of profits to their countries where applicable. Regardless of the terms in it, I believe the bill should be passed because investors are beginning to look elsewhere.

For example, you can see that one of the biggest IOCS in Nigeria has gone to Guyana to build one of the biggest LNG projects in that region. Mozambique is another environment developing a significantly sized LNG project while Ghana is making new discoveries. All while we have been debating and repackaging a bill. Most of us investing in Nigeria today are doing it mostly based on nationalism and faith rather than economics alone.

Over the past few years, indigenous oil firms like Newcross started developing capacity to match the IOCS, especially in exploration and production. What gaps still exist?

The participation of indigenous players in Nigeria oil and gas industry has continued to increase. I am not looking at the oil and gas producers alone but also services companies. One of the things the Niger Delta Development Commission (NDDC) has done is empowering a lot of Nigerian companies to provide services for the oil and gas producers.

Prior to 2003 bid round, I believe indigenous production was around 3 to 4 percent of Nigeria’s total production. By the first round of divestment by the SPDC JV in 2009/2010, indigenous contribution to production rose to about 10 percent and by the 2014 divestment by the same JV, it rose to between 18-20 percent. This mean that indigenous producers are contributing more to the economy, although my bigger worry is on indigenous companies’ reserve replacement. Ultimately, this is the indicator of long-term growth.

If you can remember, most of the indigenous companies including Newcross are producing now because we bought the assets and started producing on them. But the bigger part to the sustainability and life of an oil company is finding new oil or new reserves, which is what determines your strength.

For example, if you look at the books of the IOCS, it is more important for them to have reserves or new oil because that is what majority of their share value is based on. Most local producers are still unable to actively commit to finding new reserves , which is understandable, because majority of us accessed significant loans and debt to secure those assets. Local producers also need to be working on evacuation, which means moving oil via secure pipelines.

At Newcross one of the things we did in 2009 was take advantage of an opportunity to pursue exploration assets in Nigeria. We decided we want to start finding new oil from Greenfield, which indigenous producers are never keen on. We acquired two assets in similar states at significant costs, and high risk. Sometimes, just sometimes, luck favors the brave. We hope to commercialize one of these assets in the next 6-9 months. For a small company of our size, this is a significant feat.

I always tell people that I am more proud of the assets we build from the exploration phase than the producing assets we acquired. We value each asset in our portfolio but we have stronger attachments to the full cycle assets

How is the regulatory environment impacting indigenous oil companies?

In understanding the industry, we need to know that NNPC is technically your partner, which is their role. However, they also have to benchmark you by making sure you are an efficient operating partner. Department of Petroleum Resources, DPR is the sole regulator for the oil and gas industry in Nigeria. DPR is doing its best because, honestly, it is a tough sector to regulate because their job is very expansive, ranging from upstream, midstream and downstream activities. A role they have assumed successfully is also as a mediator in sensitive operations situations.

So far, I feel the regulator is doing a decent job. Where we worry is the leadership structure of Nigeria’s regulatory agencies, where some appointees don’t understand the challenges the industry is facing. It has to be contextual in application and interpretation of the laws.

Is the Nigerian oil and gas industry as attractive as it used to be in the 1990s?

Nigeria is always attractive to international players. However, people are beginning to look at other oil-producing countries.

The bigger challenge some of us worry about is the issues surrounding ancillary regulatory authorities. In Nigeria, you are subject to many organisations’ or committees’ meetings that have a right to your books or summon you, which are disruptive to your business. DPR should regulate and Federal Inland Revenue Service, FIRS should collect taxes on behalf of the government. It’s not unusual to receive invitation letters from different arms of the government relating to the same issue. These are things that scare investors because there is no clarity of purpose, unlike other countries that are creating a more enabling environment. Fortunately, Nigeria is a proven province for hydrocarbon, thus making it always attractive, however other countries are catching up.

One of the changes we noticed when many of the onshore assets were handed over to indigenous oil companies was a drastic reduction in the confrontation between host communities and oil companies. How has Newcross managed the relationship with its host communities?

There are three groups to this issue. There are elements outside the host communities who incite the host communities against oil and gas producers, which is one group. There are other elements of people who are empowered with arms to attack your facilities. Lastly, there are members of the host communities who for one reason or the other feel they have been maligned or taken advantage of for many years, who are agitators. Our goal as a company is to have a good relationship with members of our host communities who truly seek peace but want to partner in development. For the first 2 groups, we are unable to identify or discuss with this group. Only the government can manage this group decisively.

At Newcross, one of the things we strongly believe in is that growth should be symbiotic, which means if I am growing you are growing, if I am going down you are also going down. This gives you an incentive to protect my interest or investment. At Newcross, we focus on three primary things – Healthcare, Education and Economic sustenance. We do social impact assessment study to find out the most prevalent issues in these communities and help in providing the right infrastructure to solve those peculiar challenges.

We don’t give free money to our host communities rather we look for ways to stimulate economic growth. We look at areas where fishing and farming are the most predominate occupations and find ways we can do more to stimulate economic growth.

According to DPR, a total of 42 oil bloc licences held by some indigenous and international operators will expire this year. Does that worry you?

This is a very sensitive issue for the indigenous companies who have invested in Nigeria. For those of us working in Nigeria we really believe it is important for government to find a way to reconcile the issues, irrespective of the challenges, unless it’s a criminal case. Revocation of a license has significant impact on investors, hot communities, relationships and families. The repercussion is significant.

Personally, I think there are ways to solve issues rather than a hammer. It can be likened to a child who has an infraction. There are many micro and macro factors that affect firms, which expose us to economic infarctions.

What are the things Newcross is doing with gas infrastructure?

If you take a holistic view of Nigeria’s economy and what it needs for industrialisation, gas is a bigger enabler of what Nigeria needs than oil. As an organisation, we are working on some initiatives; we are a big believer in distillation of gas molecules into Liquefied Petroleum Gas (LPG) utilisation and enabling LPG usage. So, one of our assets that is coming on-stream in the next 12 months is targeted at the LPG chain, where we will be producing LPG Nigeria. We are already a minority partner in a LPG producing plant in Nigeria and we feel the impact on empowerment and environmental protection.

In other areas, we are working towards providing gas for power. So, in Newcross Exploration, which is one of the subsidiaries of Newcross within the group, our company is committed towards producing gas for power in the Eastern corridor of Nigeria.

Recently, we formed a new team completely different from our main team to look at our infrastructure from a gas perspective, which means we are paying more attention to gas, irrespective of how much oil we are producing. Gas investment takes time, but we are happy at the direction we are going. We are not too far behind the leaders in commercializing our gas.

What is the future for Newcross?

Our long-term goal is to be seen as an energy company and not just a petroleum company. We are looking at the global market and what will change Nigeria. We see gas in the competitive landscape for companies, knowing that in the future a one-product country or company, majorly focused on oil will struggle to survive.

Already, the likes of Shell and Chevron are doing it by going into renewable energy. Our emphasis on oil operations will continue but we are clearly looking at how to contribute to the renewable energy industry.

What should be the priority of the new minister of petroleum and the NNPC?

He should focus on passing the PIGB that governs the industry. The governance of the industry is a big one that needs clarity for everyone.