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Seplat will stay profitable inspite of oil prices – Avuru

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Austin Avuru, respected oil industry player and CEO of Nigeria’s fastest growing independent, Seplat Petroleum Development Company Plc hosted a team of select group of journalists at the company premises on Thursday July 30, 2015  days after the announcement of his company’s half year report. Avuru provided fresh highlights on the result and other sundry issues from the falling fuel prices to his company’s gas commercialisation policy as well as NNPCs effect on the oil industry. Excerpts…

How would you assess your half year result?  Let’s take a look at fundamentals and key highlights?

So you see our half year results looks, on the surface of it, very disappointing. Profits after tax 79 percent lower than it was this time last year. I think that’s a big highlight that makes it look disappointing.

But the very positive side of it is that recall that at the end of last year, November/December last year we were hit with I would say 3 very critical buckets of headwinds if you will call it that way.

So, we suddenly started seeing oil prices that was half of what it was. So, for instance you look at our gross revenue, it is a revenue of $248million as against$388m as it was last year again that’s just purely due to oil price difference.

The second big headwind, the NPDC receivables, they were not abating. It is an industry wide problem. NNPC and its subsidiaries owed the industry about $7billion and that’s largely the reason you see overall work programme across the industry is very low because of deep water production which makes us as a nation to be able to do 2.2/ 2.4 million barrels, people don’t realize that if you take away deep water we are actually doing just 1.2 million barrels. That’s a reflection of the cutback in work programme consistently over the past 5 years. So we are not seeing increase in capacity in traditional terrain on shore and shallow water. I am just giving a background to the fact that the cash call problem has been a major hindrance for development. It finally hit us so we have receivables from NPDC that is twice our total debt that’s as huge as it is. So it starts affecting your cash flow, starts affecting ability to grow. That was the second biggest headwind we had.

Then we had the second Trans-Forcados problem between November and April this year. As a matter of fact, it was 40 percent outage for the first half, so 77 days out of one half of the year, that’s 180 days. For 77 days we were not producing because of the outage. So you combine these three buckets of very terrible headwinds, you would think, and quite frankly anybody who doesn’t have the capacity to react would probably be struggling  , maybe not today, but anybody who hasn’t had the capacity in the next six months to adjust to these headwinds will run into serious problems in the next one year .

Austin Avuru
Austin Avuru

Your investment in gas seems to be paying off with a 117 percent rise in the first half of the year. Tell us about the investments, target and plan?

If you look at the key areas for promises we have made in the past three years, we had always said that our target was for our gas business to account for 20-30percent of our bottom line by 2017.

Today as we speak we have a processing capacity of 300mmscf per day and we are averaging between 220 million and 260mmscf today as against the previous three years where our annualized average was probably about 70mmscf.

And this is because we have commissioned now our 150mmscf gas plant in addition to the capacity we had before to retuning even the 19mmscf capacity we had.

So we know we’ve delivered on that. I don’t know any other company that has delivered in terms of more than doubling its capacity to deliver gas into the domestic market. So we are on target for our gas business to be a key source of our bottom line.

Like I said if we can achieve 20/25 % of our bottom line, it’s looking like we can achieve it before 2017, so you can tick that box; we made that promise a long time ago.

You released a statement earlier in the year about a deposit for an investment that seemed to have dragged. Has that been fully resolved and is that part of the headwinds you mentioned?

The other headwind we had is that we made a deposit for an investment that has dragged on for too long. Plus also the fact that we’ve not been able to extract the full value out the investment we made on OML 53 and 55 because there’s still the ongoing litigation. So we have two key areas of investment that have dragged on our balance sheet because they’ve not brought the revenues at this time that they should have. They are there, they remain assets that we contribute to our balance sheet and our production but over this period they managed to just be a drag on our balance sheet. So, that’s what I mean by inspite of all these we made key adjustments to the way we run business, to still be able to return a profit. So we think we have turned the corner.

We had a talk with some of the regulators and they said that the indigenous independents that have actually been managing the divested assets have brought production pressure on these assets without actually doing much to increase the reserves. I know you as one of the people who have actually spoken very elaborately on expanding reserve base, so may we know your performance on this mandate.

For us, as a listed company we can only quote figures that are certified by reserve auditors. So our working interest, 2p reserve, in 2010 when we took over these assets was 71m barrels and since then we have produced 25m barrels, working interest. We added just 10 m barrels by our acquisition of 40 percent of pillar marginal field. And through our drilling and development activities we added an additional 83m barrels. Today at the end of 2014 our working interest and 2p reserve is 139m barrels. So, clearly we cannot be one of those, we don’t need regulators to tell us that we need to have reserves because that’s our life. We are a listed company, our life is reserve, we like to operate at a reserve production ratio within 15 and 20 years. Once our reserve production ratio falls below 15 years we worry. We don’t need a regulator to tell us.

Sir, talking about cost cutting and mergers, have you in any way thought of cutting cost in the area of human capital for Seplat and is the new oil price in any way affecting your move to acquire more assets?

First, human capital. Yes, you cannot reduce G and A without affecting human capital. Our core-staff has not been affected and they will not be affected. There were non-core staff, contracts staff that were. And that’s why at any point in time you have core staff and contract staff that are related to aspects of your growth. So if I am building a gas plant and it is going to take me two years I can hire some people dedicated to that project and when the project finishes they go. So, there are people who were working for us as drilling consultants when we were running 7 rigs. We are now running one rig so they won’t be there.

So, in that respect again it was part of our prudent planning that even during our growth, we knew the staff we would retain that even in bad times we must keep, and the staff we kept that could easily be shed when that extra fat was not there so those who have had to go are those who would go because we have scaled down projects but core staff remain. It has not affected them and it willnot affect them.

Now whether oil prices were high or low our acquisition strategy is based on filing certain critical gaps, so today, as a company, we have a projection for what our oil and condensate production should be at the end of 2018. So we have a growth profile that we are working towards.

Ok I am wondering sir, maybe on a general note, there seems to be an administrative gap in the oil sector. I wonder how you think it affects operations right now for people just like you.

It’s in two ways, first of all is the fact that decision making processes  are now very slow in NPDC because of the gap you referred to, but for us,I think  what is more important to us, is the fact that at the end of this we should see a bright light , that’s what we hope. We believe or our internal projection is that we will see the restoration of discipline, the elimination of impunity and elimination of any form of large scale corruption, and for us as a company if those three things happen we are happier than anyone else. We run a public company, total public disclosure and so the greatest inhibition to our business is when the playing field is not level or if there are elements of those three things I mentioned.

We see from what the current administration is doing, we see, that without the PIB, there are things that the presidency could do on their own to address some of the gaps we see in the oil sector especially upstream you know, how would you say passage or non passage of the PIB as it were could affect or better your lot?

You know 4 years ago in 2011, we had said, this company had said that our internal business model is to run a business in spite of and not because of the PIB. Four years later we restate the same thing without mincing words. Our business model has always been in spite of not because of the PIB, and for that matter its always in spite of and not because of any anticipated changes in regulation. So we are running a business model in which if there are regulations we key into it, we react to just as quickly as we did with oil price and key into whatever comes from it. We don’t go to sleep bothering about PIB whether it is passed or not. Whenever it is passed we will key into it.

They say they’ll spilt NNPC, they haven’t given us the details but in case it happens, how do you think that’s going to work, what are your thoughts about the workability and then in what  manner too?

We cannot pre-empt what they will do, all I can say is some of us have argued, that the less of NNPC footprint we have in the business, the better for this economy, that’s what we have always said and we’ve been consistent on that. We’ve seen in it LNG, people who know the history of the LNG will know that the day Bonny LNG took off was the day Etiebet as minister, gave up 2 percent out of NNPC’s  51 percent to IFC and reduced NNPC interest to 49 percernt. That’s the day the Bonny LNG took off and till today they’ve not missed a cargo in 16 years

So, after that there was a minister and the minister dissolved the board of LNG. The board wrote back to the minister and said you don’t have the power, you can withdraw your members but you can’tdissolve the board. So, there are examples. It’s been shown. If the footprint is not large enough to cause the instability we are seeing in the industry the economy will be better.

About 4 weeks ago, you said that fuel queues will return and it happened now that refineries are starting to work what do you think that portends for subsidy and fuel queues?

My view about subsidy is that it is unfair on this economy. It does not matter who is the president. It is unfair on every citizen of Nigeria to keep subsidy. It is unfair to spend $5billion a year on subsidy when you are spending less than $1billion on capital expenditure, that’s my view. It doesn’t matter the sentimental argument by either union or anybody.

The National Bureau of Statistics published a figure, I don’t know if you saw it, I read it online, average price that Nigerians are buying fuel is N113 per litre and you still want to spend $5b and you say you are subsidizing fuel in two cities, Lagos and Abuja and you can’t tar roads?

On Tuesday, DPR said we have 79years reserve of gas in Nigeria and Seplat has always prioritised gas. What does this mean for the company ?

So, if the country is doing 3bcf per day and you say we have 79 years of reserve maybe 4bcf, so 79 years of reserve means we are doing 2tcf a year essentially.

That’s whatthey are saying okay, and now the power people are telling us that we need to deliver 4bcf a day to power alone and that overall, without LNG, domestic demand by 2020 ought to be about 7bcf a day. So, if we triple production in the next five years that 79 years becomes….divide 79 by 3.

So, I don’t know the significance of having reserves for 79 years when in fact our production is 1/3 of what we demand . So not only do we need to produce more gas, we need to find more gas. I have always said it that this previous 187tcf national reserve has been the same figure for the past 15 years; I havealways said it, as if we have not been producing

You also mentioned gas to power. In the annual report you talked about $3.50; the current price. Do you think the price should go up?

As a company we are modelling a price that we think is sustainable. Today, because of desperation, there are people who are telling us they will pay us $5. We are not signing any agreement with such people. We think that a price of $3 to $3.50 for the long term contract with the normal escalation clause of US inflation which is less than 1% is sustainable. That’s what we think. If it went to up to $4.50 in the next five to ten years that’s even better cause that’s what they pay in Egypt, in South Africa. But here, I think a price in that $3  to $3.50 in that range with necessary escalation and payment guarantee that enables you to plan, that is sustainable.

So even when we see desperate demand that is telling us they will pay $5 to $6 we don’t bother using those prices because we don’t think they are sustainable because if you kill the business that demands the gas then the business won’t be there .