‘Investment impasse, not theft, accounts for oil output fall’

• Output decline to continue until NUPRC rises to duty
• NNPC must yield local tussle for value driven partnerships

His voice commands power in the petroleum industry where he has traversed the full activity routes and provided leadership to different professional and investment groups. The Chairman of A A Holdings, MR AUSTIN AVURU, tells Sopuruchi Onwuka in this exclusive interview that Nigeria’s energy crises, falling production and commodity income will worsen until regulators rise to the duty of efficiently managing the prevailing asset ownership change. He also frowns at the intimidating presence of NNPC in the industry. We present the excerpts.

Nigeria is Africa’s biggest oil producing province, holding highest installed output and refining capacity. However the acute shortage of energy, from transportation fuels to electricity, remains recurrent and keeps escalating.  This problem keeps pulling the trigger for inflation and poverty. What can we do?

The problem, in my view, might be likely complicated but it is not difficult to understand. In the past 10 years, and more particularly in the past five years, the industry has been passing through a transition. Unfortunately, the transition has not been well managed.

So, we are in a situation where the key investors, the major multinationals, upon which the country has relied for the past 60 years for delivery of its crude oil and natural gas production, are leaving us behind.

I know that in all these period of 60 years, these companies have been dependable allies of government. When the government prepared its budgets, it simply pulled the figures from these companies: Shell, ExxonMobil, TotalEnergies, Agip, Chevron, Addax; about six, seven of them. So government would base its budget on the companies and those production volumes were delivered. Even in terms of policies, plans and investments in gas monetization, these foreign companies also delivered. When we wanted to do LNG, they also delivered on the aspiration. So the country got used to that dependence on both the efficiency and the reliance on these multinationals.

The signals have been there in the past 10 years that they are withdrawing, at least from our traditional onshore and shallow water terrains. And if the managers of the industry had handled this properly, we would have been able to manage the transition in such a way that we cultivate the independence: indigenous independence or a combination of multinational and indigenous independence.

Usually when multinationals are pulling out if a mature basin, the independents take over. That process needed to have been managed well so that it would be seamless. But unfortunately it has not been managed well. And to make matters worse for those who are pulling out, working their sale process and selling to indigenous independents passed through a process where there was no regulatory mediation. And when the process finishes, even getting approval takes another two to three years.

What it then creates is a transition period of about four years between when the process starts and when the new owners take over. That period of four years is no man’s land. Neither the buyer nor the seller is in a position to work the assets.

So, when you look at it, I can count on my fingers about four or five critical assets that are in deficit of about 400,000 barrels of production per day.

What?

Yes, you can count them yourself. Go back and count some three or four big Shell assets that could have been doing about 600,000 barrels per day if they were put on peak production. But today, between the four they are doing 150,000 barrels per day at best. So, that is already a fault of 450,000 barrels per day in production deficit.

You add that to the ExxonMobil assets which have declined from about 360,000 barrels per day to about whatever it has become today, because in the past six year there has been no investments in them because the majors are leaving. So we have period in which the major is no longer staking investments because it is leaving and the new buyers have not taken over.

So, when you take another 200,000 barrels from ExxonMobil, you see that you can easily account for the 600,000-700,000 barrels per day deficit today. And instead of understanding where the deficits are coming from, we wave it aside and say it is crude oil theft.

Nobody is stealing 800,000 barrels of crude oil per day and brings you from 2.2 million barrels to 1.2 million barrels per day.

What I have just described are the problems of badly managed transition and subsequent lack of investments over this period and what have led to this major decline.

There is theft, but nobody is stealing 800,000 barrels of crude oil per day. That is what I am saying.

So, what is the solution? It is to come in and manage this transition properly. The PIA has enough provisions to manage the industry in such a way that only those who are serious, who are competent and probably have investment funds will remain in the industry. That is the only when we will gradually ramp up production through the support of those who have the competence and the resources.

And I keep emphasizing that it does not have to be all Nigerian independents. It could be independents from anywhere in the world who can manage the resources well.

The resources are still there. These assets are still good. It is only that they are below the threshold of the multinationals. You see what ExxonMobil is doing in Guyana. So if you are gaining so much billions of barrels of cheap oil in Guyana, it justifies your shifting of focus. It doesn’t mean that resources have dried in their Nigerian assets. The resources are there and there are people who can work them.

So, it requires the managers of the industry to go back, sit back in a war room to sort out the basic problems where this transition could be managed properly, quickly and in such a way that every single asset in our terrain today is being worked by those who have capacity to work them. Then we can start climbing back to our 2.2 million barrels per day of production. Otherwise it is going to get worse.

Go to deepwater; all the multinationals are not making further investments in that area. Check it out. None of them is making any further investments in deepwater. So, deepwater production has been declining steadily. From peak of 800,000 barrels per day we are currently doing 550,000 barrels per day. In another two years, deepwater production would be probably 400,000 barrels per day if nothing is urgently done. 

Currently, there appears to be not enough effort to reverse the trend of decline. So, there is work to be done; and that work is for the managers of the industry to re-establish competent operators to take over from those who are leaving. That simple job has to be done.

If you drill this analogy down to midstream and downstream especially in the areas of gas and refinery, why are we still in such crises even with so much abundance of resources?

They are all connected and it is that simple. Now everybody is now boasting that in the next two years Nigeria is going to be the largest refining hub in the world. Is it coming from government? So, this tells you that the reason we have not been the refining hub all these while is because government is actually standing in the way. If government had sold all those refineries 10 years ago we won’t be where we are now.

Everybody is waiting for Dangote Refinery. Is it government that set it up? These modular refineries some which are delivering badly needed diesel in local areas today is it government that set them up? The BUA refinery that will probably be processing some 200,000 barrels per day in the next two year is it by government?

I have always said this: if government stays out of the way, the private sector is ready and capable to step in. Therefore, if everything works well a combination of government refineries they are trying to revamp and the refineries being built by the private sector will jointly give us refining capacity of about 1.2 million barrels per day. That is where we should have been 10m years ago. And 87 percent of that will be for export. So, there will be value addition before export.

Then we are going to go back again. Why not solve this problem of competent operators taking over and assist us deliver the volume of gas required to revamp this economy? We have stagnated since 2015. Between 2010 and 2015 we rapidly ramped up from about 300 million standard cubic feet (scf) of gas to about 1.1 bcf per day. We have stagnated at that figure since 2015! We need to start going up to 3.0 Bcf of domestic gas to be able to service the industries and the power stations that need it.

Again, that whole transition required to deliver those volumes would need to be managed properly by industry managers. If we don’t have an NUPRC that will take this industry to where it should be then we are in trouble. It is not a job for NNPC; it is a job for the regulator.

Why not NNPC, sir?

The NNPC is now in the fray with competitors. So, they have to settle down, swim or sink. You have to operate efficiently or die. We have seen government’s limited liability companies that failed to lift off the ground. We were here when NITEL was given its license for mobile telecommunications.  So where is NITEL? So, NNPC is currently chasing its own demons now as a limited liability company.

I am sorry to pose this question sir. There is huge concern in the industry about the intimidating presence of the NNPC in the domestic environment where it has been accused of choking out its own partners from competition and slating the playing field with overriding powers. So, as an International National Oil Company, should NNPC be competing locally or internationally like Petrobras and Equinor?

The NNPC should not try to choke out the independents! The independents are going to replace the multinationals. You cannot wish that away. It is not the independents that the multinationals should go. They are going anyway. And if the indigenous independents don’t fill the space, the international independents will come in eventually. So, really the NNPC should be building very viable and valuable partnerships rather than struggling with any of its small partners. It is uncalled for.

There is no need for local competition. NNPC is already a partner in all the assets. All NNPC needs to do is to strengthen its partnerships; strengthen the operational efficiency in their partnerships such that between them and their partners they deliver value. The national oil company has no need to fight its partners over assets. It already has over 50 or 55 percent in all the partners’ assets.

Credit to NNPC, increasingly they are moving close to the FTSA arrangement where cash calls and all those issues would no longer be there. Provided the FTSA contractor is competent, efficient and prudent; then the operator will deliver value to the owners of the asset including the NNPC. It is a modified form of what used to be PSC.  I understand the Indians are starting well with the model and we will see what will come out of that.

So, those are the areas NNPC should concentrate on: that is, restructuring its partnerships to deliver value and minimising the disruption that come from cash call issues. That is the area on which it should concentrate.

The NNPC should not try to choke out the independents! The independents are going to replace the multinationals. You cannot wish that away. It is not the fault of the independents that the multinationals should go. They are going anyway. And if the indigenous independents don’t fill the space, the international independents will come in eventually. So, really the NNPC should be building very viable and valuable partnerships rather than struggling with any of its small partners. It is uncalled for.

The 2022 oil profit windfall by the IOCs and INOCs lay huge exploration investment agenda. How do you think Nigeria should position to attract and trap international investments, especially with the situation where the big players on ground are leaving?   

That is part of the points I am making. Each of those state oil companies you mentioned like Saudi Aramco and ADNOC has developed partnership that works for it. Saudi Aramco brings in multinational companies to work for it as contractors. It has worked for them. All the big multinational companies are there in Saudi Arabia but not under the structure of the JV we have here.

Look at ADNOC. The CEO of the company at some time was British.  They have also worked out the partnership model that delivers value for them. And that it is the point I am making. What is important is to take these resources out of the ground to the market at the minimum cost.

So, NNPC has to work out the partnership that works for her to deliver the resources at the lowest cost. The partners will make their money and the NNPC will make its money on behalf of the federation account. That is what should happen.

We cannot sit down here and be giving excuses why we are delivering half of the volumes we should be delivering at twice the cost! Nobody is being held accountable, otherwise you can’t explain it. We cannot be producing half of our volume at $30 per barrel when we should be doing 2.2 million barrels per day at less than $10 per barrel. So, where is the profit going to come from? The volume is low; the cost is too high. Nobody can render any result. That is the case. That is the very first point I made here: we have to create partnerships that works for the national oil company and jointly create value for the federation account. And that is regulatory and participatory: regulatory from the NUPRC and participatory from NNPC.

Time has come to hold people accountable for delivering on targets. This is the volume, this is the cost, and this is the projection of revenue we are looking for. And they should be held accountable for delivering on the targets. There should be no excuses.

The multinational oil companies are still pumping money into new and unproven hydrocarbon provinces in Sub-Saharan Africa, building new LNGs and driving new explorations at a time they are pulling out of Nigeria. What is wrong with our environment?

First of all we are fortunate as country to have resilient investors in the petroleum industry. You don’t find it anywhere else in Africa.

Look, we used to think that without LaFarge, when it was still West Africa Portland Cement Company, there would be no cement. LaFarge is now a minor producer of cement compared to Dagote and BUA.

We just discussed the midstream where we thought that without Shell there would be no refineries.

We have seen it in the banking sector where the same people who came in as multinationals to set up First Bank when it was Standard Bank, Barclays Bank and International Bank of West Africa (IBWA) We had thought there would be no bank in Nigeria when they would pull out. Then we now have Nigerian banks!

But Central Bank managed the transition that enabled these Nigerian banks to come in and build capacity. Now if you go to Ghana today, after Barclays Bank the major banks there are Nigerian banks. We are heading in that direction in Kenya.

So, we are already fortunate to have a resilient private sector that is very robust. Governance is a problem here.  So, what we need to do, for those who manage this economy, is to do it in the same way they did it in South Korea. And you need to manage the private sector well. If you don’t manage them well to institutionalize corporate governance, they will fail and everybody will be blaming everybody.

So, back to the exiting oil multinationals, if we manage them well, then some smaller multinationals will ride on their back and come back here. Other countries are not as lucky to have a resilient private sector that can move into this gaps being created by the exit. So, I am not chewing my fingers over companies that are leaving. I am chewing my fingers about our inability to manage the transition well because we have the capacity to replace them.

You are a leading geologist in the Nigerian petroleum industry. And we are seing licensing rounds swinging from the conventional Niger Delta terrain to the Dahomey Basin which is largely untested. Some un-awarded exploration blocks still lie in the deepwater. So, why are we not using the tested deepwater block to woo new multinational investors or retain existing ones instead of trying to open up an uncertain terrain?

I think the NUPRC as a regulator is doing its job properly to ensure that every basin that has any prospect at all is tested. It is for the same reason that 30 years ago we went to Chad and Benue Trough to see what we have there otherwise it will never be explored.

You are right. Most of the untested parts of the terrains in the country is the Dahomey Basin. We need to test it. And if we are lucky and a couple of competent companies snatch up these blocks, they will drill wells and know what is there! And that is the job of the regulator: to be sure that they at least understand what is there and what is not there.

I hope we are not going to slide back to one licensing round every 30 years. I am assuming that at least every year there would be mini licensing rounds like this. As block are thrown up and thrown into the basket by those who cannot work their acreages, we will be doing more licensing rounds until a point where we have a bunch of competent operators, as I said earlier, with the competence and the resources to work these assets. Whether in deepwater, traditional basins, the Dahomey Basin, even in the Benue Trough; what we really need is a large basket of operators with competence and resources. And I hope that is what they will do if this licensing round continues on regular basis.

We have large volume discoveries like the Owowo, Zabazaba, Bosi, and other that are yet to be developed. We have also seen price cycles like the 2020 demand destruction that threaten commerciality of these assets. Currently we record declining output at a time of strong price cycle. Why are we still sitting on these assets?

Again, this takes us back to where we started. That is: the managers of this industry must consciously create a basket of operators that are efficient and competent. This means that cost must come down and the hunger to produce must be there. You normally find it in the independents. We should create a basket of competent independents, not all comers.  

Interestingly, the multinationals still have discovered resources they are not developing or appraising. Eventually they will all be produced.

And anybody who is sensible should be in a hurry now to produce the resources he has because of energy transition. I am not one of those who think that energy transition is a 10 year thing. No, but maximize your production especially when the prices are looking good.

So, my simple answer is: our focus in managing this industry is to create a basket of competent, efficient operators that will collectively bring cost down to the very lowest and optimize production. Those are the two things: optimize production and lower the cost and all of those volumes will come to the market ultimately.

Is it possible to give up these assets if people are not willing to invest in their development?

Yes, that is why I referred to the PIA earlier. If the NUPRC implements the terms of the PIA, when everybody will be converted to the new terms, you will no longer have the luxury of sitting on assets for 10 years without doing anything. It will be drill or drop.

If they give you an asset, you come up with a development programme and the timing. If you don’t develop within that time; there is no provision to write you to be explaining. If you don’t develop, then the assets just fall back into the basket of the NUPRC. So, if you don’t develop, you will be continuously giving up portions of your asset into the basket and the NUPRC will be continuously doing this bid round until you have a large number of independents that are efficient enough to produce the assets at low prices. That is what will happen.

But that should be their target! It is a well managed process that would deliver the results I am describing. It can’t drop from the air.

Nigerian players will build the capacity for crew change if the regulator manages the process well in such a manner that those who are building capacity and demonstrating efficiency will see the benefit, stay in the business, produce the volumes and make money.

Conversely, those who just loiter in the space because people are coming will also see that they cannot survive in a strong regulatory environment.  

I like using the banking sector for illustration. We have more than 126 Nigerian banks but again we have about five banks they call frugals that control 70 percent of the market. And they are spreading across Africa. It will be eventually be like that in the upstream petroleum industry.