Low prices not the problem
Managing Director of Energia Felix Amieyeofori talks to AOP about financing as the missing link in Nigerian local content, barriers to entry for local technology providers, and how Nigerian firms are surviving low prices and militant attacks in the Niger Delta.
Nigeria is seen as a beacon of local content success for other Sub-Saharan African countries, but critics say the work is not yet finished. What remains to be done?
Local content started a long time ago in Nigeria, but it has not evolved. It started with the government allowing indigenous companies to participate in the upstream segment as far back as 1990. But the real challenge is that the oil and industry is capital intensive. The government did not factor in this dearth of adequate capital in the local financial sector. The fact is that the locals are not able to fund the industry and when the government came up with the marginal fields round in 2003, they did not see that picture. They awarded 24 fields to 31 companies, but they missed one aspect: How do the local companies secure funding to participate in the oil and gas industry alongside the international oil companies? This is the reason for the rather poor performance of the marginal field awards, as most of these assets are truly marginal in reserves, coupled with adverse crude properties, and located far from existing infrastructures.
Local banks were able to syndicate most of the funds, estimated at $2.5 billion, required by local companies to pay for assets during recent divestments by the IOCs because of the quality of these assets in terms of reserves, facilities and production potential. This, however, is crippling our economy as the banks can barely fund any major oil and gas projects in the country. It is seriously affecting the funding of marginal field assets, since they rely more on local financing. For local companies to compete favorably in the capital intensive oil and gas industry, they require easy access to funds and this is not forthcoming at the moment.
For us to really have a local oil and gas industry, there has to be a collective effort between the oil and gas operators, government, and the banks in order to build the required financial capacity. The government has to create the right environment for Nigerian companies to be able to access foreign capital. For a small company like Energia to drill one well and put it into production costs about $25 million, so a four-well program over a year will cost $100 million. Bigger companies like Seplat need almost $1 billion for projects per year, and this capacity is not within the Nigerian sector. So that is what we are saying to the government: you have to create an environment where we can access foreign capital to be able to invest in the business.
The second problem is technology. Technology is still foreign; it is still outsourced. We need to work towards domesticating the needed technology as we cannot import every tool and everything we need into the country. That is a capital flight. Otherwise, in terms of knowledge, collaboration and expertise, Nigerians have with time acquired the necessary skills to operate assets. Our obstacle for a complete ownership of the industry is the capital.
What are the barriers for Nigerian companies in terms of access to new technologies in E&P and power?
Definitely we are behind. We buy the technology and bring it from abroad because we have to. Presently, those who have the technology are international services companies like Schlumberger. Local content law says that these international companies must collaborate with local companies to operate here. To me, that is not the real solution. The real solution is to come together and ask: How can we get these companies to come into Nigeria and set up bases, repair shops, assembly shops, and manufacturing? Because until that happens, the overhead for Nigerian companies will still be very high, as they still have to go to Schlumberger or Halliburton to buy or rent their tools. Like the internationals, they also have to fly tools in from abroad at a very expensive rate.
These technologies are available, but at a very exorbitant costs and Nigerian companies have to pay a premium to use them. For this reason, our local services providers cannot give low rates. In a bidding process, the international company will always win.
What is Energia’s strategy to continue exploration and development activities in the face of a sustained low-price environment?
The low price is something we are getting used to it. For those of us who have been in the industry for more than two decades, we have seen these cycles of booms and busts. The oil industry is not a stranger to low prices. For Nigeria, the problem is the militants in the Niger Delta attacking the oil infrastructure.
We are losing 700,000 barrels per day to these attacks, which adds up to an enormous amount of revenue. Most countries don’t even produce 700,000 barrels per day, but that is what Nigeria is losing to the militants. Our problem is not low oil prices, it is that we cannot produce effectively and plan. Today you have a pipeline, but tomorrow the pipeline is out. Today you have a terminal, but tomorrow the terminal is out. We are becoming aware that for us to survive and for the economy to survive, we have to discuss with the service providers how to spread out our cash flow. Cash flow is based on availability of exports, and we cannot sell as frequently as we should. That is how the industry can survive until the government solves the militancy problem.
Energia is also turning to downstream. We are working on installing a refinery; that way, whatever we produce we can refine and sell in-country. Nigeria still imports 80 percent of its products. The refinery should come on stream in 2019 and will boost our economy. We are also looking at creating a temporary export terminal, so there is a lot of creativity among Nigerian companies in solving these issues.
Frankly, we have very little control over oil prices. This is an international factor based partly on the geopolitical environment, but whatever we can do to remain sustainable at a reasonable price is what we are doing.
This is the first post of a two-part interview with Mr. Amieyeofori. Read part two here. Join the Energia MD at Africa Oil & Power 2017, where he will appear on stage with Nigerian E&P and power experts and international finance executives as a panelist.