MAXIMIZING NIGERIA’S DOMESTIC ENERGY CONSUMPTION DESPITE PRICE VOLATILITY

                                                         Austin Avuru, Seplat, CEO

Oil price volatility means a lot for operators at all levels including the country at large. Stakeholders believe that in 2040 the oil and gas industry will be insignificant but there is sharp rise in renewable and gas production. Assessing combination of oil and gas, it still accounts for about 50% of energy mix hence there is still hope for the industry. Fifteen years ago there have been some changes in terms of production in the industry.

Expressing concerns about price volatility, Chief Executive Officer of Seplat, Austin Avuru, said at present, technology has brought solution into the oil industry. Tight oil and gas is the introduction of technology into energy mix given the right price regime to supplement conventional oil and gas. In his words, “If we didn’t have tight oil and tight gas today, probably oil will be $200 per barrel, so what you see is a supplementary volume coming from the application of technology to curtail prices.”

Avuru was of the view that independent operators in the oil industry, from 2010 to 2015 lent money to buy assets and do same to keep them. Seplat financed its debt with $1 billion to keep its assets in February 2015 when oil price crashed. According to Avuru, “It is a miracle that we were not wiped out from the surface of the earth, all the private operators.” Some independents are still struggling as a result of the ugly situation the industry found itself then. The oil majors survived because they have resilience and could adapt to any challenges in the industry. They used Capital Expenditure (CAPEX), for adjustments.

Oil crash affected Nigeria and the country’s economy went into recession. The cause of recession has nothing to do with fiscal regime but because production was low coupled with crash in oil price. The crash affected exploration and investments. When exploration and CAPEX drop, other circles for the next three years will feel the impact.

The Seplat CEO explained that oil and gas account for about 90% of Nigeria’s foreign earnings, 80% of government revenue and 60% of government tax receipts. When there is crash in prices, 90% of foreign earnings will be reduced by half. In the same vein, when production and oil drop below budget price, it will have adverse effect.

Avuru dissected Nigeria’s economy which picked up by 2.4% negative GDP growth, in July 2017, it improved minimally while the country still struggles with about 2% GDP growth in 2018 and it is expected to improve in 2019 with about 1.9%

He explained further that in price volatility regime, there are key things to consider for survival either as a country or as a company. There is need for financial resilience. Avuru said Seplat has learnt its lessons, “Never again do we get to a point where we can’t pay our vendors, contractors, we have to risk payment and every other thing.” The company managed its balance sheet to key cash position. He advised oil companies to draw a line for a certain cash reserve decision in the balance sheet and tune all CAPEX spend. The Chief Finance Officer takes care of this aspect while there should be time frame for the implementation.

In terms of operational activities, there is need for resilience, a culture which Seplat has imbibed in all its wells. According to Avuru, Sepat portfolio resilience also kept the company at bay. This saw the company throughout its difficult period when for sixteen months, “Seplat could not export oil through trans-Forcados.” However, the company survived through gas production. It produced 200 million scoff of gas, and about 10000 barrels of associated condenses hence “Portfolio resilience is important so that you can tune and make adjustments as to where the revenues will come from.”

The Seplat boss opined that confidence is gradually returning into the oil and gas industry after major upset due to price crash. He said about 32 sanctioned projects have been executed and by the end of 2018, there will also be another 30 FIDs which was down to 7 and it rose to 10 projects from 2015 to 2016. Indeed, there is confidence now in the industry as projects are being sanctioned.

There is a paradigm shift for Nigeria to use its gas resources not as a rental revenue agent, but as an enabler for business and bigger economic growth. Avuru noted that a nation is as large as how many energy it consumed, “When you produce 8.9 billion cubic feet (bcf) a day and only 9% of it is consumed domestically, it says a lot of how our economic looks like.”  He stated further that countries with largest GDP per capita are also the largest energy consumer per capita.

As a country and as an economy “Our aspiration, beyond just increasing our oil and gas production, should actually be to maximize our domestic energy consumption,” Avuru averred. This is the crux of the matter and what will expand the economy of the country, not just receiving 25 to 30 billion dollars yearly as oil revenues through foreign earnings. 

On power generation, Avuru pointed out that Nigeria’s gas production should have gone up from 1 bcf a day where it is currently to 12 bcf in 2020, unfortunately, the country has not been able to attain this feat. The ailing power sector with minimal distribution is responsible for this, by 2020, Nigeria is supposed to be delivering 15 Megawatts (MW) per day, at present, the country distributes and transmits 3700 MW. In fact, in the past four months, due to heavy downpour hydro stations have increased power generation from average of 700 MW to about 2000 MW. This is capable to increase power generation to about 5000 MW, the thermal stations have been mandated to reduce production by half because only 3700 MW can only be distributed.

The power sector is still hovering around where it was four years ago domestic gas consumption has not gone beyond 1 bcf per day. Ultimately, the country needs to get to the point where it will be generating 40 MW because of its teeming population while consuming 12 bcf of gas a day. Avuru said, “That is the aspiration.”

The aspect of refining has remained in retrogressive state. The refining capacity remains low for the past fifteen years. The country will be unable to manage its refinery due to its current ownership structure unless the government takes decisive action and do the needful. The journey may be a little longer and the 2019 vision has been shifted to 2021 for refinery progression. But, ultimately, the additional 650 000 barrels private sector financed built refinery will augment the country’s existing refineries. Hopefully, the government will sell its refineries to private investors in order to boost production domestically with other private driven concerns. The aspiration of refining domestically will definitely be achieved by 2023 to 2025.

Avuru stated thus, “If we then get to that point when we are doing 5 bcf gas to power and supplying gas to heavy industry, cement, agriculture, fertilizers, petrochemicals out of our gas production with of 1.2 million barrels per day and gas distribution network that is functional and effective, what the country needs to do is just pay attention to its transportation particularly rail and water.” This is not rocket science, it is something that can be done by the government. “If it is done in four years, the country’s GDP will be doubled in eight years.”

Speaking optimistically about the progress of Seplat, Avuru said the only competitors that the indigenous company has in its domestic gas processing and distribution business, are other independents like it. Seplat is in one hub in the west of Oben, and between its plants in Oben and Sapele, the company has a processing capacity of about 520 million scf capacity of gas a day up from 16 million scf when it took over the asset in 2010. Seplat supplies one third of gas to power in Nigeria. It was 400 scf but in June, 2018, the company has been producing between 189 to 210 million scf because the thermal plants are not taking gas.

Avuru revealed that the problem of power in Nigeria is not due to non-availability of gas rather gas is not been taken from gas companies. The company produces half of its production. Seplat is proposing a Jiont Venture with NNPC to build another 300 million scf in the Southeast including other satellite plants. The company is part of the gas to power story in Nigeria. Avuru stated that operators can build necessary operational and financial resilience with proper planning, if oil price drops due to fluctuations, companies can still be doing business in the country. For instance, multinationals have been producing oil in Nigeria for the past sixty years and price fluctuations have never kept them out of business. He advised operators that oil price fluctuations should be seen as part of the risk of business, “And your job is to manage that risk and not to be affected it.” 

Indeed, the Seplat story in times of price volatility is a positive one for oil operators either marginal or major to learn from its experience and how it survived from a near collapse.