25 Mar 2020

‘Oil companies not leaving Nigeria in next 30 years’

Sarki Auwalu is the Director/Chief Executive Officer of the Department of Petroleum Resources. In this interview with the Business Editor, CLARA NWACHUKWU and FEMI ADEKOYA, he talks about a wide range of issues bordering on oil licensing, compliance with production quotas, gas-to-power, as well as other regulatory issues.

Covid 19 is a global pandemic ravaging the whole world and impacting heavily on oil-producing countries. How is DPR coping with the challenges of this virus?
I will say this is a pandemic that the whole world is facing. Coronavirus is something that has had a huge impact on the energy balance of the world. Once people cannot move, aircraft cannot fly; once energy demand is low, definitely the industry will go low. So, for DPR, we are very careful as we relate with a lot of international oil companies, international service providers, as people fly from different parts of the world and work in the facilities that we monitor, so we consider it very critical. Right before the number of cases rose to the number it is now, we made sure that hand sanitizers are everywhere in the facilities we monitor and in our offices while taking other precautionary measures. This is because we considered that if this virus gets into our operational areas, we will have to shut dow. If we shut down in this era of low oil prices, it will be double jeopardy.

Even at very low oil price, our cost of production per barrel is still very high and the government has for so long said it would address the situation, but that is not happening yet. What is DPR going to do in this regard?
When you talk about production cost, you talk about the average. We are so blessed that we have oil in every terrain. We have it onshore, nearshore, in swamps, offshore, deep offshore and you know that as we go deeper offshore, the cost of production also rises. Again, we have these great reserves whereby the vaults that trap the crude itself is not in a big pool but in several of such pools that require for more wells to be drilled. When you drill, you need a collection point where you need to have flowlines because of the terrain; so all these contribute to the cost of production per barrel as we speak. When you compare Nigeria with countries like Saudi Arabia where they have onshore mainly and the cost of a barrel is just to punch a well here and sell it over there with shorter pipelines and distances, shallower wells, so the cost is lesser compared to us when you add the aggregate cost. To do this, we deployed technology because there are research and development every day and there are two things – one is that the cost of drilling a well at an average is almost the same everywhere, but it is the terrain that differs. When you work over a well to increase production from that well, definitely there is a cost in that number which is economies of scale, so we encourage improved production and enhanced recovery and also cheaper technology that will enable you to produce at a lower price. For example, when you drill a well and you do conventional completion, it is more expensive when you compare it to a smart completion, so we encourage people to go for that smart completion whereby if you change that well into an injectible well or a producing well, you can make it versatile so that it will lower the price because the natural occurrence of hydrocarbon in all the terrain will not allow us to achieve the expected lower cost the way you will put it on a straight line to see it. What we do is to get an aggregate cost and get the cost element to see how we can use technology to reduce it and that is what we are doing.

But the problem mostly is that those costs are usually padded, operators will tell you that they are taking account of their environment plus inflation, but then, the same scenario plays out in other environments?
In DPR, there is a unit called economic value and bench-marking. We developed a solution like software which would aggregate the cost. By law, every company, every year will come and make presentations to us about their work programme and under this work programme, we take cognizance to ask who spent what, which we use to develop the economic value and benchmarking. For investments that have government interests, we now say that for any approval for field development, we use an archive to see the cost. Right now, we have values and that is why we call it to value and benchmarking. Definitely, you will see people resisting and this is a fact, and that was why there was a time we wanted to see how we can reduce the value by some certain percentages because we have empirical data in the sense that we will not approve the field development plan till we now see the economic value. This is because before now, we do not have empirical data and that is helping a lot greatly.

Sarki Auwalu is the Director/Chief Executive Officer of the Department of Petroleum Resources

But does that ensure that producers declare actual production?
Yes of course, because when it comes to actual production, it is different from field development. These are two different things. When you talk about field development, you talk about the cost of developing a field and how you reduce it and make it optimal and when you talk about the cost of production which implies the cost per barrel. Yes, they declare because the unit cost is a function of the investment you make based on the terrain, number of wells you drill, number of people you employ and the companies have no option but to declare. After all, we charge them royalty based on what they produce.

Despite government promises to jumpstart activities in the industry, apart from ExxonMobil and Total, the rest are probably on holiday. What is happening in terms of new finds, exploration and production activities?
Well, I do not know what ExxonMobil or Total did, but I can tell you that the industry is very active, and why do I say this? At present, the industry is maturing and you know that the last time we did license was around 2007 and people invested, people paid bonuses and developed the fields. Right now, what the industry is doing is to see how they revamp and upgrade the fields. There is no international oil company that does not have de-bottlenecking, upgrading or deeper-drilling. Most of the companies that are involved for example in LNG projects, go to drill deeper so that they can get gas to supply rather than going to spend money to explore in new areas. In 2018 and 2019, Seplat alone invested $4 billion. All the investments that came through a gas are Shell; look at Obi-Obi, it is Agip; Egina, it is Total. So, if you look at each of these companies, there is one thing or the other that they are doing because they come here to present their work programmes and for work programmes, the moment you are not active in any field, not making any investment, what we do is carve the field out and put in the offing, there might not be any find and it is not affecting us alone it is affecting them as well because the volume of the reserve they declare from Nigeria determines their price in the international market as they are in the stock market. So, it is in their best interest also to make the finds. It is also in their best interest to be profitable; profitable in the sense that we explore this and we invest, let us see what we can do so that we increase the line of this project and none of the IOCs is thinking of leaving Nigeria in the next 30 years.

Even though you say a lot of them are involved in a number of activities, the belief out there is that a whole lot of blocks are lying fallow and like you said if there is no investment they will relinquish some after five or ten years, but that does not seem to be happening. The IOCs are reluctant to relinquish and DPR is not enforcing that relinquishment policy.

Not only relinquishment, but it is also in the news that we revoked even some active fields; we revoked 98 licences. We revoked many fields and the essence is that it is not in the interest of the company for them to relinquish. What we rate them with is the rate at which they renew the oil mining lease (OML), and a lot of these IOCs take for example Shell, they renewed over 27 OMLs and for the country, it means that we are getting more money. If you come and you renew your mining lease, you are telling me that you are ready to stay in the country for the next 30 years and all of them are doing that. So, this gives us the confidence to say yes, this is real and they come to us and say we want to renew the OML and they renew. When we issue the renewal, we are confident that they are going to stay for the next 30 years and that is our number one pointer.

Secondly, all the known active dormant fields were identified and we asked why are they dormant. Take for example, for an IOC, if a field that is discovered, the risk reserves is 50 million or 40 million barrels, it will be too marginal for Shell to go because of their overhead cost. For some, if the risk reserve is like 200 million or 250 million, they will now decide to say; look, we reserve the right to farm out so that we can still make money out of this if we get somebody to farm-in, and there are lots of applications for that to show that these IOCs are ready.
The Local Oil Companies (LOCs) that farm-in are active as well. So for me, the way I see the industry is an industry that is maturing. The IOCs do not want to take more of overheads, the dormant fields they allow the government to take and the active fields they tell the government to renew and they pay all the renewal fees. They tell the government that we are in it and here they are renewing their licences to say they are going to work with the government for the next 25 years. Those fields that are not economical enough for them are good enough for them to farm-out. They keep it in view and they want to do that and that is why you see some of these IOCs trying to say they have marginal fields they want to give out, but what they really want to do is to farm-out because they have spent money, time but unfortunately, it is not economical for them because it would affect their profit margins. So they rather value it and let someone else farm-in so that government will still make money as the resource does not belong to them anyway, even though they own the lease. However, they want to farm-out of the lease so that someone else will farm-in, and it is a win-win situation for the parties involved.

Since you raised the issue of farm-in and farm-out, I remember what Shell did some years ago when they sold some of their marginal fields and most of the Nigerian companies that bought those assets paid highly because they believed they were going to be operators of those assets, but unfortunately, NNPC came with NPDC with right of first refusal, and many of them complained, saying they thought they would become operators rather than just being a shareowner. Is that fair?
There is a lot to be done when a company wants to farm-out or farm-in, the Nigerian companies did not do their due diligence very well. I want to buy something and I need to know what I am buying and again, a lot of companies seldom come to DPR for due diligence, but rely on consultants that do not know anything. This is a house that has data for everybody; we have a national data repository and this an authentic data which IOCs rely on, but yes, I am a Nigerian company where Shell has agreed to divest to me, so I will only rely on consultants that Shell recommends to me rather than coming to DPR. I want to know what is the available resource here, who does what and what is the history of this growth? They had the advantage, but they did not do that. Secondly, they did not know the rule of engagement for Joint Venture Partnership, nobody reads; and remember, the stake of Shell is not Shell alone, it is Shell, Agip, Total and the likes, so there are no operating venture partners who are the main owners, and the owner of the venture is NNPC, so they have the right of first refusal. If you have 20 per cent or 30 per cent and you want to go out and the person coming in wants to feel that I am to operate, then there is a big problem and that is why we advise them to do their due diligence. Again, look at it this way; NPDC is the only 100 per cent Nigerian company owned by 200 million people, you, me and everybody, we own NPDC. And going into a time where NPDC is the only Nigerian company, where its production is not up to 10000 barrels is a shame, because every country that produces oil and gas, their national oil gas company is up there, look at Petrobras, look Equinor, all these are national oil companies. NNPC is not an oil company it is a corporation housing many other companies, but NPDC is the truly national E&P company that explores oil and gas, and sells crude for 200 million people, so that company needs to be very strong and they are in onshore and offshore.

If somebody will come, NNPC owns 60 per cent and they have an E&P company, to allow an incoming person who does not have the experience of NPDC, it does not make sense for Nigeria to allow that to happen, and today, NPDC is producing over 200,000 barrels daily. That will never have happened if NNPC does not exercise its right of refusal. So I see it from a perspective of having to protect the interest of 200 million people as against a limited liability company that borrows money at the international market or from national market to take over a field and operate for a limited number of people rather than operating for 200 million people. This is my view, and I think we should be thinking about how NPDC will be better than Equinor or Petrobras or Petronas. Today, Equinor is all over the world, it is a national company of Norway, Petronas is all over the world and it is a national company of Malaysia, Petrobras is all over the world and it is a national company of Brazil. NPDC is the replica and it is only a few years back it hit over 800,000 barrels which is a shame. A country that exports about 1.7 million to 2 million barrels, the production capacity of the company the entire nation own it. I see it from a nationalistic point of view that we need to empower that national company that will bring more accountability, probity and transparency. If people are aware that this is our company, they will not look at Shell. Look at Amni when they decided to leave, nobody believed that NPDC could run the Okoro field and that was the first time the jinx was broken. Thank God for that management who authorised NPDC to take over, look at it now, NPDC is the cash cow for NNPC and the nation.