Seplat Petroleum is one of the indigenous operators in the Nigeria’s oil industry. The company is listed in both Nigeria Stock Exchange and London Stock Exchange. Its Managing Director Austin Avuru knows his onions very well and at a dinner with editors tagged “Evening with Seplat CEO” recently in Lagos, Avuru took time to explain some thorny issues in the oil industry like the effects of the drop in oil prices, the controversy surrounding the Petroleum Industry Bill and other issues affecting the oil industry. TUNDE RAHMAN, who attended the session, brings the excerpt of the interview…
Beyond the ownership of oil blocks and the feel -good factor that indigenous players are actually participating in the downstream oil sector, how does oil block owned by Nigerians benefit the Nigerian economy?
Yes, I appreciate your view on the feel-good effect, which comes with ownership of oil bloc. At a recent event, I had said publicly that we have reached a point where the things that should drive the whole policy of indigenous participation should be valued to this economy and not the feel-good effect. We have passed that point. As you know,we have been listed in the London Stock Exchange and when you are listed, you cannot play tricks. For us, we pay our taxes and royalties as and when due. If you ask me if we paid our royalties in December, I can proudly confirm the date we remitted it. We operate like any other multinationals operate. We are absolutely no different from the way multinational practises here. Since we must pay all things that are due, we can only make profit if we are efficient. So, the reason why we went to London Stock Exchange was in the determination to build a company with long term survival. In actual fact, long term survival and health of our company depend largely on how well the company we have been able to run both in terms of corporate governance, efficiency and prudence. As I said earlier, at $100 per barrel, if you dodge tactics of royalties, you can do just about anything and still make money. But for us, we don’t operate that way. That is probably why you cannot find any Nigerian company whose production graphics and plot remain the same for 5 years. I remembered that at a time foreign companies like Addax, Elf, Texaco were producing between 25,000 and 32,000 barrel per day. If you watch their graph, for over 50 years, you will realise that they were all ramped up and stayed there. But if you take a typical indigenous oil company, once they ramp up production, even though they do not have a good asset but did well in succession for three years, once it is five years, it is gone. You will see company that is doing 37,000 barrel before now doing 3,000 . So, the difference between these companies and their foreign counterpart is corporate governance. If you think you are interested in the feel-good effect, of course, you will make money for some times but you won’t last for a long time. I think, as an industry, we have passed that stage. I think that is what the regulator should hammer on. The regulator should treat everybody on a corporate and fair ground including the tax that you should be paid. On our part as a company, we don’t joke with the four levels of our stakeholders, which include the shareholders, host communities, staff and shareholders. Each of these stakeholders must benefit in what we do. It is really important that these things are understood. Nobody comes here with the feeling of the feel-good effect because it does not help the company, the industry as well as the nation.
What sort of perception does the divestment from Nigeria by IOC selling marginal oil fields create in the international finance market?. Does it affect the ways indigenous oil companies are able to source for funds and work with international partners?
Divestment is not new but it is just that our industry was less than 30 years when it started. The first time I started dreaming of participating in this business, I was working for Kase Lawal in Ireland . At that time, Shell has one of its subsidiaries, Shell Vector in Cameroon in 1998, which was producing 3,000barrels from all its assets. We open a data room and we went as ally to the data room because we were bidding to buy it over. It took a long time before it was eventually sold. These always happen. So, it is not a new phenomenon. I knew that it was going to happen. The difference would have been that if Nigerian companies were not available to participate, smaller foreign companies would still have been buying the assets that we are buying. We would not have stopped the divestment from happening. The difference in Nigeria is that divestment is happening and the asset is going to indigenous companies. Elsewhere, it would have been some American Independents, European Independents or Chinese Independents buying the same asset. That is what Perinwinco does around the world. It is now new. In term of perception, it has created a new vista. At the moment, about 5billion dollar in debt has been injected into these assets. So far, we have invested 5billion now. And between 2009 and 2010, we invested 3billion naira making it $8 billion in total and 70% of that debt are from Nigerian banks. For me, I think it has created a corporately new environment because Nigerian banks have moved in. It behoves on us to make it a success because if we fail, the larger implication will be very ugly because many Nigerian banks are neck deep in this business. So, we cannot afford to fail.
Are there aspects of PIB that indigenous oil firms find uncomfortable?
I will leave the issue of PIB until when it resurfaces to see what the clauses are. In 2009, when we were initiating the transaction to buy these assets, a mutual friend asked me why we should go into this kind of transaction when the PIB is about to be passed. To him, you cannot take such investment decision without considering the passage of the PIB. I had this discussion with him mid-2009. But if you look at it since then when we had gone ahead to take the investment decision, you will realize that others have taken similar step thereafter. As I speak, $8billion of similar assets sales have happened after ours and yet PIB has not been passed. In Seplat, our business model is to keep moving in spite of and not the PIB. Whenever the PIB becomes law, our lawyers will take a look at it, our planning and economists will take a look at it, and come to the board to tell us the ramifications and implications of all the clauses and whether the business model need to change along a particular line. So, we don’t sit down to think about the PIB when we are planning. If it is eventually passed, we will work within that context.
Why do indigenous oil firm avoid discussing PIB despite assurance from parliament because there are strong indications that the bill may not be touched until the end of the Seventh Assembly.What are the implications of the passage of that law and the tough times that we are experiencing now?
The real implication arises out of the uncertainty about whether it will become law. If you were a Total Oil company and you went ahead to defend a 3 billion dollar project 7 years ago in your head office and you were asked what was going to be the effective tax rate or royalty and you realize that this is what it is today and the PIB is recommending something else. Then, you are likely going to be concerned about the sanity in the process before you think of the PIB. That is just the big killer. So, it is the level of uncertainty. If we can at least pass something, then we can decide that under this fiscal environment, I will not invest. As I have always argued, we have always reduced discussion of PIB to fiscal regime which was not the original intention. The original intention of the PIB was to give rise to what we are witnessing in the power sector, a complete rebirth of the industry to make it more efficient. That was the original thinking. The whole debate is now about tax rate, i.e whether it should be 80% or the amount of royalty to be paid or fiscal regime. Fiscal regime for me is not an issue. You can decree a fiscal regime today and five years from now it will be difficult to determine its viability. If investors don’t make money, they will walk away with their money. We saw it in 1985 when official selling price was used to determine our taxes and royalties while the official price set by OPEC was twice what the realizable price was at the market. That was how the MOU came into being as a subtle amendment to the PPT Act. So, if you come out with a fiscal regime that does not make business sense, you are likely going to reverse it in five years time when you begin to see the difference. Fiscal regime should not be an issue because it will self-correct. So, the real problem about PIB is the uncertainty it has created for business decision that should not need difficulty. However, one way or the other, we need to pass it into law such that business people can make decision on the basis of what becomes law whether to invest or not. If we don’t invest, then it would only mean that a review of the law to attract investment, and if we invest, it means that the new law is good enough for everyone. That is, it is good enough for additional revenue for government and investors. We have to get rid of the uncertainty.
If the National Assembly is ready to pass it, do you think the fiscal regime will encourage investors?
That is exactly the same point I made why talking about the PIB. Take for instance, if PIB was passed into law last November and oil price became $42, what would have been the real implication? Besides, when you look at it both sides i.e govt and the industry , you will realize that both parties have been arguing about percentage portion of a pie. On the part of government, it argues that they need a bigger pie but the industry seems not to agree. For instance, The 1993 PSE gives zero royalty less 50% PVT while effective take to govt comes at 30%. And if you are running an industry, in which on land, effective take to govt is 78%. So, if you are in the shoe of someone coordinating the ministry, I know you are likely going to ask questions. If you are producing 2 billion barrel and you were earning a particular amount, the question will be why will you be producing more and earning less. For instance, in 1990, we used to laugh at certain companies whose technical cost was $9 per barrel but today you are doing $20 per barrel and the companies are saying that it is real and books are open for scrutiny by auditors. So, if cost have escalated from $7 to $30 here in Nigeria and oil price is $42, what really would be the implication if you make the fiscal regime even more less. That is why I say fiscal regime will self-correct. If it is not good enough for investment, there will be no investment. Even if you pass it into law, somehow, it will simply not fly.
You enjoyed dual listing on Nigeria Stock Exchange and London Stock Exchange, I remembered when the company was listed and its stock price was about N576 per share but today it has gone down to a little above N300. Are you not worried about the new share price of your stock in the Nigerian Stock Exchange market because one company can muster a few dollars and buy up your shares and become a significant stakeholder?
We are not the only one affected as far as the stock exchange but that is not to say that we are giving excuse. I will say that there has been a serious hammer in the case of the Nigerian Stock Exchange. There are a lot of things responsible for this. There is a lot of uncertainty in government spending as well as uncertainty in overall liquidity in the whole economy because of the oil price drop. Once this doubt exists, remember that 60% of our investment in Nigeria Stock Exchange are foreign funded. And once they start pulling their funding, that is what you see. So, there is no disputing the fact that there has been a general downturn. For us in this business, we have made it a point of responsibility to focus on big business. If we focus on short term movement in stock prices, we won’t go anywhere. Take for instance, when Dangote was first listed, we know that it was N132, we know that it went to about N107 before it went to N250. For us in Seplat, the business is focused on three things which includes growing the gas business, organic growth for asset owned and growth by acquisition. As a matter of fact, we are consciously building the balance sheet and human capital to be able to deliver on those mandates. For us, as long as we think we deliver on those three in the short, medium and long term, we won’t exercise any worry over the stock price but instead ask potential shareholders to buy now that the prices are low.
Tell us about the performance of your shares abroad whether it is also suffering the same fate as experienced in Nigeria?
As I said we know that things are not quite right. Performance is exactly the same thing in Europe. But one thing is that if you plot the graph of our share price and plot the graph of the oil price to track the situation, what you see happening to the share price is not any panic about the company’s business fundamentals. It is just giving it a new value relative to what the oil price or commodity is today. If you plot the two, you will see a close tracking. If I were an investor, I won’t lose sleeping but buy more.