• Nigerian oil independents are technically capable, but poorly funded

Dr. Emmanuel Okoroafor, erudite and practiced, sits on the board of one of Nigeria’s fasted growing integrated energy companies, Hobark International Limited, as Executive Director. With over 30 years of vast industry experience in engineering and business management in Nigeria and overseas, Dr Okoroafor has traversed several fields of endeavor and comes with unblemished pedigree of unchallenged punditry. Dr. Okoroafor has held the positions of Head of Materials Technology and Senior Technologist at BOC Edwards in the UK; as well as various teaching and research positions at universities also in the UK. He holds a Bachelors of Science in Physics from the University of Ife, Ile-Ife, Nigeria; “Diplôme D’ Ingénieur in Nuclear Engineering from Ecole National Supérieure D’Ingénieurs Electriciens de Grenoble, France; and PhD in Materials Science from Université Denis Diderot (Paris VII), Paris, France. He is a registered Chartered Engineer with UK Engineering Council, and a fellow of the Institute of Materials, Minerals & Mining also in the UK. He is a Chartered Physicist (CPhys), Chartered Engineer (CEng), Fellow of the Institute of Materials (FIMMM), and Fellow of the Institute of Management Consultants (FIMC). In series of chats with Oracle Intelligence, Dr Okoroafor has been passionate about the soundness of economic policies and programmes that govern commercial investments in different segments of Nigeria’s energy and industrial sectors. In this chat with SOPURUCHI ONWUKA, Dr Okoroafor provides insight into operational issues emerging from the prevailing crew change and transfer of operating responsibilities from international oil companies to indigenous independents in the upstream petroleum industry. He warns that the rave of local content policies sweeping across Africa might negate the spirit of the African Continental Free Trade Agreement (ACFTA) and impede intra-continental industry collaboration. Enjoy the excerpts.

Thank you sir, the last time we spoke we discussed the movement of oil majors to the deepwater and the race to replace them by local independents. With the divestments that we see, are you convinced that the local independents actually fit into the shoes left by the oil majors in the onshore and shallow water play?

Yes. Some of the local independents onshore have the capacity and the capability to handle the work on-shore; but most of them don’t have the money, which is the major difference between the local independents and the IOCs.  The IOCs could get their money right from either the London Stock Exchange or from the New York Stock Exchange because they are listed. The few companies that we have here that are listed they are still struggling financially. They don’t have the kind finical clout that the IOC’s have.

So, in terms of onshore, yeah, a few things could happen. But most of the assets that are being relinquished to the local independents now will actually require a lot of investment. The relinquished assets are like cows that you have milked, so there is not much left in them. And if you want to continue milking them; then you will have to feed the cows to fatten them. And so, it is going to cost you some money.

So, those fields will require investments; those people who are leaving onshore have it. So, question is: do the local independents have the cash to invest and get those things running and also not pollute? There’s a question of pollution and also some of the liabilities that IOC’s are leaving behind; like abandonment of the wells cost a lot of money. Decommissioning of wells costs a lot of money. Some local independents are excited with the idea that is still a huge volume of oil to be mined of the well; but decommissioning is going to cost some money. So, I hope they will actually do it well?

Now, going shallow water and offshore, only very few independents will even attempt that. In terms of the technology; we have the know-how because some of our guys have worked for the IOC’s both onshore, offshore, shallow water and deepwater. So the expertise, the knowledge is there. It is a capital, the financial muscle to undertake those projects.

So, yes; to an extent, I’ll say the independence can handle some of them: but there are certain things they may not be expected to do because they don’t have the financial backing. But in terms of technical expertise, the independents have the expertise because most of the guys who own them have worked for the IOCs, to the ranks. So they also understand what needs to be done.

But if you don’t have the capital, it is like your hand will be tied to the back while you want to move forward.

When it comes to bidding and acquisition, we normally do not hear funding issues. But when it comes to making operating investments, then everyone will raise the funding challenge. Why is it easier to get acquisition funds than operating funds?

“But most of the assets that are being relinquished to the local independents now will actually require a lot of investment. The relinquished assets are like cows that you have milked, so there is not much left in them. And if you want to continue milking them; then you will have to feed the cows to fatten them. And so, it is going to cost you some money.”

You see, you put it very well. At the bidding stage, it looks a bit simple because what is needed is not much in terms of funds.  It is not much compared to the development of a well. Signature bonus for some assets is about $250,000. But the development budget for a marginal field, for instance, is in several hundred million dollars. If it is a little offshore the development cost might roll off your hands.

So what will you do now? You need to be looking for finance because you can’t get anyone who would want to do the job for you without getting paid; or who would want to do it up to the stage you get the first oil without getting paid because it is too risky.

When you headhunt for positions in the executive team for operating an oil field, you will need to get the CEO, CFO, CTO and others. Those executive officials would already they’ve negotiated their salary, and the negotiated salary before the first oil is in hundreds of thousands of dollars. Each of them is about $100,000 per annum. So four of them is $400,000 per annum. And that is even before you start. And when you hit first oil, there are chances the salaries will increase by 25%. This has nothing to do with development cost of the wells. So, that’s why it’s easier to bid and win and probably pay the signature bonus than the cost of development.

There are two aspects; there are some people who are lucky. Where they win, the ones they win might have most facilities in place like the pipelines, wellheads and everything. All they need to do is a little bit of work-over and voila, they’re producing oil and probably selling. But for others, they need to do some serious work!

And those ones who are able within the first few months to start shipping oil, they now make money to develop it.  But others who are not in that situation who have to wait for two years or three years before getting to first oil, because of development requirement and cost, what do you think will happen? Some of them may eventually not be able to do it, and they’ll abandon. Just like some people won but they were not able to pay signature bonus and what happened? It was taken from them and given to others. So it’s easier to bid, win because the cost there is not much compared to the development cost of the well.

So, where is the problem now? Is it that the money market in Nigeria is weak to take industry challenges, that the commercial proposition is not promising or that the credibility of the individual company cannot propel access to funding?

The commercial propositions are often good and also the proposals for funding are also often good. But no company of investor gives you the kind of money you will require if there’s nothing to show for it. So, investors would rather you have hit first oil before they start putting their money into it. If you have not hit first oil, investors find it difficult to throw their money at you. So, it boils down to “yes you have a good proposal.” And that is it, unless you have something like collateral that investors can latch onto. If you don’t they would rather see that you’ve hit first oil. That means you’ve stated producing, you know. And because that means you’ve gone past the major risks.

You know in oil business, you can get oil well or the allocation of an oil well and it turns it out to be a dry one: after you’ve spent up to $10 million drilling it and it turns out to be a dry well! Investors will take it but they won’t be happy.

Whereas if you hit a well and it starts gushing then, you will see them; they’re willing to listen to you. In fact, they will start coming to you without your having to go to them. That’s how it works. It’s not that the people are not writing good proposals or people do not have integrity as such. That also counts, but the most important question for every investor is: have you started, have you hit first oil, how much is your reserve, et cetera. But the first oil is very important! And so what you are going to do is try with the little finance you have get to first oil; because once you get to it, investors will come.

There are some companies currently producing their assets dry without explorations programmes for reserves replacement. NUPRC has started annual bid rounds as we speak. What would you recommend to government in terms of due diligence before handing out brownfield assets?

I understand your question clearly, but let’s look at the general industry like manufacturing industry, all those high tech industries.

If you move into them and they are selling products today, you’ll be tempted to say ‘oh there is the market’ because they continue to sell the same thing. But a better business man, while selling the same thing and would put money aside, invest in research and development to come up with alternatives or to innovate to have new products that will enable them to retain the market. Now, if you translate that to the oil business, a guy you give an oil field that is producing and they have a couple of partners and at a board meeting they say, “fantastic, let’s continue selling!” They start selling; they didn’t even keep money for exploration, research and development. They just sit on what they have and be milking it.

The quantity of oil underground is limited so at some point it declines and some of them don’t even know that there are businesses that have technology to help them improve. Even though it’s declining, the companies can help them improve on the quantity that comes out. That is one thing some of the Hobark companies does. Hobark has what is called enhanced oil recovery technology, it uses microemulsion techniques. They inject something into an already depleting well and they are able to move the production from 1000 to 1500 barrels because of what they do. Sometimes they push it up to 4000 barrels per day.

So, if a company or a consortium wants to acquire such fields, I would rather the government allow existing operators that have established to acquire them and not new players. New players are there for cash and carry, sell the oil and grab the money. If you’re telling them “oh no you are going to do appraisal,” they tell you “no no no, it will cost money.” But they’re happy to continue to sell on what someone else has developed without making their own input into it.

You must continue to do exploration and appraisal in order to grow. That is how Shell and other companies were able to grow in Nigeria.  They started with one well but eventually they have so many fields they discovered. That discovery what led to it? It is R&D (research and development) okay. So, you either you do that or you buy other fields to add to your portfolio. But the most important thing is exploration; to at least have an idea of what’s around you. Shell started in eastern region and before you know it they found the most oil wells that people are now calling whatever they call it; either new or brown or green field, they were found a long time ago.

So, before even handing them to people government should do due diligence on how exactly these people have conducted their businesses in the past. Have they been involved in R&D, in exploration, in appraisal and things like that?

It would be good that to avoid people keep on depleting and depleting, and the production level drops completely; people need to do more exploration. If people are not doing it, then the government should take it upon themselves to do it because it’s a major source of our country’s income. Government should be involved in exploration and all those appraisals.

And also if a company is not doing that, you give them a timeline that ‘if we don’t see this and that,’ you will withdraw their license.  But man is of the nature that if given the opportunity he’ll continue to milk the cow without feeding it. That’s man’s nature.

Players are happy with the level of stability in the regulatory space, especially with the retention of the heads of regulatory agencies after change of government in 2023. Others now canvass that that tenures of regulators should b tenured and safeguarded by law. You play in Europe, what should be the norm?

The two things you’ve said can be done together. If you want to change the PIA, it can take up to 2-5 years. You use the executive order to say this is going to happen. And once the executive order is there and it starts to happen, then someone can go behind and re-write and make some alterations to the PIA. If you want to change the PIA, wow! Some civil servants will spend the next 10 years reworking the whole thing. So, begin with executive orders, and while that is running, get back and have the PIA amended. The executive orders are used to address urgent issues that are important to take care of.

All investments we see in the deep water now are already developed clusters. For instance, Shell is back to the Bonga cluster, total is tying back Perowei because existing floaters and facilities are in OML 130 cluster. But the stand-alone discoveries in the deepwater are not seeing development proposals even now that the IOCs are focused in deep offshore. Everything still goes back to say that this PIA we are praising is still imperfect or is it not accepted by the industry?

I don’t think it is imperfect or not accepted by the industry. But there’s a section of the industry that wants fiscal the regime that kind of favors them (I won’t say whether it is to the detriment of the country because by the end of the day, they are the ones bringing in the development money; because these fields were talking of, it is only the IOCs that can work on them and they’re going to bring in the money.)

So they’ll want a regime that is not punitive against them because they also report back to their own investors in their own country overseas.

Whereas the federal government of Nigeria is looking at ‘in favor of Nigeria’ which is right; the IOCs are also looking at what their own investors in their own country will think of in all their dealings. So, if they’re asking the federal government to look at the physical regime, there’s a reason. They’re not asking for the same thing onshore. It is offshore because the amount of money you need to develop offshore is too much. On land wells, with $40 million you would probably have done everything.  But in swamp development, with $100 million you have not done much. Then in deepwater you need a lot of money.

So if you are going to put up such amount of money, you need the fiscal regime to be at least favorable to you so that you can report back to your investors. The Exxons of these words, the Shells and the Totals; their investors are in their own home countries. They are not from Nigeria. Shell is from London and Netherlands, Exxon is from Houston and New York, Total is in Paris. Their investors will be looking at the bottom line: ‘So, if we invested these, what are we getting out of it?’ They might not tell you the whole truth but they do get something out of it. They still want their margins to make more sense to them.

So, it’s not the PIA, it’s the people who crafted the PIA. Some of them are not really well versed in international business; and if we have national companies that have the same capabilities as these IOCs we won’t be talking about that. If the NNPCs, the seplats or Yinka Folawiyos of this world have the same capability to go deep water, we won’t be talking about all these; but they don’t. Sometimes, it is pride but it is their right to do it because they have the capability and the technology and the money. So, it is for our own people now to look at to see how they can save things without losing a lot of money on the Nigerian side and let the other people have it so that they will continue to drill, to explore and we make more money out of it. Because as long as the oil is underground, were not making anything out of it. It has to be brought to the surface.

Thank you very much for your time today. Please kindly share your final thought on any issue you want to address.

The biggest debate platform for the local content, Nigerian Content and African Content is the SAIPEC. And a a lot of these Africans are talking about Africa relations, blah blah blah. That is fine! That’s our life and it’s fair. But do you notice that all of them are also talking about their own local content? And I didn’t hear anyone in their own local content extend beyond their country.

So, I asked Emeka Ene after the one session that he moderated. I said “Emeka, these countries are talking about their local content individually how they’re going to reinforce compliance and all that.” One of the countries is called Mozambique. Guess what their population is? 34000! Someone said that’s the size of his own village in Nigeria.

Mozambique is 34,000 and they have serious ambition and they are talking about local content. So, my question out there for him is, such countries, if they want local content, why don’t they extend a hand of friendship to Nigeria so that Nigeria go there to work. Because with the way they drive their local content goals, anyone who achieves what he wants might as well boot out others.

So, my take there is that in driving their national content policies, they should also put African Content in the second line of priority, so that if they can’t find what they need in-country, then they should by law give the opportunity to sister African countries. That is the key there, otherwise it would not work.

You are talking of ACFTA, intra-African trade, and you now have your local content to tie it up.

What is the one thing that Nigerians have in common? We export human beings, our skills. It is bigger than our oil. Our people, our brains, our skills are all over the world. And their remittance is bigger than out oil revenues.

So, we encourage our sister African countries to understand that local content is introduced to enable us have more Africans to be able to so these things themselves. It is not for any African country to build a silo and shut itself from other African countries.

That is one thing that I found missing in all the local content policies that have been presented to us. So, they should make allowance just like the European Union did. In Britain, for instance, if they cannot find a british citizen, black or white, who can do the job; then they hire Europeans as second priority.  It is only when they cannot find Europeans that they go outside. So the African Content policies that we circulate in our presentations should borrow the European model.

I remember in one of our earlier chats that we should be careful how we promote the local content narratives so that we do not shut ourselves out of opportunities by building single country silos that form trade walls against our neighbors.  It might backfire on Nigerians in African countries.

You may notice that the foreign multinational service firms like Schlumberger and Halliburton have Nigerians as country managers in many African countries. If we are careless with our narratives, other African countries will replace them with indigenous people.