CAPEX FOR DRILLING IN 2019

Nigeria 2019 | ENERGY | VIP INTERVIEW

TBY talks to Austin Avuru, CEO of Seplat Petroleum Development Company Plc, on the effects of lower oil prices and the decision to move into the gas segment.

How have the past three years of low prices forced you to optimize your operation?

Prices fell in 2015 followed closely six months later with the outage of Trans Forcados Pipeline, so this was a challenge. We were averaging about 10,000bpd at a low-price regime. We had to react quickly, and the first thing we did was to rejig our 2015 and 2016 work programs and reduce operations to the bare minimum. We combined this with also reducing our OPEX costs to the minimum. We had to improve efficiency and reduce costs, as our goal at the time was to survive. Finally, by the mid 2017 we saw the light at the end of the tunnel, and by the end of 2017 we were back to full production. We were then able to start addressing the quality of our balance sheet, and the results were seen in 1Q2018.

What role will your recent USD350-million bond offering play in terms of a fiscal foundation?

The entire refinancing package was targeted at two things. The first was to reduce our cost of borrowing with Nigerian banks, which was approaching 12% dollar debt, and about 7% for our revolver with foreign banks. In the aggregates, the combined bond and bank loan gives us a gross debt of USD550 million at a cost that is closer to 8.15% now rather than 12%. Over the next three years it gives us a great deal of room to accumulate cash, which we can then re-invest. This gives us some money to spend on increased CAPEX. In 2016 and 2017, CAPEX spend was minimal, and we now have to go on a more aggressive spending program. For the second half of 2018 we are back to drilling wells, and in 2019 we will increase the number of wells and critical facilities to maintain production and eliminate any drop in production. We will also have a balance sheet strong enough to support any acquisition that falls our way. In addition to organic growth by spending more money in the ground, we are also looking at inorganic growth by acquisition.

What are you looking for now in terms of acquisitions?

Our core acquisition targets have always been assets that have near term production opportunities with substantial upsides in terms of resources. In addition, we have an aggressive work program that can convert contingent resources into production. We have a fairly wide footprint of gas processing, and when we finish the Assa North-Ohaji South (ANOH) project, any asset that has either gas or oil will be interesting to us. We look for assets that have near term production with either gas or oil that we can bring to the market as quickly as possible.

What is the timeline for the ANOH project?

The project will take 18-24 months, and we are targeting finishing it within 18 months of FID. Our Production mix as supplied will continue to be 30% gas and 70% oil in terms of dollar value of gross revenue despite the excess capacity from that project. Most of these gas projects we keep engaging in will serve two purposes: maintaining the balance in terms of revenues of 30% gas and 70% oil and also maintaining a critical market share in the domestic market space. Right now, we contribute 30-35% of domestic gas supply and, as demand increases from the current 1.2BCF to anywhere above 2-3BCF, we want to maintain that market share. When the actual domestic consumption rises to 3BCF, we should be able to do 1BCF of processing capacity. Those are our targets, and they are the reason why we continue to invest in gas projects.

What initially led Seplat to investing in gas in 2012 when the market was slow?

The asset we acquired already had substantial gas reserves that had no value in the pricing of the asset done at that time. The ruling gas price of USD0.20 and the selling ratio meant that gas volumes had a negative NPV. We already had gas processing infrastructure that were part of what we were acquiring, and we had gas reserves and processing capacity through acquiring the oil assets. It only made sense to build on it, though in an efficient manner. From there, the market has only improved, and we have grown with it.

You hold a key gas supply contract with the Azura IPP. How was this gas price determined by the market?

The Azura offtake is currently receiving commissioning gas, and in the last two years the Nigerian Gas Marketing Company (NGMC) has been taking most of our volume to satisfy its customers, both industrial and power. We had already committed part of that volume to Azura three years ago, and we gave that volume to NGMC on a floating basis. As soon as Azura came in, we took that volume from NGMC and gave to Azura. There is no change in revenues except for a change in customer structure with Azura coming in. The target is for NGMC to be just one of six or seven customers that we supply gas to.

What role has the government played in the development of the gas sector?

The government has done a fantastic job since 2012 to boost domestic demand and capacity to increase domestic supply through the gas master plan. Demand already captures a market-driven price. Any government intervention now will only be in the way; the transition is over and it should only supervise willing buyer and willing seller negotiations rather than impose prices.

What is your vision for the year ahead?

In 2018, we moved to the beginning of our build stage, which is where we are currently. 2018 and 2019 are years of building up our business, strengthening our balance sheet, and returning to and maintaining profitability. We have told the market that we want to be able to consistently pay dividends and be consistently profitable through growing the business with both oil and gas production and oil and gas reserves. By the end of 2019 we want a large chunk of our future business to be fairly predictable in terms of balance sheet quality, profit, and production. The building blocks in order to do so involves spending more CAPEX in drilling and so on and looking at acquisitions when they are available. We are preparing the balance sheet to be ready for those building blocks so that business will be more solid and predictable in the future no matter where the oil price takes us.