Managing Director/Chief Executive Officer, Seplat Petroleum Development Company Plc, Mr Austin Avuru, speaks about gas development in Nigeria and the power sector among other vital issues
The Federal Government has said it will reduce its stakes in joint venture oil assets to at least 40 per cent this year. What is your view on this?
As a former Minister of Budget and National Planning, Senator Udo Udoma, said in his budget presentation, the divestment will generate badly needed fund for the government that will supplement the funding of the budget. I think they made a provision of about $3bn in revenue if that divestment were to happen to help fund part of the deficit in the budget.
Seplat is a big player in the gas space; what has your experience been so far, especially in the power sector?
We believe that gas is not just a revenue-earner for the government. In fact, the most critical element of the gas business for Nigeria should not really be about revenue generation. We have been earning revenue from Liquefied Natural Gas for the past 20 years, but we have not seen so much difference. The critical impact of gas on the economy is that gas is an enabler or should be an enabler. As you are aware, if we harness our gas resources, we improve greatly our power generation capacity, and if you take power generation and distribution capacity to the level of about 12,000 megawatts per day, you know the larger implications for the economy. The same thing applies to gas to industries – heavy industries, including steel and cement industries, that require gas for their operations. So, gas is a critical enabler for economic development in Nigeria. The secondary role of gas is to earn revenue for the government.
Gas supply to the power sector is still low: why is this so?
We saw rapid growth from about 300 million scf per day in terms of domestic consumption to about 1.1 billion scf. But over the past four years, we haven’t seen growth beyond that 1.1 billion scf, and that is because we have not seen sufficient growth in the power sector as we expected; 80 per cent of the domestic gas consumption goes into the power sector. So, once the power sector growth is stunted, as it has been in the last four years, the gas supply side will also be stunted.
What in your view are the major challenges facing the power sector?
There are two key problems with the power sector. Regulation is one of them. For about two years or one and a half years (between 2016 and the end of 2018), we didn’t have a regulator in the power sector; the Nigerian Electricity Regulatory Commission wasn’t there. Therefore, it was an all-comers affair; everybody was doing what they liked. Those that are collecting revenue, the distribution companies, were remitting whatever they liked to the Nigerian Bulk Electricity Trading Plc, and that almost destroyed the entire fabric. Now, the regulator is struggling to get the industry back to sanity. But you can see how long it is taking them to get back to sanity because they allowed the destruction in the first place. So, one of the biggest problems is regulation; it has not been effective.
The second biggest problem is liquidity. The sector does not have enough liquidity to go round – that is, the distribution companies are not collecting enough to pay the generating companies. Therefore, the Gencos don’t have enough to pay for gas. That is the circle that has to be broken. So, you have to first inject sufficient liquidity to close the gap and ensure that the entire system is self-financing. As long as the system is not self-financing – that is, if the power sector doesn’t generate enough money to fund the entire value chain – we will keep running into this liquidity crisis. Those are the key problems. It is not rocket science; if we solve both of them, then we will be back on track.
Despite the liquidity challenge, gas producers seem to be still bullish on gas supply to the power sector? What is your take on this?
The truth is that when there were no investments in gas processing and domestic distribution for over 20-30 years, even a modest 10 or 20 per cent increase in demand will meet a shortfall. There are very few of us – when I say ‘us’, Seplat and one or two other companies in the past five years – who have actually invested in processing gas for the domestic market, and we are still investing because in spite of the lull in the power generation and distribution space, we will still see some increase in demand for gas that cannot be met by the existing supply infrastructure. So, we are actually investing for the future, hoping that, ultimately, the power sector will be fixed because the economy has no future if the power sector is not fixed.
Global oil prices have declined in recent weeks; are Nigerian oil companies not jittery that this might affect their cash flow?
Oil companies don’t panic on a day-to-day basis because of oil prices. These oil companies that you see in Nigeria operated when the oil price was $3. They operated when it was $18. They operated when it went to $37 and fell back to $9. They operated when it was $140 and fell back to $26. We take this in our stride; in this industry, if you have to worry about oil price on a daily basis, you won’t even wake up the next morning.
What are your thoughts on the non-passage of the Petroleum Industry Bill?
I hope that this time they will pay enough attention to it because some of the reforms in regulation and some of the reforms in terms of government participation in the industry can only come through a well-thought-out PIB. So, I hope that this time, the four elements of the PIB will be passed, so that we can start the journey of the reform that we are talking about.
There has been no licensing round in the nation’s oil industry for over 10 years; what is your take on this?
This is part of what we are talking about with respect to the PIB because once those regulatory frameworks are well defined, then the government can find assets that they can put in a basket for licensing rounds. As it is today, everything is so fluid and that is why since 2007, we haven’t had any licensing round; we haven’t had any licensing round for marginal fields since 2002. It is unfortunate.
What has Seplat done over the past few years to boost domestic gas supply?
We have invested heavily in gas processing. Right now, we have gas processing capacity in excess of 500 million scf a day. We announced three months ago that we took the Final Investment Decision with the Nigerian National Petroleum Corporation as our partner to build an additional 300 million scf of gas processing facility in Imo State. So, in the next two years, we will have a processing capacity in excess of 850 million scf a day. That is the critical part of the infrastructure we need, so we can harness gas from the upstream, process it and put it in the domestic market.
The challenge, as I pointed out, is that we expected much more bullish expansion on the demand side, if the power sector reform had run its full course. So, we are seeing a slowdown in that, and that is a cause for worry because we don’t want to process 850 million scf in the next two years and the demand on us is only 500 million scf. It is a lot of capital we are injecting into that. So, those are some of the challenges. But you have to take some investment risks in an environment like this if you have to be ready in the future to meet the demand.
In your presentation at Moody’s Annual Nigeria Summit, you noted that Nigeria was not fully tapping the West African market in terms of gas development; can you give more detail on this?
Nigeria should be dominating the entire West African sub-region in terms of supplying the needed gas for the entire region because we do not only have the resources, we already have the infrastructure to deliver the gas. So, it is really a shame that all parties keep complaining about not having enough gas delivered into the West Africa Gas Pipeline to meet the demand of the West African sub-region.
Is there a need to increase the gas price to further incentivise operators?
No. The domestic gas price today (at about $3.50/1,000 scf) is just about right because there has to be a balance between the users of gas being able to pay a price that enables their businesses to flourish and then the producers of gas being able to make money. As I said, where we are now is just about right. So, it is not about increasing the price of gas; it is about getting the infrastructure for distributing the gas to be very efficient so that both the users and the producers will be happy.