Adewale Sanyaolu
Contrary to the lamentations of some stakeholders that the drop in oil prices was a major setback to the oil and gas industry, the Managing Director and Chief Executive Officer (CEO) of Energia Limited, Mr. Felix Amieye-Ofori, has a different view of such a development.
In this interview, the operator of the Energia/Oando Joint Venture Oil Mining Lease (OML) 56 Ebendo/Obodeti Marginal Fields located in the southern Delta Basin in Delta State, maintained that oil prices at $100 per barrel or more would not augur well for the industry as it would spike other ancillary costs.
He explained that with oil prices above the $100 threshold, margins that ought to accrue to investors would have been eroded, saying “with oil prices at $60 per barrel, you could make more profit than it selling at $100 per barrel. That is just the reality,” he argued.
Amieye-Ofori equally spoke on the cost of oil production, which the Nigerian National Petroleum Corporation (NNPC) recently said has crashed to $20 per barrel, and noted that the cost of oil production is never the same across countries.
He maintained that the cost of oil producing a barrel of oil for a marginal or indigenous operator is far higher than that of an International Oil Company (IOC) because they have access to cheap funds.
The indigeneous operator said the operating environment also goes a long way in determining the cost of production, adding that, “a field in a swampy terrain will attract additional fund, hostilities will also require you to make provision for your own security.”
The Energia boss also spoke on the unique Corporate Social Responsibility (CSR) concept of the company, which has endeared it to members of its host communities.
Excerpts:
Profit in oil industry, myth or reality
Cost of production isn’t uniform across countries. It is purely about volume and cost. More volume translates to lesser cost and vice versa. If you look at cost based on geographical location, the Middle East with higher volume has a lower cost. The IOCs will probably have a lower cost of the fund while a marginal field operator like me will have a higher cost of the fund because of the lesser volume.
Aside volume, one should also consider efficiency factor. Cost is not the only factor but with efficiency things could turn right. Consider when you are operating in a swampy area. Before you move your product, you need to rent a gunboat, make provision for additional security and all these are aggregated into the cost. This means that aside the cost, your environmental factors and managerial factors must be factored in too.
Efficiency also includes how you manage your cost. Nobody will want to do business with a bad debtor. They will deal with you but at a higher cost. Cost reduction and cost-efficiency is a school on its own. However, if you have much volume, your cost should drop. So, I will say our cost is within the NNPC bracket and it is very low. We are within the NNPC benchmark.
Impact of drop in oil price
It is positive, but you know, it will take a while before we really feel the impact. This is because they are all indexed. While you think you are producing at $65 per barrel, the refiners are buying at a higher price and the product will start getting higher. The demand and supply side will definitely adjust towards this trend.
If you have oil at $100 per barrel, you would want to ask yourself what will be the chain effect on other services. Once oil price gets to $100 per barrel, it will definitely spike up other costs.
What this means is that the transporter will increase his charges, service providers who are oil servicing technocrats will also adjust their prices upward and the multiplier effect will erode the margins. So, it is not what you think. If the crude price rises to let’s say $115 per barrel, I don’t think I will get much benefit because operators in the oil servicing sub-sector will also increase their costs. I would not want the price to get to $100 per barrel because it will spike all other costs and the margin won’t be much at the end of the day.
It will shock you to know that even with oil price at $60 per barrel, you may make more money than when the cost is at $100 per barrel as a result of all other ancillary costs that would go up once prices begin to move up astronomically.
Managing host communities
Frankly, this is a good question and I think this is also what government, through the Host Community Bill, is trying to address because the people are becoming aware that it is better to be partners and stakeholders and not as benefactors where I give you some money and you go, such that whenever you come, we give some envelopes to the chiefs. We don’t do that because we make them feel that the oil is in their lands, and it is for their own good. It is for their children and for their future. So this community royalty we are paying is broken down into community projects and trust funds. There is a part of it that is saved for tomorrow, there is a part of it for investment, for entrepreneurship for the community and then there is a part for sustainable projects and infrastructure. So the people are involved round the clock. They come to see our operations as a source of economy and they now begin to protect our facilities.
Occasionally, they fight among themselves if there is anybody trying to disrupt our activities. If someone sends letter with the intent to disrupt, the community will return the letter and write to us that they don’t support his intended action and that we should disregard it. We have been able to operate with them to a level that they see our production as their production. They see the pipelines as theirs, they see our project as a sustainable project and we recruit them to monitor the pipelines. They clear the pipelines’ right of way themselves and they are working as contractors clearing our facilities.
Strategy deployed
In terms of employment, we have about 25 per cent of our workforce from the community. All the local contracts go to local contractors. Besides, we do bursary, we give scholarships and we have scholarships different from bursary. We have a development consultant who is working with them to create soft loans in form of cooperatives to empower the women from the community. This is quite commendable.
So, they begin to see that one barrel produced from our operation is empowering the community and this model is working. You may think that you are losing, but by the time you shut down production or your pipeline is blown up, you realise that it is cheap. Look at what happened when Forcados (pipeline) was shut down. We lost as much as 20 million barrels. But you are not going to spend that much money to keep the peace. All the people want is that if you are there, let the people feel that you are there.
We have a Trust Board and we have the Parliament. The Parliament is all the segment of the community, while the Trust Board is made up of selected individuals with corporate experience. The Trust Board approves the project, it has a project committee. The Parliament is made of the community where they discuss what project is to be executed. We are represented on both sides. There is always a high level of transparency and, of course, there are community development committees that interface with all these institutions. So we don’t just spend money, we give the institutions to manage the affairs.
Status of refinery project
What had slowed it down is the cash issue. If we have been producing and there have been no challenge, by now, we should have gone far. We have got approval from Department of Petroleum Resources (DPR). We have done our field work; DPR has said we should go into detailed engineering and now we are going to start fabrication. But we had a little hiccup with funding. Once your source of revenue goes down, your project is affected.
In Nigeria, there have been lots of heavy loading on oil and gas in the banks, and the banks are slow in lending. And, of course, there is a little bit of risk of foreign fund coming into the country because of the noise. But now the environment is open as a result of the harmonisation of the Petroleum Industry Governance Bill (PIGB) by the National Assembly.
We are re-opening discussions on the refinery. Recently, someone called that they are interested in the project and you know it is a little bit capital intensive. We have our own crude so we don’t have to go and source for crude. But the capital expenditure (CAPEX) is a bit heavy.
The reason for us going into the refinery project is to resolve the frequent pipeline interruptions. If we have the refinery, we will continue to produce irrespective of what happens to the pipeline. We are not going into the downstream for its sake but our refinery is to sustain our upstream operations. As long as the refinery is there and considering the challenges confronting the downstream sector, it will create an opportunity for us to continue to produce our crude, refine it, sell and keep producing.
But the challenge is that we buy in dollars and sell in naira, but the Federal Government has come up on how it can help with the naira-dollar parity, especially for those who will raise the money offshore.
A situation where you source for a dollar at N360 cannot work. That’s why we are collaborating with the Ministry of Petroleum Resources, the Central Bank of Nigeria (CBN) and a lot of other government agencies to create a special window for those of us operating in the petroleum sector.
We will be starting with 10,000 barrels per day (bpd), which is a full stream refinery including Premium Motor Spirit (PMS), popularly called petrol, Automotive Gas Oil (AGO) and dual purpose kerosene at a cost of over $100 million.
But at some point, due to cash constraints, we decided to scale down to something modular to produce AGO and kerosene. Later on, we would be able to add petrol and scale it up because the design we have is for a full scale refinery.