Both indigenous and foreign oil companies are apprehensive about the failure of the National Assembly (NASS) to pass the Petroleum Industry Bill (PIB).
According to Seplat Oil Group Managing Director, Austin Avuru, who spoke to the media in Lagos, the PIB is a thorny issue, hindering business decisions and creating high level uncertainty in the sector.
Senior Correspondent, Goddie Ofose, who was at the parley, reports…
Oil blocs and their contribution to the economy
I appreciate your view on the feel good effect which comes with ownership of an oil bloc. I said publicly at a recent event 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. We have been listed on the London Stock Exchange and when you are listed, you cannot play tricks. 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 them.
We operate as any other multinational operates. Since we must pay all things that are due, we can only make profit if we are efficient. So, the reason we went to the London Stock Exchange was the determination to build a company with long term survival.
The long term survival and health of our company depend largely on how well we run it in terms of corporate governance, efficiency and prudence. At $100 per barrel, if you dodge payment of royalties, you can do just about anything and still make money. But 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 five years.
I remembered that at a time foreign companies like Addax, Elf, Texaco were producing between 25,000 and 32, 000 barrels 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 a succession of three years, once it is five years, it is gone. A company that produced 37,000 barrels before now produces 3,000. So, the difference between these companies and their foreign counterparts is corporate governance.
If you think you are interested in the feel good effect, of course you will make money for some time, 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 one should pay. 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 from 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.
Divestment and indigenous oil companies
Divestment is not new but it is just that our industry was less than 30 years old 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 had one of its subsidiaries, Shell Vector in Cameroon in 1998, which was producing 3,000 barrels per day from all its assets. We opened a data room and went as ally to the data room because we were bidding to buy it. It took a long time before it was eventually sold. These always happen. It is not a new phenomenon.
I knew 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 asset 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, European or Chinese independents buying the same asset. That is what Perinwinco does around the world. It is not new.
In terms of perception, it has created a new vista. At the moment, about $5 billion in debt has been injected into these assets. So far, we have invested $5 billion. Between 2009 and 2010, we invested $3 billion, making it $8 billion in total, and 70 per cent of that debt is from Nigerian banks.
I think it has created a corporately new environment because Nigerian banks have moved in. It behooves us to make it a success because if we fail, the larger implication will be very ugly, as many Nigerian banks are neck deep in this business. So, we cannot afford to fail.
PIB and indigenous oil firms
I will leave the issue of PIB until 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 was 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 we took the investment decision, you will realise that others have taken a similar step thereafter. As I speak, $8 billion of similar assets sales have happened after ours and yet the PIB has not been passed.
In SEPLAT, our business model is to keep moving in spite of 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 needs to change along a particular line.
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.
Implication of PIB
The real implication arises out of the uncertainty about whether it will become law. If you were Total Oil Company and you went ahead to defend a $3 billion project seven years ago in your head office and you were asked what was going to be the effective tax rate or royalty, you realise that this is what it is today but 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. It is the level of uncertainty.
If we can at least pass something, then we can decide that under this fiscal environment, we will not invest. As I have always argued, we have always reduced discussion of the 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 about tax rate; that is, whether it should be 80 per cent, or the amount of royalty to be paid, or fiscal regime.
Fiscal regime 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 (Organisation of Petroleum Exporting Countries) was twice what the realisable price was on the market.
That was how the MoU (memorandum of understanding) 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 the PIB is the uncertainty it has created for business decision that should not need difficulty. However, one way or another, we need to pass it into law such that business people can make decisions 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 the government and investors. We have to get rid of the uncertainty.
Will the fiscal regime in PIB encourage investors?
That is exactly the same point I made while talking about the PIB. Take for instance, if the PIB was passed into law last November and oil price became $42 per barrel, what would have been the real implication?
Besides, when you look at it on both sides, the government and the industry, you will realise that both parties have been arguing about the percentage portion of a pie. The government argues that it needs a bigger pie but the industry seems not to agree.
For instance, the 1993 PSE gives zero royalty less 50 per cent PVT while the effective take to the government is 30 per cent. You are running an industry in which effective take to the government is 78 per cent. If you are in the shoes of someone coordinating the ministry, I know you are likely going to ask questions.
If you are producing two billion barrels and earning a particular amount, the question will be why will you produce more and earn 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 opened for scrutiny by auditors.
If cost has escalated from $7 to $30 here in Nigeria and oil price sells for $42 per barrel, 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.
Fear over Seplat stock
We are not the only one affected as far as the Nigerian Stock Exchange is concerned, but that is not to say that we are giving excuses. There has been a serious hammer in the case of the 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.
Remember that 60 per cent of our investment in the Nigerian Stock Exchange is foreign funded. Once doubt exits, and once they start pulling their funding, that is what you see. There is no disputing the fact that there has been a general downturn.
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, it was N132 per share, and it went to about N107 before it went to N250.
For us in Seplat, the business is focused on three things, which include growing the gas business, organic growth for asset owned, and growth by acquisition. We are consciously building the balance sheet and human capital to deliver on those mandates.
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.
Performance of Seplat stock abroad
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.