Emafo: Multiplicity of Taxes, Challenge for Oil and Gas Firms

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In an interview on the sidelines of the just concluded 2018 edition of the annual Nigeria Oil and Gas (NOG) Conference and Exhibition, the Managing Director of Eroton, an indigenous oil firm, Ebiaho Emafo, spoke about how the country can significantly grow its oil reserves. He also spoke about other issues in the oil industry. Chineme Okafor presents the excerpts:

What is Eroton doing at the moment?
We currently provide 15 million Standard Cubic Feet (scuf) of gas a day to fertilising plant in Onne area of Port Harcourt. We are an oil and gas exploration and production company. We have our headquarters in Lagos, we have office in Port Harcourt. And our field location is in Niger Delta, River State area
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What are your immediate projections, off from a low-price regime?

We have been able to achieve a growth basically by rigorous intervention. So, the plan is to start drilling our activity sometime in the first quarter of 2018. We intend to bring in a drilling rig to start drilling in the last quarter of 2018. So, we see ourselves continue to grow in terms of oil production by adding additional barrels through drilling activities.

We also see ourselves growing in gas space as well, increasing our gas production because there is a huge opportunity in the gas space. You have the gas-to-power for the power industries; you also have gas for export. We want to grow the gas business this year moving forward to next year in a really short time.
We currently produce 60 million scuf of gas. We intend to grow that to 100 million. We have the potential but we want to make it a decision that will be economically viable for us.

Are there challenges in this regards?
There are challenges with recovery in terms of payment for gas-to- power. So, we are not just going to increase the output of gas without commercial justification for that. If we grow our gas business to about 100 million scuf, that would be dependent on commercial viable off-takers. Like I said earlier, the gas-to-power space is a little bit challenging because of recovery. There is equally a potential of us having gas industries. But again, in the gas business you have to look at the structures as well as challenges in infrastructure.

Do you anticipate the PIGB clearing these challenges, and enhancing your business?
It is hopeful that the PIGB will be able to clear some of the challenges but when the PIGB will be signed into law is another question. The intention of the PIGB is to make it easier for people to do business within the oil and gas space, but we have been waiting for several years for the PIGB to be signed into law.

For example, one aspect of the bill that will help us is in the area of production to be recorded in terms of calculation of royalties, not at the well-head, but at the export end. This is because for us, we quickly have a loss of production on the line due to sabotage, theft and at a time we were losing over 40 per cent of our production due to crude oil theft.

Initially, when we started, we were losing nine per cent of our production, but it went up to 46 per cent. Now it has dropped to about 23 per cent loss on the line. Meanwhile, when royalties are calculated at the well-head, not at export, it leads to loss to us in the business. Nobody invests in an asset with the thought that this amount of losses would occur.
Of course, issues to do with the fiscal regime as well. To make it comfortable for oil and gas industry to play in the Nigeria space, we have challenges with a lot of multiplicity of tax that oil and gas companies must pay. We are hopeful that it is signed so that all of us will benefit because more oil will be produced.

So, these losses aren’t factored in your business calculations?
The losses are never counted for. There is nowhere in the world you will buy an asset and factor in a loss of 40 per cent. That is huge and alarming in terms of production. You factor in a loss of one to five per cent. But when you go as high as 50 per cent, it is a challenge to any business. Be it manufacturing or oil and gas.

Are these all the challenges you are facing?

Security is a challenge. There is a lot of security problem in the Niger Delta area. We have engaged and worked closely with communities since we started and contributed immensely to the development of the community. For instance, school rehabilitation, medical care and providing them with scholarships.
We just finished a programme whereby 12 students went to the US to obtain a degree programme. So, working with the communities has helped us to have some form of security within our own operational area.

We pump all our crude oil into a line that is not controlled by us but controlled by a third-party. They maintain and provide the line with which we use to pump our crude oil. So, even with all the efforts we currently have going with the community, we are still not able to guarantee the security on the line because it is not within our control. You succeed with the community where you are operating, but still you cannot produce crude oil. For the last three to four weeks, we haven’t produced crude oil. We were only able to produce non-associated gas, and nobody envisaged that for four weeks you will be out.

So, you don’t have crude oil storage facilities?
We don’t have storage for crude oil but it is something we may think of in terms of looking for alternative evacuation option because this is a big challenge for us. We don’t have visibility of how long the pipeline will be out and it is a big issue for us to be able to look for alternative means of evacuation.

What do you think about the marginal field rounds that haven’t happened?

Even though it has nothing to do with our operations, it would be prudent for the government to open up the marginal field round and determine who it would allocate them to because when you are able to do that, you are also able to get people started in terms of the processes. It is a good source of revenue to the government and I don’t know why it is taking this long. It would be good to determine who they are awarded to through a transparent process and when the people who are beneficiaries start developing to grow production, it will contribute towards the production quota of the country and more additional revenue for the government to be able to grow the country.

We’ve talked about growing oil reserves, how can this happen?
Generally, as a country, best practice has to be in place, for us to be able to grow. We have challenges with the contracting cycle, typical delays with the approval cycle. But I will say recently it has improved. So, we need to have some improvement in terms of time to contract. The time within all the necessary approval will be given for us to contract. Also, project execution is a major area we have to work towards. With efficient project execution, a lot of the deficiencies in the system will be wiped out. There has to be a decision regarding what is best for the industry, in terms of financing as well. We are gradually moving from cash call to alternative funding regime, which is good, but not all the operators have signed up to the alternative-funding regime.

It will be good for us to have alternative funding in place especially with the joint venture arrangement, so that when you decide to embark on a project, you are not waiting for cash call funding because you have a ready source of capital to be able to execute your project. If we have a system whereby the JV operators are given a free hand to start a contract process from the beginning to the end, it will bring about efficiency. And when there is an audit process which is in place to audit what they do from start to end, then there will also be a feedback mechanism. But the process of having to go for approval for every $500,000 is a bit slow and cumbersome.

Security is also necessary, we need to be able to secure the pipelines from point to point because at the end of the day if you are losing a lot on your line, you have to discount for your reserves. A lot of these need to be in place. Another key area is the communities. If more money is spent developing the communities, not laying solely in the hands of the operators, it will move them away from the mentality of going into vandalism. If all these are put in place, we will get there even though the situation is so bad.

Do you see oil going above the $100 price mark again?
To be honest, I wish it hits $120 per barrel but the reality is that it will be a tough call for it to hit $100. I think it will hover around $60 to $80 per barrel mark, but to hit $100, it has to be something fundamental that changes. Everybody want the price of oil to go beyond $100, but now even if it gets to $100, Eroton has no benefits because we are not producing currently. All these things – crude oil at $100, and us having the pipeline to be able to export, are the things that we want. If oil is $30 today and we are able to export, we will be happier that it at $100 and we cannot export.