Emafo: Security, Challenge to Indigenous Operators

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The Managing Director of an indigenous oil firm, Eroton Exploration and Production (E&P) Limited, Mr. Ebiaho Emafo, in this interview explains the cost of poor security to the operations of his company as well as other operators in Nigeria’s oil industry. He also speaks about other issues such as the lingering marginal fields licensing rounds, the Petroleum Industry Bill, and others relevant to the industry. Chineme Okafor brings the excerpts.

How has the operations of Eroton E&P fared so far?
We are the operator of OML-18 (oil mining lease – situated in Eastern Niger Delta south of Port-Harcourt), which we got in the divestment from SPDC (Shell Petroleum Development Company).
We took over the asset from the former operator in 2015 when we were producing about 10,000 barrels of crude a day based on the previous operator’s production output. Since then, we have been able to grow production from 10,000 to 70,000 barrels a day and 73,000 barrels at peak production. We have been able to grow production in the gas space to circa 100mscf per day which we then deliver to our primary customer called Notore Chemical Industries. Notore is a fertilizer company based in Onne, Rivers state.

Can you assess the contribution of indigenous players in the E&P segment of Nigeria’s oil industry?
Indigenous producers have contributed significantly towards exploration and production in Nigeria. We used to contribute about 10 per cent towards Nigeria’s total oil production, today that contribution has moved to about 21/22 per cent. The aspiration at a time by the Nigerian National Petroleum Corporation (NNPC) was for indigenous producers to contribute 30 per cent of the total daily production, we are not there yet, but we are consistently growing our production and I am sure within the near future, we can attain that target, which has been more or less requested for by the NNPC.

It is also important to note that most of the operations that the indigenous players have were from the divested assets of international oil companies (IOCs) that are on land and swamp locations where they had security challenges which we inherited. However, we have been able to work closely with the host communities regarding the issues of security, though, we still face significant security challenges and breaches on the pipelines which traverse our acreages on route to the export terminal. These breaches lead to about 20-30 per cent loss of our production and other producers on the line. Despite these challenges, we have ramped up production significantly and our aspiration is to continue to grow with a view of surpassing the 30 percent contribution aspirations of the federal government through the NNPC.

What are the peculiar challenges that indigenous E&P players encounter, that if removed would raise their efficiency?
Security is a great challenge for all the indigenous operators. Anybody within the swamp or land region is susceptible to security challenges. You have vandalism of your flow lines because it is easily accessible and vandalism of the export line because it is easily accessible. At a time, we experienced losses in excess of 30 per cent, but now ranges between 20 and 30 per cent of our daily production. Look at that in the value terms, we were losing about 20,000 barrels of crude a day.

Some operators produce as much as 20,000 barrels and that’s a viable business for them. If you’re losing 20,000 barrels of crude, it severely impacts on your cash flow and return on investment. So, if the government is able to fix the security in the lines, we would be able to realise our full production and that will bring significant returns to the business and nation. In the area of gas, government need to create infrastructure to pipe the gas that we produce to area of utilisation so we can have bankable opportunities where we are able to sell our gas and make returns on our gas investment. But now, we are restricted in terms of ability to sell our gas because of lack infrastructure, and that’s across board. Security again is a challenge because when we talk about the attacks on the line, we also talk about the shutdown on the export line which occurs if the oil spills that come as a result of the intrusion on the lines by vandals. Sometimes, when the line is down, we are not able to produce neither oil nor associated gas.

This year we have lost about 24/25 days of production because of sabotage on the export line. In addition, we have the attendant environmental challenges that come as a result of the pollution caused by the acts of sabotage on the pipelines. Statistics show that most of the leakages and spills are as a result of vandalism and or illegal bunkering. This could naturally invoke a sense of aggrievement amongst the host communities who are unfortunately saddled with the negative effects of the pollution caused by vandals which could create a difficult environment for us as business to operate in. We, have, however worked closely with our communities to ensure that issues like this remain contained as we continue to enjoy a good working relationship with them.

Have you in this regard considered alternative evacuation for the crude oil you produce?
Yes, we are working on the possibility of an alternative crude evacuation line due to the current challenges faced, which we are hopeful would significantly reduce crude theft and improve production uptime from our Asset.

Do you know the government is looking at selling down its joint venture asset?
While government participation is good, sometimes for business, working outside the confines of normal government bureaucracy could also be beneficial, as there would be the opportunity to progress at a faster pace with a higher level of efficiency. We expect that with the proposed divestment of government equity, there could be a resurgence in investment and hopefully maximisation of returns on investment for all stakeholders. The NLNG model serves to buttress this expectation which to date remains a reference point for balanced public-private participation in business.

How do you think this should happen?
I believe existing equity holders should be given right of first refusal, this naturally makes sense as there always exist the risk of stakeholder misalignments and or conflicts if too many equity holders exist on one particular asset.
In the event that the operator and or other equity holders (excluding government) are not interested in acquiring additional equity, it should then be opened to the public by way of a competitive bidding exercise.

As mentioned earlier, the NLNG model is always a good reference point. Government should retain a minority stake in its oil and gas assets and rather focus more on regulation and fiscal compliance. I am of the firm belief that if executed, government would realise more revenue and also debottleneck the investment pipeline thereby spurring private investors to dedicate more funds towards the development and production of more hydrocarbons.

This approach refers primarily to the oil element of the business, in the gas space, I believe government would still need to play a critical role by way of providing the necessary infrastructure to evacuate and deliver gas from the producers to the respective potential consumers across the nation.

Oil is said to be intensely challenged by renewables now, are you considering renewable energy?
For now, we are primarily focused in the oil and gas space. We need to increase our current oil production. We recently commenced a drilling campaign to grow our production and also develop our remaining reserves. To date, we have drilled two wells and are preparing to spur the third this month. We also need to grow our gas side of the business. We are working very closely with a view to expand our gas customer base and also pursue expansion of our current supply obligation, working closely with NNPC on the 7 critical gas project. We are looking at growing our gas production from 100mmscf a day to 270mmscf in the short to medium term and then continue to increase gas production once bankable opportunities exist.

Can you tell how you’re dealing with the challenge of infrastructure deficiency in the gas space?
We have been working closely with the government in identifying gaps that are hindering our gas development and commercialisation. There exists the possibility of self-funding by the business if there is a viable business opportunity, but it entails working very closely with the government. We see a lot of promise and opportunities in the future as we are currently involved in the 7 Critical Gas Development Project (7CGDP), spearheaded by the NNPC which is tasked with delivering 3 billion cubic feet per day (bcfd) to the domestic market by 2023.

There are no lease awards in the marginal fields for years now, are you worried, what would you suggest to the government on this?
I think it should be priority for government. It is a huge opportunity that government could leverage on. The opportunity to award blocks and marginal fields by an open competitive process is something I think the government should embark upon as a matter of urgency as these assets have remained fallow for a long time and has thus deprived the nation of much-needed revenue and employment opportunities. It would appear that the opportunity for a bidding round on marginal fields has been in the works for sometimes, but I am not certain progress has been made in this direction. I am of the opinion that if done openly and transparently, which would be the route to go, it would be received with great enthusiasm and participation by industry players.

We witnessed the transparency in the award of GSM licenses back in the days. No one has complained about the process regarding the award of GSM license. So, if in the oil and gas space as well, we work towards opening up competition and getting realistic competitive bids for these assets, it would generate revenue to the government for which they can use to further infrastructure development and also bring additional crude into production. The government also stands to gain from the uplift in taxes and royalties

What are key policy changes or inputs you would want happen in the industry?
First and foremost, they need to pass the Petroleum Industry Bill (PIB). Uncertainty can be a disincentive for investors as it limits one from predicting and projecting their returns, the passing of the bill would ultimately improve the ease of doing business in the Oil & gas space in Nigeria.

In addition, I believe key social indices need to be addressed. Lack of adequate infrastructure and social amenities in some of our host communities and environs is one of the primary causes of the state of insecurity in the region. Unemployment also remains a thing of concern. Due to the scarcity of viable employment opportunities, people are driven to take their perceived share of the ‘National Cake’ by means that are illegal. So, the social dimension needs be tackled while providing security for those operators within the zone so they do not lose the crude oil or the investment they have made.

Are you still burdened by multiple taxation, fines and levies in the sector?
The whole industry faces this challenge. Inconsistency and duplication of relevant policies and levies could be a problem. Typically, any business needs to be able to plan within a known regulatory and compliance framework which would then form the basis for your companies cost of operations and attendant revenue profile. Planning becomes difficult if the business is burdened with multiple levies from different agencies and uncertainty in policies. Government should work towards streamlining the process and roll out clear policies and harmonise roles and responsibilities of government agencies so as to create an enabling environment for business to grow.

Nigeria relies mostly on imported petrol, do you in this regards have any ambition to go into refining?
Not in the immediate time. But there always exist a possibility of us looking at the opportunities within the refinery space but not in the short, medium term.