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Orjiako: Cost of Production Will Determine Oil Firms’ Survival
The Chairman, Seplat Petroleum Development Company Plc, Dr. ABC Orjiako, recently spoke to journalists on the performance of the company, the oil and gas industry and other issues. Goddy Egene presents the excerpts:
The year 2019 was an interesting year and 2020 has been characterised by so much uncertainties, what factors will drive the oil and gas industry this year?
Number one is cost sensitivity. Any company that would like to survive in the oil and gas industry going forward will have to be a low-cost producer of oil. This is because, the oil has become a marginal business, the price volatility will continue, therefore, only the companies that are able to continue to produce at low cost can thrive. Another important area is that the world is changing, along with climate change advocacy which means that the narrative of cleaner energy is real, and that is why we are emphasising our gas business. Over and above that, we also keep very close eyes on everything that will make us reduce the level of carbon emission into the environment. We will continue to contribute our quota in making sure that the entire populace is well aligned with healthy environment, while also ensuring very well and solid social impact in our businesses by encouraging gas to power initiatives, supporting SMEs and job creation through our gas commercialisation. Other drivers of the oil and gas business depend largely on the global supply /demand balance. The market requires demand recovery to become balanced. The geopolitics among producers and consumer nations is a key determinant for oil price sustenance.
Can you highlight some of the achievements of Seplat in 2019?
The achievements of Seplat are very many, but I will highlight a few of them. We remained profitable as a company, we have continued to be cash generative, a very strong revenue earner, we have also remained profitable. Profit after tax of $277 million is quite remarkable; and at the back of that, we have maintained very healthy cash balances. We have maintained payment of dividend which is very good return to our investors. We have of course continued to be very good corporate citizens. We have paid huge sums of money in taxes and royalties to the Federal and State Governments. Our very well acclaimed Corporate Social Responsibility (CSR) programmes are ongoing and growing especially in areas where we operate, but also in Nigeria as a whole. We have also continued to maintain a very healthy workforce while generating jobs. We have continued to produce oil and gas and at a maintained low cost oil production of about $6 per barrel of oil equivalent. These are the few of very many achievements that the company has been able record. Obviously, there is always room for improvement, and we will continue to focus on those areas.
What are your priority areas and business survival strategy given the state of the energy market at present?
One area of priority for us is to make sure that the liquidity and the cash flow of the company remains strong and that our balance sheet maintains its resilience and robustness. We set up a liquidity committee which meets regularly to make sure that our liquidity remains healthy and our cash flow remains robust. With free cash of over $300 million as of last year, we will make sure that we maintain healthy balances in 2020. With respect to 2020 challenges, one thing I highlighted to shareholders was the area of prioritising our gas monetisation. Even before COVID-19, we made sure that our priority was to commercialize gas for the long term, and this is for many reasons. The first is that we are committed to identify with the federal government in terms of closing the gap in power infrastructure. As a result, we have invested heavily in gas, and today Seplat is happy to say that we provide 30 per cent of gas to power in Nigeria, and still growing. We are supporting the government and the people of Nigeria in making sure that the narrative of the diversification of the economy is built on the platform of growth in power infrastructure. At present, statistics show that off grid power supply in homes through gas, diesel and petrol generators is accounting for as high as 20 gigawatts of power.
That tells you that the level of pollution in our environment is very high. Seplat will continue to contribute to cleaner energy from its gas supply. Also it is important to note that our gas supply will power the industries, support SMEs and create jobs on a continuous basis. The other point of course is that gas is lucrative in the domestic market and is a significant contributor to our revenue base. The contribution of gas to our revenue is increasing year-on-year and we expect to see this continue to increase as the volatility in global oil price persists. We are going to leverage on all of these stated factors and make sure that we would not only survive this trying period, but will remain positive in performance indicators.
You completed a major acquisition last year. Do you envisage further acquisitions in the near future?
We have not changed from our very long-term plan and strategy. We are continuously looking at acquisition opportunities. We concluded a very successful acquisition last year, despite the collapse of oil price globally and despite the hardship in the global economy. We remain focused on acquisitions. we have continuously said that we are very committed to price sensitive acquisitions. That means, we do not overpay. So, as the industry changes, it means that the prices that buyers are willing to pay will continue to change and we would adapt and continue to do our acquisitions. The real reason for us to continuously stress the strength of our balance sheet as well as our free cash flow is because it puts us in an advantageous position. We have a major competitive advantage as a result of this because Seplat, being that we are dually listed on the Nigerian Stock Exchange (NSE) as well as the London Stock Exchange(LSE) means that we have access to global investible capital. That is why you will see that our cost of borrowing is one of the lowest among peers. Our access to new investible capital in terms of equity is very strong. At the back of all of these, free cash, strong and robust balance sheet, availability of internationally available investible capital, we have a strong competitive advantage to play in the consolidation market as well as acquisitions.
What is the state of Seplat in terms of corporate social responsibility (CSR)?
We have continuously emphasised that our business is not just about declaring profit for shareholders but to run an inclusive programme where all stakeholders matter. You would have seen that over the years from inception, we spend a tremendous amount of time and resources in communities. In the communities where we operate, you will notice that in terms of our CSR programmes, we focus in a number of areas: Number one is Education. We believe that solving the problem of education is one major step towards the emancipation of any economy. Therefore, we have been running scholarship programmes for universities because we believe that if we produce very good university graduates, and better employable Nigerian youths, then we have empowered them. Our well received Seplat Pearls Quiz programme for senior secondary schools promotes academic performance and encourages youth interaction and engagement. Secondly, in health, we have focused over the years on child and maternal health, and therefore, the ‘Safe Motherhood’ programme of Seplat is next to none, where tens of thousands of pregnant women are treated, and this is mainly addressing the very high mortality rate in terms of maternal health and infant health. This has paid off, we have spent a lot of time to provide them the amenities they require to make sure that throughout their antenatal period, they remain safe.
Another very important area that we have covered is that of sight. We realised that sight is a major challenge in our environment, so we launched the ‘Eye Can See’ programme, where we have again reached out to several tens of thousands of Nigerians, especially in areas where we operate, and this is very prominent. In areas where we operate, we decided that it is important to empower people, so we run various skill acquisition programmes, we train people, employ them when possible, and make sure that they are well represented in areas where we work. The other thing we have also done is to make sure that people in areas where we operate are significant in our number of contractors. So, we train them as contractors; we teach them the skills and make sure they participate while following our laid down procedures and processes; so, you are now beginning to see contractors from our areas of operation who are now retrained to provide various kinds of services. This is a very important aspect of empowerment that we give in these areas and of course we are seeing quite several youths being employed. We provide social amenities: water supply, electricity supply, road network, in the areas where we operate such that we have enjoyed a good working relationship in all these areas. The people have confidence in what we do, they take us as a true company, they receive us and we receive them. Going forward, we can only improve on that.
What is your strategy for 2020 and what should stakeholders be expecting from you?
From inception, we made it clear that our shareholders will continue to reap two major benefits which are dividend and growth in their investment. We have kept up with the payment of dividends and we will continue to do so. We have no plan to deviate from this. 2020 could be a challenging year but we have not taken a decision not to pay dividend.
There were rumours recently that you plan to downsize, how true is this?
That is not correct. This is not the first time that the industry is challenged. In 2016 and 2017, a lot of companies were challenged including Seplat but we didn’t cut our labour force because we recognize all the efforts our staff continue to show in making sure that the company grows.
In 2020, we have not planned to cut down our labour force. We will keep the current staff strengthas part of our strategy to go through the survival mood of 2020 and as well as see growth even in the face of difficulty.
COVID-19 is something no one saw coming. What was your immediate response to it as a company?
The safety and security of our staff and all our stakeholders is number one on our agenda. The first thing we did was to protect our staff. We did start a quarantine programme where all staff who traveled outside Nigeria were quarantined for 14 days before coming back to work, and this predated what is happening at the national level. Even before the government declared closure of offices cost oil production of about $6 per barrel of oil equivalent. These are the few of very many achievements that the company has been able record. Obviously, there is always room for improvement, and we will continue to focus on those areas. In Lagos and Abuja, we had taken a decision to close our offices.
We reduced the number of staff we have at the fields to make sure that adequate social distancing was maintained, and also made sure that all of the requirements that the NCDC put in place were maintained.
Our Health, Safety and Environment (HSE) department is making sure that these are followed strictly. So, on that basis, we have maintained good safety and security of our staff. In the areas where we operate, we take these stakeholders very seriously.
We have made sure that despite the $1.2 million we contributed at the national level through the NNPC to fight spread of the Coronavirus, we still went further to spend various amounts of funds in the states and communities where we operate to keep them safe. We have helped to strengthen supplies in the hospitals; we have also made sure that the communities received certain palliatives, with respect to food security during this difficult period; in addition to supplying them with very essential sanitation and hygiene materials.