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| Seplat Petroleum Managing Director, Dr. Austine Avuru |
By Oluwagbenga
Bankole
As
a result of the downturn in oil prices,the Managing Director and Chief Executive
Officer of Seplat Petroleum, Dr. Austine Avuru has said that 57 percent of the land rig in
Nigeria today are not working.
Avuru stated
this while delivering a paper titled 'Oil Price: Challenges and Opportunities'
at the 13th edition of Aret Adams Lecture held in Lagos recently.
"In
2013 we were operating 7 rigs in Seplat, we dropped our last rig in November
2015, we don't have any rig working for us today. So you can figure out all the
service companies working on 7 rigs. These days, there
is hardly anything to approve. Service companies are in real trouble,” Avuru
said.
Explaining
how and why some indigenous oil companies operating in Nigeria will close shop
by the end of 2017, Avuru said market forces will determine crude oil price and
will shut out companies that can't survive and keep those that can produce what
the world needs.
As a result
of the impeding closure of some operating companies, the Seplat boss said
Nigerian banks are jittery than the oil companies because of the exposure they
had to upstream activities.
In his
words; "Remember that in the past especially in the 90s when total global
oil demand was 75 million barrels. Once we had a million barrel glut for
producing 75 million barrels per day and there was a drop in oil prices, OPEC
will withdraw one and the half million barrels and stabilise the price.
"So
when this current situation occurred, people expected OPEC to do the same but
OPEC led by the Saudi reasoned that why should they lose their market share
because they produce 30 million barrels today and world demand is 95 million
barrels a day. When world demand was 75 million barrels a day, OPEC was
producing 30 million barrels a day.
"So
with 20 percent increase in world demand, OPEC has not increased its own share
of production. So the thinking was, why would OPEC reduce production to shore
up prices, taking it to the same level where people ordinarily who should not
compete with OPEC to come into the market.
"OPEC
decided to allow the glut to continue while world demand is 95 million barrels
per day. But there will be an equilibrium price at which production will be
equal to or less than 95 million barrel
a day. Clearly it is not $30 per barrel, it may not be $100, it may be
$60 or $70.
"When
we get to that equilibrium price, the market will shut out those who cannot
survive and keep those who can produce what the world needs. That is the
equation which really in my view was the right thing to do except that some of
us would have been dead as companies by the time that equation balances.
"I
think that the simple equation is that by the end of 2017, the market will
determine that equilibrium price which will be in my personal opinion between
$60 -$70."
Avuru added
that the situation is even more scary in the United Stated of America noting
that their banks are also exposed to debts as result of the shale activities.
"Even
in the US where you think everybody should be jubilating they too are also
jittery. There is some $226 billion of debt that is threatening to go bad
probably had already gone bad from the shale business.
"So if you
are a banker today and you are heavily expose to the upstream business anywhere
around the world, you will be jittering, you will be facing lots of
impediment," he said.
Challenges
with Indigenous Coy
The Seplat
boss said the biggest challenge for indigenous companies in Nigeria during this
oil price regime is that they are heavily leverage.
"The
biggest problem with the independent is that we are heavily leverage. We borrow
to buy an assets, we borrow to work the assets, we deploy critical Capex to
rap-up production so that we can repay our debts.
"With
the drop in crude oil price, we can't grow production because you don't have
the free cash flow to deploy further Capex.
"We
need more production during this price regime to earn the revenue to service
our debts. Our biggest problem is not about firing staff or raising Capex but
the discussion we need to have with our bankers.
"Most
of us are now cash negative. We need more cash to do investment, to produce oil
and meet obligations but we don't have cash," he said.
IOCs
workings
Unlike the
indigenous companies in Nigeria, Dr. Avuru said International Oil Companies
have cash reserves but only need to fire some of their work force and declare
low dividend to shareholders.
"What
they (Majors) need to do is cut Capex, fire some staff, re-balance their books,
and explain to their shareholders why they are reducing marginally the dividend
pay out otherwise they are usually ok.
"They
have cash reserves rather than being in debt. So they are the opposite of
independent. They are the first to cut Capex, the first to fire staff, and
apologies to shareholders with 20 percent reduction in dividend."
On the
opportunities available during this period, Avuru said both as country and
indigenous operators; "we need to champion the shift from oil and gas
being a primary revenue earner to oil and gas being a source of energy to
secure our domestic energy security. That shift must now happen."
The service companies are the worst hit.. Each of
these rigs will ordinarily employ 210 people but all of these staff are sitting
at home, no salary.
