As Nigeria continues to navigate the complex landscape of the global energy market, one thing is clear: the country’s future prosperity depends on its ability to unlock its vast energy potential. With decades of experience in the Nigerian oil and gas sector, Mr. Austin Avuru, Founder and Executive Chairman of AA Holdings, offers a unique perspective on the challenges and opportunities facing the industry. In this interview with Valuechain and other Energy Correspondents, Avuru shares his insights on the future of Nigeria’s energy sector, the role of independents, and the government’s efforts to address energy poverty.
What are your views concerning the upstream, midstream and downstream as we begin to see a revival of the midstream sector in Nigeria? Your response should be channelled towards domestic supply and the entire chain of energy security.
The emphasis of government across the entire value chain from the upstream all the way down to product distribution emphasizes domestic energy security. So we’re seeing a regulatory direction that will move us away from revenue from oil and gas activities to utilizing oil and gas productivity for energy security to cure our energy poverty. So you’re seeing first, from the upstream point of view, you’re seeing a regulatory push that now recognizes that there is homegrown independence who are likely to be operating mainly in the near term in the onshore and shallow water while the IOCs move into deep offshore and that this shared responsibility among Independent and IOCs will complement the entire Nigerian economy. What we will then see is that collaboration and shared responsibilities will lead to a reinvigorated industry. Optimum production coming from both the matured fields in the onshore, fields in deep offshore and additional exploration effort across all the basins. That should lead in the medium term to optimum production. Then you go to the mid-stream, and you see a lot of gas processing development going on, particularly with OICs intended to supply the 3-4bcf per day of gas that the domestic economy requires both for power generation, for heavy industries, fertilizer and so on. That is beneficiation; enabling the oil and gas business, particularly the gas business to be a major contributor to our GDP. Then you go further into the mid-stream, and you are now seeing the country becoming a refining hub, so, we’re going to a point where the next three years, would probably have a refining capacity in excess of 1.2 million bpd. Even at the 2.5 million bpd production; if we get there, you’d see that half of our production is being refined locally. Now, if you’re doing 1.2 million barrels refining capacity within the country, our consumption would probably not be much more than 400-500, 000 bpd; which means we have a huge export potential for our refineries across the sub-region and beyond. Then, further down, you’re now seeing, particularly independents, in the product distribution and gas distribution business. In summary, what you’re seeing is an integrated business that earns revenue for the economy, but more importantly, supports the industrialization of the economy and contributes much more to our GDP than what we’ve seen in the past sixty years.
What are the prospects for further investments in the local supply of gas, given the limited capacity in the local market?
The demand capacity in the local market is not limited, what is limited is the level of growth and stability of that market. For instance, we’re still struggling with the power industry, by the time we have sustained 20GW of power (sustained), when that power market is developed to the point where it is reliable, you’ll need more than 2pcf of gas pd just for the power industry. Once you have a stable demand, then investment into the supply angle will also lead to stable supply. When that market matures and becomes stable, you are going to see an equilibrium between demand and supply which will then give you more confidence in investing in the supply side, but the pricing is already commercial, those who are producing gas today, whether to industries or to power and so on, are selling gas domestically above 2 USD per MMBtu and really, anything above 2 USD per MMBtu, can sustain the gas business, those who are in it, companies like Seplat and even platforms at the small level will tell you that their gas business is commercially viable and that the market is there. All I’m saying is, that we just need the market to develop to the level of stability where both supply and demand are stable enough to be predicted.
You are a geologist; what is the outlook for further production from the mature fields especially in the Niger Delta and the decline we see in the deep water; where will the additional one million bpd come from?
This time, I will talk as a Geologist and Explorationist: if you look at the marginal field operators that have bought assets, almost every marginal field operator will tell you that, for instance, we were assigned a marginal field with 2p reserves of 7 million barrels, we have produced 12 million barrels and we’re still producing, that is the story you keep hearing across boards. What we call mature fields, from a geological point of view, are those assets where easy discoveries have been made, the easy-to-develop fields have been developed, but there are still substantial reserves. They require more technology, higher costs, and more diligence to develop them, but it is there. So when you see an asset that you think holds a hundred million barrels, by the time you bring in technology for secondary recovery, you’ll probably recover 180 million barrels. So, we’re now in phase two of the Nigerian oil and gas play, where we are going to squeeze out the remaining barrels, it’s not that they are not there, they are there, but they were not captured in our original 2p, but which is why in every reserve play you have 2p and 3p. We’re now going to be converting the 3p and 2p into one 1p and producing them. So, almost in every basin, when you say it is matured, you probably have as much left as you have produced, but you will require more intense technology, and more prudence to then produce it usually at a higher cost.
We have seen an era where we have very big discoveries, today we no longer hear about these announcements of big discoveries. What we see are appraisals. Does this mean that the Atlantic has given us all it has?
In the Nigerian deep-water basin, as you heard in one of the presentations by the Presidential Adviser on Energy, we haven’t had any exploration work done in the deep water in the past 13 years. So after the first rash of exploration that discovered about 8 billion barrels, they have all gone into production mode and that’s the production you are saying is now declining. Again, with the kind of policy thrust we have today, they are now incentivised to go into exploration mode both for oil and natural gas. You’re going to see some additional discoveries, either near field appraisal discoveries or even exploration discoveries and that will happen even onshore that is so matured, like 60 years old; you heard Chevron the other day say that the field has been in production for over 45 years; there was a near field appraisal discovery, so those potentials are still there and those are the potentials that new players are going to be chasing because they are commercially viable.
In the past two years, the conversation has been about attracting investments. Do we have the right policies and commitment to achieve these aspirations? Secondly, about the divestment by the IOCs, some players are concerned that those who acquired these assets cannot maintain them. What are your views regarding this?
Capacity, there is a regulatory tool for ensuring that only those that have the capacity play in the industry, just like you have it in the banking sector. There’s always a regulatory tool to wean away those without capacity and ensure that only those that have capacity; to answer the question roundly, there are regulations and laws in place that enable the regulator to ensure that if you do not implement the work programme that you have submitted and the FDP that you’ve submitted, the regulator can take back your asset. That’s why I’m saying there’s a regulatory tool to ensure that over time, those who have the capacity and can implement the work programme that has been approved for them are the ones who will continue to be in business. Those who do not have the capacity will have their assets taken away from them, it will take some time, and it will take regulatory courage, but the regulatory tools are there to ensure that only those with capacity are left in the industry. Now to your second question; I’m confident among the divested assets, you’re going to see both those who have demonstrated capacity and can grow even better capacity and those who probably do not have the capacity. But over time, those with capacity will overtake those without capacity and you’re going to have a robust industry. The oil and gas industry would not be an exception, we had it the same way in the banking industry; from a hundred and twenty-six banks, we came down to about twenty-four banks, with five that are very viable and very active across entire Africa. This won’t be any different, I can tell you from my experience in the next five years, we’re going to come up with our five strong Independents and about another 8 – 10 smaller Independents in the marginal field play, but together, they will account for 80% of the production from Independents and probably about 50% of the entire production for the country, I’m confident that that’s what’s going to happen.
It is companies with capacity that will bring investments, that’s what capacity is about; I don’t like to be specific, but I can tell you that in the past ten years, Seplat has drilled almost on average, 7 – 12 wells each year, that’s investment. If you go and read the annual report you would see between 2010 and now, how many billion USD they have spent and invested in the assets that they have. So, capacity is what gives rise to investments in the assets; so those who have capacity are those who are going to invest in the assets and grow production, that’s what you’re going to see.
At some point, we were hoping to bring the cost of fuel production to about 10 USD pd, given what the Federal Inland Revenue stated at the National Assembly saying the average cost is about 40 USD pd. Also, the indigenous companies have just taken over these divestments, what does this mean for the market?
First of all, I don’t think the average cost is 40 USD, there are costs as high as 40 USD, and there are some costs as low as 10, or 12; so the average can’t be 40 USD. However, especially where we are coming from 30 years ago we were averaging 3 USD pb in Nigeria, even 15 USD is a high cost. When you look at the physical details of the PIA, you’ll find out that every decent operator, who knows what he’s doing; you don’t need the government to force you to reduce your cost. To remain in business and be profitable, the PIA is modelled in such a way that low-cost operators have the highest tax incentives; high-cost operators will be punished. Again, coming back to capacity, by the time these Independents grow sufficiently capacity, they on their own will have to reduce their cost to the barest minimum in the interest of their own business practices so that they will make the most profit.
Yesterday in one of the sessions, you expressed optimism that the government is moving in the right direction but you didn’t elaborate due to time. What really gives you the hope that the government is doing the right thing?
Take these divestments, divestments that we participated in, at Seplat then, that was 2010, that’s 14 years ago. Between 2010 and the last two years, there really was no regulatory framework for divestments, you simply went and did transactions with the IOCs and it is only when you brought it to the table for approval that they will start dancing around. The result has been that in the last 5 years, those who are divesting are hung in there, they haven’t left, those who are coming in haven’t been able to come in and what has then happened is that there is no investment because both those who are leaving and those coming in, none has been able to invest. But for the first time, we now have a regulatory framework, it may not be perfect, but, at least today, in any divestment process, the NUPRC has a framework to say this is how it should be done; these are the terms upon which we do approvals. So, it’s now been streamlined and you are beginning to get consent that wasn’t seen in the last five years or so.
The so-called ease of doing business presidential directive and the development of deep offshore gas, are policy directives that are unlocking things that have been stuck there for the past 15 years or more. What I meant yesterday, is I wasn’t just patronising the government because the government people were there, I am seeing for the first time what we saw in 1991 under Professor Aminu, when he came out directly and said we want to achieve reserve base, these are the things we’re going to do, and that was how he unlocked the deep-water. So today, we’re seeing a recognition by government, particularly the office of the adviser, that there are things to be done to unlock the bypass place in the matured basin that you’re referring to, and those policy thrusts are what are put in place; because you cannot wish away the Independents, the Independents that will play a really matured basin, Nigeria is not an exception; whether you go to the North Sea or; look at Perenco is in Gabon, Shell pegged ten in Cameroon. Matured basins belong to Independents; once we have now reached that point of recognition that Independents have to be supported to grow capacity, then you’re doing the right thing because it is these Independents that will unlock additional production from these assets.
Let’s look at how all these translate into prosperity, especially for the average Nigerian. Will the divestment address the energy poverty of Nigerians?
I started by saying that we’ve run an industry that for 40, 50 years, was addressing the energy security needs of other countries around the world, and all we were interested in was revenue. We are moving away from that now into addressing our own energy poverty and when you address energy poverty, it will eventually filter down to the common person. For instance, I believe that with some of the gas developments that we are seeing by Independents, we’re moving to a point where we have enough LPG production in the country to meet local needs and the growing demand. So when you see most of the gas plants now being built, each one has an LPG component. Before now, LPG could only be produced by refineries, once the refineries were down, there was no LPG and LPG is for the masses and that addresses clean cooking. Now, gas-to-power; if we achieve power solution in the next five years, the greatest beneficiaries are the ordinary poor people; it goes down to almost every basic thing that they do. Again, once we’re moving the industry towards solving our energy poverty problems as a country and as a continent, then really, we’re now turning the industry around to benefit even the poorest person on the street.
What does the future hold for the independents?
Independents must have to decide the most appropriate geography to operate in, otherwise, I can tell you that in the next five years, a company like Seplat can operate anywhere in the world; and can operate at the level of an IOC. As a matter of fact, once they integrate the Exxon Mobil assets into their current operations…let’s define the scale, once Seplat integrate Exxon Mobil assets into their operations, operated production will be in excess of 200,000bpd. As an IOC what was Texaco producing? What was ENI producing? Their operated gas processing capacity will be about 1bcf/pd. They currently have 465 million, they are developing 300 million scuffs in Anoh, they’ve just started gas in their Sapele and is 85 million scuffs. If you add all of that up, we’re close to 1bcf/pd. So a company that is capable of delivering 1bcf/pd and over 200 thousand oil bpd; there were no more than two IOCs in our history that will have that capacity. So yes, we’re developing Independents in Nigeria and we should be very proud of that. Independents in Nigeria that are operating at the level that IOCs were operating in Nigeria and those days we grew up thinking that they alone and God were capable of what they were doing, but we’re seeing it happening now in Nigeria.
The biggest concern for players and those who can invest is access to assets. Most people are of the view that the entry barrier is too hard to break. How do we leverage the thirst for more production and reserves by opening up the assets to people who can handle the investments?
It is a regulatory duty; if a regulator knows that his job is to emphasize vibrancy in the industry and it’s implementing what I described earlier, in the PIA as drill or drop, if you don’t develop your assets they will take it away from you. Then you’re going to be seeing regular bid rounds and then people who have the capacity will have more and more opportunity to participate in those bid rounds. And so over time, those who have the thirst will participate in these bid rounds and acquire more assets and those who do not have the thirst and capacity will fizzle out. So, it is the primary regulatory function to ensure that their regulations and the implementation of their regulations are targeted at ensuring vibrancy in the sector. If they do it well, you’ll see vibrancy and if they don’t do it well, we’ll go back to redundancy.
Looking at the viability of investments in certain areas, especially in gas, the biggest challenge there is the power sector; their capacity to invest. The level of return on investment in that area is very poor and that has prompted regular interventions from the government. In your opinion, how can we model the power sector to be more responsive?
It is already modelled that way; the power sector, the way it is modelled can pay, what we’ve not seen in the past is a stable market and that stable market didn’t grow because, at the power end, we stifled the tariff. So when we didn’t have a market-driven tariff regime in the power sector the distributors didn’t earn enough revenue to pay the generating companies and the generating companies didn’t have enough money to pay for gas. Now, if you look at what they are doing in terms of deregulating the power sector, is to achieve a market-driven sector where the entire value chain from gas to generation to distribution is serviced by the revenue that comes from there. I’ve always emphasized market stability in everything I’ve tried to explain. Once you achieve that market stability at the demand side, which is power and industries, you’re also going to achieve stability at the supply side because then the entire revenue will be enough for the entire value chain. So the structure is there, it is just to achieve market stability so that the market itself pays for every service within the value chain, that’s where we are heading.
Austin Avuru is the Founder and Executive Chairman of AA Holdings. A Geologist by training, he spent over 40 years in the Nigerian oil and gas sector and was Managing Director of Platform Petroleum Limited in 2010, he later became the pioneer CEO of Seplat Ltd, a company he co-founded. Under his leadership, Seplat was dually listed on the London Stock Exchange and Nigeria Stock Exchange. He retired as CEO of Seplat in 2020 and remains on the Board. He is also the Chairman of AA Foundation, a not-for-profit organisation dedicated to creating social-economic change in education and healthcare.
He is a fellow and past President of the Nigerian Association of Petroleum Explorationists (NAPE), a member of the American Association of Petroleum Geologists (AAPG), a member of the Society of Petroleum Engineers (SPE) and a recipient of the Aret Adams Award. He is the author of “Politics, Economics & the Nigerian Petroleum Industry” and co-author of “Nigerian Petroleum Business, A Handbook”. He won the 2013 Ernst & Young Entrepreneur of the Year award in the Master class category for Nigeria & the West African Sub-region.