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Capitalising on local resources and content

Interview - April 11, 2012
Phillip Ihenacho, Executive Chairman of Septa Energy Ltd, shares his optimism about Nigeria’s strength as an oil and gas investment destination, and explains why local companies should be playing a larger role in the exploitation of the nation’s hydrocarbons

Goldman Sachs classified Nigeria as one of the economies that will attract the most investment in the 21st century and it has a promising future business-wise. However, there is a bit of a gap between how people see Nigeria on the international arena and reality. What do you think is the most important thing that the international community should understand about Nigeria now?

I would say that most of the companies that are involved in Nigeria are investing further in Nigeria. Nigeria is not necessarily an easy place to understand from a distance, but if you invest the time to get to know the country, there are enormous opportunities. But you need to get through the initial concerns. We operate onshore Niger Delta and before we started, there were a lot of people who said that you couldn’t attract international capital to onshore Niger Delta. With the right sorts of projects, if the investment community takes the time to understand Nigeria, then there are many opportunities. I would say that you should take the time to understand the country first-hand, and do not judge the country based on what is said internationally.

The Petroleum Industry Bill (PIB) has been described as one of the most authentic pieces of legislation that will turn the industry around and rewrite the relationship between indigenous companies and the international oil companies (IOC). What impact will the PIB have on Septa?

I think what is difficult with PIB is that it consists of many different pieces of legislation. Some of it has to do with separating the various functions of NNPC [Nigerian National Petroleum Corporation] and providing more regulatory clarity around various players in the petroleum industry. More regulatory clarity is extremely helpful to anybody who operates in the industry. Obviously the piece that has made PIB more controversial is changes to the fiscal regime. I think there, what we would hope is that the indigenous companies are given some preferential status and some benefits, and the IOCs are encouraged and rewarded for relinquishing assets that are not core assets for them, to the indigenous sector. As the IOCs focus on the larger fields and working with government, the smaller fields should be in the hands of smaller entrepreneurial companies, and that will happen with or without PIB.

On that note, how would you evaluate the effects so far of the Local Content Act, which aims achieve what you have just said?

I think it is going to have a greater impact on the oil services industry in Nigeria. In many ways, the Local Content Act should have been passed a long time ago. The amount of services that are provided to the oil sector in Nigeria are not provided by local companies, so I think this act will make upstream players take local content much more seriously, and will really support the growth of the oil services sector. I think the challenge is going to be making sure that you allow enough time to develop the capability within the local sector, whilst at the same time ensuring that the super majors use local talent as much as possible. It is about trying to get that balance right.

The removal of the fuel subsidy is a burning issue at the moment. Do you think this controversy will iron itself out, and what impact will this have on Septa?

The direct impact on us is very little indeed. What should happen in Nigeria is that we should be in a situation where we are using our own natural resources and processing and consuming them. But at the moment we are exporting too many raw materials and importing the same materials in finished form, and that needs to change. The problem is that to attract investment into the refining sector, you need deregulation. You need to have a commercial end price, and some certainty around pricing to allow the long-term investor to invest in the refining sector. In the end, if we are to attract substantial private sector investment, the sector needs to be deregulated. One of the few benefits that most Nigerians receive directly or indirectly is cheap gasoline. So the issue is how to retain the trust of the public, whilst implementing necessary reform. That is a very hard balancing act.
In all major sectors where substantial investment is required, the Government is going to have to work with the private sector, and the private sector will invest substantially if they have certainty around pricing and returns. That generally means a deregulated market, where the price is set by the market and not by government.
Septa is an upstream business; we are not in the oil refining business. Our goal is to be able to provide as much gas to the domestic market as possible. In some areas, like in the transportation sector, we would like to see compressed natural gas being used by buses and lorries. We would like to see the Government really trying to attract investment into the gas sector and working to accelerate gas development. A lot more could be done in the gas sector domestically.

What are the main challenges ahead when it comes to fully tapping into Nigeria’s gas potential?

The biggest challenge by far is infrastructure. There is no doubt that there is huge demand and huge reserves in Nigeria, but in order to get the gas from the supplier to the customer, you need infrastructure. You cannot just load it out onto a barge and sail it out to customers; you have to create pipelines, or you have got to liquefy or compress it, and transport it. There is very little pipeline infrastructure in the country, and that is the challenge. It is about trying to mobilise the capital into gas infrastructure. In order to do that, the market must set the end price. The more the government interferes when it comes to saying what the price should be, the more difficult it is for the private sector to invest in the sector. Infrastructure development capital needs are massive, and are directly linked to what the Government would like to do in the power sector. The Government is spending a lot of money on power generation as well as distribution, but you need the gas supply to work, and enormous investment is required in order for that to happen.

Do you think that the Government is open to investors like you, who would like to tap into this potential?

Yes, in general. We have a good relationship with the Government, so in general, yes.

How would you evaluate your cooperation with Governor Akpabio in achieving this shared goal?

If we could do the same thing with federal government and others, it would be fantastic. We have a very good relationship with Akwa Ibom, and they have been enormously supportive. They understood from day one that for a project to work, it must be a commercially viable project. We like the fact that they approach things in a business fashion. Both the Governor and Deputy Governor understand that for investment to happen, it must be right for business and long-term investment. There is plenty to do. We hope we can build on that model.

How important is the success of this gas plant in the scope of all your operations?

It is the single most important project we have, primarily because we need to demonstrate as a business that developing upstream, midstream and transporting gas works commercially, and the success of this project is absolutely essential to be able to do more of this. This is our test case, and when this works, we will effectively do the same thing over and over. We have a large commitment on the gas side, and there is a lot more we would like to do, so this has to work in order for everything else to work.

About $1 billion has been invested in this project and it aims to provide power to about 10 million Nigerians. How is Septa making sure that the right quality and level of investors are attracted to the project?

It is a continuous process. We have got good partners on the project. Our partner on Uquo field is a company called Frontier Energy, and they have been a very good partner with us. On the funding side, it is pretty much a continuous process of attracting additional capital into our projects. We have tried to run our business as a transparent business with good corporate governance, so that it is easier for international investors to engage with us. If international investors are interested in investing in the upstream oil and gas sector in Nigeria, we want people to see us as a means of investing in the sector in a transparent manner, consistent with the highest international standards. That is what we try to do.

You have recently arranged a debt facility of US$150 million from Standard Chartered and about US$75 million from Petrofac. This injection of capital will put you right up there compared to your competitors. Where do you see Septa in the Nigerian market compared to the competition?

We have actually got north of $150 million from Petrofac, and that is closed already. In equity terms, we have raised north of half a billion dollars for equity investment in Nigeria. We are one of the best capitalised independent oil and gas companies focused on Nigeria. We believe that if you look at the scale of reserves in Nigeria and the opportunities, there is room for over a dozen Septa Energy-sized energy companies, easily. So we do not see ourselves as competing with anybody – in fact, I think it is more the opposite. There is a lot more room for cooperation. The size of the opportunities is huge. We very much believe in partnerships, so we have active discussions with other indigenous and/or E&P companies about partnering with them. The size of the reserves here is huge, and the challenges in mobilising capital are also considerable, so there is plenty of room for all the independents that exist today.

Septa is a relatively young company. Considering the volatility in the global markets, how do you manage to instil investor confidence and actually get them on board?

We cannot change the press that comes out about Nigeria and we cannot change unfortunate events that happen in Nigeria, but what we can do is explain to people and try to be as transparent as possible as to the opportunities and risks. Secondly, our philosophy is that we want to run our businesses as transparently as possible, in a manner that is consistent with corporate governance. If people spend the time understanding Nigeria well, they understand that there is a very big gap between the perception of risk and the reality. The issue is trying to get people to consider it, and not be put off from what they perceive from a distance.
We have been fortunate in that we have been able to attract capital when we needed it, and it has been primarily due to the fact that there are experienced investors and if you can get them to focus on the market, the opportunities speak for themselves. 

What is Septa doing to give back to the communities in which it operates?

For us to operate successfully, we need to partner with the communities we are involved in and we will not operate in communities unless we are investing in relationships with those communities. Rather than telling communities what we think they should have, we try and understand what they want. That means partnering with NGOs that can help to intermediate. We invest very heavily in training and local employment and that is almost always the number one priority. But it is not one-size-fits-all; it is about understanding what that community needs and wants, and listening to and working with them. Particularly in the gas business, we are not interested in pulling out gas as quickly as possible and then moving on – we are actually building gas infrastructure that will be there for 20 to 25 years hopefully.
A typical board normally has two or three sub-committees, and we have a community and environment sub-committee board. It is that important to us.

In our EIA (Environmental Impact Assessment) we actually look at the needs of the community as well.

Why should Nigeria deserve a chunk of investment from the CDC’s 2011-2015 £1.2 billion plan to invest in the sub-Saharan region?

It depends on what the goals of that investment are. Like many other emerging markets, one of the biggest challenges is that although Nigeria has its opportunities, resources and a growing middle class, it has a huge infrastructure defcicit. The investment required for infrastructure in Nigeria is just enormous, and that investment cannot come from government alone – it needs to come from international investors, the private sector and the likes of CDC. Generally, there is willingness in Nigeria to allow an investor in infrastructure to make a good return on their investment. It is not Nigeria holding out a begging bowl and asking for money – it is Nigeria saying that there is an opportunity here; there is huge demand, and if you come with your requirements, you will be able to have an open dialogue with the government.