We need more oil production to pay debt – Edozie

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The Managing Director, Neconde Energy Limited, Frank Edozie, in this interview with ’FEMI ASU, talks about the impact of oil price drop and production disruption, among others, on local players

How have indigenous oil companies like yours fared in the past few years amid challenges in the industry?

It has been very difficult against the backdrop of low oil prices and inability to produce because of the challenges of producing in the Niger Delta. Many of the indigenous producers are in the Niger Delta where they use the Trans Forcados Pipeline, which has not really been reliable. So, it has been a very difficult, challenging environment. Many of the producers also have had to take loans and have had very difficult time with the lenders.

The Trans Forcados Pipeline came back on stream last month after a long period of shutdown. How has this impacted on your operation?

The return of the Trans Forcados Pipeline is a welcome development; it has eased the challenges that we faced with exporting our crude oil. However, challenges remain with respect to the continued availability of the pipeline. For instance, the pipeline has been back for about five weeks and it is currently down; this will be the third time it is going down. So it is a challenge. You must remember that the Trans Forcados Pipeline is an old asset; it has been there for over 40 years and suffering mechanical stress from age and all the disruptions that have happened to it.

Despite the fall in crude oil prices that has affected a lot of companies including the oil majors, there has been no merger among the indigenous firms. Why is this so?

Many people have bought into assets only in the last five to seven years. The economic climate has not allowed for business to develop. You may find people willing to sell; but to whom are they going to sell? So, it is an uncertain business environment and it makes it difficult for people to expose their risks by taking more.

Neconde Energy is one of the indigenous firms that acquired stakes in assets divested by oil majors few years ago. What has been the experience?

We acquired 45 per cent in Oil Mining Lease 42 in 2011 from Shell and its co-joint venture partners. In the old joint venture arrangement, Shell was the operator of the SPDC Joint Venture. When Neconde expressed interest in acquiring the share of the asset that was being divested, the expectation was that it was also going to acquire operatorship of the asset, and that was the basis on which the bid was made and open and the winning bidder was assigned. However, given the government of the day and the peculiarities of it, shortly after Neconde was announced as the winning bid for the asset, government moved the goalposts and effectively denied Neconde of operatorship of the asset. It assigned operatorship to the Nigerian Petroleum Development Company, which is the exploration and production arm of the Nigerian National Petroleum Corporation. That sets the asset into a period of turmoil and uncertainty, which was effectively only getting resolved in February of this year when a construct, called on asset management team, bringing together management staff from the NPDC and Neconde together to run the affairs of the asset.

A number of other things also happened. These include the disruption of the Trans Forcados Pipeline. As you may know, it was not operational from February 13, 2016 until the first week of June this year. So, essentially the asset, OML 42, was unable to produce through the Trans Forcados Pipeline into the Forcados export terminal. As I said, that was only resolved about a month ago. What that has meant is that we have not been able to realise any proceeds, practically, from that acquisition. At the time the asset was acquired, the expectation was to produce about 100,000 barrels a day. The asset was acquired with a bit of equity and a fair amount of debt that was brought in by banks. The impact of not producing is that you don’t have money to pay your loans, even to pay the interest on the loans. That means many projections cannot be realised. That includes what you are able to do in the communities where you operate.

So, it came as a total surprise to us when news emerged that the traditional council of the Gbaramatu Kingdom had information that they were entitled to five per cent equity in the asset. There was no such promise; there is no such document to the effect of transfer of equity. The claim is totally unfounded and has no basis. We have had an opportunity to have an engagement with the leadership of the kingdom. Last Saturday, we had a meeting with them – the king and his chiefs. What became obvious is that they have a number of grievances, understandable when they are not fully aware of what is going on. But the outcome of the meeting is that we have established a basis for an understanding and have agreed with them that they will set up a meeting at which we will have the opportunity to discuss with them, lay the facts straight. So, we have a dialogue going on and my belief is that it will result in better understanding by them of what the realities are and perhaps a better understanding by us of what their grievances are; and together, we are better able to forge a mutually beneficial relationship going forward.

Would you rather your company was given the operatorship than the asset management team that was established?

Yes, we would rather be the operator of the asset. It means that we have full control over how we develop and plan, develop and produce the asset. Without operatorship, we are looking up to somebody else to make those plans. In the best of times, they may have a different set of priorities from ours. So, the best place to be as an investor in an asset is as an operator.

The asset management team is a compromise, and working with my partners in the NPDC, we are trying to make the best of the compromise.

It was recently disclosed that your company owed banks about $558m used for the acquisition of 45 per cent interest in OML 42. Do you think there might be a default?

The answer is yes. We are not producing enough barrels; not as many as we had hoped when the loans were taken. We are not selling them at the prices we had expected. Yes, we are technically in a near-default situation. We do need to see fairer prices and more volumes produced to enable us to meet our obligations to the lenders.

When the Trans Forcados Pipeline was down, because we had loan to service, we didn’t just sit there and fold our hands, otherwise the banks would have foreclosed on us. We had to take unusual measures at least to ensure that we were getting some money. We went into what is called barging. The normal process of producing oil and gas involves getting the oil from the ground, putting it into the pipeline and selling it through the terminal. In the absence of the pipeline and the terminal, because we sit in the swamp, we devise a method of producing oil into barges; these are sea-going tankers that take the produced crude to a ship where ocean-going tankers can come to lift the oil. You may imagine the challenges associated with this; it is not easy. The best we have been able to do using barging method has been in the region of 15,000 to 17,000 barrels a day. That is how we have been surviving. Even in this, we are fully engaged with the communities. In all our operations, we have ‘freedom to operate’ established.

We are doing our best to make sure we have a cordial relationship with our communities, one that is mutually beneficial and allows us to produce so that they can get benefits from what we do.

Do you think the barging method will help to meet your production target?

It is going to help a great deal because we have better control over the production value chain. We expect to have more reliable production, not subject to the ups and downs of the Trans Forcados Pipeline.

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