Interview: Austin Avuru
What factors will drive industry consolidation in the short to medium term?
AUSTIN AVURU: Going forward, industry consolidation will be driven mainly by the need to pool financial resources. Just as we saw in previous acquisitions, domestic companies will have to form consortia to acquire assets with substantial reserves. In the end, I predict that there will be four to six consortia that will account for all local production. It remains unclear when the next marginal fields bidding round will take place. Most Nigerian companies today grow organically or grow through the acquisition of international oil companies’ (IOCs) divestments. Fortunately, several material assets are on the table. Between now and the first half of 2014 there will be acquisitions that will exceed $3bn.
In which activities do local firms hold a competitive advantage over foreign firms?
AVURU: There is a framework in place for oil and gas services under the Nigerian Content Development and Monitoring Board, which has set clear targets, employment quotas and minimum levels of local production. In the upstream sector the framework is less clear. Greater local content has come through marginal fields allocations and IOC divestments. As divesting multinationals seem to favour Nigerian firms, we have seen a substantial increase in local capacity in the upstream sector. At the moment, local firms account for 3-5% of national production. Before the end of 2017 we should expect to see 20% of total production from Nigerian operators. Another area where local companies have a competitive advantage is domestic gas supply. While multinationals lack the impetus to invest in domestic gas supplies, I think that by the end of 2017 Nigerian operators will account for 40% of domestic gas supply.
How can smaller-scale operations hope to commercialise their gas reserves?
AVURU: Nigeria is nearing a regime of market prices for domestic gas and already boasts sufficient local demand for gas. Going forward, market forces, not regulation, will encourage reductions in gas flaring.
Even as the industry awaits full deregulation of the market through the Petroleum Industry Bill, a number of local firms are working together with multinationals, particularly Shell, Total and Agip, to develop gas infrastructure. We will then see a situation whereby large operators delivering gas to the domestic market can buy the stranded gas from the smaller operators.
How are lenders responding to the growing sophistication of Nigerian companies?
AVURU: We have already seen improvements in access to local finance for Nigerian companies. In the past five years local banks have built a lot of capacity to accommodate local demand for debt. At Seplat, 85% of our financing comes from local banks. Going forward, we are beginning to see an increased appetite among foreign banks, which are joining local banks in providing financing for acquisitions. A public listing can lower the risk rating of a Nigerian oil company, making it easier to attract funding from banks or to post bonds. This is true for both a listing on an overseas exchange like the London Stock Exchange and the Nigerian Stock Exchange, as the listing requirements do not differ substantially. Both provide greater assurance to a lender.
What opportunities exist for “community content”?
AVURU: Oil operators look for talent for all levels of staff. An oil company can easily recruit older, more experienced personnel with knowledge gained at multinational companies or contract key functions to large services firms. The challenge comes when searching for lower level technical staff. The key is to hire individuals who meet minimum education requirements and then subject them to rigorous training. It is inadvisable to award jobs to those in local communities just to pacify the population. However, community members who do find work in key services like security or pipe-laying will also find that this track is more profitable.
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