Given the current glut in the international oil market, the Chief Executive Officer, Oilserv Group, Mr. Emeka Okwuosa, thinks oil prices will slide further. He also tells journalists what his Group is doing to cope with the slump and what government can do to cushion the economic effects while also calling for the restructuring of the political system, as captured by Clara Nwachukwu. Excerpts:
Six months down the line, would you say your expectations have been met by this government and if not, how do you think government can meet them?
To start with the current government, one thing we must bear in mind is to look at the basis of current issues, facts are facts. For me as an engineer, I deal with facts and then try to be logical. The first thing we have to bear in mind is that we have an unprecedented situation in Nigeria, which is for the first time in a democratic setting, we have had a change of government from one party to another; it has never happened before.
We are moving into a protracted territory. This government came in effectively end of May or June 1, and a few months have passed on and in my own view it is still a work in progress. Being a new party, a new set of systems you expect them to take their time and study the environment before they can put things in place before they can move. I never had any expectation in reality that any government like that irrespective of what government it is, coming in on this basis will achieve much in the first year because they have to understand where things stand.
Based on that they have to develop policies, appoint the right people in places and then try to drive the system. Some people would say they should have done it faster or quicker, but I don’t subscribe to such. We are in a very poor shape, and being in poor shape that was already in place before they came in. It is a combination of a few things that have happened before, added to a situation where Nigeria has a mono economy that is dependent of oil and gas, mostly oil. And oil price has dropped below $50 from the highs of $100 and we were never prepared for it in any way. I don’t subscribe to the thinking that they are not doing the right thing. I believe they have a programme and we have to give them time and judge them over time.
Also, everybody has been expecting the crude oil price to rise, but that is not happening. How do you think Nigeria, going forward, beyond the rhetoric of saying diversify the economy? How can the country survive under the current oil regime?
If you come to the issue of oil price, you can say that your expectation is this but I think using the word expectation may not be entirely right, it’s a wish and not expectation. This is because to get your expectation, you go through a process of trying to understand how the oil price plays over a long time.
It’s not about government alone. Are you going to tell any bank that we want to retool, we want to do agriculture, you must give money out, and you must do a single digit interest rate and give about four, five years? Where will they get the money to do that? Banks take in money and do a margin business; lend out and take the money back. They cannot lend out at a lower interest than they received. It takes time to retool; it’s a policy change that takes time. If you decide to have a manufacturing base that is better than what we have today, in order to stop importation because one of the scourges we have is that we virtually import everything so we need foreign exchange to back up your importation and the foreign exchange comes from the oil sales. But oil sales are reduced and we don’t have the foreign exchange to drive that also.
If we need to retool that, we cannot do it overnight, and we have to address our power issue. If you don’t have power to be able to drive your industries, industries cannot work; it is quite a lot of things going on. The bottom line is, we need to adapt and there are many things that can be done to adapt, we require government to intervene. But most importantly, the entire nation has to understand that there is a paradigm shift and it’s going to be a shift that if we do not act quickly and address, the country will have a major economic problem.
You said Oilserv diversified into E&P, can you tell us more about it with regard to which oil blocks you acquired or intending to acquire?
Yes, we have gone into E&P, we have a subsidiary, because when you talk about Oilserv, it started as a construction company. We became EPC over time, covering from the front engineering, detailed engineering, construction, commissioning as well as procurement of the other things that go there. Today, we have other entities like Frasmez Engineering, which is purely an engineering company that supports all the activities of engineering, and then handles project management as well as doing feasibility studies.
Then we have Fraz Oil Exploration and Production, which is the E&P arm of Oilserv. With Fraz Oil, we have block 3 in Benin Republic which we are developing as we speak. We have also used Fraz Oil to buy into Midwestern Oil and Gas; we have also bought into Eroton, the operator and owner of OML 18. Currently, we have this as existing activities and we are also bidding for blocks in Ghana and East Africa. It is a two year old company and like I said earlier, E&P takes time and what is important is that we have production capacity. We are also doing exploration as we speak but we intend to build it up and develop it.
Earlier you mentioned foreign exchange restrictions, and operators had complained about the new CBN rules on FOREX transactions. How have they impacted on operations and what can government do to improve access to FOREX?
Yes, we have to admit that there is a problem with our ability to fund foreign exchange requirements. This is a fact. Nigeria, as I said earlier is a mono-economy country and more than 90 percent of foreign exchange comes from oil and gas sales. The gas sale we are talking about is LNG, but mostly oil. And today, that is grossly reduced and it poses a major challenge for fiscal management. It means clearly that CBN, the Finance Ministry will have to come up with ways of managing it.
They are doing what they think is the best, which is to curtail the utilisation of US dollars in the Nigeria system, because they can’t support it and we neither. What it means to me is that they are working towards trying to reduce the amount of foreign exchange being used in the productive sectors. But that requires a lot of work because you have to define our productive sector. We are so used to easy life over the years; we are so used to importing everything that we need so much that everything has become essential commodity, but they are not necessarily so. But we should give them the chance to do that, but having said that, some of the policies they introduced earlier were more or less firefighting policies. That is to be expected. Some of them were addressed because as members of PETAN, we had two meetings with the CBN Governor, where we discussed with him and he was an understanding. He understood our point and other entities like MAN met with the CBN also. The CBN has adjusted some of the policies to make them workable.
The bottom line is that some of the policies now are quite tough on the economy; they make it difficult for the economy to move. But I believe strongly that overtime, especially now that we have a Minister of Finance, some of the duties put on CBN that they shouldn’t be doing like the macro economy management should be addressed squarely so that we can have a longer time perspective on how to handle things. But at the short term, this measure has helped to address some issues. However, these measures cannot be for a long term otherwise they have the tendency to slow down the economy. It is affecting us, but this is a price that we have to pay. But if it remains on a longer term, I can bet you that some of the things done in the oil industry will basically fail. Today, even the banks are not able to get LCs confirmed oversees and it is becoming a problem.
By delisting our bonds and all those activities done internationally are suffering. Our credit worthiness is suffering; it is not the fault of the government this is an issue that is coming from lower intake of foreign exchange and also the fact that the previous government we had failed to diversify to make the country more sustainable. So these things cannot be solved in six months; they require more than two, three years of hard work. We have to figure out a way to get going and I’m sure they have figured out the way forward for the economy. Because not figuring it out will shrink the economy, get people out of work, increase the cost of items and create social problems, which I know no right thinking government would wish.
What are your projections for 2016?
We have to be optimistic, because if you don’t have optimism, then you cannot live as there is no need to. I have been told that Nigerians are one of the most optimistic people in the world, very hopeful and that is one of the things psychologically making us to keep going and moving forward. I am optimistic, but realistically, it is a hard time. My optimism is coming from the fact that the government will now have time to look at the issues and try to address them.
But we should not expect too much because the problems are very deep. We have structural problems, we have short problems and we have long term problems. But again, being an optimist, these problems create opportunities. We have to look at them from the opportunity side of the coin and see how we use this to create more value in what we do. But at the end of it all, we must address two key issues in the country. One is productivity – we are not that productive as a people. We like easy life but we don’t want to work for it.
The second is our political system. We have to realise that our current political system is not sustainable for the development of the country. We cannot be using 80 percent or more of the nation’s income to run our government. If you do that, it means in a long term, you are not going anywhere. My view is that anything more than 50 percent of what Nigeria produces, or what is the intake, not more than 50 percent should go into running the government. If that has to be so, let us cut down the way we run our government. We can address it and look at our structure and see whether it makes sense to run a system like that. Why do we need to assist the government when they cannot pay salaries? Why do we see states governors running everywhere with big convoys, entourage, and they are paying money, what do they produce for us?
People tend to look at Nigeria from the perspective of the federal government. Do not forget that the federal government does not spend up to 50 percent of the money that comes in; the rest goes to states and local governments. And local governments do not exist; it is states that control them. As such, state governors should be held accountable, but nobody is holding them accountable. And so, we cannot continue with these wastes and hope that Nigeria will move, let us really be serious.
On that note, what is your view about the proposed N5000 stipend they want to introduce?
I am not a politician but an employer of labour and I feel the pulse of the country every day. I have worked and lived all over the world and I’ve done business all over the world. The worst thing you can do to an individual is to give him a hand out without productivity attached to it. Once you do that, you destroy the individual because you make it difficult for the individual to think and work. When you give people that kind of money, it may appear to be small but when you add them up, it goes into billions. But that is not even the issue; the issue is that they become lazy. What we should do is to think about how to provide jobs for them, provide opportunities for small scale industries, get the power supply running so that a local barber can get his shop running, and be able to expand to other shops and employ more people. That is really what will help Nigeria.
The other aspect of this that is very bad is that once you throw this money out there, scams will come into play. The people that are meant to get this money will not get them. Those that will get it may end up paying a premium – ‘if I pay you, you will give me something out of it.’ So, it is an unsustainable idea and I hope that this joke will not be taken too far because it is going to set us backwards and it will not solve the problem.
Years 2014 and 2015 have been very bad for most companies on account of this oil price crash. How was Oilserv able to survive the bad weather and what mechanism is Oilserv putting in pace to continue to weather the storm, and give dividends or returns to its shareholders?
For Oilserv, we are affected like every other entity in the oil and gas industry across the world. We have tried to adapt and to adapt means being realistic; we have diversified in the past two years from being purely an EPC company, into exploration and production, which is a longer term business. We’ve also gone into gas development. If you put all these together, you find that what we’ve done in the past one, two, years is to balance ourselves better. But some of the benefits are yet to come because our investments in E & P take time; you talk about that in decades.
But when it comes to our bread and butter, which is EPC, our activities are low across board. Normally, when you have a low price regime, the first thing that will suffer is services. Oil companies will cut their budgets, reduce their services and try to produce cheaply. They will defer their budgets and then wait until they can re-kit their systems and decide which of their fields can produce profitably. Services suffer a lot and we’re affected, but what we do is to be able to be in tune with our clients and understand their issues and see a better way of solving them in a way that is a win-win. We proffer solutions, introduce technological solutions that will help them reduce costs at the same time also reduce our own costs
Reducing our cost means we have to look across board, and make no mistakes, reducing cost is not about firing staff; I don’t believe in that. What we are doing is we are looking at our various operational costs and how we can reduce them. If you have a scope of job that will take you four months, how do we make it work in two or three months? When you reduce the time, you make your efficiency better, and then you reduce your costs, it is about ingenuity. I know it is difficult for some companies to keep staff. Make no mistake, if you don’t have money how will you pay salaries?
Can you quantify the losses? In terms of gas, what are the local realities in growing the economy?
In terms of numbers, I’m very worried about that because for you to talk numbers effectively, you need to do proper work. What is important is that activities have come down tremendously. We can easily say in the past one year, close to 50 percent of activities in the industry have disappeared.
Now, to calculate what it translates into in terms of billions of dollars, requires some works and it requires some scenarios and picking information from different entities. What is important is that activities have dropped and will still continue to drop if oil price does not rebound.
If you talk about gas, it is double sided. One is that gas in oil and gas industry comes from two sources. One is associated gas that comes with producing the oil that is why you see flaring, because companies must produce the oil and do not have the capacity to utilise the gas, they will flare the gas.
We also have non-associated gas and this is purely a situation of a gas field that has no oil or liquids, you want to produce that gas for the sake of production.
The second fact is that the pricing of gas have some correlation with oil but not entirely. This is because gas is priced based on again, demand and supply internationally and is traded differently. You may be aware that when oil price dropped to $50 per barrel, gas price was still pegged at $2 to $3 and it never went down. But in the past month gas price has dropped and that reflected the situation between supply and demand. Also looking at the heating requirements based on the climates. Gas price internationally is below $2 now and it is very low.
Bearing in mind these facts, you come to Nigeria. The Nigerian issue is peculiar. Again over the past 10years and more, we have not judiciously developed our gas system. What is gas? Gas is only meaningful when you have the infrastructure to transport it. It is not like oil that you can put in tanks and then move. You must match production and utilisation. You cannot store gas. The only way you can store gas temporarily is through LNG or CNG. But LNG is in bigger quantity where you liquefy it and then move it to somewhere. That is a different industry, but for domestic gas, you must match production with