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Adding value to crude oil, gas remains Waltersmith’s mandate

Waltersmith Petroman Oil Limited was established as an indigenous exploration and production company in 1996. It was awarded the Ibigwe field located in OML 16 (now OPL 2004) in 2003 after participating in the marginal field licensing round specifically designed for indigenous companies. The firm has been developing and operating this field through a farm-out agreement executed in 2004 with Shell Petroleum Development Company (SPDC) and its Joint Venture Partners, including the Nigerian National Petroleum Corporation (NNPC). In this interview with STANLEY OPARA, its chairman/chief executive officer, Abdulrazaq Isa, spoke on  Waltersmith’s quest to become an integrated  energy company through its recent investment in a modular refinery and  gas-fired power plant, among others.

With the non-passage of the Petroleum Industry Bill, do you think this is the best time to invest in this magnitude?
The PIB is very important for the energy industry, especially for international investors. It should provide clear fiscal terms and certainty, especially in the deep offshore space, that is where I see the real impact of the PIB. This is where the International Oil Companies (IOCs) and the government will have to arrive at a consensus of what is fair for taxes and other things. These are some of the things constraining investment in that space. For us, onshore players, we think there are opportunities especially if you are a Nigerian company.

The existing fiscal terms that we have for onshore assets are decent for us to be able generate revenue and invest. If you are just focusing on oil production and export, I think there is still opportunity for us to invest and make decent revenue based on the existing fiscal terms. Yes, it can be improved upon.

However, all of us in this space are comfortable to just produce oil and export. That gives you dollar revenues and some are satisfied with that. I come with a different mind-set, may be because I am not traditionally part of the industry. Some of my colleagues in the industry think I am crazy to be doing what I am doing. But I am passionate about this.

I want to make money and believe me there is money to be made in Nigeria and if we invest in the right sectors, we still have opportunity to make money. We are not going to stop. We will continue to look for new assets to buy and acquire. If we see a good asset today, we go for it, especially now that we are building a refinery and a power plant; we need assets that will serve as feedstock for our refinery and power plan.

The PIB will improve it for us for sure. However, an absence of it does not constrain us from acquiring onshore assets. I always go back to the main reason for wanting to do what we are doing. It was to keep our upstream business running efficiently without losing about 15 percent to crude oil theft.

With your 5,000 barrels per day modular refinery and 300 megawatts power plant for a start, what is the bigger picture?
We have been producing oil for the past 50 years as a nation and we seem to be thinking of the value addition side of the business. It is really a missed opportunity. This should form part of the benefits you get from producing crude oil. The derivatives of crude oil are so many that they can impact other sectors of the economy.

We see a big opportunity for a country that has a population of close to 200 million people, today. Our objective is producing and refining crude oil for the benefit of this huge population. We have a bulging population, we have crude oil and the only missing links is inability to harness and process this crude oil. This is a huge investment opportunity. This in itself is an advantage. Remember, when you look at the Nigerian market, it does not comprise Nigeria alone – we are looking at all of these activities benefitting the entire West African sub-region.

So, when you measure the opportunities that are available to us, we are looking at Nigeria and the entire West African sub-region. Whatever we do with the oil and gas we produce and add value to it through refining and petrochemical products, we know there is a huge market awaiting us. As a company, the opportunity is the motivation for us by the virtue of the market we see.

When you have a diversified portfolio as an oil company, you are able to mitigate risks. For example, if oil price goes down, with your diversified portfolio of refining and petrochemical activities, you will cushion the effect in the downward pressure on oil price. If it goes up, well it is good for you. But we have had situations in the country where a downturn in oil price negatively impacts everything in the economy. This is part of our reason to build an integrated oil and gas company.

Down the line, we plan to build a power plant that will be serviced by the gas we produce. Once you can make power available, you can also energise industries. It is just the sheer size of the opportunity that is making us to position our company properly in the market.

What segments of the petroleum products value chain will you be addressing given market opportunities and the limitation of modular refinining?
Our modular refinery is going to make available diesel and kerosene which is currently being imported into the country. No matter what people say about the inefficiency of modular refinery, we are utilising what is available in this country and adding value to it to provide diesel, kerosene and Heavy Fuel Oil (HFO) which some industries utilise. Nigeria needs products, refined products. Despite the existence of four large scale refineries, we depend almost 100 percent on imported products.

There is no other modular refinery that is operating successfully in Nigeria, today apart from NDPR. That modular refinery does not make money? I do not hear that. I do not see it. I have gone to a global financial institution like African Finance Corporation (AFC) and convinced them to give us money to fund our project.

With our modular refinery project, Nigeria is going to have a private sector-owned refinery by an oil producing company that is providing its own feedstock and operating it as efficiently as it has operated its upstream business. Apart from NDPR no other company in Nigeria is currently doing that. For us, our motivation is to add value to the crude oil we produce and this is a critical motivation for us and we are going to do this in a very efficient way. Our aspiration, which is why we have gone modular, is to add and progressively grow capacity.

We have started with 5, 000 barrels a day and we are going to add more modules that will take it to about 25,000 to 30,000 barrels a day. Our strategy is to take crude oil that we produce, that is close to us, put the plants very close to the source of the crude oil, refine it and distribute it within our area of operation. So, the critical issues that people refer to, we would have eliminated some of them.

Refining margins are big issues, transportation cost is a big issue and we have eliminated this through the location of our plants to a large extent. This is because the plant itself is located right where the crude oil is produced, which improves our project economics. Our market is just about 30 kilometres away from where we are.

We know that as a standalone modular refinery, the margins are very thin. We are not oblivious of the criticism of modular refinery. If you are not in our own situation and you set up a modular refinery somewhere, you will have these challenges being talked about.

Once we get this going, we will then improve on it by increasing the modules to about 30, 000 barrels a day and when we are able to do that, then the whole economics will begin to actually be more positive We see this as a starting point despite the inefficiency that people claim exists in it. We have started and are positioning ourselves to be one of the pioneers of privately owned refineries in Nigeria. Despite the skepticism, I believe we have a business case. We are helping to solve some of Nigeria’s energy needs.

Will you depend solely on your OPL 2004 asset for the feedstock for the refinery?
Not at all. We are looking at other third party crude oil producers not too far from us. Our location is close to about 300 million barrels of oil in reserves sitting 30 km radius of where we are. This is our estimate. For most of this oil, the current strategy is to produce them, put them in pipelines for export.In the process, a number of things happen, you lose over 90 days due to the vandalisation of oil pipelines, so you are not able to produce and export that oil due the vandalisation of oil pipelines. Secondly, you have a fixed transportation cost. The cost of transporting it from that area to Bonny terminal for export is $5 per barrel. On top of that you are going to have 10 to 15 percent loss of oil due to crude oil theft.

What level of investment are you looking at in the next 10 years?

In the next 10 years we plan to increase our oil production to 100, 000 barrels per day. Now, the size of the investment that will enable you achieve this entails a number of things.  You have to get the reserves, you have to buy the oil, buy the concession – we are looking at anywhere around $500 million dollars or more. This will give you the level of reserve you need for that size of production. Given this range, in the next 10 years we are talking of investment to the tune of $2 billion to cover upstream, refining and petrochemicals and power.

It is not easy to find funds but you can find money when you have good quality project. I believe so. Getting funds for our modular refinery was tough because we had to approach international development finance institutions and were subjected to rigorous financial evaluations. Once this is up and running, it opens doors for similar projects.

People are already talking to us about wanting to do one deal or the other.
You must invest money in the development of the project. This is risk capital; it does not give you anything. This enables you to de-risk the project and make it attractive to investors, both local and international. For us, it is a mark of faith in our country and a way of giving back by adding value. For a power plant, for instance, you need development capital of between $7 – 10 million that you spend and all you have are just papers. This is because at the end of the day all you would have are reports from various consultants, feasibility, market and environmental studies, etc. Mind you, you are engaging international consultants that you have to pay. This is the documentation you require to approach international development finance institutions.

author: The Guardian