Walter Smith Fills Up The Room

From losing an oil well in an inferno to clinching a stake in a $400Million transaction, the Nigerian minnow has had a busy season

Of the several entities that formed the Niger Delta Western Ltd, the Special Purpose Vehicle which recently acquired the Shell/TOTAL/Eni equities in the Oil Mining Lease(OML) 34 in western Nigeria, Walter Smith Petroman Oil Ltd was a small, almost invisible participant.

The company, run by two former bankers out of an office in Lagos, Nigeria’s financial city, hardly got a mention in the major news stories of the transaction, largely because Niger Delta Western Ltd came forcefully across in the media as being greater than the sum of its parts.

But Walter Smith’s decision to be involved, and get a stake in a deal of this magnitude, says something of a company that is quite understated, and often seen as “just one” of Nigeria’s marginal field producers.

Walter Smith is the operator of the Ibigwe field, which it won in the 2003 marginal field auction by the Nigerian government. It put the field in production in 2008 and currently produces 3,500BOPD. Walter Smith estimates that the Ibigwe Field holds 24Million barrels Of Oil Equivalent (BOE).

With the $50MM it invested in the OML 34 transaction, Walter Smith became an 8.33% shareholder in Niger Delta Western Ltd, which has 45% of the block. This translates to 3.75% share of the entire asset.

“We went into the transaction clearly for reserves replacement”, says Abdurazaq Isa, the company’s Executive Chairman. “The estimated reserves (P1+P2) in the entire license is 1billion BOE. That means 37MMBOE for us”. With the 24MillionBOE in Ibigwe, Isa calculates that the investment in OML 34 has brought his company’s (P1+P2) reserves to 61MMBOE.

It is cheerful news for a company which has had a really difficult 18 month period.

“Our biggest challenge is crude theft”, Isa laments. “Last year we suffered 79 days of not being able to inject our crude into the Shell system”. Ibigwe field is located in the eastern flank of the Niger Delta Basin in a concession operated by Shell. “We have had the same kind of downtime for 34 days this year alone”, Isa remarks in his office in Keffi, in southwest Ikoyi, Lagos.

Shell has consistently complained of losing between 100,000 and 150,000 barrels a day to bunkering, describing its economic effect as worse than what militancy wrought.  Isa interpretes the situation, for his small company, as unfortunate and economically disabling. “For us as a company trying to grow, the impact is severe”.

Waltersmith Petroman Oil Limited was incorporated in 1996 as a joint venture between Waltersmith and Associates Limited, a Nigerian company and Petroman Oil Limited of Calgary, Canada to operate as an oil exploration and production company. In 2001, Walter Smith Petroman Oil Limited became a wholly owned Nigerian company with the divestment of Petroman Oil Limited.

After winning the Ibigwe marginal field in 2003, the company invited Paul Caldwell, the African American petroleum engineer who was formerly Managing Director of Mobil in Nigeria, to be its technical and funding partner. As Mr. Caldwell could not come up with the funding, Walter Smith decided to seek funding itself, figure how to set up a structure to sort out the technical issues, re-enter and produce the field. “It took a long time convincing bankers to fund us”, Isa says. “They were looking at it from a corporate finance point of view, whereas we looked at it from a project finance point of view”, Isa explains. “My partner (Danjuma Saleh) and I used to be bankers. Now we were in this business we could see the repayment, but our former colleagues didn’t see it”.

Isa was a banker with African International Bank Nigeria Ltd., Chartered Bank Nigeria Plc (now Stanbic IBTC) and was co-founder of Safetrust Savings and Loans Limited (now a subsidiary of Sterling Bank Plc). In the course of his professional career, he was involved in the structuring and financing of several multi-million dollar transactions in the upstream and oil service segments of the oil and gas industry.

Saleh has worked for NIB/Citigroup and Universal Trust Bank Ltd, Danjuma. He was co-founder, pioneer Managing Director and later Chairman of the board of directors of Safetrust Savings & Loans Ltd. He too had been involved in the structuring and financing of several multi-million dollar transactions in the upstream and oil service segments of the oil and gas industry.

The first loan that Walter Smith raised for Ibigwe field development was $22.7MM, from Skye Bank, a small Nigerian bank, for three years. “With that money we were able to reach first oil. We now went back to the bank. We said these were old wells and we had to drill new wells.” The company got $17MM and then $12MM.

The initial production from wells 1and 2 started declining and at a point Well 2 died out completely. The company drilled Wells 4and 5 in 2009, which boosted production to 2,000BOPD, but Walter Smith didn’t consider this volume as optimal production. The main reservoir in Ibigwe field is filled with heavy oil. Walter Smith imported gas lift equipment and re-entered well 2 to complete a gas zone and use the gas to boost production in wells 4 and 5. That was when the disaster happened, in April 2011. “We were in completing phase when the blow out occurred”, Isa recalls. The rig NRG1, belonging to NRG Drilling, a Nigerian rig service company, was completely razed. The fire raged for six weeks. Walter Smith tried to drill and intercept the old well, kill it and then convert the new well into a producer. After five sidetracks, and $36MM down, it could still not find the old hole. Asked about the rig that was razed, and all the losses incurred by other providers in the vicinity Isa answers in a tone that seems to lessen the gravity of the issue, even though the words are significant:

“That’s a potential source of litigation. But arbitration is the way to go. We go through legal process. Our technical investigation points to error on the part of the rig company.  Service providers send claims. We have insurance. The insurance company has done their best. It’s ongoing”.

To Isa’s claim, Charles Nwankwo, NRG Limited’s Managing Director, shakes his head vigorously. “He can’t say that. No he can’t. No one has done any forensic investigation into what happened. I call that Speculative Engineering”

Given the fact that Walter Smith is now a 3.75% owner of OML 34, it would seem that the company was able to juggle many balls; while it was going through a difficult time dealing with oil theft, and then a financially disabling blow out on the Ibigwe field, its officials had the presence of mind to sit at tables negotiating for a slice of another hydrocarbon asset.  But that’s not exactly what happened. “The bid process for OML 34 had started in 2010 and we had been talking to Niger Delta Exploration Production (the lead company in the consortium) since that time”, Isa says.

The company had also set on course a relatively aggressive development of Ibigwe field. “The well that burnt out was one of the five we had plans for”, Isa allows.  This year, apart from attempting to intercept an old burnt well, Walter Smith has drilled Wells 7 and 8(Well 6 was the hole that tried to intercept the fire-gutted hole), with the Deutag Rig T26.  Well 7 was water wet in the primary objective, but Well 8 has been completed and put on stream, raising production to 3,500BOPD. Isa says the company will now return to work over Well 1, complete it in two sands and take the rig to Well 6, and hopefully complete it as an oil and gas producer.

At this point the Executive Chairmanmakes a point that is technically curious. When Well 8 reached the reservoir that had been correlated as the same reservoir where the fire erupted in Well 2, he says, the zone was wet and the interpretation was that the entire reservoir has gone up in flames during the six week fire. It’s an intriguing interpretation, but he insists that the company, with Degeconek, a subsurface consulting firm, made the presentation to Shell and it was well received.

Having failed to reach the burnt reservoir in the subsurface, and “knowing” that the fire had consumed the entire gas in the reservoir, Walter Smith now wants to move in for the final solution: pump cement into Well 2 from the surface and seal it up. “We’d then remediate the environment”. He says this with a note of finality. True grit.